A Different Source of Funds
Community Venture Funds Aren’t Just for “Politically Correct” Enterprises
Sometimes, funding comes from the most unexpected places. Three years ago, Michael Cote was on the lookout for financing to help him expand Look’s Gourmet Food, his newly purchased cannery in Whiting, Maine. The 85-year-old family-owned business had fallen on hard times, and Cote planned to revitalize it with new ingredients, modernized packaging and revamped processing facilities. But, Cote had already taken out a sizeable bank loan and didn’t want any more debt. Where else could he turn?
One day, while visiting a trade show for New England-based manufacturers, a fellow attendee provided Cote with the answer: Contact CEI Ventures, a Portland, Maine-based community development venture capital firm that was interested in investing in companies able to help local economies. “I’d never heard of this type of fund before,” says Cote. “But it was worth a try.” Six months later, Cote had raised $300,000 from the fund, plus a matching sum from its sister firm, CEI Community Ventures. The money is going into new equipment and opening new markets in California, Chicago, and the Southwest. That rapid expansion, Cote says, would have been impossible without CEI, which backed Look’s Gourmet Foods because it will bring more employment to an economically challenged area.
Chances are, like Cote, you haven’t heard of community development venture capital—or maybe you assumed that you couldn’t get any. But, the fact is, community investment is a rapidly growing source of funding for small business. These specialized VC firms began appearing about 15 years ago. Their goal is to harness the power of private enterprise to revitalize depressed areas and/or improve the lives of poor and/or minority citizens by providing job opportunities.
“We are able to make money by investing in companies that benefit our entire region economically,” says Lynn Gellermann, a founder of one such firm, Adena Ventures, in Athens, Ohio, which focuses on job creation in Appalachia. Across the U.S. there are more than 90 such funds either actively operating or in formation, up from about 55 in 2000, according to the Community Development Venture Capital Alliance in New York. These funds now have more than $870 million in capital, up from $400 million six years ago.
A common misconception is that community venture funds only finance politically correct companies—importers of organic cotton from developing countries, for example. In fact, they tend to include many conventional businesses in their portfolios. Some funds focus on a specific region. Others, like CEI, look for any company that will provide jobs for unskilled workers; half of CEI Ventures’ investments, for example, are not in Maine. Certain funds also provide operational advice—marketing, public relations, executive recruiting and the like—to some companies, but not financing.
Even if your business doesn’t now fit the profile, you still might be a candidate for funding. Earlier this year, for example, Adena approached Advanced Imaging Solutions, an Omaha-based video surveillance company, with a proposal. The firm was developing video technology for team coaches and players. Why not start a separate company and set up shop in Athens, where the business could establish an R&D and product development office at Ohio University’s renowned sports management program? Adena, whose investors include the Ohio University Alumni Foundation, helped raise a total of $2.5 million, bringing in two other investors, to help launch the new firm.
Despite their growth, community venture firms are still a tiny part of the venture business and tend to make small investments, at least by VC standards. Nine-year-old Boston Community Venture Fund, for example, makes initial investments that range from $250,000 to $1 million.
On the other hand, community venture firms aren’t looking for the same returns as most venture capitalists—perhaps 20%, compared to the 30% of the big VCs. And they tend to invest in manufacturing and service companies, not trendy technology startups.
Where do the funds get their own financing from? The largest source is banks—about 42% of total capital, according to the Community Development Venture Capital Alliance. That’s because investing in these funds helps banks meet the terms of the Community Reinvestment Act, which require that they invest a certain amount of capital in their own communities. The rest comes from a mix of government programs, foundations and insurance companies. While federal funding for several programs has been cut, there’s legislation pending in Congress to reauthorize at least one of them.
| A Community Venture Sampler | ||||||||||||
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These VC firms sprang out of community development corporations—non- profit, government-funded groups established by Lyndon Johnson’s Great Society to provide social services to low-income areas. One such company, Kentucky Highlands Investment Corp., in London, Ky., took the innovative step of investing in and lending money to new businesses in the region. Other community development groups followed suit. More recently, for-profit venture capital funds got into the act. CEI, for example, is a for-profit subsidiary of Coastal Enterprise, a 30-year-old not- for profit community development corporation that lends money to groups providing affordable housing, day care and other social services.
How to Apply
Just because they’re non-traditional, doesn’t mean these funds skimp on doing their homework. The due diligence process is similar to that of traditional VCs. You will be and to provide detailed financials as well as market analysis and growth projections. “We’re as tough as anybody else out there,” says Gellerman. Then there is the added hurdle—proving that your expansion can benefit the community. For more information, contact the Community Development Venture Capital Alliance at http://www.cdvca.org/
