In recent years, the "cutting edge" of community development finance has been community development venture capital (CDVC) funds. The community development finance industry recognized access to debt capital was not sufficient to move rural and other underserved markets into the economic mainstream. CDVCs began to emerge in the mid 1990s. By late 2000, the industry comprised just over 50 funds with $300 million under management. Today there are over 80 such firms with $548 million under management. CDVC Funds invest for the "double bottom line" of financial return and social gains.

Two good examples of CDVC funds are associated with Coastal Enterprises Inc. (CEI) of Maine and Cascadia Revolving Loan Fund in the Pacific Northwest. CEI Ventures, Inc., was formed to invest socially responsible venture capital in Maine, New Hampshire and Vermont. Founded in 1996, CEI Ventures manages $25.5 million in two funds, Coastal Ventures LP and Coastal Ventures II, LLC. Together, these funds have invested $12 million in 33 companies. They invest in growing companies that can generate above-average equity returns over a five to seven-year period, and meet social goals. These goals include the creation of high-quality jobs and ownership opportunities for low-income individuals, among other benefits.

One CEI portfolio company utilizes waste from salmon, wild blueberry, and shellfish processors to make organically certified composts, fertilizers, mulches and soils. Another portfolio company develops technical outdoor apparel for women. A third is a direct-mail provider of frozen, high quality, chef-prepared meals marketed via catalog and website.

Cascadia's Rural Development Investment Fund (RDIF) was also established in 1996. Its parent is Cascadia Revolving Fund, a private, non-profit community development loan fund. The RDIF provides quasi-equity investments and technical assistance to small businesses in rural areas of Washington and Oregon. It has $5.6 million under management and has invested $4.1 million in more than 20 companies, targeting industries that can demonstrate a competitive advantage in rural areas of its region.

The RDIF makes its quasi-equity investments through the use of a Participation Agreement (PA) -- a low interest, deeply subordinated loan with an on-going revenue-based fee. Many traditional lenders view the PA debt as equity, allowing "investments" to leverage additional debt. The PA allows for an exit over time and the owner is not forced to sell the company to pay off true venture capital investors. Similar to true equity, the entrepreneur pays a higher rate of return only if the business is growing and successful - if not, the cost of funds is lower.

The RDIF seeks value-added wood and seafood products, alternative agriculture and food processing, and manufacturing using industrial by-products or recycled raw materials. Initial portfolio companies included a kayak manufacturer, fish wholesaler/retailer, lumber recycler and several value-added forest products firms.

The Pathfinder Fund, LLC, and Native American Capital, LP

Today there are just two existing CDVC sources exclusively serving Native Americans. Each will acquire CDFI status by the end of 2004 and will be CDEs, eligible for New Market Tax Credit allocations. Like CEI Ventures, both funds will provide assistance with management, strategic planning, financing, and introductions to local and national business communities, along with financial capital. This will typically be delivered via a seat on the portfolio company's Board of Directors.

The Pathfinder Fund, LLC (TPF) is a CDVC entity headquartered in rural southwestern Washington State. Its market area covers 14 states in the 12th and 9th Federal Reserve Districts (the West and Great Plains) plus New Mexico and Colorado. This area is home to almost 60% of all Native Americans.

Pathfinder will focus on -- but not be limited to -- investments in commercial and industrial space, giving small businesses a place in which to locate their enterprises, and in distributed energy. Distributed energy means power sources which may not be connected to the national power grid (e.g., wind, solar, micro-turbine, low-head hydro). It will consider all industries, across all stages of investment, with a primary focus on early stages It will seek to co-invest with other venture capital firms and private investors, where appropriate. The Pathfinder Fund is a sub-allocatee of CDFI New Market Tax Credits through Community Reinvestment Fund of Minneapolis.

Native American Capital (NAC), LP is a CDVC entity headquartered in Silver Spring, MD. Primarily led and administered by Native Americans, it is the first private equity and venture capital fund specifically serving a national market of all Native American and Alaska Native communities. NAC has received two Native American Technical Assistance grants from the U.S. Department of Treasury’s CDFI Fund.

NAC looks for business development opportunities in sectors that are of compelling interest to Indian Country, including infrastructure industries. These range from information technology to alternative energy technologies and services; they include health care goods and services; rural environmental-based businesses; education; basic commerce and retailing, and tourism. NAC seeks relatively large scale projects involving basic tribally controlled assets that it can assist in making available to previously unachievable major project development.

Together, the “sister” funds of Pathfinder and NAC have crafted a "bookend strategy" to address the problems of insufficient business scale and the absence of depth in managerial experience. Pathfinder focuses on growing smaller businesses and developing local management experience (human capital). NAC focuses on catapulting existing businesses to their next level and leveraging opportunities to create infrastructure. These two capitalization strategies combine effectively to draw conventional venture capital and the financial services industry into Native communities' enterprises.

Conclusion

CDFIs are vital to increasing investments in Indian Country. However, CDFI loan funds need additional sources of equity to realize their potential. Specialized CDVC CDFIs can help solve the capital puzzle by providing equity and "quasi-equity" products to promising businesses. CDVC equity will enable CDFI Loan Funds to realize their full potential by making larger loans safe and feasible. CDVC CDFIs will also be indispensable for driving non-governmental new capital formation, providing that equity and more on a scale that will boost participation from "mainstream" capital markets. This will accelerate new capital formation in our communities – and turn the “equity desert” into a fertile oasis.

Patrick Borunda is Managing Director of The Pathfinder Fund, LLC. Of Tarahumara and Mescalero descent, he is a Principal of The Navigator Group, LLC, where he has provided strategic management counsel to Fortune 500 firms in diverse industries as well as to federal, state and tribal governments for over thirty years. A former two term director of the Portland Branch of the Federal Reserve Bank of San Francisco, he is a nationally recognized expert on the capital markets to Native community interface.

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