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Matching VC to Local ED Goals Expanding Rapidly

May 25, 2001

With so much attention given to increasing private seed and venture capital activity as a means of growing tech-based economies, one might expect that encouraging and attracting community development venture capital (CDVC) – that is, equity investments and entrepreneurial assistance to meet both profit targets and community development goals – would be a common element of a state or local community’s portfolio of economic development tools.

Increasingly it is, according to the first in-depth research on the state of the CDVC industry, released recently by the Community Development Venture Capital Alliance (CDVCA).

In fact, the study, prepared by Harvard Ph.D candidate Julia Sass Rubin, found more than 50 CDVC providers actively investing or in formation at the beginning of 2000 – up from a mere handful only five years ago. The combined capitalization of these providers at the end of 1999 was $300 million.

Community development venture capital providers make equity investments in businesses in distressed rural and urban areas. CDVC goals, in addition to receiving a positive return on their investment, are to promote economic growth by providing high-quality, higher-wage jobs for low-income people. As a result, CDVC investments are typically made in low- and moderate-income communities or rural areas, not Silicon Valley or Route 128.

CDVC differs from traditional venture capital in many other ways as well. CDVC deal sizes typically range from as low as $10,000 to $1,000,000, compared to the ever-increasing average VC deal (more than $13 million on average in 1999).

Eighty-six percent are willing to invest at any stage of a company’s growth, according to the study. The majority of CDVC providers also target manufacturing jobs; CDVCA reports 50 percent of all equity-focused investments were in manufacturing companies at the end of 1999.

While technology-related companies accounted for more than 90 percent of private venture capital activity according to groups like the National Venture Capital Alliance and PricewaterhouseCoopers, CDVC providers had placed only 34 percent of their investments in tech firms.

And, the report finds, CDVC funding creates jobs at a lower investment/per job than both traditional VC and Small Business Investment Corps. (SBICs). Three of the oldest CDVC funds reported creating more than 4,000 jobs at an average investment of less than $10,000 per job. The study indicates jobs created through SBICs, for comparison, cost an average of $35,000 per job.

In spite of the recent explosion of CDVC activity, the study indicates there are still 24 states with no access to community-based risk capital. Most CDVC providers work along the East or West Coast, or in Minnesota and Ohio.

Banks and financial institutions are increasingly important sources of capital for CDVCs, according to the report. Banks and financial institutions account for 34 percent of all domestic CDVC funding, yet they provided 58 percent of the capital for the newest funds. Foundations account for 22 percent of all CDVC funds, and the federal government has contributed 19 percent of the capitalization.

Community Development Venture Capital: A Report on the Industry can be purchased for $15 from CDVCA ($10 for multiple copies). More information on the Alliance can be found on the CDVCA website: http://www.cdvca.org

New York