Replenishing venture | An effective program may have a new lease on life thanks to a pending bill
For the past seven years, I’ve led a small team at CEI Community Ventures, one of two for-profit venture capital subsidiaries of Maine’s Coastal Enterprises Inc. and one of only six New Markets Venture Capital companies in the country. A Clinton administration initiative, the SBA-sponsored NMVC program was created in 2000 to drive high-impact capital as equity and operational assistance, or OA grants, into targeted underserved regions. In CEI Community Ventures’ case, those underserved regions were Maine, New Hampshire and Vermont. The program required prospective funds to raise private equity capital and grant money that would be matched by the SBA.
But shortly after the six funds were SBA licensed, the remaining program capital was deleted from a 2003 omnibus appropriations bill. The licensed funds, however, still targeted growth opportunities in cities and towns in 15 states, including Maine. While the geographic span was expansive, capital was limited; each fund managed only $10 million to $30 million — small potatoes in the realm of fast-growth companies.
The bill’s advocates, including Ron Phillips, president of Coastal Enterprises Inc., therefore pushed for a unique operational assistance grant pool amounting to 15% of the fund’s capital under management. The OA would provide pre- and post-investment resources (principally, consulting) to prospective and existing portfolio companies. For CEI Community Ventures, this resource was put to good effect transforming a company’s brand identity (using Westbrook-based Ethos Marketing), developing business plans, developing sales forecasts and assessing and developing growth strategies.
On March 12 this year, Democrat Rep. Gwen Moore of Wisconsin and Republican Rep. Hal Rogers re-introduced the SEED Act legislation that spawned the NMVC program in 2000; the bill would reauthorize the program and create a new group of NMVC funds. In the current environment, given the administration’s focus on underserved urban and rural markets and access to capital, this bipartisan bill ought to get a positive reception.
Overcoming NMVC challenges
Having managed one of the six licensed entities since its inception, I’ve found NMVC to be a challenging and effective program. The challenges have been primarily driven by the program’s limited geographic scope in select underserved regions and by the small size of the fund, restricting the capital it can provide businesses. The team addressed the narrow geographic scope in the following ways:
Marketing outreach: Since 2004, CEI Community Ventures has led over 45 financing seminars to educate businesses in the region on sources of growth capital and to identify entrepreneurs that might be candidates for fund investment. Two of the fund’s nine investments were discovered this way.
Proactive deal origination: The team proactively reached out to company CEOs it identified through a variety of regional sources like newspaper articles, directories and top 100 lists.
Using capital as incentive to relocate: The fund’s geographic constraint was mitigated by using equity capital as an incentive to build business in underserved regions; five companies moved their headquarters from five to 60 miles to locate in a target community.
The fund’s small size: The $10 million fund ultimately made only nine investments averaging $1 million each in multiple rounds — demanded that it supplement its investment opportunities with local and regional angel investors and smaller venture capital funds.
According to a Federal Reserve Bank of Boston article, “fully two-thirds of U.S. venture capital investment takes place in five concentrated geographic areas (Silicon Valley, New England — primarily metro Boston, metro New York, Texas, and Los Angeles/Orange County), and the economic areas of the Silicon Valley and metro Boston account for nearly one-half of all investment.” Rural and secondary cities (such as Portland, Bangor and Lewiston-Auburn) see comparatively less of this high-impact investment.
Early-stage venture capital is a catalyzing force for communities fortunate enough to attract this funding. Managed properly, the NMVC program can be an effective way to make risk capital available to the rest of the country outside of urban centers. Capital supports new businesses that may build locally, creating primary (job creation) and secondary (food and business services, local real estate) market impact that support the growing venture. In the current market environment, the main focus for the Obama administration has been loosening the debt markets. But since small business is the driver of job growth in this country and they have greater challenges accessing capital than large businesses, it’s all the more critical that specialized programs like New Markets Venture Capital be funded.
Michael Gurau, managing general partner of Clear Venture Partners in Portland, can be reached at mg@clearvcs.com.
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