The USDA delves into capital opportunities for investing in rural America
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.
Early-stage venture capital, private equity, near equity, angel and other capital resource providers offered insight in the course of a four-hour session. 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 often back or own manufacturing companies whose locations are in rural communities. The question posed to the group: How can we (feds and the private sector) collaborate to direct capital to regions that have not typically been high priority for the VC community?
The feds' role
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. PE folks spoke about improving the regulatory environment (less of it) and credit markets (more of them). Early-stage VC funds wanted to see the feds make more capital and tax credits available to spur private-sector investment. All of the early-stage funds present for support of the agency's Rural Business Investment Program, funded as a partnership between USDA and the Small Business Administration. RBIP was modeled on the New Markets Venture Capital program, which licensed six funds — including CCV — to commit high-risk capital and a unique grant pool to distressed communities in targeted regions. The RBIP licensed only one fund, Meritus Ventures, before funding was withdrawn in 2005.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 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 Portland or Burlington, Vt.; but they often have to consider what their options are if the venture fails when there are fewer fallback options 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.
Challenging investments
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 Maine-based Looks Gourmet Foods, 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.
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 mgurau@clearinnovationpartners.com.
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