Many people across the country think that the story of rural America has already been written. Small towns are increasingly being left behind, and the capital that is so badly needed to spur economic growth and opportunity is not finding its way to small business owners and entrepreneurs that are the core of rural communities. In fact, less than 1% of all venture capital makes its way to rural communities in the United States. In order to spur innovation, access to capital is critical, and it is a major barrier for rural entrepreneurs in today’s day and age. Small businesses drive the US economy and are an even larger factor in economic growth in rural communities. Since the financial crisis and recession, rural communities have not recovered at the same rate as their urban counterparts. Lack of access to capital continues to stretch small businesses, yet it, along with credit, is vital to spurring the startup and growth of businesses in communities of all sizes.
It is not all bad news for rural communities however. According to the US Small Business Administration analysis of the Census Bureau’s Current Population Survey, rural residents were self-employed at a slightly higher rate than national average in 2016 (6.5%, compared to 6%). While many people think of farming and agriculture as the main industries in rural communities, they only make up 1/6 of the business owners in non-metro areas. Small businesses are the heart and soul of rural communities and are often the most important indicator of success or failure of those regions. The smallest rural areas actually have the highest rate of self-employed businesses, and those businesses are, on average, more resilient than their urban competitors. Some rural states, including some in the Rocky Mountain West and Maine, have the highest rates of business formation since the recession. Overall though, rural communities are lagging behind, often because of the capital gap that is ever widening.
How do we help, and whose role is it to fill these capital gaps? There are federal policies and programs that attempt to address the issue of access to capital in rural communities, but it is not enough. For example, many agricultural and rural small businesses enjoy preferential access to loan capital at below-market interest rates from the U.S. Department of Agriculture, and more than 60% of the US Economic Development Administration goes to rural communities. Still, gaps exist, and small businesses have no place to turn.
This is where the private sector can find an opportunity to fill the gaps in access to capital. Access to equity capital is a critical factor in entrepreneurship success. Patient capital helps develop and get products to market and is a major factor in the success of a small business or startup.
So why have rural based entrepreneurs struggled to access venture capital if it is so important?
- Because typical drivers of venture capital are profit maximization, the industry tends to look to regions that maximize potential investment opportunities and minimize cost.
- This is harder in rural environments, as infrastructure, talent and geography constraints make these transactions more difficult.
- New models of venture capital are necessary to be successful in more rural areas.
- One such example is the community development venture capital (CDVC) model. CDVC providers make equity investments in small businesses, however their investments are predicated on a company’s potential for high-quality job creation for low-and-moderate income residents on top of its likelihood for rapid growth. Because of the additional focus areas, CDVCs are willing to invest in companies in different industries, stages of development and locations.
- Utilizing existing programs like the New Markets Tax Credits and RBICs are other ways to spur investment from non-traditional rural focused venture capital funds.
The truth is that there is not a shortage of investable opportunities in rural communities. The gap exists in educating investors and connecting them with those opportunities. Universities are increasingly playing a larger role in this area. At the Rural Opportunity Initiative (ROI) within Georgetown University, a partnership between Georgetown, Iowa State University, Mississippi State University and Purdue University has emerged to try and tackle this issue. ROI and the university partners are working to highlight these opportunities and to educate investors and lenders to help create new rural asset classes and drive capital into rural communities across the country. Several events across the country have been developed in partnership with the university partners to bring venture funds and other investors into the state to hear from and connect with entrepreneurs and small businesses that are investable.
There is a lot of opportunity ahead, and rural communities will continue to be at the forefront of innovative ideas and opportunities, they may just look a little different than those in urban environments.
Matt McKenna, Executive in Residence and Founder of the Rural Opportunity Initiative, a program at Georgetown University’s Global Social Enterprise Initiative, part of the McDonough School of Business. Visit: Rural Opportunity Initiative