Community development venture capital funds sow economic opportunities: during the 1880s, a small number of African-American-owned banks anticipated today's community investment vehicles by providing affordable capital and access to basic financial services in underserved communities.
Explaining CDVC funds in terms of traditional venture capital funds is much like comparing apples to oranges. Both are the fruit of well-capitalized plans that stem from a solid business concept, and both are nurtured through infusions of equity and prudent management oversight. Furthermore, both usually reap a significant cash return after several years of investment, as well as nourish the economic health of the communities or industries they support. The flavors, however, are distinctly different.
Comparing traditional and community funds
Traditional venture capital funds aim to produce significant financial returns by offering high yields in exchange for assuming risk. In contrast, CDVC funds expand the definition of reward to include not only interest and dividends to investors but also new jobs and services for low- and moderate-income populations or distressed communities. This investment with a social mission results in a "double-bottom line."
CDVC funds can be structured as for-profit, nonprofit, or "hybrid" organizations in which a for-profit CDVC fund is affiliated with a nonprofit organization. The latter approach has the distinct advantage of enabling access to grant funds, according to a 2001 study by Julia Sass Rubin in Changing Financial Markets and Community Development. All CDVC funds strive to engage quality management teams, who bring significant experience in the traditional private equity industry as well as strong relationships with bankers, corporations and other economic development engines.
According to a statement from the Community Development Venture Capital Alliance (CDVCA), an industry group for CDVC organizations, CDVC funds represent one of the "fastest growing sectors of community development finance." The number of CDVC funds in the U.S. has grown from 52 funds managing $300 million in capital at the end of 2000 to over 80 managing $548 million, as of the second quarter of 2003. Research for a San Francisco Fed publication by Kerwin Tesdell and Charity Shumway in 2003 indicates that the CDVC industry grew by 38 percent over that stone period, which marked one of the most difficult fundraising environments in the venture capital industry's estimated 30-year history.
Not unlike their traditional counterparts, CDVC funds seek to invest in businesses with solid business concepts, good management teams and high growth potential. However, CDVC funds pursue distinctly different types of investment to achieve this goal compared to traditional venture capital funds.
Characteristics of CDVC investments
Unlike traditional venture capital funds, CDVC funds aren't restricted to high-growth areas or a particular stage of business development. Rather, they are more likely to extend to all businesses in urban mid rural low-income communities throughout a geographic region. For example, SJF Ventures in Durham, N.C., is concentrated in the eastern United States and invests in companies at all stages of development (see sidebar).
Another difference is that CDVC fund investments are not likely to be industry-specific. While private venture capital funds in the 1990s invested in technology-related firms, for example, CDVC funds focus on investments that will create quality entry-level jobs with good benefits and livable wages. Like traditional funds, they provide "patient capital": that is, investors don't realize a payment on their investment until the business is well-established, usually several years after the investment is made.
Unlike traditional venture capital funds that seek high returns on higher-risk investments, the financial returns on CDVC funds are usually more modest, with an additional payoff in the forms of community benefits such as job creation or neighborhood stabilization. The size of the investment is also smaller than traditional venture capital funds. According to Rubin and others in a study presented to a 2003 Fed conference on Sustainable Community Development, the average investment is $186,000 per round and $393,000 per company as compared with the traditional venture capital industry's average of $8 million per round of investment.
Finally, intensive technical assistance is critical to the success of both the CDVC funds and the businesses in which they invest.
In both types of venture capital funds, providers need to "harvest" or exit the investment to return a profit to investors and re-capitalize funds for new investments. According to Rubin, at the end of 2000, CDVC funds tracked in the study had exited 67 of their 237 total investments. More than half of exits as of 2002 were through acquisition from outside buyers, and 32 percent involved management and owner buy-backs.
Assessing the financial and social performance
Several factors make it difficult to evaluate how successful CDVC funds have been from both financial and community development perspectives. On the financial side, the majority of funds are less than seven years old and not many have exited their investments. The financial evaluation is further complicated because some of the funds received operating subsidies, used a combination of debt and equity instruments, or both.
Although the available data are limited, preliminary assessment of the industry's social impact is encouraging. Rubin tracked the jobs created by businesses financed by three of the oldest funds and found that they created more than 4,000 jobs at an average cost of less than $10,000 equity invested in the company per job. These jobs were in economically distressed rural communities and provided higher than average (for the region) benefits and wages.
To learn more about the community development venture capital industry, visit the Community Development Venture Capital Alliance's website at www.cdvca.org.
This article was written by Nancy Montoya, Regional Community Development Manager in the Atlanta Fed's New Orleans Branch.
Community Development Venture Capital Fund Close-Up: SJF Provides Capital Boost for Community-Minded Atlanta Business
Established in 1999, SJF is comprised of two organizations: SJF Ventures, a community development venture capital fund, and SJF Advisory Services, an affiliated nonprofit that offers workforce development and sustainable business services. SJF's overall mission is to "create quality employment for low wealth citizens and communities by financing and assisting companies that generate social, environmental and financial gains."
SJF Ventures invests in innovative, growing companies that provide high quality, entry-level jobs with good pay and benefits as well as a strong financial return on investment. It has made $10.1 million in equity investments in 18 companies throughout the eastern United States, including the Sixth District states of Georgia, Florida and Tennessee.
One of SJF's successful projects is Ryla Teleservices, Inc., located just outside metro Atlanta. Since 2002, SJF Ventures has invested a total of $700,000 in the company, which provides outsourced customer contact, data verification and validation services for business-to-business interactions. Since SJF's initial investment, Ryla has grown from 20 employees to 280 employees. Benefits for their employees include 100 percent employer-paid health insurance premiums for permanent workers, a 401-K savings plan, extensive training opportunities and opportunities for promotion.
SJF's companies are further supported by SJF Advisory Services, which invests in technical assistance to create, retain and enhance long-term jobs for the residents of economically distressed communities. Its role includes matching these companies with services, such as job placement and training, welfare-to-work, and economic development programs for employees.
The advisory arm of SJF has assisted Ryla through board involvement, introduction to potential investors, assistance with management recruitment and legal counsel. In keeping with their mission to build wealth for employees, SJF Advisory has also worked with management to launch a multi-tiered stock option plan to provide incentives and rewards for employees at all levels.
Mark Wilson, Ryla's CEO, was featured in the February 2004 issue of In Focus as a successful "Innovator of Tomorrow." In 2003, Ryla was named the U.S. Department of Commerce's Minority Business Development Agency's "Local Service Firm of the Year." The company was also featured in a New York Times (10/31/2003) article, "Capital for Companies that Aid Communities," and was spotlighted at the annual Community Development Venture Capital Alliance (CDVCA) conference in March 2004.
SJF's 10-member staff maintains offices in Durham, N.C., and Philadelphia, Pa.
For more information, please visit SJF Venture's website at www.sjfund.com or contact Rick Larson, Managing Director, at (919) 530-1177 or firstname.lastname@example.org.
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|Publication:||Partners in Community and Economic Development|
|Date:||Jun 22, 2004|
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