“The traditional East Coast and West Coast investment organizations seem to ignore the middle of the country, ignore rural America.”
That’s according to Matt McKenna who heads the Rural Opportunity Initiative (ROI), aimed at making the heartland a magnet for new “financially and socially-sustainable” investment – investment that could soar with help from renewable energy.
In an interview, McKenna explained that then-Agriculture Secretary Tom Vilsack invited him to launch USDA’s ROI project in 2013. After his career in corporate finance in New York City, the former senior vice president for finance at PepsiCo said he was ready to tackle what he sees as a national “misallocation of investment resources” that’s shortchanging Middle America and the rural economy.
With the Trump administration’s arrival, McKenna and ROI left USDA to be housed instead at Georgetown University’s Global Social Enterprise Initiative (GSEI). ROI still works with USDA, but, as part of its new academic focus, it has added land-grants Purdue University, Iowa State and Mississippi State as full working partners in its drive to promote rural investment opportunities.
McKenna, GSEI executive in residence, says one of the first lessons learned in ROI’s early days at USDA was that scale is a key challenge. He points out that many rural companies in the Midwest offer great investment opportunities in the $5 million to $15 million range. “That’s a rounding error,” he says, for venture capital firms in New York and Silicon Valley. “So, we had to find some way of combating that issue of scale,” to grab the attention of major investors.
The answer ROI came up with was to dust off the idea of Rural Business Investment Companies (RBICs), a financial vehicle that Congress created in 2002 but subsequently left unused. A rural-based and rural-focused RBIC acts as an intermediary, raising capital from major investors in order to make its own venture capital investments in small rural enterprises that wouldn’t show up on the majors’ radar screens.
In 2014, USDA licensed its first RBIC, Advantage Capital Agribusiness Partners. This first RBIC pledged $150 million in new investment in partnership with the Farm Credit System. Under RBIC rules, these funds are invested in rural-based businesses.
“It’s no secret that businesses in rural America face a shortage of investment capital,” Tim Hassler, Advantage’s principal, explains. “Advantage Capital Agribusiness Partners is focused on making impactful investments to foster growth and job creation in those rural communities.”
“This new fund,” Vilsack said at the 2014 announcement, “will allow innovative small businesses throughout rural America to access the capital they need to grow and create jobs. This new partnership will allow us to facilitate private investment in businesses working in bio-manufacturing, advanced energy production, local and regional food systems, improved farming technologies and other cutting-edge fields.”
By the time ROI left USDA for Georgetown this year, it had created six RBICs, collectively making $1 billion in new funds available for rural investment.
Along with RBICs, another answer to the scale problem may come from solar, wind and other renewables. As McKenna explains, “Renewable energy is an example where hurdles to rural investments can be overcome,” especially now that the risk premium that had been associated with solar has diminished.
As a result, “investors have increased, and more facilities than ever are being constructed,” as investors accept lower yields in exchange for safety in their investments.
McKenna welcomes the shift because “It actually makes more capital, and cheaper capital, available for needed rural investments.” With solar attracting new investor interest in rural America, he says, “This success can be extended to other renewable projects like ethanol, natural gas, transmission facilities, biomass projects, etc.” He’s also hopeful that this new awareness of rural investment opportunities will expand the field of investments to include woefully underfunded areas such as rural water systems and broadband.
A second major lesson learned comes from ROI’s Rural Investment workshop in Des Moines. Advantage Capital was at the Nov. 2 workshop along with two other RBICs, Open Prairie and Innova Memphis, to hear 32 Iowa business executives deliver their pitches for funding.
McKenna says the workshop confirmed that “the investors are obviously sophisticated, they know what they are looking for and can evaluate opportunities quickly.”
“The greater challenge,” he said, “is to have the entrepreneurs present themselves in a way that is attractive and understandable to the investors.” He expects that for ROI’s next workshops at Purdue and Mississippi State, there will be more focus on making sure that the business owners back up their business plans with the more detailed financials that investors expect.
ROI’s first investment targets have been in ag and ag tech, McKenna notes. He says the targets being worked on now are renewable energy, “as well as rural infrastructure, which many times is necessary for local rural prosperity.”
McKenna says choosing an investment focus is vital because some investments, such as in farmland, “generate great returns to investors but don’t necessarily generate great jobs and growth.” He says ROI is working on ranking investment opportunities in terms of their “impact on rural prosperity and the rural economy.”
McKenna concludes that there are tremendous rural investment opportunities because “every day our great land-grant partners are producing students, producing research and development ideas that are going undeveloped.” He points out that “USDA is able to lend money for rural water systems, for example, or cable broadband systems,” but that with long waiting lists, there’s an urgent need for private-sector investment.
McKenna is pleased that ROI and its RBIC offspring are not alone in their drive to boost start-up rural businesses and the rural economy. He notes that ROI will be in Nashville in January at the American Farm Bureau’s annual convention. A prominent agenda item there will be announcing the winner of Farm Bureau’s annual Rural Entrepreneurship Challenge – choosing among the four finalists: GeoAir of Knoxville, Tenn.; Hawk Knob of Lewisburg, W.V.; SwineTech Inc. of Oskaloosa, Iowa; and Wild Valley Farms of Croydon, Utah.
While farmland may provide high returns for absentee owners, McKenna says, it’s rural start-ups that will provide the jobs needed to revitalize Middle America and attract major new investment.
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