Federal Reserve Bank of San Francisco

Community Development

Rural Community Development Venture Capital - Volume 2, Issue 3

December 2006

Foreword

David Erickson
Center for Community Development Investments

Community Development Investment Review

John Maynard Keynes cautioned that market forces alone were not sufficient to keep an economy at its peak capacity; governments would have to intervene and guide economic activity. Friedrich von Hayek’s response was that government, from the top down, did not have enough information to make the millions of efficient economic decisions that were necessary for economic growth. This debate dominated much of the economic policy discussion in the 20th century, but remains at the heart of the problem faced by rural economies.

The market is not delivering the same growth in rural areas that metropolitan regions enjoy. Yet past government interventions, such as expensive tax incentives to lure industry, or substantial subsidy programs in agriculture, have not delivered robust economic growth either.

As the articles in this issue of the Community Development Investment Review explain, there may be more value in a blend of Keynes and Hayek; an approach that combines the market information on the ground in rural communities, with the resources, information, and capital that can come from government. In a vein similar to James Willard Hurst’s explanation that changes in legal principles in the 19th century brought about a “releasing of energy” in communities across the country, a change in rural community development financing might re-release that energy in the 21st century. So, this issue of the Review wrestles with how rural entrepreneurs can find the financing they need to release the energy of their local communities.

We have gathered a variety of perspectives in this issue of the journal—from leading academics and community development practitioners to politicians who are helping to shape a new approach to growing rural economies. David Barkley and Mark Henry discuss the challenges that many rural communities face in terms of generating new innovations and Julia Sass Rubin focuses on options and obstacles to financing new ventures in rural areas with community development venture capital (CDVC). L. Ray Moncrief and Grady S. Vanderhoofven, two leading practitioners in rural CDVC, also discuss current challenges to their work, but focus too on trends that point to a stronger future for rural economic development.

There are also two articles about specific and promising new approaches to funding rural business: (1) state government-sponsored venture funds (George Lipper), and (2) rural angel investor networks (Steve Mercil). Finally, we have a collection of essays from Senator Jay Rockefeller, a leading advocate of rural investment, Kerwin Tesdell, the executive director of the primary trade organization for CDVC, and Jaratt Applewhite, the head of a CDVC organization in New Mexico.

It is our hope that we can keep this conversation going with subsequent articles and conferences. We look forward to hearing from you on which ideas you think show the most promise to grow rural economies.

Finally, I want to draw special attention to the fact that this issue would not be possible without the help of Ray Daffner, the Entrepreneurship Initiative Manager for the Appalachian Regional Commission. He brought direction, contacts, and energy to this issue and we owe him a great deal for his help.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System. Material herein may be reprinted or abstracted as long as the Community Development Investment Review is credited.

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Table of Contents

Innovative Activity in Rural Areas: The Importance of Local and Regional Characteristics
David L. Barkley, Mark S. Henry, and Doohee Lee

Financing Rural Innovation with Community Development Venture Capital: Models, Options and Obstacles
Julia Sass Rubin

A Vision for the Future of Rural Developmental Venture Capital
L. Ray Moncrief and Grady S. Vanderhoofven

State Governments Start Investing Capital for Entrepreneurs to Grow the Local Economy and Keep Jobs
George Lipper

Organizing Angel Investment to Benefit Angels, Companies, and Communities
Steve Mercil

Commentary

Senator Jay Rockefeller
U.S. Senate

Kerwin Tesdell
Community Development Venture Capital Alliance

Jarratt Applewhite
New Mexico Community Capital