URL: http://www.abqjournal.com/biz/outlook/353633outlook05-23-05.htm

Monday, May 23, 2005

Fund Seeks Social Returns

By Andrew Webb

Of the Journal

TECH BYTES: New Mexico Community Capital, a statewide venture fund seeking both financial and social returns, became official this month.

The fund closed last week after raising about $7.5 million, with about $5 million from the state and the rest from banks, nonprofits and individuals. Its founders hope to eventually raise $10 million.

Fund founder Jarratt Applewhite has been racking up the miles in recent months soliciting the money to create the fund and beating the bushes for investments.

That's because the types of companies that get funded by such groups— which represent a growing U.S. trend toward investment funds with "heart"— might never have thought about seeking additional capital.

"Some of the greatest New Mexico companies are just too busy to ask," he told the Journal in an interview. "We're looking for companies that have a very clear understanding of what the opportunity is, and who are open to and are constrained

from achieving those ambitions because of lack of capital."

So far, Applewhite says, his efforts to wring ideas from bankers, community leaders and officials in the state's far-flung communities have worked.

For instance, "I'd ask bankers 'who are your best customers— who would you lend more money to?' '' he said.

Applewhite says the fund now has a list of unusual companies that could benefit from an injection of equity capital, ranging from food processing and manufacturing to customer service and construction.

And they are not your typical investment recipients, admits Applewhite.

But then, so-called community development venture capital is quite different from, say, technology investing in the 1990s.

"You need a really unusual combination of very strong venture capital finance skills and an understanding of community and economic development— so if venture capital is hard, then community development venture capital is twice as challenging," said Kerwin Tesdell, president of the New York-based Community

Development Venture Capital Alliance.

The trade group represents about 80 funds around the country, and its ranks are growing fast, Tesdell said.

"People are recognizing the power of working with markets in achieving economic goals and achieving goals of poverty alleviation and job creation as compared with just giving money," he said.

In the last four years, the amount of money invested by such firms has grown from $300 million to $500 million. The first such fund was created in Kentucky in

1968.

Banks are the largest group of investors in community development venture funds, Tesdell said, noting they are not only bound by banking rules to reinvest in their communities, but that they also see such funds as a way to create markets for lending.

"You don't want to load on too much debt without some equity in a company," he said.

Hence community development venture funds, which take an ownership stake in their investee companies, just as a conventional technology-driven venture fund would.

Furthermore, Applewhite said, New Mexico Community Capital aims to help companies recruit management talent and hone business practices.

"I tell them I hope 10 years from now the least important thing they got was capital," he said. "I hope they say 'your intellect, hard work, contacts and support

was far more valuable than the check you wrote.' ''

Besides Applewhite, Santa Fe-based New Mexico Community has hired a fund manager, Thomas Keleher, and a business manager, Jyl Safier.

Applewhite says the group aims to make investments of between $250,000 and $500,000, with no less than 40 percent of the funds going to companies outside

Los Alamos, Santa Fe and Albuquerque.

The main contributor to the fund is the New Mexico Small Business Investment Corp., which uses a $27 million chunk of state funds to encourage small investments and micro-loans. The rest comes from several banks, including Wells Fargo and First State Bank, and nonprofit organizations such as the McCune Foundation.

Applewhite says though the investments will have a slower return than a traditional five-years-to-exit venture investment, the group is still obligated to generate returns, which will be closely monitored by its board.

"We understand it's a lower financial return," Small Business Investment Corp. chairman Chuck Wellborn said of the state's contribution. "When you look for social return, that's the tradeoff."

The social return will be harder to measure, notes Applewhite, a Santa Fe entrepreneur who most recently founded Albuquerque-based government information aggregator Samba Holdings.

"You'll know it when you see it," he said. "If we can go to a company and three years later it's doubled its employees, then I think we can assume a social return."