Financing Rural Innovation with Community Development Venture Capital: Models Options and Obstacles

A ccess to equity capital is a critical component of business entrepreneurship. Young companies lack the cash flows necessary for debt repayment. They need patient capital, such as equity and near-equity, to develop and get their products ready for market. As Barkley and Henry confirm in this issue of the Review, the creation and growth of such companies is the path to economic prosperity for many rural regions. It also is a means to economic opportunity for rural residents. Rural economies, however, rarely attract traditional venture capital (see Lipper and Moncrief in this issue). This is due in part to the structural impediments they pose for the traditional venture capital model. Because the primary driver of traditional venture capital is profit maximization, the industry tends to gravitate to geographies that maximize potential investment opportunities and minimize operating costs. Areas such as Silicon Valley in California and Route 128 in Massachusetts embody such geographies and consistently draw a disproportionate share of traditional venture dollars. Such geographies have a critical mass of potential investment opportunities and the supporting infrastructure in the form of technological, managerial, legal and financial expertise necessary to take ideas to market. Their proximity to desirable quality-of-life amenities also enables these geographies to attract venture capitalists, who can minimize travel time and operating expenses by living near their investments. By contrast, rural geographies are characterized by limited deal flows and supporting infrastructures, and large distances that make oversight difficult. Because of these structural impediments, the venture capital that exists in rural areas tends to be developmental in nature. Unlike traditional venture capital, which has a primary objective of financial returns for investors, developmental venture capital is designed to foster both social and financial returns. In the case of rurally-focused developmental venture capital firms, the social returns are often in the form of economic growth, either general or specifically targeted at helping low-and moderate-income populations. Community development venture capital (CDVC) is one form of developmental venture capital that has evolved in rural areas. Like traditional venture capitalists, CDVC providers make equity and near-equity investments in small businesses.1 However, their investments