These days some of the best funding opportunities are coming from community-development venture-capital funds.
Capital
Can't find money anywhere? Maybe you're searching too far from home.
Lewis Buchner knew he was looking for a needle in a haystack. The CEO and founder of Vida, an office-furniture manufacturer based in Brisbane, Calif., had grown his company to $6 million in revenues and 50 employees over 27 years. Now Buchner was ready to launch Vida's own branded product line, but he wasn't sure where to turn for the necessary funding to get the project going.
Though he was reluctant to take on any more bank debt, Buchner was completely realistic about his chances of finding equity financing. "It's extremely difficult for a company like ours to go to the VC market," he says. "We might as well say it's virtually impossible. We're a small low-tech company that is never going to go from $6 million to $60 million in two years. It's just not going to happen."
Yet five months after Buchner's search for capital began, Silicon Valley Community Ventures (SVCV), a firm that targets businesses in low-income communities in the Bay Area, invested $250,000 in Vida in exchange for a 6% stake. What aspect of the business caught SVCV's eye? Two very surprising elements: Vida's commitment to training and advancing its blue-collar workforce, and its socially responsible business practices, especially its commitment to sustainable forestry.
Those qualities may not seem as if they would be particularly attractive to a typical venture-capital firm. But SVCV is hardly typical. As one of some 50 funds involved in community-development projects throughout the country, SVCV seeks both practical and altruistic compensation -- referred to by those within the community-development arena as a "double bottom line." The dual goal: to see not only a financial return on an investment but also a return to the local community in the form of such things as jobs for low-income workers, inner-city property revitalization, or opportunities for women and other minorities.
Community-development funds are not an entirely new idea. Their roots can be traced back to the 1960s, when the federal government created community-development corporations, nonprofits backed by government money for the support of companies and community programs in inner cities and rural areas.
At the time the notion may have had merit, but the reality couldn't quite live up to the ideal. Since most of the original corporations didn't require a return on their investment, they needed continual infusions of capital to keep them going. Ultimately, a new self-sustaining iteration -- community-development venture-capital funds (CDVCs) -- evolved.
Since such funds rely on the success of their portfolio companies to underwrite subsequent investment rounds, they seek tangible financial returns -- for example, five times their initial investment over five years. Today, backed by capital from charitable foundations, the federal and state governments, and banks, CDVCs serve geographic regions as well as lower-tech markets neglected by the traditional venture-capital industry.
At present, some 20 U.S. funds are using the community-development model to make either equity or near-equity investments, while another 10 or so funds focus primarily on community-development lending or some other social-service provision and only occasionally make equity investments in companies in underserved areas. An additional 20 funds are in the initial fund-raising stage. All told, the funds are worth an estimated $300 million. (For a list of community-development venture-capital firms, visit www.cdvca.org, the Web site of the Community Development Venture Capital Alliance.)
Lewis Buchner's secret weapon in making his pitch to SVCV was his company's business plan itself. He drew up a traditional document, including an overview of the marketplace, a list of his company's competitive strengths and weaknesses, and what he saw as the market opportunities for his new product line. He also included information about Vida's diverse workforce and made forecasts about job-growth potential because he saw those elements as a critical part of his company's identity and thought SVCV would be particularly interested in his community-development commitment.
He was right, says Jacob Singer, senior portfolio manager at SVCV. "The thing that really caught our attention about the company from a social-return point of view was the willingness of the CEO to implement training programs for low-income workers within the company," he recalls.
After 60 days of due diligence, during which SVCV challenged Buchner on his financial projections and his expectations for the new product line, the CEO walked away with $250,000.
He also gained access to SVCV's advisory program, a free service through which SVCV links its portfolio companies with Bay Area executives who volunteer their time and expertise in such business-critical areas as finance, marketing, and strategic planning to companies that could otherwise never dream of being able to hire them. Vida recently received a convertible-debt round of financing from SVCV, and Buchner says he wouldn't hesitate to look to the firm to lead any additional funding rounds.
On the opposite side of the country, in Helenwood, Tenn., Container Technologies Industries LLC is so far removed from the fast lane that CEO and president Tom Reddoch can't get cell-phone service when he's in the office at his steel-container manufacturing plant. But although the rural company might not have made any venture capitalists swoon with its line of hazardous-waste storage and transport containers, its job-generation potential -- and the benefits that its products afforded the environment -- made the investment committee at Sustainable Jobs Fund (SJF) sit up and take notice.
In 1999, when Reddoch and a group of local angel investors were trying to raise the $600,000 they needed to purchase Container Technologies from its former owners, they approached SJF and asked for help in reaching their goal. SJF, which has offices in Durham, N.C., and Philadelphia, made a $266,500 preferred-membership-interest investment in Container Technologies in exchange for a 15% nongoverning stake in the company. ("Preferred-membership interest" indicates that SJF, as the biggest cash investor, receives the first income and potential capital-appreciation returns that Container Technologies sees. "Nongoverning" indicates that SJF has a nonvoting interest in the company.)
