Rural Venture Investments As Successful As Metro Counterparts, Shows Report

Venture capital (VC) funds that invest in rural and low-income regions can be as successful as those in tech-oriented metropolitan regions if they are large enough to attract high-quality deals and provide follow-on funding, according to a recent report published through the Ford Foundation's Wealth Creation in Rural Communities project.

Author Patricia Scruggs examines the practices of rural and urban angel and venture funds and the impact their investments have on rural communities. In particular, the report focuses on the application of triple bottom line (TBL) practices in the equity capital community. These practices incorporate social and environmental benefits, alongside financial and economic returns, in making investment decisions and evaluating the success of the venture capital firms. While TBL practices still are seldom used in an explicit and consistent manner within venture firms, they are growing in popularity and create a useful standard by which communities can assess the contribution of these firms to the local economy. TBL criteria are used throughout the report to identify VCs that have been successful in generating community wealth.

The report finds no statistical difference between returns on investments in active VC states, such as California and Massachusetts, and in less active states. The same holds true for angel capital investments. Properly-sized firms in rural, low-income and underserved regions can act as local leads for deals that offer returns that compete on a national level, attracting investment capital that creates new high-tech companies and jobs, according to the report.

In addition to direct financial returns, VC firms can have a positive impact on rural economic development. Lack of capital often results in growing companies, including high-growth gazelle firms, in rural areas seeking more active venture markets. Local VCs can serve as a local lead on deals, attracting out-of-state dollars without driving away promising companies. The report identifies three types of positive impact that equity investments can have: (1) increasing jobs, wages and skills, (2) building local assets and networks, and (3) catalyzing community change. VC firms also introduce expertise in financial controls, capital strategies and high-performance business practices through the advisory services they offer to portfolio companies. These services are particularly valuable in rural areas where VCs can serve as a link to leading-edge knowledge and practices.

The report identifies several common traits among firms that have been successful in generating community wealth in rural regions. These tend to work at both the community and investment level, looking not only at the individual companies and its balance sheet, but also at the local context of the firm and its industry. By understanding the dynamics and history of the region, the firms are able to promote not only individual companies, but also local industries. Second, successful firms tend to intentionally address issues of isolation, connecting portfolio companies to suppliers and customers through the VCs own networks. These firms also intentionally seek out opportunities that generate wealth for investors, entrepreneurs and the community as a whole.

Rural venture firms face some challenges that differ from those faced in more urban regions. Though funds and investment dollars must be large enough to attract nationally-competitive deals, both deals and returns are typically smaller in rural markets. Smaller returns can make it more difficult for VCs in rural areas to raise funds that can attract high-quality deals. For this reason, intervention by state and local leaders may be necessary to support a healthy equity market.

Since scale is an important element in ensuring that VCs in underserved regions maximize their positive impact in the local economy, agencies and organizations seeking to build a strong equity capital market should focus on expanding the reach and size of local equity firms. The report recommends helping VCs establish entrerpeneurial funds that meet the needs of companies at all stages of development and companies with limited equity capital requirements. Local leaders also can help to make sure advisory services are integrated and sustained part of work done by VCs that invest in their region. Finally, communities should work with firms to help them adopt approaches that integrate regional wealth creation into their investment strategies and practices.

Read "The Role of Equity Capital in Rural Communities" at: http://www.yellowwood.org/The%20Role%20of%20Equity%20Capital%20in%20Rural%20Communities.pdf