Capital Xchange, October 2001
Kathryn Wylde, President and CEO, New York City Investment Fund
Peter Plastrik, Author and former President, Michigan Strategic Fund
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More About the New York City Investment Fund (PDF)
I. Introducing the Fund
Because there were no models for the type of institution we envisioned, we had to build one.
Henry Kravis, chairman of the board, Jerry Speyer, vice president, The New York City Investment Fund2.
A thumbnail sketch of the New York City Investment Fund, one of the nation’s few “corporate civic investment funds,” depicts a Who’s Who of Wall Street and corporate CEOs on its board of directors; $100 million in capital under management; and $50 million invested in 47 of 1200 projects that it’s reviewed in its first five years. These 47 projects helped to create 2,750 jobs in New York City.3.
However notable, these facts miss what makes the Fund a remarkable effort to rejuvenate a city’s economy. A richer portrait reveals a network of CEO-to-CEO relationships that give life to the Fund and support portfolio companies in numerous and unpredictable ways. This portrait illuminates the successes and challenges the Fund encounters combining a financier’s commercial discipline with a social-investor’s orientation to place-based and social outcomes, a rare amalgamation that gives curious shape to the Fund’s project portfolio. Funded projects as diverse as Internet-based start-ups; specialty retailers; entertainment media companies; and a university consortium for biomedical and pharmaceutical clinical trials number among those of retail shopping plazas in distressed neighborhoods; a non-profit, employee-owned home health care service for disabled Medicaid recipients; and the region’s first center for recycling and disposal of computer equipment. This portrait depicts the Fund’s evolution from business-deal financing to strategic investment in key business sectors with growth potential in New York City. And it shows how in the past few months, the Fund has expanded significantly its ability to influence public policy to help the city’s economic development.
In this article, we will look closely at the Fund’s network development, and the way the Fund has addressed commercial and social bottom-lines; developed large-scale sectoral investment strategies; and linked investment approaches to public policy development. We also will discuss lessons learned from establishing and implementing the Fund, hoping these will be useful to others wanting to mobilize corporate and financial community resources for urban economic development. First, though, we set the fund within the context of corporate involvement in cities and social investment markets.
II. The Emergence of Corporate Civic Funds
New York City Investment Fund, 1999
In an important way, the New York City Investment Fund resembles the corporate civic funds that Cincinnati, Cleveland, Detroit, and Pittsburgh business leaders established, which, between 1995 and 1998, received more than $170 million, mostly from corporations.4. In each case, the impulse to create a fund was rooted in the belief of the importance of corporate involvement in community affairs-particularly in the city’s economic development. Corporate leaders usually concerned with global markets and wealth-production systems also recognized the value of caring for the needs of their local place.
Collective corporate involvement in civic affairs is not new. Probably the first CEO civic organization emerged out of the smoke of Pittsburgh in 1943-to address the city’s pollution and flooding problems, both barriers to redevelopment. This Allegheny Conference on Community Development launched the traditional model, according to a Frey Foundation study, of civic affairs business involvement: “Business interests come together; work out a plan to address a given problem; take the plans to local government, where they [sow] the seeds of implementation and/or they make personal commitments to play limited roles in the implementation of the plan; and then the group disperses.”5.
The New York City Investment Fund, created in 1996, began within this model, and then departed from it. Its founder, Henry R. Kravis, was concerned that New York City’s economy lagged behind the rest of the country in job creation and diversified economic growth. The city was facing high costs and lacked a business infrastructure to support new growth industries. A large percentage of its urban workforce was on welfare or chronically underemployed. Many neighborhoods were isolated from the mainstream economy. Kravis mobilized a leadership group to develop a plan, but it was a plan for what they, not others, would do. Instead of taking the plan to local government, the leadership acted independently and controlled plan implementation, as they do today. Of course, the Fund collaborates with public agencies and takes advantage of government incentives, but it is owned and operated exclusively by business leaders; none of its 28 board members is a public official.
For CEOs, a corporate civic fund is a social investment that does not require them to change the way they run their businesses, but enables them to finance projects that benefit the community. Benjamin Franklin initiated social investment in the U.S. when he left 2,000 pounds sterling for a young-artisans revolving loan fund. In the 19th century, wealthy, reform-minded individuals financed construction of housing projects at below-market rates. Since the early 20th century, New Yorkers have played an important role in advancing social investment. Several foundations and private donors have financed “modern garden communities” in the city and, in the 1960s, the Ford Foundation made the first philanthropic “program-related investment” and helped to launch the first wave of community development corporations.6.
Social investment markets are small compared to conventional capital markets.7. Only a small fraction of social investment flows to community development financial institutions such as the corporate civic investment funds that provide financing to businesses.8. In this context, then, the most significant immediate effect of corporate civic investment funds is that they bring important new investors-corporate leaders-and substantial new investment into the community-development financing niche of the social investment market. More than 175 corporations and corporate leaders have invested in the five corporate civic funds we mentioned. The more than $270 million that has been aggregated in this way represents a large fraction-perhaps as much as 10 percent-of the capital of community development finance institutions.
As we will see, however, capital is not the most important asset of the New York City Investment Fund.
III. The Fund’s Heart is a Network
It’s easy to write a check. It’s much harder to give of yourself.
The lifeblood, the heart, of the Fund is its network of investors, board members, and volunteers, including their connections. Let’s see how it works at a June 12, 2001 reception in midtown Manhattan.
Fernando Espuelas, a Latino entrepreneur in his mid-30s, has flown in from Mexico City for the reception. Three years earlier, he started StarMedia Network, Inc., an unprecedented on-line vehicle for Spanish and Portuguese-speaking audiences in Latin America. One of his investors, Chase Capital Partners, asked him to make a pitch to the Fund, with which it had an agreement to share investment opportunities. Espuelas was given three minutes at the reception to sell the idea to the Fund’s board of directors. This wasn’t enough time to summarize his 150-page business plan. Instead, he spoke about the impact, similar to that of economic integration on European nations, that his business would have unifying Latin American people separated by national borders. A board member interrupted him. It was David Rockefeller, retired head of Chase Manhattan, brother of Nelson, and a longtime pillar-the pillar-of corporate involvement in New York City life. Rockefeller wanted to hear more. He invited Espuelas to his office.
“It was the most exciting thing in my life,” says the entrepreneur. He recalls how the meeting went: “I didn’t close the sale with him until I showed him a map of Latin America without any borders. He said, ‘Oh, that’s good.'” Rockefeller and the Fund became investors in StarMedia, which moved its headquarters from Connecticut to the city and quickly grew to more than 700 employees worldwide. Espuelas tells this story at a reception that New York’s corporate elite was throwing for Rockefeller’s 86th birthday. He introduces Rockefeller as his “shareholder, partner, and inspiration.” Then the young Latino mingles with the crowd. Before long a publishing empire CEO buttonholes him to talk about a possible business relationship. He tells Espuelas he wants to conduct on-line surveys in Latin America and states, “It seems logical to talk to you.” This is a network moment-a pulse of corporate commerce through the many seamless connections the Fund makes possible. Fernando Espuelas is plugged in.
The Fund’s network involves close to 250 New York business and finance leaders. “Our Fund is actually a network that uses its capital to engineer the transformation of public and private markets,” says Kravis, who is chairman of the Fund’s board. Kravis started the Fund with network building in mind, encouraged by what he knew and admired about corporate network development in response to Minneapolis’ racial disturbances two decades earlier.
As Fernando Espuelas discovered, the Fund’s network, in action, is something to behold. It started early on by capitalizing the Fund: Kravis called on CEOs and other friends to put up, along with him, $1 million each-David Rockefeller made the first pledge. Then Kravis asked for more: “? I don’t just want the million dollars. I want your people, their expertise, their time.” His pitch attracted $53 million at the outset,9. and an outpouring of volunteer venture capitalists and investment bankers.
This extraordinary pool of experts organized themselves into “sector groups” to look for, develop, and vet possible investment deals. The brainpower and experience amassed in just one Fund sector group, Media and Entertainment, led one Wall Street veteran to call it the “best media investment bank in the world.”
The network’s members use all-out effort to help the Fund’s portfolio companies. “The Fund has been huge for us,” says Jim Holden, CEO of TelViDa Inc. “It’s not the money-a lot of people have money. It’s the network.” The Fund helped his firm secure a multi-year contract with a large, New York-based corporation; find an experienced CFO that “we could never attract on our own;” and work with state government to get funds to train low-income workers. “We would have spent months on that,” Holden says. “Instead, the Fund has us in front of the right people, right away.” Other examples follow:
Some members sit on the companies’ boards and provide ongoing advice and mentoring. These companies normally could not attract such “star power.” For instance, Beverly Chell, vice chairman of Primedia, took a seat on the board of Metropolitan Teaching and Learning Company, an African-American-owned publisher of educational materials for urban schools and inner-city youth. “She is a tough task master-very knowledgeable about publishing,” says Metropolitan CEO Reginald Powe. “Without the Fund, we couldn’t have gotten her.”
Some use their own networks to evaluate candidates for senior management positions in portfolio companies. When one of these companies was about to hire a candidate for its human resources position, Fund staff checked with the network and conveyed back, “Don’t go there.”
Some network members help companies find additional equity or debt financing, or introduce companies to other corporations with which to build contractual relationships. Some themselves become buyers or suppliers to companies. When, for instance, the Fund invested in Per Scholas’ computer recycling center, many board members contributed aging hardware-“raw material”-from their own corporations.
The Fund’s network regenerates itself-sometimes in unpredictable ways. For example, one board member introduced the Fund to his senior business partner who, cutting back on business activity, decided to use his investment experience in a new way. He began to advise the Fund. An investment banker met a Fund executive at a conference and asked her to send him potential deals to examine on the Fund’s behalf. After he left his firm, he called one day to make sure the Fund kept him in the loop, so he could help from another firm. Meanwhile, the three people he recruited earlier to look at Fund deals are still involved. Some network members who have moved from New York are taking their experience with the Fund elsewhere, to help put together similar corporate-backed investment initiatives in other cities.
As the Fund’s network has expanded and developed, it is little wonder that Henry Kravis and Jerry Speyer emphasize that the network of business leaders and industry experts, entrepreneurs, and venture capitalists is the Fund’s “real success-and its legacy to the city.”10. Of course, the extraordinary capacity of this network has to be put to use-and figuring out how to do this involves making investments that generate benefits for a place-for New York City-not just for a business. This means learning to invest in ways that create social outcomes-job generation, neighborhood redevelopment, environmental improvement, and essential, missing services provisions-not just financial outcomes captured by business.
IV. Commerical Discipline Meets Social Goals
We invest in things that on balance are good for the city.
Ken Miller, vice chairman, Credit Suisse/First Boston
TelViDa Inc. is one of the Fund’s portfolio companies, the recipient of $500,000 in equity and $4.1 million in subordinated debt in the past year. About 350 people work for the business, installing cable lines and equipment into houses and apartments, mainly for television reception. Most are African-Americans, Hispanics, and immigrants from Caribbean nations. They hold low-level technician jobs that pay $7-8 an hour and include health insurance. “We’re basically in the business of supplying blue-collar labor to a low-tech job,” says TelViDa CEO Jim Holden. “From the cable industry’s perspective, this is the bottom of the barrel.”
Yet, Holden sees TelViDa fulfilling important social purposes-and he means more than just providing jobs to low-income people. The employees receive a fair amount of technical and customer-service training, which are useful skills in the marketplace. They are unionized and they have a shot at upward mobility within the company. And because Holden’s objective is “to help people create wealth,” they may eventually become company employee-owners-with an opportunity to get a piece of the action.
These social purposes matter to Holden. He was born in the Bronx to black working-class parents, and he experienced how working for a large company enabled him to realize his dreams. After getting a Dartmouth and Harvard Business School education, he hooked onto career ladders at several major New York City investment banks. But Holden always wanted to be his own boss. “I saw working for large companies as a way to get skills and credibility, and to pay off my college loans.” He left Wall Street to buy and create small businesses. Now 43, he and a partner merged five businesses into TelViDa, which generates about $25 million in annual revenues.
But TelViDa is not a social-purpose enterprise; it is a for-profit business in a very competitive industry historically dominated by “mom and pop” firms and low margins. The company has grown rapidly, capturing about 45 percent of New York City’s cable-installation market. But Holden’s goal is a $100 million business, built as quickly as possible, with a foothold in other metropolitan regions such as Long Island, Philadelphia, and Washington, D.C. Holden believes his competitive advantage rests on two factors. First, TelViDa is minority-owned-a rarity in the industry-which makes it attractive to minority workers and to cable companies looking to diversify their supplier base. Second, Holden’s team has demonstrated an ability to manage an urban, low-income, minority workforce in ways that increase its performance and reduce turnover. “We’re about labor utilization,” he explains. “What makes a difference is that we are able to hire, train, and retain the best people. This allows us to operate really well, which allows cost savings, which translates into margins better than the industry.”
However, TelViDa does not yet generate enough cash flow to finance its growth, and so far conventional lenders have been willing to provide only limited support. So the Fund stepped in, essentially as a financial bridge, until the company is able to attract additional capital.
A key to TelViDa’s future growth is to develop long-term contracts with the nation’s larger cable providers. With the Fund’s help, Holden took a first big step in this direction, landing a business relationship with Time-Warner Cable. Another key, Holden believes, will be to expand his business into other installation niches. Holden points out that TelViDa is an acronym for telephony, video, and data; so far, though, the business has been almost exclusively video-related. “At some point we see ourselves installing, servicing, and provisioning all three.”
In short, Jim Holden is keeping his eye on the commercial bottom line even as he pursues social bottom lines. To him, they are all of a single piece. As the company expands and succeeds, he hopes to move its headquarters from Queens to Harlem’s designated technology zone. “We want to be the first money-making technology company-that is not a dot.com-to relocate to that area to really help it become a venue for business opportunity.”
In addition to its investment in TelViDa Inc., the Fund has backed 46 other projects. They range from areas of purely commercial business, especially in high-technology and Internet applications, to enterprises concerned primarily with achieving social results, such as increasing retailing in distressed neighborhoods; employing low-income workers and welfare recipients; and redeveloping buildings for manufacturing use in blighted neighborhoods. Some of the Fund’s portfolio companies, such as TelViDa, span both ends of this continuum-they make money and do good.
A Sampling of the Fund’s Portfolio Companies
The Feedroom, an all-news broadcast production and broadcasting service.
Capital Thinking, a software company focused on the commercial real estate industry.
DataSynapse, Inc., a distributed computing software company focused on the financial services sector.
Greenpoint Manufacturing and Design Center, a non-profit group that redevelops for manufacturing use vacant buildings in blighted areas.
Independence Care System, Inc., a non-profit managed-home-care organization servicing severely disabled Medicaid and Medicare recipients.
Regional Computer Recycling Center/Per Scholas, the region’s first recycling and computer equipment disposal center; sponsored by Per Scholas, a non-profit organization.
3-Legged Dog, a non-profit multimedia theater group developing a new digital, multi-medium control software.
Metropolitan TLC, minority-owned educational publishing business targeting urban elementary schools.
Royal Health Care, LLC, a management services organization administering managed-care programs targeting Medicaid patients.
The Fund is neither a profit-maximizing venture-capital company nor a social-change philanthropy, but draws on the perspective and know-how of both worlds. Overall, the Fund seeks a balanced portfolio that contains economic development projects and includes non-profit organizations targeting distressed areas and disadvantaged populations; technology companies; and businesses in select growth sectors. This mix keeps the Fund from putting all of its eggs into one basket – a selected target industry, for example. Equally important, this guarantees for network members participation in a rich mix of interesting projects.
A portfolio of unusual deals might keep the Fund’s network members engaged, but it does not necessarily help the Fund achieve its desired impact. To generate returns that make a large-scale difference and are more than just commercially rewarding, the Fund must pay attention to much more than deal making. It has had to learn to leverage its relatively small resources.
V. The Art of Strategy
What do you do with so little money?
Michael Lobdell, managing partner, J.P. Morgan Chase
In November 1999, the Fund received a call from a New York University (NYU) medical school official. The university had been negotiating with the city government to obtain a public building to be used to house students. The city had offered to turn over the building to the University if it also would take an adjacent, deteriorated, six-acre site on which to erect the city’s first commercial biotechnology office building. When NYU said it didn’t know how to manage such a project, city officials suggested it call the Fund.
Eventually the Fund committed a $3 million loan to NYU’s East River Science Park project, a new office park to include commercial office and laboratory space, clinical research facilities, a business incubator, and post-graduate housing-a highly visible redevelopment of a deteriorated section of the city. But the phone call from NYU resulted in something more important. It mobilized the Fund into strategic action.
Led by the Fund’s Health Care & Sciences Sector Group, Fund staff and outside researchers produced a market-demand study for New York City commercial biotechnology, biomedical and “bioinformatics” facilities.11. The findings illuminated the city’s problem developing this sector and described a potential path to success. New York City has fewer than 40 biotechnology companies and offers 2,000 related jobs-a pittance compared to the San Francisco Bay and Boston areas.12. Nonetheless, the study found that New York City has a significant number of top academic and medical research institutions with demonstrated ability to generate intellectual capital that can be commercialized. The city also has access to venture capital and proximity to the majority of the nation’s pharmaceutical industry. Findings show that the city has failed to capitalize on these intellectual resources, primarily because of a lack of affordable commercial facilities. No biotechnology research parks exist within the city, and there exists only one biotechnology incubator. The 30 or so biotech start-up companies that emerge annually from its top medical research institutions leave New York City, and often the state, to secure space for growth.
The study projected that demand in the next five years for space from early-stage biotech companies and from existing research centers and labs, hospitals, and other institutions will approach 1.7 million square feet. However, it cautioned, early-stage companies, typically cash-strapped, will not be able to afford the rent that developers must charge for biotech facilities, which is significantly higher than for traditional industrial space. As a result, the study concluded, “To jumpstart the [biotechnology] industry, new construction of a critical mass of combined laboratory/office space in reasonable proximity to the leading academic research institutions is required. The initial construction will have to be subsidized by government in order to attract and leverage private investment.”13. The study also concluded that the city’s academic and medical institutions must alter their current policies. They must encourage faculty entrepreneurship much as universities in California and Massachusetts do, and to cooperate, rather than compete, over the use of public dollars to develop the biotech sector. “The goal should be commercial facilities that are related to multiple academic institutions and open to scientists and entrepreneurs regardless of affiliation, rather than closely controlled by any one institution.”14.
This market-demand analysis propelled the Fund to develop a biotechnology sector strategy, not just a deal-by-deal approach such as it had pursued with the NYU project. In seeking government investment in an entire sector and cooperation among the many academic players, the Fund hopes to change the underlying market for commercial biotechnology space development, and views the change as a “leverage point” for getting biotech entrepreneurs in New York to build their companies in the city. If the strategy works, it could help generate many future deals for commercial space development and biotechnology startups-and the Fund might not even need to be involved in any of them.
This is not the first time the Fund has explored a strategic sector-approach. During the early phases of its development, Fund executives asked, “What do we do with its capital?” To help guide the Fund, Kravis says, “We invited a lot of creative thinkers to see where the ball would land.” One advisor focused on education, another on retailing, and yet another on health care. “We shook our heads,” Kravis recalls. He was forced to cancel the Fund’s first scheduled board meeting because he had no course of action to recommend.
Eventually, the Fund decided to organize its work around key sectors in the New York City economy. It set up six sector groups: Media and Entertainment; Health Care and Sciences; Education and Information Services; Manufacturing; Finance, Insurance, and Real Estate; and Retail and Tourism.15. Although most corporate civic investment funds target “bricks and mortar” real estate, the Fund’s creators didn’t, feeling that the city had enough infrastructure players and that the Fund’s financial resources were too small to make a difference. 16.
Progress in understanding and investing in these sectors has been uneven-as might be expected. The Fund secured the pro bono support of Boston Consulting Group to underwrite a study about the potential of expanding New York City’s filmmaking industry, a perennial favorite proposition of local elected officials. The study documented the need for additional sound stages, which turned out to be an “opportunity” in which private investors had little interest. At the same time, the Fund has had difficulty finding projects related to the manufacturing sector, which has been declining for decades. To support technology development, the Fund has built a partnership with the City University of New York (CUNY) and the venture capital community to grow a network of high-technology accelerators and incubators on as many as nine CUNY campuses. The Fund has allocated $3 million to support a pilot TeleMedia Accelerator, which already has for use 19,000 square feet of built-out space and four start-up companies located at the Borough of Manhattan Community College. The Fund aligned with CUNY to request $21 million in government investment in the system and is raising operating support from as many as 10 venture capital companies.
As the Fund matured, it developed a better understanding of how the hundreds of individual projects it reviews yearly fit-or don’t fit-into the economic sector big picture. Sometimes the Fund considers a potential deal first, then looks at the sector’s dynamics. But increasingly the Fund looks first at sectors, then for ways to invest strategically by tapping its network to identify deals that might fit. For example, New York City has a long-term problem disposing of its solid waste; the mayor recently shut down the city’s only landfill, and there is no alternative. When the Fund heard from an investor about a company that might be able to offer a solution, it started discussions with the firm.
As the Fund explores strategic approaches, it often becomes clear that it is not powerful enough to influence sector large-scale evolution. As in the case of the market for commercial biotechnology facilities, the Fund has to find ways to create the public policy and investments that will significantly influence a sector’s path. It must turn to government.
VI. Linking to Public Policy
Business had paid too little attention to the problems of the city.
David Rockefeller, on why he started the New York City Partnership in the 1970s
In June, Fred Wilpon, owner of the New York Mets, and chairman of Sterling Equities, a real estate company, tells a personal story to scores of New York City business leaders. He talks about co-founding years earlier a biotechnology company called PathoGenesis Corporation. But, Wilpon continues, as the business grew, he couldn’t find space for it in New York City. Instead, the firm expanded to Seattle, Chicago, and New Jersey. Today the company, which was bought by Chiron Corporation, has more than 1,000 employees. “It always hurt my heart,” Wilpon says, “that here’s where we founded the company, but we couldn’t find a place [here] to put it.”
Wilpon is addressing the annual meeting of the New York City Partnership, an organization started by David Rockefeller. Two hundred partners, representing the top leadership of New York’s business, real estate, and investment communities, comprise the Partnership. The organization is their voice on legislation, regulation, and public issues impacting business and the economy. It has an annual budget of $14 million and a staff of 90,17. and maintains more than a dozen standing and ad hoc committees.
Wilpon, a Partnership director, is co-chair of its Biotech task force. His experience with PathoGenesis is relevant to the recommendations this group makes. “New York City has a wealth of scientific and research capacity in biotechnology,” he tells executives, “but we have not capitalized on our intellectual capital to build a biotech industry here.” He goes on to describe the findings of the market demand study conducted by the Fund and reports on its public policy and investment recommendations for city and state governments. The demand study estimated that city and state governments should invest, in a combination of direct funding, tax incentives, and real estate contributions, something less than $100 million to catalyze city biotechnology and biomedical cluster development.18. If enacted, Wilpon says, “it wouldn’t surprise me if biotechnology jobs come to New York.”
The close cooperation between the Partnership and the Fund is no accident. The Fund’s legal entity, the New York City Investment Fund Manager, Inc., was organized as a wholly owned for-profit subsidiary of the Partnership in 1995. When the Fund came to the point where its transactional activities were evolving into systemic interventions, it was time to call upon the policy and advocacy resources of the parent organization.
For most Fund members, engaging public officials is new work, but they are getting used to it. Henry Kravis and Partnership leaders visited top state elected officials in Albany, for a round of meetings to lay out Partnership and Fund priorities. In June, Kravis, Wilpon, and Russ Carson, a Fund director,19. attended a meeting convened by New York’s mayor, to discuss biotechnology-cluster strategy. The heads of medical research institutes and venture capital companies attended-and agreed to launch a full-court press to secure state investment in the approach.
VII. Some Lessons Learned From Evolution
I don’t have a grand scheme. I want to make sure it works.
Our portrait of the Fund suggests effective principles to guide the evolution of this corporate civic investment fund into a promising new institution dedicated to New York City economic development. These principles include:
Mobilize the network (not just the money).
Develop a new “lens” on enterprise development, meeting in various ways the bottom lines of commercial discipline and economic and social outcomes.
Develop an eye for strategic approaches to sector development (not just enterprise deals).
Organize the business community to influence public policies and investment that support sector development.
As the Fund has been putting these principles into practice over the past five years, it has stumbled occasionally and le…