Rural America is ripe with potential, starving for capital

Rural America is ripe with potential, starving for capital
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Investment in venture-backed companies in the United States reached $57 billion in almost 4,000 deals in the first half of 2018. Yet, only a fraction of those dollars found their way to funds and companies based in rural America.

This capital deficit is starving innovative and valuable growth opportunities across rural communities. Many people think immediately of agriculture when focused on rural communities, yet it only makes up 6 percent of today’s rural economy.

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Small businesses are the lifeblood of rural economies, and will continue to be the single biggest opportunity for growth for small communities. Without crucial access to capital, job growth and rural economic development will continue to lag the rise in prosperity of the rest of the country. 

 

One way of addressing the issue of scale that is often a limiting factor for rural investment is the development of funds that target mid-tier investments. The recent wave of Rural Business Investment Companies (RBICs) is a good example.

Their charters limit their investments to rural-based businesses and their typical investment slice has been in the $1-5-million range. Another tool is a fund of funds approach, where many small funds are brought together by institutions as way of allowing their customers to obtain the diversity and scale that is denied them in more targeted funds.

Here is an area the federal government has a role in, tackling some of the obstacles that exist to small business investments in rural America. Under the authority of U.S. Department of Agriculture (USDA), the recent wave of RBICs has been impressive. Several hundred million dollars have been raised in these funds. More are in line awaiting approval.

Last year’s tax bill and the Opportunity Zones provisions are also a source of great potential for incremental equity investments. About 23 percent of the state-designated investment zones are located in rural America. Now it is imperative to align potential opportunity funds with opportunities to invest in rural communities.

The Senate version of the 2018 Farm Bill also includes language that would expand the opportunities for RBICs, as well as create Rural Innovation Centers, focused on spurring innovation in rural areas. Both RBICs and Rural Innovation Centers are included in the bipartisan Rural Jobs and investment Act of 2018, a crucial step to addressing these issues within the Farm Bill. 

There are several groups and organizations focused on addressing these gaps in capital flowing to rural communities.

RuralRISE is a partnership between dozens of rural-focused entrepreneurial ecosystem builders from throughout the country, all working together to create opportunities for entrepreneurs and small-business owners to thrive in rural communities.

Given the economic and geographic disparities that rural communities face, it is imperative to find ways to share best practices from across the country to ensure there is a community of practice that allows rural entrepreneurs and those striving to create opportunity for those entrepreneurs to learn from one another, advocate with a collective voice and push for more capital to flow to rural opportunities.

At Georgetown’s Rural Opportunity Initiative (ROI), we have partnered with the USDA and three leaders of our land grant university system: Iowa State University, Mississippi State University and Purdue University.

Together, we have embarked on an effort to increase investment from the private sector in rural America, a geography that is more than 95 percent of the country’s land area and less than 20 percent of its population.

It is well established that small business and particularly new small businesses are the greatest source of job growth. Yet, these new businesses lack access to a critical source of capital. There are several issues that lead to this gap, including: a lack of awareness, issues of scale and development of funds

Innovation and emerging technologies that are growing in rural America need to be connected to institutional investors. Efforts like Steve Case’s well publicized Rise of the Rest tour is one example of how to do this using established investors and platforms. Awareness-building is only the opening of the door to the investment decision. 

Other more significant barriers remain. Chief among these is the issue of scale. Most rural businesses are small businesses. They are not looking for hundreds of millions of angel investment or a Series A funding.

More often, they are looking for $500,000-$2 million of mezzanine financing, money that is essential to the development of a business plan, initial working capital and operations. Yet, few organized sources exist for this level of funding.

Partnerships from the federal government are important, but the primary source of change is going to come from the private sector. We know those dollars are available — $57 Billion in the first half of 2018 alone — but the challenge is how to change the direction of those investments toward sectors of the economy and geographies where venture capital has not been well represented.

That is ultimately a challenge of building awareness of those investment opportunities and connecting those opportunities with investors ready and willing to make investments as they become available.

Matthew M. McKenna founder and executive in residence of the Rural Opportunity Initiative at the McDonough School of Business at Georgetown University.