Rural entrepreneurs face a serious lack of access to capital compared to their urban counterparts. Did you know that less than 1% of all venture capital goes to rural startups? In 2017, just 5 metros accounted for nearly 80% of all venture capital investment nationwide: San Francisco, NYC, Boston, San Jose, and LA. Furthermore, just 3% of all SBIR/STTR funds went to micropolitans and non-metro areas.
This capital gap has real consequences: Rural entrepreneurship rates have fallen significantly, standing at just 12.2% in the 2010s compared to 20% in the 1980s. And without the power of entrepreneurship to spark economic growth, rural economies overall have struggled as innovation has concentrated in major urban hubs.
Direct Driver: Access to Capital
Such challenges are why access to capital is one of the 5 direct drivers of CORI’s digital economy ecosystem model. Entrepreneurs need capital to grow their startups: outside capital reduces risk to the founder, often comes with mentorship, increases capacity to scale, and bolsters opportunity for job creation. Communities, too, benefit from strong local access to capital, as this helps them retain and attract startups and can form the basis of a network committed to local entrepreneurial growth.
All of this is possible to have in rural America. It starts by finding the right funding sources. Many states and localities have investment incentive programs, and the federal government runs the SBIR program, which provides grants to innovative companies. Rural banks can provide subsidized loans, including through the SBA program. Additionally, the USDA has sponsored Rural Business Investment Companies (RBICs) that invest the majority of their capital in rural communities. And there are often grants startups can apply for that provide free money.
But perhaps the most powerful source of capital rural communities can start building is through angel investors, especially when paired with tax incentive programs such as Opportunity Zones. Angel investors are high net worth individuals who make investments in startups, either on their own or through a network. This kind of capital can be more flexible than traditional loans, and comes with a host of benefits that can spur rural ecosystem building. Angel investors are often successful entrepreneurs themselves, making them great mentors for local founders. Angel investors can fund a pitch competition, bringing out the best ideas in their community and driving funding to the winners. And angel investors are often deeply passionate about their communities, meaning they really care about the success of the companies in which they invest.
While rural communities don’t always have the pre-existing angel networks of a tech hub like Boston, with the right approach, community leaders can identify potential investors and turn their passion for place into a launching pad for local startup growth. Additionally, rural communities can band together to create deal flow, giving investors interested in supporting startups outside metro areas a strong opportunity to identify promising companies in places they might not otherwise have known. We’ve seen this firsthand through our work with the CORI Innovation Fund, where we’ve utilized the deal flow generated by our Rural Innovation Network to source more than a hundred promising tech-based startups.
How to Start a Seed Fund:
At CORI, we’re not just helping communities build their own strategies for finding access to capital: we’re providing some of that capital ourselves. We do this through the CORI Innovation Fund, a Qualified Opportunity Fund that invests seed capital in promising rural entrepreneurs like Sho Rust of Sho.ai out of Cape Girardeau, MO. To date, CIF has made 5 investments in growth businesses all across the country, and has identified more than 100 rurals startups primed to scale and drive job creation in their communities.
Many rural communities might not think a seed fund is possible. But with help from public entities, it can be. CORI started our innovation fund with support and funding from the US Economic Development Administration’s Regional Innovation Strategies program, which provided Seed Fund Support Grants to organizations all across the country. That funding was the reason we were able to cover the costs of a manager for the fund, charged with leading its operations, raising capital, and sourcing companies for investment. The EDA program made our work possible, and has allowed our small targeted fund to invest in the rural communities that have seen so little venture capital, especially in the area of technology. Our fund was also synergistic with the EDA, given our focus on investing in Opportunity Zones which are a priority area for the EDA; rural communities can take this lesson of finding alignment when searching for funding themselves.
To learn more about CORI’s work and the portfolio companies CIF invests in, sign up for our newsletter and read profiles of entrepreneurs in our Rural Edge series. To download our Rural Innovation Initiative community toolkit, which includes an assessment plan for your community’s Digital Drivers including Access to Capital, click here.