Reaching out to fund innovation
CREDC leads effort to build pot of money to boost new local firms
Monday, June 7, 2010
A general lack of funding is stifling business growth and innovation in Southwest Washington, community economic development officials and business owners say. In the aftermath of the financial crisis, commercial bank loans are still scarce and venture capital investment is even more elusive for startup companies seeking rapid expansion.
And so the Columbia River Economic Development Council is leading an effort to build a $5 million community equity fund that would pump $500,000 to $1 million at a time into a handful of local early-stage companies.
The fund will help companies “span the valley of death between startup financing and a proven business model,” said CREDC President Bart Phillips. “They need that capital to grow.”
CREDC in January first floated the idea as an economic development and job creation tool modeled after similar programs in communities around the world that provide money in locations that traditional venture capital has ignored. The nonprofit Community Development Venture Capital Association counts at least 60 community equity funds with a total of $2 billion under management in 2009.
But CREDC’s model is a hybrid of different investment strategies, adapted to the specific needs of this region, and therefore still largely untested.
“This thing is conceptual and it’s easy to critique,” Phillips said, “let’s make it better.”
No taxpayer dollars would go directly to the fund, although public agencies would likely be involved in staffing or other support, said Camas Mayor Paul Dennis, part of a group of business leaders involved in planning the fund. Instead, CREDC will likely establish an independent agency or nonprofit to manage the fund and recruit investors from a variety of sources inside and outside of the community.
CREDC’s plan earlier this year was to raise $5 million to $10 million for the fund through a mix of public and private dollars, but board members were skeptical about the feasibility of that plan, Phillips said. The scope has since been scaled back to a $2.5 million to $5 million fund.
Experienced investors would manage the fund with two main objectives: earn a high rate of return and create jobs in Clark County. Their investments would focus on companies in the county’s growth industries including diversified manufacturing, microelectronics, renewable energy and medical devices.
The idea is to provide funding for startup companies that have passed the seed stage and are looking to ramp-up hiring and production, but aren’t quite big enough to qualify for a bank loan or attract venture capital funding, Dennis said.
“There is risk, but less risk than a (brand new) startup,” Dennis said.
The fund would offer investors an opportunity to bet on Southwest Washington as a region, but investing in companies that aren’t yet ready for venture capital or traditional bank loans, also carries a higher risk.
“If the banks and the professional lenders aren’t able to see their way clear in financing those kind of ventures then why would it be a better investment for some other entity?” said Ron Wysaske, president of Riverview Bank in Vancouver. “If it’s worth doing and has financial viability there should be financing available from the more traditional sources of capital, in most cases that being banks.”
Unlike a loan, which lands a business in debt, the fund would offer equity to be redeemed only when the company has reached the next stage. But such a fund could also have a hard time attracting investors because it would be limited to companies located within Clark County’s relatively small geographic boundaries or those willing to relocate here.
Several traditional investment funds focused on companies in certain states or even on the entire Pacific Northwest already have a limited number of high-growth companies to choose from, said Brad Zenger, managing director of Pivotal Investments, a clean technology venture capital firm based in Portland. The most likely way to generate double-digit returns happens when investors find companies that can compete globally, outside of their immediate market, in places such as California and China, he said.
“If you limit yourself to investing only in your neighborhood then you risk doing suboptimal deals that ultimately can’t scale,” Zenger said.
Limiting investment to companies with a presence in Clark County could also increase the risk that one countywide catastrophe, such as plummeting real estate values, would devastate the fund.
“If you’re diversifying a portfolio, why live here and have a business here and invest here?” said Alisa Pyszka, business development manager for the city of Vancouver.
Pyszka suggests it might make more sense to direct Clark County’s efforts toward attracting investment from venture capital firms in Seattle and Portland instead of trying to create a smaller version of that here.
Incentive to move
Much of the risk in concentrating on one area can be overcome, however, through a “disciplined” investment process, Zenger said. The fund should focus on finding “the best deal in the country that happens to be in your neighborhood,” and not just the best deal in the neighborhood, he said.
That’s why Phillips says the fund won’t necessarily focus on companies headquartered in the Vancouver metro area, but also those that want to establish operations here. That way the fund would act as an incentive for companies to move to Vancouver for their next stage of growth.
“We’ve definitely run into established companies where an equity investment of $1 million or $2 million would have landed the company in the community,” Phillips said. “Especially in renewable energy, it would have made a difference in where they located.”
Phillips cited companies such as nLight Photonics, which moved to Vancouver from Seattle about 10 years ago, as the sort of successful startup company the fund would like to create.
But nLight moved to Vancouver with $55 million in funding, while the community equity fund would provide less than 5 percent of that amount to companies relocating here now. Still, most of that venture capital investment in early-stage companies would go to hiring people, providing a direct benefit to the community, said Scott Keeney, chief executive officer of nLight.
“Anything we can do to encourage more startups in the area would be a good thing,” Keeney said. If the CREDC board approves the plan, the next step will be a feasibility study to gauge investor interest and identify potential investment opportunities.
The development council is now seeking feedback on the community equity fund model from investors, business owners and other community leaders, and expects the fund to make its first investment in about 18 months.
Get connected to entrepreneurs, investors
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