FINANCING INNOVATION

Financing Innovation and Entrepreneurship in the Country

Entrepreneurs Gather with Agriculture Secretary Vilsack to Discuss Bringing Private Capital to Rural Development

SOURCE: AP/Jon C. Hancock It's not just about farming. Rural regions could be home to vibrant and innovative manufacturing and other value-added industries, said participants at a Venture Capital Roundtable. Increased access to risk capital can help.

By Michael Gurau | Monday, August 15th, 2011

Early-stage venture capital, private equity, near equity, angel, and other capital resource providers offered insight over the course of a four-hour session. The fund I represented, Maine-based CEI Community Ventures, or CCV, was one of a handful of early-stage equity providers, and one whose charter includes a focus on investment in rural communities in northern New England. Three private equity funds were in the room—late-stage investors such as these often back or own manufacturing companies located in rural communities. The question posed to the group: How can we (the feds and the private sector) collaborate to direct capital to regions that have not typically been high priority for the risk capital community?

The USDA has an understandable interest in leveraging rural markets’ natural assets to serve high-growth sectors such as renewable energy. Additionally, the agency has long supported value-added food and agriculture ventures, sectors in which CCV has made three VC investments since 2005. Biofuels, both waste agricultural stock and newly grown agri-fuel sources, were top of mind for the secretary.

Vilsack asked what the federal government could do to improve access to capital in rural areas. As one might imagine, different capital providers brought different perspectives to the question. Private-equity folks spoke about regulation (less of it) and access to credit markets (more of it). Early-stage VC funds wanted to see the feds make more capital and tax credits available to spur private-sector investment. All early-stage funds present advocated for support of the agency’s Rural Business Investment Companies, or RBIC, program, an initiative funded out the 2002 Farm Bill as a partnership between USDA and the Small Business Administration, or SBA. RBIC was modeled on SBA’s 2000-2001 New Markets Venture Capital, or NMVC, program, which licensed six funds—including CCV—to commit high-risk capital and a unique grant pool to underserved and distressed communities in targeted regions. The RBIC initiative licensed only Meritus Ventures (an early-stage fund based in Kentucky) before program funding was withdrawn in 2005.

From a risk-capital perspective, the rural scene is challenging. Early-stage funds seeking high growth with proven teams are hard pressed to find them laying low in the woodlands, lowlands, or mountains of rural communities. But for a handful of experimental—and so as yet unproven—funds focused on rural and underserved communities, the early-stage equity market has gravitated, for logical reasons, to urban markets. Rural challenges include limited high-growth investment opportunities in sectors that attract capital, few experienced VC management teams, and difficulty attracting management talent to rural communities. It’s not that potential CEOs and senior managers don’t want to live in great livable cities like Portsmouth or Manchester, but they often have to consider what their options are if the venture doesn’t work out and they’ve moved their family to a rural area with fewer fallback opportunities than in a metro area like Boston.

A similar problem exists in finding experienced VCs who want to play in rural markets. A fund targeting rural markets is likely to find few similar funds with whom to co-invest. Small funds do not afford managers the capacity to attract the best talent, let alone continue to support its investments through multiple financing rounds. For this reason, I made a case to USDA to be cognizant of a minimum fund size ($25 million) that can support a fee structure and follow-on investment capacity.

Like many in the room, I supported Vilsack’s case for focusing on renewable energy, though noted that biofuel-based business models are challenging for their commodity nature and regulatory uncertainty. Many venture capital and growth equity funds supported biomass early in its evolution and—having been burned—are not so enthusiastic to double down in this post-recession environment. Biomass is a challenging sector in that its supply source and its end product are commodities, products that compete on volume and thin margins, not a great combination for venture capital.

I and others offered strong support for the value-added producer segment, which can bring higher growth rates and gross margins to rural areas. For example, the fund I manage has had a good run so far in support of food plays, including Pittsfield, New Hampshire-based Rustic Crust. But mine was a qualified endorsement, given that this, too, is a field with limited co-investment support. Risk capital tends to be biased toward high-margin, high-growth web businesses like Facebook and Groupon. This paucity of co-investment capital increases the risk of failure, since a processed food company will find it challenging to support growth through the early stages of development. Companies fail for a lot of reasons—access to growth capital is a pretty important one.

There’s no easy answer to Vilsack’s aim to see greater funding flow into rural markets, but it’s great to see this traditional agency reaching out and looking at how innovation tools like equity can address the short- and long-term challenges of rural economies.

Michael Gurau is president of CEI Community Ventures and is raising a new fund (Clear Venture Partners) to focus on early-stage ventures in secondary rural and small metro regions in New England. You can reach him at mg@clearvcs.com.

Tags: access to capital, agriculture, finance, innovation clusters, rural communities, rural development, venture capital

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I recently joined about 30 others in a New Investment Capital in Rural America roundtable convened by U.S. Department of Agriculture Secretary Tom Vilsack to brainstorm about one of the key catalysts for innovation and entrepreneurship: risk capital. Early-stage venture capital, private equity, near equity, angel, and other capital resource providers offered insight over the course of a four-hour session. The fund I represented, Maine-based CEI Community Ventures, or CCV, was one of a handful of early-stage equity providers, and one whose charter includes a focus on investment in rural communities in northern New England. Three private equity funds were in the room—late-stage investors such as these often back or own manufacturing companies located in rural communities. The question posed to the group: How can we (the feds and the private sector) collaborate to direct capital to regions that have not typically been high priority for the risk capital community? The USDA has an understandable interest in leveraging rural markets’ natural assets to serve high-growth sectors such as renewable energy. Additionally, the agency has long supported value-added food and agriculture ventures, sectors in which CCV has made three VC investments since 2005. Biofuels, both waste agricultural stock and newly grown agri-fuel sources, were top of mind for the secretary. Vilsack asked what the federal government could do to improve access to capital in rural areas. As one might imagine, different capital providers brought different perspectives to the question. Private-equity folks spoke about regulation (less of it) and access to credit markets (more of it). Early-stage VC funds wanted to see the feds make more capital and tax credits available to spur private-sector investment. All early-stage funds present advocated for support of the agency’s Rural Business Investment Companies, or RBIC, program, an initiative funded out the 2002 Farm Bill as a partnership between USDA and the Small Business Administration, or SBA. RBIC was modeled on SBA’s 2000-2001 New Markets Venture Capital, or NMVC, program, which licensed six funds—including CCV—to commit high-risk capital and a unique grant pool to underserved and distressed communities in targeted regions. The RBIC initiative licensed only Meritus Ventures (an early-stage fund based in Kentucky) before program funding was withdrawn in 2005. From a risk-capital perspective, the rural scene is challenging. Early-stage funds seeking high growth with proven teams are hard pressed to find them laying low in the woodlands, lowlands, or mountains of rural communities. But for a handful of experimental—and so as yet unproven—funds focused on rural and underserved communities, the early-stage equity market has gravitated, for logical reasons, to urban markets. Rural challenges include limited high-growth investment opportunities in sectors that attract capital, few experienced VC management teams, and difficulty attracting management talent to rural communities. It’s not that potential CEOs and senior managers don’t want to live in great livable cities like Portsmouth or Manchester, but they often have to consider what their options are if the venture doesn’t work out and they’ve moved their family to a rural area with fewer fallback opportunities than in a metro area like Boston. A similar problem exists in finding experienced VCs who want to play in rural markets. A fund targeting rural markets is likely to find few similar funds with whom to co-invest. Small funds do not afford managers the capacity to attract the best talent, let alone continue to support its investments through multiple financing rounds. For this reason, I made a case to USDA to be cognizant of a minimum fund size ($25 million) that can support a fee structure and follow-on investment capacity. Like many in the room, I supported Vilsack’s case for focusing on renewable energy, though noted that biofuel-based business models are challenging for their commodity nature and regulatory uncertainty. Many venture capital and growth equity funds supported biomass early in its evolution and—having been burned—are not so enthusiastic to double down in this post-recession environment. Biomass is a challenging sector in that its supply source and its end product are commodities, products that compete on volume and thin margins, not a great combination for venture capital. I and others offered strong support for the value-added producer segment, which can bring higher growth rates and gross margins to rural areas. For example, the fund I manage has had a good run so far in support of food plays, including Pittsfield, New Hampshire-based Rustic Crust. But mine was a qualified endorsement, given that this, too, is a field with limited co-investment support. Risk capital tends to be biased toward high-margin, high-growth web businesses like Facebook and Groupon. This paucity of co-investment capital increases the risk of failure, since a processed food company will find it challenging to support growth through the early stages of development. Companies fail for a lot of reasons—access to growth capital is a pretty important one. There’s no easy answer to Vilsack’s aim to see greater funding flow into rural markets, but it’s great to see this traditional agency reaching out and looking at how innovation tools like equity can address the short- and long-term challenges of rural economies. Michael Gurau is president of CEI Community Ventures and is raising a new fund (Clear Venture Partners) to focus on early-stage ventures in secondary rural and small metro regions in New England. You can reach him at mg@clearvcs.com.

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