The Pot of Gold on the Other Side of the Tracks
Harvard's Michael Porter explains why inner-city entrepreneurs are a great investment
Prof. Michael Porter
Inner-city businesses know about fair-weather friends. During
election years, the rigors they face -- poor infrastructure,
discrimination from lenders, lack of access to markets -- get lots of
promises from politicians, corporations, and institutions, who vanish
come a downturn. Lately, struggling urban entrepreneurs have become a
cause celebre again, with President Bill Clinton and others preaching
the need to share the fruits of the New Economy.
Michael Porter, C.Roland Christensen Professor of Business Administration at Harvard Business School and an authority on competitiveness, contends the
do-gooders are missing the point: With the right support, inner-city
businesses can be excellent financial investments. In 1994, he founded
the Initiative for a Competitive Inner City, a private program devoted
to bringing management and investment to entrepreneurs in Boston,
Baltimore, Oakland, and Kansas City. Now, Porter and New York-based
American Securities Capital Partners are starting the Inner City
Ventures Fund, which will invest in businesses with strong potential for
growth in distressed urban cores. They plan to raise between $100
million and $150 million and will start making investments within the
next 12 months.
Porter spoke with Business Week Online's Jeremy Quittner about the
fund and the outlook for businesses in U.S. inner cities. An edited
Q: What is the goal of ICIC?
A: [Instead of] social programs and trying to redistribute income, I
believe that the only way we can address the problems of the
disadvantaged in the U.S. is to help our disadvantaged communities
actually succeed in the market system. The problem is not going to be
jobs. The demographics we have now are going to lead to tight labor
markets for the forseeable future. I think the real issue is income and
wealth. How can we create opportunities for all of our citizens to
really be part of the American Dream?
Q: Is this a public-private partnership?
A: I founded the ICIC because I felt that the private sector needed
to take this agenda on. So our principal support has been from
corporations, corporate foundations, entrepreneurs, and wealthy
Q: What is the point of the fund?
A: We believe that the problem today in inner cities is really equity
capital because of the limited wealth [there]. Private-equity investors,
by and large, have ignored this opportunity.
Q: How much are you trying to raise? What kind of returns on
investment are you looking for?
A: We are targeting $100 million. I think we should be able to go up
to $150 million. Its objective is to make high returns. We are telling
our investors that 30% is our hope.
Q: How are you going to get 30% returns?
A: The same way other types of equity investors have earned those
returns elsewhere in the economy. With equity capital, you can
accelerate the growth process and also upgrade the capacity of
management in a way that will allow them to move to the next level.
Q: What kinds of businesses are you looking at specifically?
A: We will be looking for companies that need $5 million to $10
million, especially companies that have minority ownership and
management. A lot of them are business-services companies. Things like
information-technology related services, printing, publishing, repair,
and maintenance. We also see some manufacturing companies, some
technology companies. They will almost never be startups. The
philosophy of the fund is [to bet on] going concerns that in general
will be profitable. They have much less risk.
Q: How will you get significant returns? Venture-capital firms put
tremendous pressures on businesses to generate returns quickly. Can
these businesses live up to that?
A: This is not a venture-capital fund. Our partner, American
Securities, has the philosophy of keeping money in the companies for
three to six years. If you're in the Internet startup world, you have
nine failures for every one success. This is a fund that is going to
pick 10 growth companies. The goal is all of them will be at least
Q: The talk about the potential in inner cities coincides with a
period when assets are expensive. Is the inner city just seen as a
A: The inner cities are really the last pools of underemployed
workers. The growth rate of the workforce is forecast to be less than
1%. You have companies moving into urban cores because that is
the best place to access workers that they can retain. This is going to
be an enduring trend. It is not just a business cycle.
Q: Does that mean large corporations turning inner cities into malls
or fostering small businesses as well?
A: In the past, mayors have tried essentially to bribe large
companies to put plants in the inner cities. That is what empowerment
zones are all about. That is what all these tax subsidies are all about.
We believe the right strategy is to help improve the business
environment and to help large companies realize that the inner city
could be a good location. More than that, it is to create an environment
where all little companies in these areas can start to grow more
Q: How do you get beyond the boom and bust cycles with the inner
A: If the inner city is a place where [large companies] locate
businesses out of social conscience, that leads to boom and bust because
-- of course -- when things get bad, those are the first plants to be
closed and the first jobs to get cut. If you think of the inner cities
as a place where there is a real economic opportunity, then you get away
from boom and bust.
Q: What do you mean by "inner-city business?" Is that a code word for
black and Hispanic?
A: We mean one that is actually based in and employs from these
communities. We are particularly anxious to support companies with
minority ownership. But we also believe that white-owned businesses in
inner cities that employ inner-city residents are a very good thing as
Q: You said that debt capital is not really a problem. Yet we hear
over and over again that minority entrepreneurs have trouble getting
A: We have found that because of the [Community Reinvestment Act] and
because many communities have set up loan funds of various types, any
business that is really creditworthy, has a business plan, and is
profitable can get financing. We don't see that as nearly so great a
problem as equity capital.
Q: Clinton and Gore have declared their interest in the inner cities.
What if we have a Republican administration?
A:: I would simply say that Governor [George W.] Bush, a former
student of mine, is riveted on this issue. Both parties and both
candidates will be talking about this in this new way. There is a
sea-change in thinking about our distressed communities, and it could
not be more overdue.