Venture capitalists generally look to cash in big on the hottest new technology companies with major metropolitan addresses, pouring money into the Next Big Thing in New York or San Francisco.
But CEI Community Ventures in Maine was created specifically to go where the other venture capitalists usually don’t — depressed areas with a higher poverty level. Areas such as Hartford, which CEI’s president is now targeting.
Originally part of a federal program, CEI Community Ventures has invested in nine northern New England businesses, and now its president is looking to launch a private-capital-only fund in southern New England.
The plan is to create a new venture group and raise $50 million in private funds from banks, insurance companies or other typical venture capital sources. The group will then find promising local businesses and put time and money into making the companies thrive.
Though its funding may have changed, the format won’t — the new group will limit itself to investing in depressed areas. Its organizers hope to have the money raised by the end of the first quarter in 2008.
“It’s the same material [as before], just slightly customized to the region,” said CEI Community Ventures president Michael Gurau.
In seeking out distressed areas, the company is limiting itself to a relatively small section of Connecticut. The group has marked out potential areas, some as small as a four-block chunk, mostly in Hartford, New Haven, Bridgeport and a few other scattered zones. In Massachusetts, the group has a wider geographical swath to work with, including areas around Worcester and Springfield. Businesses located outside those areas aren’t necessarily off-limits, though – the new fund could work with companies willing to relocate to distressed zones, a strategy that worked with companies under CEI Community Ventures, Gurau said.
Gurau has approached the Hartford Economic Development Corp. to form a partnership that would put his group in touch with local businesses. Ideally, he said, HEDCo would help sponsor seminars such as the ones that allowed CEI to meet capital-starved companies up north.
Sam Hamilton, HEDCo’s executive director, said he was interested in what Gurau’s group had to offer but needed to do more research before jumping into a partnership.
“We’re going to check them out very thoroughly,” he said. “It has possibilities, but I think there’s a lot more work to be done.”
Mark Heesen, president of the National Venture Capital Association, said CEI Community Ventures isn’t the only federal venture group moving to go private. The federal programs that funded such groups helped a lot of them get off the ground and eventually go completely private. Now that federal funds aren’t there anymore, many of the same people, like Gurau, are going for all-private funds with their next projects.
“There is certainly evidence out there that investing in these off-the-beaten path companies and geographies can be socially gratifying as well as economically advantageous,” he said.
Doing Well By Doing Good
Using a combination of private capital and federal funds, CEI Community Ventures bought into various companies around Maine, New Hampshire and Vermont, combining private and public money to grow businesses in depressed areas. “Depressed” in this case means that the area’s makeup meets specific criteria, including whether more than 20 percent of the area falls below the poverty line.
Gurau said the company assumed an interest in food businesses, clothing lines, skincare products – not typical venture-capital magnets.
“It’s not about the next Microsoft, it’s about the next Tom’s of Maine or Stoneyfield Yogurt,” he said. “If we can make money and do it, it’s a win for everybody.”
CEI Community Ventures and other outfits like it have been following the same basic model for years. Like many venture capital groups, it finds a promising private business and invests money into it, with a representative taking a seat on the business’ board of directors. Eventually, after repositioning and realignment, the company is sold or goes public, ideally generating a healthy return on the original investment.
Performance Measures
With federal funding available, venture capitalists like CEI Community Ventures were willing to pump money into businesses from depressed areas. But Gurau said it’s not a charity cause; those businesses have to be able to turn out strong returns.
Garau points to success stories including that of The Rustic Crust Co. in Pittsfield, New Hampshire.
In 2004, The Rustic Crust was called Ever Better Eating, an organic pizza crust company that employed 11 or 12 people, said president Brad Sterl.
With the help of CEI’s funds, Sterl’s company re-branded itself, got new packaging, hired a vice president of marketing, and revamped its strategy. It now employs more than 30 people and business is growing, Sterl said.
Sterl noted some companies have to give up a great deal of control to their investors, but he was able to maintain most day-to-day operations.
“They’ve been a good group to work with,” he said. In three years or so, Rustic Crust will either be sold off or go public, but Sterl said as it’s too early to say which option is more likely.
