Page 147 - 1-Entrepreneurship and Local Economic Development by Norman Walzer (z-lib.org)

136 Deborah M. Markley

Equity capital, however, is often more mysterious to rural entrepreneurs.
An equity investment conveys a share of ownership in the company to the
investor, reducing to some extent the entrepreneur’s control over his or her
creation. The investor, in turn, gives up the certainty of repayment for a
share in the future profits of the enterprise.
Venture capital institutions serve as a conduit between investors and en-
trepreneurs and provide the information entrepreneurs need to understand
the equity transaction. These institutions pool the investment capital of pri-
vate sector institutions or individuals and then invest in entrepreneurial
ventures that offer the promise of significant rates of return. The experience
of venture capital investing in the United States suggests, however, that en-
trepreneurs in more rural parts of the country are not well served by these
traditional institutions (RUPRI Rural Equity Capital Initiative 2001).
Equity capital investing in the United States is concentrated both geo-
graphically, sectorally, and by stage of investment (PriceWaterhouseCooper
2006). In 2005, more than $21 billion in venture capital investments were
made, with 60 percent going to four regions: (1) Silicon Valley, (2) New
England, (3) the New York metro area, and (4) the Los Angeles metro area.
More than 60 percent was invested in just four states: (1) California, (2)
Massachusetts, (3) New York, and (4) Texas. Of this total venture investing,
about half went to just three sectors: (1) software, (2) biotechnology, and
(3) telecommunications; and 80 percent was in expansion or later stage in-
vestments rather than seed or early stage investments.
The concentration in this industry has been consistent over time, and it
does not bode well for entrepreneurs in rural markets. Most venture capital
firms are located in the regions in which investments are concentrated.
Given the hands-on nature of venture investing, most deals are made close
to the offices of the venture investors. If a rural entrepreneur is able to at-
tract investment from a traditional venture capital fund, the capital invest-
ment often comes with a significant string attached—that the company be
moved to the region in which the venture fund is located. While this re-
quirement may bring much needed capital to a rural entrepreneur, it does
not support the economic development goals of rural communities.
Two trends in equity capital investing have brought a glimmer of hope to
rural entrepreneurs actively growing their businesses and who need an in-
vestment of equity capital to meet growth aspiration: (1) the increased
number of community development venture capital institutions and (2)
the rise in formal angel investing networks. Community development ven-
ture capital (CDVC) institutions, like CDFIs, make investment decisions
based on a “double bottom line”—economic return on the investment and
the community development return that is achieved.
In a 1995 report on nontraditional venture capital institutions in rural
America (RUPRI Rural Equity Capital Initiative 2001), the authors found a