The federal focus on rural innovation and entrepreneurship
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 growth in innovation and entrepreneurship: risk capital.Over the course of the four-hour session, early-stage venture capital, private equity, near equity, angel and other capital resource providers offered insight. The fund I represented, Maine-based CEI Community Ventures, 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 whose locations are in rural communities.The question posed to the group: How can we collaborate to direct capital to regions that have not typically been high priority for the venture capital community?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, a sector 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 perspective to the question. Private equity folks spoke about improving the regulatory environment (less of it) and credit markets (more of it). Early-stage venture capital 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 Program, an initiative funded in the 2002 Farm Bill as a partnership between USDA and the Small Business Administration. (RBIP was modeled on SBA's 2000-2001 New Markets Venture Capital 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regions.)The RBIP initiative licensed only Meritus Ventures (an early-stage Kentucky fund) before program funding was withdrawn in 2005.No easy answerFrom a risk-capital perspective, the rural scene is challenging.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 in the north country. But for a handful of experimental - and as yet unproven -- funds focused on rural and underserved communities, the early-stage equity market has gravitated, for good reason, to urban markets.Rural challenges include limited high-growth investment opportunities in sectors that attract capital, few VC-experienced management teams and difficulty attracting management 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 which 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 fuel-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.As the fund I manage has had a good run so far in support of food plays, including Pittsfield, N.H.-based Rustic Crust, I and others offered strong support for the value-added producer segment, which has higher growth rates and gross margins than commodity foods.Mine was a qualified endorsement, given that this, too, is a field with limited co-investment support -- risk capital tends to bias high-margin, high-growth Web businesses like Facebook and Groupon. This paucity of co-investment capital increases the risk of failure, since a 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, president of Clear Innovation Partners, a Maine-based cluster development organization, can be reached at firstname.lastname@example.org.