Headquartered in a community of 354 citizens, a rural seed company employed 12 people and distributed seeds across 4 upper Midwest states. It experienced modest growth year-to-year until securing a private equity investment, which enabled a significant scaling of the enterprise. Since investing, the company has acquired another complementary seed company and now employs 44 people and has expanded distribution to over 10 states. The next round of investment will enable that company to become a platform to save small seed companies, save more jobs in rural America and provide a valued product for farmers across the nation, producing products to feed the world. But that next investment round now may never happen.
Like the rest of the nation, our rural communities are currently in crisis due to the COVID-19 pandemic. That crisis is particularly acute in the financial sector. Many startup and growth stage companies are seeking equity and debt capital to allow their businesses to grow, and many will not survive without the rapid and efficient deployment of necessary funds in the weeks and months ahead.
To help address this crisis, Congress should take advantage of a financial intermediary that barely existed several years ago. Rural venture capital and private equoty long been a stepchild to the developed and immense VC firms that live and invest in the San Francisco, New York and Boston markets. But beginning in 2014, USDA rejuvenated a program aimed at establishing private investment firms whose charters exclusively focused their investments to rural communities. Since 2014, seven RBICs have been licensed by USDA, raising more than $600 million in private capital and investing in a variety of industries, including: food and agribusinesses, healthcare, telemedicine, broadband deployment, and animal health technologies, to name a few. Existing RBICs have provided funding to over 40 small businesses that employ thousands of workers in rural communities and provide products and services across America.
Yet, this success comes without an opportunity that is afforded the comparable SBIC program administered by the Small Business Administration. Under the highly successful SBIC program, SBICs raise private capital and combine it with funds borrowed at favorable rates (“leverage”) based on SBA guaranteed debentures (“loan obligations”). In recent years, existing RBICs have not had access to USDA leverage. As a result, despite the success of RBICs in deploying private capital, the program has been slow to grow relative to the SBIC program and other sources of capital. Particularly in light of the current economic crisis, USDA should be authorized and empowered to issue debentures to fund requests from RBICs to leverage existing private capital, thereby increasing the program’s reach and economic impact, consistent with Congress’s intent when it established the RBIP almost twenty years ago.
The cost of the RBIC program to the federal government would be minimal. The budget cost would be represented by the credit subsidy rate, which reflects the amount of risk to USDA in guaranteeing the debentures. For the SBIC program, the current subsidy rate has fallen to close to zero, reflecting the success of the lending program. There is no reason to think that the USDA experience would be materially different.
There is currently a long list of rural small businesses that are seeking capital from existing RBICs. If USDA were able to issue government-backed debentures to RBICs, it would facilitate the flow of private capital to rural businesses serving communities in all 50 states, thereby generating employment opportunities and stimulating innovation and other critical economic development.
Matt McKenna, Former senior advisor to USDA Secretary Tom Vilsack, currently Executive in Residence of the Rural Opportunity Initiative at Georgetown University’s Business for Impact (part of the McDonough School of Business). Matt is also a Principal at Open Prairie, a private equity fund management firm that focuses on US rural food and agribusinesses.