New technology investment hubs may soon spring up in areas like California's agriculture-driven Central Valley and the United States' Appalachian region, as government for-profit venture programs help encourage investments in poor and rural communities.
As once-generous investors have become stingy amid the downturn in the markets, venture firms have begun eyeing these new government public-private venture programs because they can give investors confidence that they are investing in a fund that is entering a new market. And, in these largely untapped communities, competition with other venture firms is generally low.
The move by VCs has been largely driven by the increasing number of venture partnership programs established by government agencies, like the U.S. Small Business Administration (SBA), and other state agencies.
Earlier this month, the SBA said it extended the time that VC firms will have to raise money to participate in its New Markets Venture Capital program. The seven selected firms, which will invest in rural and economically distressed urban areas, will have until January 2002 to raise between $5 million and $12.5 million in equity investments, and an additional $1.5 million to $3.75 million to give operational assistance to the start-up companies in their portfolios. The SBA will then match those funds.
Some VCs say these types of programs could hatch something like New York's Silicon Alley, for example, which got its start from the Prospect Street NYC Discovery Fund, a private-public equity investment fund that got investment dollars from the New York City Economic Development Corporation.
"With the government's support, more money goes into low-income areas than it would otherwise," said Austin Belton, the program director for New Markets Venture Capital. "Venture capital is a very desirable thing to have and there is a will on the part of a lot of states to recognize the value of VCs."
States like California are also looking to follow in the footsteps of the SBA. State Sen. Raymond Haynes introduced a measure last February that calls for creating the California New Markets Venture Capital Program Act. The program would provide funding to the venture capital firms and require them to raise at least $5 million from outside, or non-state agency, investors.
These venture firms are expected to invest in small companies in low- and moderate-income areas. The bill is on a two-year cycle and requires a vote by the state Senate by January of next year.
The California Public Employees' Retirement System, or CalPERS, launched its California Initiative program last May. CalPERS, the nation's largest pension fund, selected 11 venture firms and private equity firms to invest $475 million in California start-ups located in areas typically overlooked by venture firms and banks. Some of the investments are expected to include technology companies, given the focus of the venture firms involved: including Garage Technology Ventures and Draper Fisher Jurvetson.
A number of venture firms are signing up for these programs, in addition to social agencies that have created venture capital arms.
In the case of CalPERS, Garage Technology Ventures received $10 million for its Garage California Entrepreneurs Fund, while Draper Fisher Jurvetson received $20 million for its Draper Fisher Jurvetson Central Fund that will concentrate in the Central Valley that spans from Sacramento, Calif., to Bakersfield, Calif.
Adena Ventures, based in Athens, Ohio, is participating in the SBA's New Markets Venture program and expects to close its $25 million fund later next month. Adena's fund will cover a range of industries, including information technology and telecommunications, in central Appalachia. The region encompasses Southeastern Ohio, Northeastern Kentucky, West Virginia and Western Maryland.
Although traditional venture firms can go it alone when entering a new region, some find it a challenging task.
"From our perspective, it's challenging to try and raise an adequately sized fund when you're entering parts of the nation where there is little or no venture capital presence," said Lynn Gellermann, president of Adena. "From our limited partners' perspective, they feel the SBA runs its program applicants through a thorough process, and that gives the investors an added level of confidence."
Adena said its previous effort to court potential investors in the rural Appalachian region was far more difficult prior to its acceptance in the SBA program.
"Some potential limited partners in the region are willing to do a strategic investment, but others, like pension funds and insurance companies, have not flocked to this area of investment," he noted.
In addition to attracting fund investors with the SBA program, Gellermann noted he would be able to leverage the $12.5 million in equity his fund has raised to a $25 million fund based on the matching SBA funds.
"The program not only allows us to scale in size but with a larger fund, it also allows us to employ a more experienced management team," he added.