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Kick Starting Rural Early Stage Investments
Delore Zimmerman Delore Zimmerman
President
CEO Praxis, Inc.
Grand Forks, ND

North Dakota, like most U.S. rural areas, lacks capital for startup and growing companies. Entrepreneurs have difficulty finding patient, long-term capital to sustain company growth and rarely find seed stage equity investments to fuel new company growth. In rural areas investment capital is the #1 missing ingredient that inhibits innovation, short circuits leveraged investment from outside the region, and inhibits creation of growth companies.

To the lack of capital there is often added a risk-averse culture and inadequate support for entrepreneurial ventures, particularly non-agriculture ventures. An ethanol plant might raise millions while a small technology company with an exciting idea and high potential goes lacking and oftentimes packing.

Active angel investors are only a small resource for rural areas. Most would-be angel investors lack experience and low confidence about pricing and structuring investments, so it's only the occasional deal made by individual investors. Capital markets in rural areas remain unorganized and are non-existent in many communities, reducing their ability to compete and thrive in the today's economy.

But some rural communities have shown the capacity and willingness to provide equity capital resources to local entrepreneurs. They are winning both the sprint and marathon race to create jobs, economic growth and prosperity by kick starting their local early-stage investment market. Here's what they are doing to create success in rural areas:

Showing potential investors how to play. Several years ago a development professional in an urbanized rural part of Washington summed it all up. "We're a very conservative farming and real estate community. So investing in technology is downright scary. Getting them (potential investors) in that process is the most critical issue that all of our communities face, because they just simply don't know how to play."

Education and familiarizing potential investors with practices, tools and peer experiences can be extremely useful.

Getting rural institutions involved as investors. Rural areas only have a limited number of wealthy individuals with experience in informal equity investments, so institutional investors must be enabled to participate, e.g. banks, local development organizations, and cooperative and investor-owned utilities.

Institutional investors were key in organizing and capitalizing the Center of North America Capita Fund, LLC in Grand Forks over three years ago. The fund has a "double-bottom line", meaning that ROI is critical consideration but that making something happen is equally important. The experience with this fund has shown that a small to moderate amount of true equity can leverage considerable amounts of bank financing and development funds.

Establishing the fund has also shown that brokerage firms and pension funds can help create a direct conduit of investable capital from rural areas to financial centers located in urban areas.

Avoiding "me too" economies. A central paradox of investing is that the information available about an opportunity is inversely related to the scope and scale of its real potential. There is a lot of comfort when someone or everybody is already doing something and there is a lot of information about the opportunity. There is less comfort with novel ideas, and in rare cases for products that exist prior to customer demand is even imagined, e.g. the mouse, but these often hold out the promise of lucrative investment returns.

Showing entrepreneurs looking for money how to play. Recruiting and using a board of directors is the proven and effective method for involving people with money, know-how and connections in the development and execution of a business model. But entrepreneurs greatly underutilize this method in rural areas, often going solo and "owning it all".

The art of pitching to investors is something that can only be learned by watching and learning from the exchange between entrepreneurs and investors. Some communities have reaped the benefits of sponsoring entrepreneur and venture capital forums where entrepreneurs watch others as they give their pitch.

Speeding up the process ("It's not two days until tomorrow"). Entrepreneurs, once knowing how to play, are given a fighting chance to launch their young company. An unforgettable editorial in a rural newspaper once chided that "if Bill Gates lived here he'd still be waiting his turn." Going too slowly, waiting until there is certainty about uncertainty, no longer works in today's rapidly moving economy. Yes, prudence is good, but business opportunities are increasingly ephemeral and the competitive landscape is now global.

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