Wednesday, August 17, 2011

How I See It

Some startup plays are better suited for outside the big cities

By Michael Gurau, president, Clear Innovation Partners

I recently joined about 30 others in a New Investment Capital in Rural America roundtable convened by Agriculture Secretary Tom Vilsack, who organized the group to brainstorm a key catalyst for growth in innovation and entrepreneurship — risk capital.

Early stage venture capital, private equity, near equity, angel and other capital providers offered what insight we could. The fund I represented, CEI Community Ventures, was one of a handful of early stage equity providers — and one whose charter included a focus on investment in northern New England. The question posed to the group: how can we (feds and private sector) collaborate to direct capital to regions that have not typically been high priority for the VC community.

USDA has an interest in leveraging rural markets’ natural assets to serve growth sectors such as renewable energy; additionally, the agency has long supported value-added food and agriculture ventures. Biofuels — waste agricultural stock and newly grown agri-fuel sources — were top of mind for the secretary.

As one might imagine, different capital providers brought different perspectives. Private equity folks spoke about improving the regulatory environment (less of it) and credit markets (more of it). Early stage VC funds wanted to see more capital and tax credits made available to spur private sector investment. Some (including me) advocated for support of the agency’s Rural Business Investment Program (RBIP), funded out of the 2002 Farm Bill as a partnership between USDA and SBA. Focused on targeted rural communities, RBIP licensed only one fund before program funding was withdrawn in 2005.

From a risk-capital perspective, the rural scene is a challenging one. Early stage funds seeking high growth with proven teams are hard pressed to find them laying low in the woodlands, lowlands or mountains that describe the landscape of rural communities. But for a handful of experimental funds focused on rural and/or underserved communities, the early stage equity market has gravitated — for good reason — to urban markets. It’s not that potential CEOs and senior managers don’t want to live in more rural areas. They have to consider what their options are if the venture doesn’t work out and they’ve moved their family to an area with fewer opportunities than one would find in Boston. 

A similar problem exists in finding experienced VCs that want to play in rural markets. Fund managers not only need experience in high-touch, early stage VC but also in the challenges that are specific to rural ventures.

I supported Vilsack’s case for a sector focus on renewable energy, while noting 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 are not so enthusiastic to double down in this environment. Biomass is challenging in that its supply source and its end product are commodities that compete on volume and thin margins. 

As the fund I manage has had a good run in support of food plays (including Maine-based Looks Gourmet Foods), I offered encouragement in the value-added producer segment, which has higher growth rates and margins than commodity foods (grains, oils, etc). Mine was a qualified endorsement given that this too is a field with limited co-investment support. But for other geographically targeted funds, risk capital tends to bias high margin, high growth web businesses like Facebook and Groupon. This paucity of co-investment capital increases risk of failure in that a food company will find it challenging to support early stage growth.

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 looking at how innovation tools like equity can address the challenges of rural economies.

 

Michael Gurau is president of Clear Innovation Partners in Freeport, Maine.