The Committee on Small Business Subcommittee on Economic Growth, Tax, and Capital Access and the Subcommittee on Agriculture, Energy, and Trade met for a joint hearing titled, 'Investing in Rural America' on Tuesday, July 24.
Matthew M. McKenna, executive in residence of the Global Social Enterprise Initiative's Rural Opportunity Initiative, served as a witness. Below is his testimony:
"Investment in venture-backed companies reached $57.5 billion invested across 3,997 deals in the first half of 2018, according to the PitchBook-NVCA Venture Report. And yet, only a fraction of those dollars found their way to funds and companies based in rural America. I am here today on behalf of the Rural Opportunity Initiative (ROI), an effort by Georgetown University to address this imbalance.
The Rural Opportunity Initiative is a partnership between Georgetown University's McDonough School of Business, the United States Department of Agriculture (USDA) and three leaders of our land grant system: Iowa State University, Mississippi State University and Purdue University. Together, we have embarked on an effort to increased investment from the private sector in rural America…a geography that is more than 95 percent or country’s land area and less than 20 percent of its population.
It is well established that small business and particularly new small businesses are the greatest source of job growth. Yet, these new businesses lack access to a critical source of capital. The Rural Opportunity Initiative was organized to address this imbalance. Together with our partners, we have organized events that bring together both investors and entrepreneurs. With Iowa State, we held an event in Des Moines, IA that attracted dozens of small businesses and potential investors, including regional venture capital funds and large institutional banks. Last month, a similar even was held in Starkville, MS where we listened to pitches from new businesses that ranged from microwave sensor technology (developed in the labs at Mississippi State University) which detect spoilage in grain elevators to healthy crackers made from a flour rescued from the by coproducts of craft beer.
Also on the Rural Opportunity Initiative's schedule for the rest of this year are events on campus at Georgetown University around rural lending and an expanding partnership with USDA. In November, we will be hosting a major conference around rural capital and how those dollars flow to investments and markets away from the coasts.
This forum, scheduled for November, will identify both hurdles and the tools available to overcome those obstacles. Let me discuss just two of those challenges this morning.
The first is a lack of awareness. There have been some effort to bring these small business opportunities to the attention of institutional investors. Steve Case’s well publicized tour is one of these. A major event this fall in Bentonville, AR hosted by the Walton Family Foundation is another. That is the major purpose of our investor conferences in Des Moines, Starkville, and in Washington, D.C.
But awareness building is only the opening of the door to the investment decision. Other more significant barriers remain. Chief among these is the issue of scale. Most rural small business are small businesses. They are not looking for $150 million of Series A funds. More often they are looking for $500,000 or $2 million of mezzanine financing – money that essential to the development of a business loan, initial working capital and dollars.
One way of addressing the issue of scale is the development if funds that target this level of investment. The recent wave of Rural Business Investment Companies (RBIC) is a good example. Their charter limits their investments to rural based businesses and their typical investment slice has been in the $1-5 million range. Another tool is a fund of funds approach, where many small funds are brought together by institutions as way of allowing their customers to obtain the diversity and scale that is denied them in more targeted funds. Finally, the federal government has a role in tackling some of the obstacles that exist to small business investments in rural America.
Rural Business Investment Companies
Under the authority of USDA, the recent wave of RBICs has been impressive. Several hundred of million dollars have been raised in these Funds. More are in line awaiting approval.
Last year’s Tax Bill and the Opportunity Zones provisions are a source of great potential for incremental equity investments. About 23 percent of the state designated investment zones are located in rural America.
2018 Farm Bill
In the Senate version of the 2018 Farm Bill that would expand the opportunities for RBICs. We think this is a good thing and urge the House conferees to join the Senate in this effort.
These pushes from the federal government are important. But the primary source of change is going to come from the private sector. We know those dollars are available – $57 billion in the first half of 2018 alone – but the challenge is how to change their direction of those investments toward sectors of the economy and geographies where venture capital has not been well represented. That is ultimately a challenge of building awareness of those investment opportunities. That is where Georgetown, the ROI and our partners are heading."