Looking for Venture Capital
in Rural America

Editor’s Note: This article is a follow-up to “The Real Need for Venture Capital in Rural America,” published in the March 2000 issue of the Economic Development Digest.

Conventional wisdom would say that there is very little venture capital available in rural America. Venture capital is simple: an organization invests, and participates, in the management of a business to realize a significant return. Venture capital tends to gravitate toward high-tech, high-growth industries in localities and states where these industries are clustered (i.e., Silicon Valley, Rt. 128 in Boston and New York). However, according to Deborah Markley, a leading researcher on the topic, innovations in delivering venture capital to rural businesses exist in some parts of the country.

Markley is Principal of Policy Research Group in Chapel Hill, North Carolina and the chair of the Rural Policy Research Institute’s (RUPRI’s) Rural Equity Capital Initiative research team. The team has contributed to the growing literature about the state of rural venture capital and the role of nontraditional venture capital funds in rural economic development. Markley notes that these funds differ from traditional funds in the following ways:

• They are either located in and serve rural areas or small urban areas or they operate in states with limited venture capital infrastructure.

• They make investments in sectors that are not necessarily high-tech and high-growth.

• They accept a lower and slower rate of return than the 30 percent rates sought by traditional venture funds.

• Many of them have a dual bottom line approach to investing, merging goals of economic development and financial return (these are referred to more specifically as Community Development Venture Capital (CDVC) funds).

A variety of nontraditional public and private funds have emerged to serve a growing area of rural America:

• Angel investors —Wealthy individuals who usually invest in nearby companies and industries they know. Often pool their funds with other angels and invest as a group.

• Community Development Corporations — Nonprofit entities that offer a range of economic development programs, sometimes including venture capital; funding from public and private sources; investments often made in ventures that will result in job creation; patient capital.

• Community Development Financial Institutions — Private financial organizations that focus on economic development in distressed areas. Publicly and privately funded.

• Public state programs — Includes publicly funded and publicly managed funds; publicly funded and privately managed funds; and tax credit or incentive programs including certified capital companies (private funds created by enabling legislation). Goal is to deliver venture capital in underserved areas and public involvement may make targeting such areas more likely.

• Small Business Investment Companies (SBIC) — Private funds licensed by the Small Business Administration that can borrow federal money to mix with private funds. Tend to invest in nearby businesses with moderate risk. A statewide SBIC has been established in North Carolina that is specifically targeting rural investments.

• Utility cooperatives — Electric and telephone cooperatives sometimes make investments in companies to increase or maintain demand in their service areas.

Despite this growth of nontraditional sources, mainstream venture capital funds are still not drawn to rural areas. When asked if the recent overall downturn in venture capital investments might have led to a shift to rural markets by traditional funds, Markley noted, “The regional concentration of venture investments is probably staying the same. A lack of good deals in regions normally served by traditional venture capital does not automatically mean there is increased investment in other more remote regions. Venture capital investing is very hands-on and not something you can do well at a distance. For this reason, traditional venture capital would more likely move into other sectors in the same regions rather than into new geographic areas.”

By William Amt, NADO Research Foundation Program Manager
For more information, visit the RUPRI website at www.rupri.org/pubs/equitycap/index.html or contact RUPRI at (573) 882-0316.

June Index | Back Page| Next Page