One recent theme that can’t be amplified enough is the lack of capital access in small to mid-size cities across the United States. There are a number of vehicles to
Venture Capital (VC): VC firms are typically in the major metros. Venture capital colloquially refers to the tech industry. A more technical definition more broadly states that VC firms specialize new businesses with high levels of risk.
The business model of venture capital is built around risk. A VC firm might invest in ten companies expecting one company to earn a return. The others could fail altogether. VC’s require rigorous due diligence and typically specialize in a market, such as medical devices. Investors will hire a fund manager to perform this due diligence and solicit deal flow.
The Challenge of VC in Small to Mid-size Cities
The deal flow of a region must exceed the nature of early-stage risk. If a region only produces a handful of deals, the business model of VC doesn’t work. The stagnation of venture capital in small to mid-size cities is likely driven in part by the lack of deal flow in these regions. VC concentrates in larger metros because there are more deals to mitigate the risk of investment. The deals are also bolstered by the intellectual property spinning out of corporations and Research Universities, another key asset not located in small to mid-size cities.
The JOBS Act, which allows for crowdfunding portals to offer investment opportunities to non-accredited investors, is a major step forward for VC’s stranglehold on the VC industry. Prior to the JOBS Act, only accredited investors could make those investments. However, in the two years that CF portals are
Private Equity (PE): Another model similar to venture capital is Private Equity (PE). Private equity is mostly a tool for consolidation. If used correctly, it can consolidate industries in a way that keeps investment local, prevent the shutter of companies, and generate company growth. Here is an example of unhealthy PE. For local investors looking to create long-term value, PE can help transition owner/operators out of business and create efficiencies by consolidating similar companies.
The Challenge of PE in Small to Mid-size Cities
Again, investors in private equity are those with liquidity, cash on hand to plow into the restructuring of distressed assets. In smaller regions, the volume of liquidity is less than larger metros. Manufacturing is an excellent example of an industry that could have benefitted from healthy private equity as prime level manufacturers move South or outside of the Country. Large manufacturers often made up a high percentage of the revenue of the supply chain that manufactured component parts.
Information Asymmetry and Market Failure
When it comes to other local assets, almost nobody has information related to the potential viability of reinvestment. Almost all infrastructure in small to mid-size cities suffer from this problem. Awareness is a critical reason why region’s don’t have a local financial sector.
Nobody is taking holistic views of infrastructure redevelopment. The notion of public/private partnerships, the Pittsburgh Model, unlock capital for the public benefit and ideally can be leverage at the public’s will. But without a capital market for these types of projects, local economies cannot muster the resource to adequately plan for redevelopment.
From here on out, local infrastructure will not only be limited to brick and mortar project. Technologies under the umbrella of smart cities can rapidly transform the cost and efficiency of societal functions.
At the local level, a lack of information stifles investment, but it also stifles deal flow. Talented and capable members of small to mid-size cities opt to work for the local non-profit because entrepreneurship is not a viable career path.
CityLab’s writing about geographic inequality shows the thousands of USD per capita available in major metros compared to hundreds of USD in smaller metros. However, venture capital is not the only investment vehicle missing in smaller regions. Other vehicles include real estate investment trusts for infrastructure redevelopment, private equity, and more small business financing.