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Small Business Equity Investment Through Venture Capital

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Small Business Equity Investment Through Venture Capital

Community development venture capital (CDVC) funds are mission-driven entities that invest in businesses in low-income communities. CDVC funds provide equity capital to businesses seeking market-rate financial returns, as well as the creation of good jobs, wealth, and entrepreneurial capacity. When those businesses grow and prosper, they deliver both a financial return for their investors and a social return for their communities.

The type of equity investment provided by CDVC funds is critical to realizing the economic power and social impact inherent in low-income communities.  However, venture capital investment requires a long view, adequate capital flow, and excellent execution.
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According to Thomson Financial and the National Venture Capital Association, through the third quarter of 2007, all private equity produced a 10-year average annual net internal rate of return of 17.9 percent and a 20-year return of 16.4 percent. Later-stage venture capital, perhaps most analogous to community development investment capital because of its higher concentration in older and non-technology businesses, provided returns of 8.3 percent over 10 years and 13.8 percent over a 20-year horizon.

By comparison, Kentucky Highlands Investment Corporation, the nation’s oldest CDVC fund, reports an 18 percent average rate of return over a 21-year history.2 Other funds, such as Coastal Enterprises Inc. in Maine and Pacific Community Ventures in California, are achieving competitive internal rates of return as well as strong social return on investment.

CDVCs are a sound federal investment. It is important that the federal government act as a catalyst for venture capital by stimulating the flow of funds to high-quality firms and fund managers with the experience to invest successfully.

This is an excerpt from The NEXT American Opportunity. The full text can be downloaded as an Adobe PDF Document.