[House Hearing, 115 Congress] [From the U.S. Government Publishing Office] INVESTING IN RURAL AMERICA ======================================================================= HEARING BEFORE THE SUBCOMMITTEE ON ECONOMIC GROWTH, TAX, AND CAPITAL ACCESS AND THE SUBCOMMITTEE ON AGRICULTURE, ENERGY, AND TRADE OF THE COMMITTEE ON SMALL BUSINESS UNITED STATES HOUSE OF REPRESENTATIVES ONE HUNDRED FIFTEENTH CONGRESS SECOND SESSION __________ HEARING HELD JULY 24, 2018 __________ [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] Small Business Committee Document Number 115-086 Available via the GPO Website: www.govinfo.gov __________ U.S. GOVERNMENT PUBLISHING OFFICE 31-210 WASHINGTON : 2019 ----------------------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Publishing Office, http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).E-mail, [email protected]. HOUSE COMMITTEE ON SMALL BUSINESS STEVE CHABOT, Ohio, Chairman STEVE KING, Iowa BLAINE LUETKEMEYER, Missouri DAVE BRAT, Virginia AUMUA AMATA COLEMAN RADEWAGEN, American Samoa STEVE KNIGHT, California TRENT KELLY, Mississippi ROD BLUM, Iowa JAMES COMER, Kentucky JENNIFFER GONZALEZ-COLON, Puerto Rico BRIAN FITZPATRICK, Pennsylvania ROGER MARSHALL, Kansas RALPH NORMAN, South Carolina JOHN CURTIS, Utah NYDIA VELAZQUEZ, New York, Ranking Member DWIGHT EVANS, Pennsylvania STEPHANIE MURPHY, Florida AL LAWSON, JR., Florida YVETTE CLARKE, New York JUDY CHU, California ALMA ADAMS, North Carolina ADRIANO ESPAILLAT, New York BRAD SCHNEIDER, Illinois VACANT Kevin Fitzpatrick, Majority Staff Director Jan Oliver, Majority Deputy Staff Director and Chief Counsel Adam Minehardt, Staff Director C O N T E N T S OPENING STATEMENTS Page Hon. Dave Brat................................................... 1 Hon. Dwight Evans................................................ 2 Hon. Rod Blum.................................................... 3 Hon. Brad Schneider.............................................. 3 WITNESSES Mr. Matthew M. McKenna, Executive in Residence, Rural Opportunity Initiative, McDonough School of Business, Georgetown University, Washington, DC..................................... 5 Ms. Falon Donohue, Chief Executive Officer, VentureOhio, Columbus, OH................................................... 7 Ms. Amy H. Gales, Executive Vice President, Regional Agribusiness Banking Group, CoBank, Greenwood Village, CO................... 9 Mr. Ross Baird, President, Village Capital, Innovator-in- Residence, Ewing Marion Kauffman Foundation, Alexandria, VA.... 11 APPENDIX Prepared Statements: Mr. Matthew M. McKenna, Executive in Residence, Rural Opportunity Initiative, McDonough School of Business, Georgetown University, Washington, DC...................... 28 Ms. Falon Donohue, Chief Executive Officer, VentureOhio, Columbus, OH............................................... 32 Ms. Amy H. Gales, Executive Vice President, Regional Agribusiness Banking Group, CoBank, Greenwood Village, CO.. 36 Mr. Ross Baird, President, Village Capital, Innovator-in- Residence, Ewing Marion Kauffman Foundation, Alexandria, VA 47 Questions for the Record: None. Answers for the Record: None. Additional Material for the Record: Chamber of Commerce of the United States of America.......... 52 SBIA - Small Business Investor Alliance...................... 55 INVESTING IN RURAL AMERICA ---------- TUESDAY, JULY 24, 2018 House of Representatives, Committee on Small Business, Subcommittee on Economic Growth, Tax, and Capital Access, joint with the Subcommittee on Agriculture, Energy, and Trade Washington, DC. The Subcommittees met, pursuant to call, at 10:00 a.m., in Room 2360, Rayburn House Office Building. Hon. Dave Brat [chairman of the Subcommittee on Economic Growth, Tax and Capital Access] presiding. Present: Representatives Brat, Luetkemeyer, Kelly, Blum, Fitzpatrick, Evans, Lawson, and Schneider. Chairman BRAT. Good morning. I would like to call this hearing to order. Access to capital continues to remain a topic of concern for American small businesses, nowhere more than rural America, which has been slower to recover from the recession of 2008, et cetera. Although venture capital has become a popular financing mechanism for small businesses trying to expand, data shows that more than 75 percent of venture capital goes to just three cities in the United States. This means that there are great small businesses' ideas that are frequently overlooked in my district in Virginia, Mr. Evans's in Pennsylvania, and across the country. This issue is compounded by the fact that the decline in community banks has adversely impacted rural areas as well. According to community bank data from the Federal Deposit Insurance Corporation, there are 625 rural counties in the United States without a community bank based in the county. While this Committee and my Subcommittee have performed rigorous oversight to ensure that SBA's funding programs can be a resource for small businesses that cannot obtain credit elsewhere, today's hearing focuses on private sector solutions to address small business capital access. I want to thank Chairman Blum for co-chairing--thank you, Rod--this hearing to examine this important issue. Today's witnesses are working to bring together small businesses and entrepreneurs in rural American with private investors. While there is a learning curve for both, these organizations are working with trade associations, land grant universities, local economic development organizations, and others, to help bring those with capital together with those who need it to impact local economies and businesses. When these partnerships work, both the small businesses and the investors can benefit. It is a true win-win. I look forward to hearing from our witnesses today about private sector solutions to the financing gap for small businesses, and also to their suggestions about how Congress can help or stay out of the way. I now yield to our Ranking Member of the Subcommittee on Economic Growth, Tax, and Capital Access, Mr. Evans, for his opening statement. Thank you. Mr. EVANS. Thank you, Mr. Chairman. Good morning. The resolve of the American entrepreneur was put to the best following the Great Recession. Credit was slow to return to the small business sector, where 70 percent of all new jobs are created. Today, most economic indicators show sustainable growth of rural and traditional undeserved sectors, like women and minorities, continue to face challenges accessing the capital needed to start and grow small businesses. The reasons for uneven access are many. Venture capital and private equity, which help high-growth small businesses scale up quickly is highly concentrated and shuns most rural and underserved markets like some in North Philadelphia. Similarly, uneven economic recovery has seen less bank capital being made available to women, minorities, and rural small businesses. This trend can be seen by using the SBA data as a proxy for the broader small businesses lending market. Less than 3 to 10 loans go to those who self-identified as minority. Similarly, 7 in 10 loans go to male-owned firms. Earlier this year, Committee democrats held a series of roundtables to better understand the issues facing traditional underserved entrepreneurs. One focused on how to better deploy SBA lending programs, like 7(a) and 504 loans. Another focused specifically on the lack of diversity both demographically and geographically in the venture capital industry. I think the broader takeaway from those meetings was that a holistic approach needs to be taken with significant investments by both the private and public sector. Today's hearing will further shed light on the issues these communities face and help build the public record on possible solutions. The witness panel represents some of the most leading-edge thinkers and investors that are crafting new and innovative ways to spread needed capital more demographically across the country. I look forward to hearing your thoughts on how to help the millions of entrepreneurs and small business owners that deserve an opportunity but are currently shut out through no fault of their own. Unlocking the potential of these hardworking Americans are potentially adding trillions to our economic output and providing hundreds of thousands of good paying jobs in communities that need them most like some of those in Philadelphia. I want to thank the Chairman for holding this important hearing and look forward to your testimony. I yield back, Mr. Chairman. Chairman BRAT. Thank you, Dwight. I would now like to yield to the Chairman of the Subcommittee eon Agriculture, Energy, and Trade, Mr. Blum, for his opening statement. Mr. BLUM. Thank you, Chairman Brat. This Congress, I chaired a series of Subcommittee hearings focused on revitalizing rural America. I am pleased to join with Chairman Brat today to focus on an issue that is very near and dear to me, and I hope everyone in here as well, investing in rural America. At two previous Subcommittee hearings on agricultural technology and innovations, witnesses emphasized the importance of entrepreneurs and farmers working together so that both small businesses and small family farms will benefit from the emerging technology and innovations. While innovation and technology is one important component of rural prosperity, witnesses at those hearings also highlighted another important component, economic development. Small businesses and entrepreneurs must be able to access capital so they can continue to operate and expand their businesses and also attract talent, dollars, and jobs to their communities. While other Committee hearings have focused on oversight of the SBA funding programs, our witnesses today will highlight success stories of other groups and organizations who are driving private investments to rural America through initiatives and partnerships with a wide variety of stakeholders, including Iowa State University, which is a partner of the Rural Opportunity Initiative represented today by Mr. McKenna. Investing in and growing rural America is vital not just to citizens to live there but also to the future of our country. I want to thank all of our witnesses for being here today, and I yield back my time to Chairman Brat. Chairman BRAT. Thank you, Rod. I now yield to Ranking Member on the Subcommittee on Agriculture, Energy, and Trade, Mr. Schneider, for his opening statement. Mr. SCHNEIDER. Thank you, Mr. Chairman. And I want to welcome the witnesses. Since the Great Recession, local economics in rural America have been struggling to stay competitive in the 21st century global economy, losing business and people, especially young people to metropolitan areas. While urban businesses experienced record profits in a tight job market, rural counties have yet to fully recover from the lulls of 2008-2009. As more and more people move to urban areas to find better opportunities, Congress must seek ways to help rural communities attract the resources to invest in small businesses. As a consequence of the financial collapse, rural businesses seeking capital remain at a disadvantage. Over 1,900 small local banks that would otherwise dispense that capital have closed down since 2009. Significantly, 78 percent of venture capital is concentrated in just three states--New York, Massachusetts, and California, and even in these states it is concentrated in the major cities. Because of this, over half of firm creation has been centered in only five metropolitan areas where access to broadband and educated workforce and necessary infrastructure have rapidly outpaced their rural counterparts. Even though their geographic location requires sturdy roads and high-speed internet, rural America infrastructure has been neglected due to the scarcity of capital. Their decreasing population means a smaller tax base, and therefore, not enough money to educate the future workforce. Meanwhile, President Trump's scattershot trade war threatens the heart of rural America. Our agricultural industry is threatened with billions of dollars in retaliatory tariffs, risking thousands of rural jobs and millions in profit, all while producers face years of low crop prices. That is one reason I introduced H.R. 6396, which would expand the trade adjustment assistance to firms to help our local businesses damaged by these tariffs. Despite the challenges, the millions of people living in rural communities in all 50 states still hold that distinctive ``can do'' American spirit. In fact, rural counties have the highest rate of self-employed business owners in the Nation and those businesses are resilient, averaging a better 5-year survival rate than their urban business counterparts. Although rural Americans build strong businesses, they still need to access capital to start them. Our guests here today have worked to bridge the divide between rural and urban growth, whether providing loans to agricultural business or connecting entrepreneurs to investors, these witnesses have discovered strategies that can regrow our rural economies. I look forward to hearing what each of you have to say and discussing what Federal policymakers can do to help. Thank you, and I yield back. Chairman BRAT. Thank you. If Committee members have an opening statement prepared, I ask they be submitted for the record. I would like to take a moment to explain the timing lights for all of you with us today. You will each have 5 minutes to deliver your testimony. The light will start out green. When you have one minute remaining, the light will turn yellow. Finally, at the end of your 5 minutes it will turn red. I ask that you try to adhere somewhat to that time limit. I will give you a little variation. I would now like to introduce our witnesses. Our first witness is Mr. Matt McKenna. Mr. McKenna is an Executive in Residence at the McDonough School of Business at Georgetown University, where he leads the Rural Opportunity Initiative, a partnership between McDonough at the U.S. Department of Agriculture, Purdue University, Iowa State University, and Mississippi State University. I look forward to hearing your testimony and you may begin. Thank you for being with us today. STATEMENTS OF MATTHEW M. MCKENNA, EXECUTIVE IN RESIDENCE, RURAL OPPORTUNITY INITIATIVE, MCDONOUGH SCHOOL OF BUSINESS, GEORGETOWN UNIVERSITY; FALON DONOHUE, CHIEF EXECUTIVE OFFICER, VENTUREOHIO; AMY H. GALES, EXECUTIVE VICE PRESIDENT, REGIONAL AGRIBUSINESS BANKING GROUP COBANK; ROSS BAIRD, PRESIDENT, VILLAGE CAPITAL, INNOVATOR-IN-RESIDENCE, EWING MARION KAUFFMAN FOUNDATION STATEMENT OF MATTHEW M. MCKENNA Mr. MCKENNA. Thank you. Thank you, and good morning, Mr. Chairman, Mr. Blum, Mr. Chairman Brat, Ranking Members, and members of the Committee. People keep track of numbers pretty tightly when it comes to venture capital. And in just the first 6 months of 2018, over $57 billion have been invested in venture capital across America. $57 billion. Yet, as we have heard already this morning, only a small fraction of those dollars found their way through funds in companies based in rural America. This capital deficit--and it is a deficit with respect to rural America--is starving, innovative, and valuable growth opportunities. Without it, job growth and rural economic development will continue to lag the rise in prosperity that the rest of the country has enjoyed. The Rural Opportunity Initiative is a partnership housed at Georgetown University. And while Georgetown University often lacks real rural roots, our partners do not. Our partners are the Department of Agriculture, our friends at Iowa State, Mississippi State, and Purdue. Together, this group has embarked on an effort to increase investment from the private sector in rural America, the part of America that as we know is almost 95 percent of the country in land mass, yet only 20 percent of its population. It is well established that small businesses, and particularly new small businesses, are the greatest source of job growth in the country. Yet, these new businesses often lack access to critical sources of capital. The Rural Opportunity Initiative was organized to address this imbalance. Together with our partners, we have begun by organizing events that bring together both investors and entrepreneurs. At Iowa State recently, in Des Moines, we held an event that attracted dozens of small businesses, small Iowa businesses, together with potential investors, including regional venture capital funds and large institutional banks. Last month, we held a similar event down in Starkville, Mississippi, where we listened to pitches from new businesses, businesses that range from a microwave sensor technology developed on campus at Mississippi State. That technology detects spillage in grain elevators. At the other end of my spectrum was a business that made healthy crackers using flower that was a byproduct of craft beer. And there is a lot of craft beer down in Mississippi, and those crackers were pretty good. Also on our schedule for the rest of the year are events on Georgetown's campus around rural lending and expanding our partnership with USDA. And in November, we will be hosting a major conference on campus around rural capital and how dollars flow to investments and markets away from the coast. This conference, the Rural Capital Forum, scheduled for November 15th, will identify both hurdles to capital access and tools available to overcome those obstacles. And let me discuss just two of those obstacles this morning. The first is clearly a lack of awareness. We need to introduce the innovation and emerging technologies that are growing in rural America to institutional investors. This is the primary purpose of our investor conferences that we held in Des Moines and Starkville, and will the central theme for our much larger meeting this November. Other examples are well publicized. Steve Case from AOL has a very famous tour called the Rise of the Rest, which is going from town to town in rural America talking about innovation and investment opportunities. Another comes this fall when the Walton Family Foundation is hosting a major event in Bentonville, Arkansas, around rural economy and rural innovation. But awareness building is only the opening of a door to the investment decision. Other more significant barriers remain. Chief among these is the issue of scale. Most rural businesses are small businesses. They are not looking for hundreds of millions of dollars. They are looking for $500,000 or $2 million of initial financing, money that is essential to the development of a business plan, initial working capital, and operations. Yet, when the numbers get to be this small, there are few organized sources for this type of capital. One way of addressing this issue of scale is the development of funds that target this level of investment. The recent wave of Rural Business Investment Companies (RBICs) is a good example. Their charters limit their investments to rural-based businesses, and the typical investment slice has been typically in the $1 million to $5 million range. Another tool is a fund to funds approach where many small funds are brought together by institutions as a way of allowing their customers to obtain the diversity and scale that has denied them more targeted funds, and at Georgetown, we have been working with two big banks in New York to arrange these fund to fund approaches. And finally, there is a role for the federal government and there is a role for Congress as well, in tackling some of the obstacles that exist. And let me just talk about three of these paths forward from the federal government side. The first is a Rural Business Investment Company. Under the authority of the Department of Agriculture, the recent wave of RBICs has been impressive. By my count, several hundred million dollars have already been raised in these funds. More are in line and awaiting approval, and I would be remiss if I did not mention the incredible contribution, not just from USDA but also from CoBank, one of my fellow panelists. CoBank has been a leader in establishing the RBIC and funding some of the RBICs, and their wisdom and guidance has paid very real dividends for small businesses in America. In addition, we have the recent tax bill that created an Opportunity Zone. The Opportunity Zones that are being provided to shelter some capital gains from investments. The Opportunity Zones are working their way through the system right now. They are a tremendous opportunity I feel. And as I have looked over by my account, over 23 percent of the zones identified by the states are rural based. So that is a significant piece of the Opportunity Zone legislation will be directed to rural America. More to come on that I hope in the future. Finally, the pending Farm Bill has a provision which I think is important for rural America. The Senate side S5034 is a provision and an opportunity to spur even more investment into rural communities. We think this is a good thing and we urge the House conferees to join the Senate in this effort. These pushes from the federal government are certainly important, but my role, and certainly the role and my role at Georgetown with my partners, is to focus on the primary source of change, which I think is going to come from the private sector. We know these dollars are available. $57 billion in the first half of this year alone. But the challenge is how to change the direction of these investments, to channel them towards geographies where venture capital has not been well represented. That is ultimately a challenge of building awareness of those investment opportunities. This is where the Rural Opportunity Initiative and our partners are heading. Thank you, Mr. Chairman. Chairman BRAT. Thank you, Mr. McKenna. We appreciate your testimony. Our second witness is Ms. Falon Donohue. Ms. Donohue is the CEO of VentureOhio, ventured in Columbus, Ohio. VentureOhio's mission includes increasing capital access for Ohio entrepreneurs. Ms. Donohue served our country in the Ohio Air National Guard. Thank you for your service. And is an active member of the Columbus Chamber of Commerce. We welcome Ms. Donohue and thank you for your service. You may begin. STATEMENT OF FALON DONOHUE Ms. DONOHUE. Thank you very much, Mr. Chairman, Chairman Blum, and Ranking Members, and members of the Committee. Thank you for the opportunity to provide testimony for this important hearing this morning. I am honored to represent VentureOhio's members who are innovating and creating high-paying jobs in communities throughout the Midwest. On behalf of these incredible entrepreneurs, innovators and investors, I am excited to share with you the momentum building in America's heartland. The Midwest is in the midst of a renaissance. As smart robotics and industrial automation proliferate, the Midwest is as reliant on innovation and research and development as our friends in Silicon Valley. Our brightest minds are electing to stay in Columbus, Cincinnati, Indianapolis, and other growing cities across the Midwest, and no longer feel they need to leave for a coast to work at a thriving tech company. The Midwest is earning a reputation as a promising new frontier in venture capital investing and entrepreneurship. For the past few years, AOL co-founder Steve Case has been traveling alongside renowned author J.D. Vance, and shining a spotlight on innovation in overlooked communities. Their $150 million Rise of the Rest seed fund has supported promising companies in communities throughout the Midwest. Another supporter of the region, Columbus-based Drive Capital has raised over half a billion dollars to invest in growing businesses throughout the Midwest. The publication Tech Crunch recently noting, ``The firm is spurring an investment revolution in areas of the country that are more synonymous with tractors than with technological innovation.'' Venture capitalists build ecosystems and support the key drivers of economic development--innovation, talent, and capital. Columbus-based NCT Ventures funded and helped to launch the Center for Entrepreneurship at The Ohio State University to inspire and educate entrepreneurs for generations to come. In Detroit, legendary entrepreneur Dan Gilbert and his team at Detroit Venture Partners have sponsored numerous accelerators and startup activities to stimulate innovation in the Motor City. The ripple effects of these investments in underserved areas are profound, supporting workers in high- paying jobs and their families and communities. But despite this promising momentum, America's heartland is lacking the critical access to capital enjoyed in Silicon Valley, New York, and Boston. Three-quarters of venture capital is being invested in just three states. My home state of Ohio received less than 1 percent. Talent is equally distributed, but if capital continues to be concentrated in the hands of a few based on geography, we risk letting this momentum fade away. The proposals to catalyze entrepreneurship through regulatory reform are critical to not only VentureOhio members but also to our peers in the national startup community. And more broadly, in this new tech-based economy, these conversations will affect the entire Nation. Most of the capital invested in startup companies goes toward research and development, job creation and salaries, and other expansion activities. VentureOhio and our partners at the National Venture Capital Association know that founders, startup employees, venture capitalists, and angel investors must all find the risk-to-return ratio worthwhile in order for our entrepreneurial ecosystem to flourish. The hardworking startup founders and investors that support them, especially in America's heartland, could benefit from additional regulatory relief to reach their true potential. In particular, the Volcker Rule, aimed at preventing banks from taking unnecessary risks, should be reinterpreted. Unfortunately, it was written overly broadly and unnecessarily prevents banks from investing in venture capital funds, eliminating a critical source of capital for startups. Investors and entrepreneurs would like to see a narrower interpretation to allow banks to participate in this proven source of job creation and economic output. This regulation is especially burdensome to communities outside of major metropolitan areas, dampening entrepreneurship and economic activity where it is needed most. To be sure positive changes are taking places, we applaud the bipartisan Investing in Opportunity Act, which promotes investment in struggling areas with the benefit of deferred or reduced capital gains taxes. We look forward to seeing use of this opportunity proliferate in Ohio and beyond. A few targeted initiatives can positively impact capital formation for startups in the U.S., making long-term risk investment as attractive as possible. I speak for many entrepreneurs and investors, and we urge Congress to create a clear and rational framework to allow America's entrepreneurial ecosystem to thrive for generations to come. Thank you very much again. I look forward to answering your questions. Chairman BRAT. Thank you, Ms. Donohue. I appreciate your testimony as well. I would now like to introduce our third witness, Ms. Amy Gales. Ms. Gales is executive Vice President, Regional Agribusiness Banking Group of CoBank, headquartered in Greenwood Village, Colorado. CoBank is a national cooperative bank serving vital industries across rural America and in all 50 states. Welcome, Ms. Gales, and you may begin. Thank you very much. STATEMENT OF AMY H. GALES Ms. GALES. Good morning, Chairman Brat, Blum, Ranking Members Evans and Schneider, and members of both Subcommittees. Thank you for calling this hearing today to focus on investing in rural America. I am Amy Gales, and I serve as executive vice president of the Regional Agribusiness Banking Group for CoBank. CoBank is a national cooperative bank headquartered in Denver, Colorado. Our mission is to be a dependable provider of credit and financial services to agriculture and rural infrastructure businesses for the benefit of rural America. CoBank is a proud member of the Farm Credit System, a national network of cooperative banks and lending associations chartered by Congress to support the borrowing needs of U.S. agriculture and the Nation's rural economy. We are acutely aware of the capital needs of entrepreneurs in rural America and strive to find flexible and innovative ways to address those needs. We call this collectively CoBank's Growing Rural America Initiative. CoBank supports rural entrepreneurs by providing flexible loan products in the Co-op Start program supporting the technical assistance and education needs to create new cooperatives, funding rural equity investments; financing community facilities in partnership with USDA, farm credit associations and community banks with bond investments; sponsoring predevelopment funding; financing and advocating for rural infrastructure nationwide; partnering with farm credit associations to serve young, beginning, small, and minority farmers; and supporting youth entrepreneurs. To address the capital needs of small or emerging agricultural cooperatives, CoBank developed a creative, flexible solution, Co-op Start. As consumers increase demand for local foods and other specialty crops such as hops for the growing craft brewing industry, we started to see the formation of new farmer-owned cooperatives for the purpose of distribution and marketing. The Farm Credit Administration, our independent Federal regulator, maintains guidelines that we must follow in terms of safety and soundness. When the new emerging agricultural cooperatives did not meet our loan underwriting guidelines, the CoBank board proposed a solution to FCA--create a separate risk pool designed to provide more flexible financing for these cooperatives. Co-op Start was launched in 2012 to provide financing up to $250,000 to early growth stage cooperatives. As a cooperative, CoBank's commitment to foster the creation of new cooperatives runs deep through our support of numerous education and technical assistance programs. To meet the needs of food access in rural towns, CoBank recently teamed with the National Cooperative Bank to support the Food Co-op Initiative (FCI). FCI provides free technical assistance to rural communities interested in starting a food co-op, either to reopen or maintain their local grocery store. CoBank understands that rural entrepreneurs, the engine driving rural economies, need dependable sources of equity capital to improve infrastructure. They depend on this to grow their businesses. While access to senior debt is generally available, equity in junior debt remains more difficult to source. Few rural focused investment funds exist beyond those that concentrate on acquiring farm land. Recognizing this gap and the challenges faced by rural entrepreneurs, CoBank and other farm credit associations started to make investments in equity funds focused in rural America. Rural equity investments serve as an effective source of capital to increase rural economic prosperity. These rural equity funds catalyze private capital investments and create jobs all across the country. Since 2013, CoBank has committed $52.5 million across four private equity funds, along with commitments by other farm credit associations, commercial and community banks, and other institutional investors. These funds are providing $300 million in equity capital to rural entrepreneurs. So far, more than 26 rural businesses have received investments from these funds. I want to thank Congress for its foresight in passing the Rural Business Investment Program legislation that has been a catalyst for the formation of rural focused funds. The capital challenges in rural America require innovative solutions. We are proud of the partnerships and initiatives we have developed with our Growing Rural America initiative and look to find new ways to support rural America. Thank you for the opportunity to testify before the Committee and for all that you do for rural America. I look forward to answering your questions. Chairman BRAT. Thank you for what you do as well. Thank you for your testimony, Ms. Gales. I will now yield to our Ranking Member Evans for the introduction of our final witness. Mr. EVANS. Thank you, Mr. Chairman. Ross Baird is the co-founder of Village Capital, one of the most active early-stage investors in the U.S. Since its founding in 2009, Village Capital has invested in nearly 100 entrepreneurs and supports over 1,000 more through affiliate programs such as with a particular focus on economic distressed areas. Ross is also an innovator in resident with the Ewing Marion Kauffman Foundation where he focuses on issues related to access to capital for entrepreneurs, and is the author of the best welling book, The Innovative Blind Spot. He is a graduate of the University of Virginia where he was a Jefferson Truman scholar, and the University of Oxford where he was a Marshall scholar. STATEMENT OF ROSS BAIRD Mr. BAIRD. Thank you, Ranking Members. Thank you, Chairman. Thanks for the invitation to address the Committee. So I am thankful to share my experience both investing and supporting entrepreneurs as the cofounder of Village Capital and also studying this issue in my role with the Kauffman Foundation, which supports education and entrepreneurship across the country. So today we have heard the bad news. Despite a strong stock market, entrepreneurial activity in the U.S. is actually approaching a 40-year low. Rural entrepreneurship in particular has declined 33 percent in the last 30 years. Now, this is a huge problem. New businesses create nearly 100 percent of new jobs in the country. So today I would like to talk about the role access to capital plays. So Kauffman Foundation research estimates it costs about $30,000 to start a business. Some entrepreneurs self-fund. Sixty-seven percent of entrepreneurs begin their businesses with personal wealth. This is savings, second mortgages, contributions from friends and family. Yet, most Americans' wealth is on the decline. In the Great Recession, 25 percent of Americans lost at least 75 percent of their wealth, most often home equity, which is a typical source of startup capital. Student debt has grown more than 100 percent in the 20 years. This wealth gap is particularly wide of women, African- Americans, Latinos, and rural entrepreneurs. As one entrepreneur told me over a cup of coffee at a McDonald's in Orange, Virginia, in Chairman Brat's district last year, starting a business has become a rich man's game. So most entrepreneurs then need to access external capital, which has got two ends of the spectrum which we talked a lot about today. On one end, small businesses have typically turned to banks, but large banks have become bigger, and small and medium-sized banks that are more likely to back new and rural businesses are disappearing. Small community banks have declined 41 percent since 2008. Today, only 18 percent of new businesses get a bank loan. We have also heard a lot today about venture capital, which is on the other end of the spectrum. It is an important tool and very valuable for a lot of businesses, but only 0.6 percent of businesses ever raise venture capital. It is usually a very specific type of tech company, usually in a big city. Less than 1 percent of venture capital goes to rural areas. So that leaves 81 percent of businesses stuck in between with no access to formal capital. So what do these 81 percent look like? Five years ago, I met Lula Luu, a woman who founded a business called Fin Gourmet in Paducah, Kentucky. Fin Gourmet catches Asian carp, a huge nuisance in the Mississippi River watershed, filets it, rebrands it Kentucky Blue Snapper, and sells it to high-end restaurants all across the country. I am serious. It is like Chilean Sea Bass is actually a muckraking bottom feeder. So when I met Lulu, she earned over $100,000. She was employing 12 people, but banks said her business was too young and too risky for a loan. Venture capitalists said she was not high growth enough. And so we innovated. We invested in Fin Gourmet and in an innovative dividend based model. They would repay us a percentage of the company's revenue as they grew until we would reach a predetermined return on investment. So we invested. Lulu more than doubled her employment and her revenue. She still faces a lot of challenges, but there are tens of thousands of Lulus in America who are too risky for a loan and too normal for a venture capital fund. So what can Congress do for the other 81 percent? First, help entrepreneurs without wealth start a business. I have seen ideas, for example, focused on student debt. Entrepreneurs who start businesses and create jobs in economically distressed areas such as opportunity zones can have their loans deferred or forgiven based off of reaching certain benchmarks. Second, innovative in the space between equity and debt. For example, the State of Colorado helped set up a fund for rural entrepreneurs, a private sector fund. And instead of a debt of equity fund it is this revenue-based investment, the Fin Gourmet model. Its creators argue that its structure is perhaps a better fit for the majority of rural businesses. Finally, build on existing tools you have created. I am encouraged by the recent bipartisan creation of opportunity zones across the country, yet I am a bit worried. Without a focus on entrepreneurs, I can see this being a vehicle for large real estate investment. To address this, we are hearing from entrepreneurs about regulatory clarity that might help. As one example, it is unclear today how reinvested interim capital gains from an opportunity fund are treated. If an investor earns a return on investment from Fin Gourmet, they are more likely to invest in future Fin Gourmets if the tax incentive still applies to their interim gains if they reinvest in another entrepreneur. Also, I encourage your creation and support for RBICs, as well as the Small Business Investment Company Fund, but I would take a look at the possible uses of funds. SBICs, for instance, have about a 4 billion annual allocation, and amazingly, the private sector does not even ask for anything close to the full 4 billion each year. You literally cannot give away money you have allocated, which maybe says it is perhaps the wrong product. The SBIC Fund can invest only debt. I hear from entrepreneurs and investors that the use of this fund for equity and alternative structures may expand the playing field significantly. Finally, programs such as the EDA's i6 grant have been helpful in creating venture capital funds, and perhaps you could also accelerate the use of other innovative vehicles by expanding the mandate of private funds it could support. So we are lucky to be in an economy with good signs, but I want to remind the Committee that 55 percent of entrepreneurs starting a business today actually think the economy is on the wrong track. If you are able to remove barriers like access to capital, a lot more entrepreneurs will be successful in realizing the American dream. Thanks for the opportunity to be here. Chairman BRAT. Very good. Thank you very much for that testimony. I guess it is on to me now for the question session. We will go around the horn. I will ask a question, give a sermon, and then return to the question. The question relates to the big man's game, the big firm's game, how you want to put it. I am totally opposed to that. I taught economics for 20 years and that is the sermon that is coming. The question will be, how has the consolidation of the banking industry impacted rural small businesses? It is kind of a softball. What key financial services are difficult to access in more rural parts of the country? And how do we give small firms the real tools to compete? And so for me, I think we have a big project on our hands. You mentioned 2008. Everybody is starting to go back to 2008 again, look in the rearview mirror. And what produced that? Risk. Banks no longer did risk assessments. They threw all the risk onto Fannie. And the financial crisis started only in the housing sector, right, and blew up. And you got the book on Johnson, his bio. He had 50, many fiefdoms across all states that no politicians could touch. Right? So that is the big man's game. Right? And the smalls cannot compete in that and so we are losing one small bank a week, et cetera, something on that. And so if you go back to my Virginia heroes, we have got Madison. You might have heard of James Madison. He is from my district. Wrote a document called the Constitution. And roughly speaking, he and Adam Smith share the exact same logic. Right? So he has enlightenment, you know, logic. He wanted a large number of small factions duking it out against each other. A large number of small factions duking it out. What do we have in D.C. today? Big, big, big. Right? So we have failed. We failed to stay true to that vision. Adam Smith had the exact same logic. No one knows anything about it because we do not teach economics in school anymore. But he wanted a large number of small firms competing against each other. Right? That produces all the best outcomes. No one knows this. Right? Everybody thinks the exact opposite is the case. That capitalism in free markets leads to profits for the big guys. So Adam Smith was exactly the opposite. There are no profits in the long run in perfect competition when you have a large number of small firms competing. And so this is kind of a setup for you. Right? This is the original architecture that made this country great, made us rich. Now it is big everything. Right? It is big insurance, big cars, big--anything. Big banking, big everything. Right? And so we need your help. And if you want to really help the small firm compete, I do not think small firms can outdo and survive in the current environment. We have $2 trillion in regulatory overhang per year out of a $20 trillion economy. And so I just want to get your insights on how do we return to give the small firm, the small man, the small woman a fighting chance? Where are the key bottlenecks where we can get out of the way, and take a proactive stance to return small firms to a competitive stance? Right? You brought up trade a little bit and that is kind of ironic, too. Right? So we have $2 trillion regulatory costs we put on our businesses, and the rest of the world does not have that yet. Right? China, India, et cetera. Two billion people. And we say go free trade. Well, that is a cynical joke. Right? So go compete on a neutral playing field when you have a $2 trillion regulatory disadvantage against you. And it is the same kind of argument. So I just want to tee you all up. Why do you not, Mr. Baird, since you started down there, on a big level, right, I do not think we are going to get to where we all want in returning power to the states and localities and small businesses without some major steps. What do you think some of those major steps are? Mr. BAIRD. Sure. Chairman BRAT. That is part of it. Fire away. Mr. BAIRD. Sure. I am also from Virginia, and I will start with another Virginia hero, Thomas Jefferson, who is not in your district but close by. There was a big debate between Jefferson and Hamilton at the founding of the republic. Jefferson said, do we design the economy for producers? And Hamilton said, do we design the economy for financiers and consumers? And the producers won, and probably rightly so, and I think over the last 30 to 40 years we have seen a major shift in how government defines competition which says so long as prices are low and profits are high, the economy is competitive. And I think we have seen whether it is in the chicken industry or the pork industry or the banking industry or cable or airlines, we have seen massive consolidation. It is very, very difficult for small businesses to compete all across the board. And I think these are intentional policy questions. So, for example, this Congress passed probably 7 years ago a bill called Robinson-Patman that actually protected small producers against large producers and was very, very good for rural areas. Robinson-Patman is still on the books today, but when a large quasi-monopoly puts a small producer out of business, the courts have said that prices are low, it does not matter, even though it is technically against a congressional statute. So I would say think about ways to promote and protect specific producers. Some of this is looking at large tech platforms that are both running platforms and selling things on the platforms. And I know you have a number of different hearings and questions about that. Some of that is ways to look at banking and financing and having different capital controls for smaller and larger banks. I can go into more detail, but that is kind of the intellectual framework I would look at if I were you. Chairman BRAT. Great. Thanks. I think we will go around the horn once and maybe get back to that for the rest of the panel as well. We will go to our Ranking Member, Mr. Evans, for his questions. Mr. EVANS. Thank you, Mr. Chairman. Mr. Baird, you raised an issue that I was just dealing with last week. If you ever get to Philadelphia, in Roxborough there is a place called Le Bus. They have some of the best food. But there is a woman who has been running a business for 13 years. You stated in your written testimony that business lending is outdated when it comes to service businesses with many assets used as collateral. How can banks' lending be restructured to allow more small service industry to access the need to start up or expand? That is exactly her issue. Listening to you, she has been in for 13 years. She went out and she bought another restaurant. Did not do well. Had to sell that restaurant. And she is struggling because of the very same issue you are talking about. So talk about from that big picture standpoint. If that model is a failed model, what do you see? Mr. BAIRD. Sure. In my conversations with larger banks, the minimum loan size that is profitable for a larger bank to underwrite is about $250,000. Now, going back to the Kauffman research, it takes about $30,000 to start up a business. That means most people are far too small to matter. So there is an issue that banks were created in a day where most businesses were goods businesses. You buy a big machine. Then you get a loan. And if the business goes under, you can reclaim the machine and that is your collateral. Today, most businesses are services businesses, like the business that you described. So the industry has changed and banking has not. One of the things that we have the opportunity to look at though is the role of technology in making lending off of cash flows rather than lending off of assets. So, for example, we invested in a company in Houston called Fig Loans. Houston is the payday lending capital of the world, and Fig Loans is a couple of numbers data scientists who have developed an algorithm to actually predict what a small business's cash flow might be. And they actually lend off of the potential of the business, even if the business is 9 months. They have a number of data pieces that go into it and they have a predictive algorithm and they are able to dramatically compete with payday lenders. So I would say there are technologies that help us look at cash flows. There are also regulations that may have different, again, capital controls, on balance, off balance. We want to manage risk, but many of these smaller banks and startup financial services technology companies are doing forward-looking cash flow lending rather than backward looking asset lending which is more in touch with most businesses starting today I think. Mr. EVANS. Banks will then turn around and blame people like us in Congress and regulators why they cannot do what you have said because there is a certain amount of money they need to keep in the bank. What is your response to that when they turn and blame us? Mr. BAIRD. Well, you recently passed a bill that loosened control significantly that were put in for Dodd-Frank. And one of the things I would keep an eye on in this Committee is banks have said for a while that they have not been able to lend because of these controls. So you loosen regulations. I would hold them accountable. I would say we did what you told us to do. Are you actually lending to rural businesses, small businesses? So in some ways you have removed an excuse, and I would hold banks accountable to make sure they do what they said they were going to do before you remove the excuse. Mr. EVANS. Ms. Gales, you mentioned in your written testimony that one of the companies you support is an American company who regularly relies on exports with the business model. Are you worried that the administration tasked on our neighbors and biggest trading partners, are these companies worried? And what are we going to do to give certain and support to this trade stressed time? Ms. GALES. We are absolutely very concerned about trade as our industry of agriculture is very reliant on exporting to get fair prices. We are very good at production, agriculture, and so it is very important for us to be able to sell products abroad. Most of our products we cannot consume totally in the United States, so we really rely on that market. So I will say we are looking at it very, very closely. We are working with our customers very, very closely. And reminding the panel that in good times and bad, the Farm Credit System is there to work with our financial partners. So we are keeping a keen eye on it. I would have to say we are worried about what that is going to do to impact cash flows of the businesses that we finance. Mr. EVANS. I yield back, Mr. Chairman. Chairman BRAT. Thank you. I would like to recognize Rod Blum for his questions. Mr. BLUM. Thank you, Chairman Brat. Mr. Baird, you said in your testimony entrepreneurship is at a 40-year low. And this to me is stunning. And I cannot believe it. Fifty-five percent of entrepreneurs think the economy is on the wrong track. I do not buy it. Tell me why I should. Mr. BAIRD. So I think that there is an increasing dichotomy to Chairman Brat's point between big and small, and I think that largely older firms--and when I say entrepreneurs, this is a Kauffman Foundation survey from February, and we look at businesses that are fewer than 5 years old. So that is the technical definition. So the vast majority of businesses that are older than 5 years old think the economy is on the right track. Fifty-five percent of businesses that are fewer than 5 years old think the economy is on the wrong track. And I think it is because it is very difficult for small businesses to compete against large businesses for a number of reasons. Mr. BLUM. Nobody said it was easy. I did it. Mr. BAIRD. So did I. Mr. BLUM. It is not easy. Mr. BAIRD. It is incredibly difficult. But I think there has been, for example, if you are in any range of industries-- advertising is a large source of revenue for many types of businesses, media, whatever it is. Ten years ago, the advertising industry was very much divvied up. Today, 85 percent of online advertising is owned by two companies--Google and Facebook. And you have to build something on someone else's platform and then they have the ability to shut you down. So I think there is an increasing sense that large businesses are both making the rules and using the rules to compete against you if you are an entrepreneur. This is something I hear over and over again. You hear it in the agricultural supply chain trying to compete with increasing conglomerates. You hear it in financial services. Mr. BLUM. The converse of that though is 2 weeks ago we had in here folks that were on Amazon's platform and they were all small businesses between $500,000 a year in revenues up to $12 million a year selling on Amazon and Etsy and eBay. So conversely, yes, they are big. Those are big companies. But the platform is for entrepreneurs. Mr. BAIRD. So I think the question to ask if I am on your Committee is, what are the rules for platforms? So, for example, Amazon as compared to eBay. I wrote a book. I cannot control the price on Amazon. And it goes up and down and I do not understand why that is. On eBay, if I sell my book for $30, no one will buy it. If I sell it for 99 cents, people will buy it but I will lose money. But I get to choose. And so I think that the question of do people competing on a platform have choice over how to take their product to market is a really important one. Mr. BLUM. Thank you. And I did mention during that hearing that Amazon needs competition. Mr. BAIRD. They do. Mr. BLUM. And when we get into sectors of industries when there is not enough competition, then that is where we have problems typically. Mr. BAIRD. That is right. Mr. BLUM. Mr. McKenna, consolidation in the farming industry, not the banking industry, good thing or bad thing? And is it being driven by only the large farms can get credit in the small--I mean, I am 63. I can remember when your average farmer would farm 80 acres or 160 acres. Today, in Iowa, I do not meet a farmer that is farming less than 12,000 acres. And I know the investments are bigger and their capital needs are probably higher. Do you think it is a good thing or a bad thing farms are consolidating and getting bigger? Mr. MCKENNA. From a venture capital perspective, I think it is probably a pretty good thing in the sense that it creates a platform under which entrepreneurs, new people, new technologies, smart ideas can bloom. And the demand for technology, the demand for innovation is as great as it ever has been. Who are going to come up with those ideas? Who are going to be the people that develop those ideas? Big companies, big farms, it may be below their radar. On the other hand, there was a lot of smart people, a lot of innovation coming out of our land grant system, coming out of smart people's garages that are invited to participate with these larger consumers, with the larger enterprises. So from a venture capital perspective, I think bigness is perhaps a fact of life. On the other hand, there is still the opportunity for the smaller firm. There is still the opportunity for the young, new person to create a new business. That new business may not be able to compete on an agriculture basis but may compete on a technology basis. May compete on a logistics basis. May compete on some part of the economic chain that the big farms are following. And that is where the innovation is that I am seeing. I am seeing innovation below that level of the big, big farm. Mr. BLUM. If we go back 8 years, let's say 2008, 2010, I can recall I think Warren Buffett was very interested in the agriculture markets. They were saying the hottest trends in Silicon Valley was now agriculture and precision farming, if you can recall that. Prices were also high back then for commodities. Is this a price-driven thing? If we can increase the prices of the commodities through trade, you know, will all the money flow back in then with this marketplace? Mr. MCKENNA. Certainly, a rising tide. We will float a lot of boats. That is certainly the case. But also, look at the small businesses. Cannot compete from a fixed capital perspective. In other words, a farm today needs a certain size. Needs a certain amount of land. Needs a certain amount of equipment. And that is expensive. On the other hand, if the small business is technology based or software based, the capital invested there is a relatively smaller number and that creates the opportunity for the entrepreneur. What I see as the opportunity for the financial side is funding those people, funding those smaller ideas. And I still think there is a world of opportunity for those smaller ideas. Mr. BLUM. Thank you. I yield back the time I do not have. Chairman BRAT. Thank you, Mr. Blum. I would like to recognize Mr. Schneider for his questions. Mr. SCHNEIDER. Thank you. And I want to thank the witnesses again for sharing your perspectives. And the chair, and for allowing us to have this actually very important hearing. Mr. Baird, you touched on the struggle between the Jeffersonians and the Hamiltonians at the founding of our Nation. Fair enough. But it was an important debate at the time. But at the time we were an agricultural economy. Over the 240 years since that debate, we have gone from agriculture to industry to a knowledge economy, and increasingly, to a services economy. And Mr. McKenna, you touched on I think very importantly that agriculture has gone from the small plot of land to a high-tech, high-investment industry that you need scale. And so my question broadly is if we look at the opportunities taking place, and I will pick on the three states, New York, Massachusetts, and California where venture capital is going, a lot of these ideas are started at low scale in garages. People with a computer and an idea are able to create something that can grow into a fabulous business. There is no reason that cannot be done anywhere in the country. And Ms. Donohue, you talked about talent being equally distributed. It may be at birth, but by the time they go to school and there are these ecosystems that are developing in these concentrated metropolitan areas. So my broad question is how do we use the very same technology that is in many ways creating this concentration to deconcentrate and allow businesses that need access to capital, that need access to talent, but cannot succeed without the opportunity for scale to gain capital, gain talent, and achieve scale while staying in smaller rural communities? And I will open it up to the panel. Mr. BAIRD. Sure. I will give a quick answer and then turn it over to folks. Thanks for the question. I think there are a lot of things that government tries to do in startups like create funds and things like that that government is not particularly good at. You know, picking specific winners and losers is not a core competency of government, I think. But there are two things that I think government has done well, particularly in rural areas in the past. The first is infrastructure. So my mom lives on a farm in Cumberland County, Virginia, just south of your district. And my wife and I, we go there. It is great because we do not do any work, but we cannot do work because they do not have broadband because there is no internet there. And I think that that is a huge, huge barrier. And the next generation of the Rural Electrification Act or the Interstate Highway Act is something around rural broadband. And the second, I want to go back to market competition. So scale is great if buyers and sellers are all treated equally. Right now in the chicken industry or the pork industry there is basically one buyer, which means farmers cannot compete for better prices. So some of this is technology. There are tech platforms that do not treat all buyers and sellers equally. Some of it is market platforms. I think making sure that free market competition rules happen in market infrastructures is a core competency of Congress. Mr. SCHNEIDER. Ms. Gales? Ms. GALES. I would like to take a crack at that. On the broadband comment that you have, I think there really is a role for government and private entities to work together. And CoBank finances communications. But when you start getting into a rural area where the density does not allow a return on a significant investment, we run into the same problems when we go home or I go home to my rural farm where I was raised in Southeast Minnesota, and you really do not have good broadband coverage. So when we start looking at what are some possible solutions to that, the Universal Service Fund Reform I think has to have some changes, and the Rural Broadband Loan and Grant program I think is also important as a way for government and private entities to work together. So rebuilding our broadband and making it attractive for our young people to stay in rural areas, as well as to have agriculture. We have been talking about agriculture, and the Farm Credit System provides 40 percent of the capital to agriculture. And so it is very important. How do we run precision agriculture? How do we turn on a tractor that drives itself? How do we look at other things, such as telemedicine? So that we can have the same kind of care that we have in urban settings; that we can have that same kind of care in rural settings. So I think there is big room for private-public partnerships. Mr. SCHNEIDER. Ms. Donohue? Ms. DONOHUE. I think building ecosystems are complex and it just takes time. I know in Ohio we are doing a lot of the right things, but we are so much newer than Silicon Valley or Boston or New York. Public-private partnerships are a very important piece of this, including building infrastructure and access to the internet. I think our corporations have a large role to play, leaning in and supporting these entrepreneurs, providing customer validation and using their products. I think the government could lean in in that way as well and be a first customer for startup companies and entrepreneurs. They are not looking for a handout. They are looking for a hand up, and I think that is one way that the government can contribute. Mr. SCHNEIDER. And if I may request time for Mr. McKenna, Mr. Chairman? Mr. MCKENNA. Thank you, sir. I would go back to the comment from Chairman Brat about, I like the expression, the competition of a large number of small firms. The rural business investment companies, the RBICs that Congress authorized and USDA administers, are a tremendous success. Giving them access to the leverage provided by the Small Business Administration would be a great benefit as well. And that is pending before the House Senate Conference right now as part of the Farm Bill. So I would urge you to consider giving them that access. Mr. SCHNEIDER. Great. Thank you. And I am out of time. I yield back. Chairman BRAT. Thank you. And I would like to now yield time to Mr. Lawson for his questions. Mr. LAWSON. Thank you very much, Mr. Chairman. Welcome to the Committee. Mr. McKenna, I was interested when they said you were from Georgetown. I was wondering what kind of rural development you have around Georgetown. You know, but I do know you have had the opportunity to work with people down south. And I would like to know how did you get involved with that research to work with people being you are from Georgetown? Do you really know what is going on down there? How can you help them with the research and so forth that you are doing in terms of economic development and small business growth? Mr. MCKENNA. Georgetown, you are absolutely right. Georgetown barely has a campus, let alone an agricultural footprint. But they recognize that there is an opportunity to be a door keeper, so to speak, for other organizations to Washington, D.C. And in the rural space, they felt there was a need for that access to Washington, D.C. to advance rural issues. Obviously, they need partners, and that is why we have reached out to the campuses, land grant campuses at Mississippi State, Purdue, and Iowa State, because they obviously have that skill, that expertise, and the desire to address those needs. So the Center at Georgetown University relies upon our partners, USDA, and those three land grant schools to be the place where the ideas come up, where the needs are identified, discussed, and then brought to the proper forum in Washington, D.C., to be discussed. Mr. LAWSON. Okay. And next, Ms. Donohue, how do you keep the character of rural communities intact with economic development? I grew up in a rural community and when things start drying up, you know, developers start selling property and a lot of people moved in. And a lot of people start saying we do not even know these people are on the commission now. You know, they started incorporating their cities. I had a lot to do as somebody within the Florida legislature. But how do you keep the integrity of the community? And someone else might want to comment on it, too, about infrastructure, the character of the community, at the same time increasing economic development. Ms. DONOHUE. I think that is a very important topic. We love our friends in San Francisco but are very wary of how that city has developed. So inclusive economic development is very important in how we build these communities and these ecosystems. I can tell you that in Ohio we have been able to maintain character by repurposing a lot of the old buildings, the old structures, job retraining, job creation, and bringing people from industries that are outdated and training them for the jobs of the future is something that is very important to us in Ohio. Mr. LAWSON. Okay. And Ms. Gales, do you think about that when you are giving loans and so forth to these developers in those communities? Ms. GALES. We absolutely do. And there is no corner on the market of good ideas in urban areas. There are many good ideas in rural areas. And oftentimes it seems what is needed is technical support so that we can work with people. I worked with a cooperative development center for 3 years in South Dakota, and there was no shortage of good ideas. But that technical assistance is so important to put the business plan together, to make sure that it fits with the community's desires, that it fits without changing the character of the community. I mean, whatever the factors are that are important to the people with the good ideas. So I think technical assistance is really a very important part of making successful businesses get off the ground in the best possible fashion. Mr. LAWSON. Mr. Baird? Mr. BAIRD. Yeah, I think a lot of this is the design of the types and tools of capital. So it is the saying, if you have a hammer, everything looks like a nail. Venture capital funds are a great fit for high growth technology companies. There may be other kinds of investments that are a better fit for rural businesses, and innovations like the fish company I told you about, the investment structure we used, I can see an opportunity to identify and scale, and maybe government can help seed some of those efforts. The second thing I would say is to your question around developers and real estate, I am very encouraged by and supportive of opportunity zones. And with the caveat that there is a world in which it is a real estate developer only benefit, and there is a world in which entrepreneurs and small businesses are at the center of it. There are a couple of questions around how gains from opportunity funds can be used. How and whether opportunity funds can raise and utilize debt that would make it much more entrepreneur friendly. So I encourage Congress to listen to entrepreneurs as regulatory clarity comes out in opportunity zones to make sure the entrepreneurs in the communities benefit. Mr. LAWSON. Thank you. Mr. Chairman, if I could have just a few more seconds. Mr. Baird, you said that there is always a lot of money left on the table. You know, I have only been up here about 17 months. What do you mean by the money left on the table? Mr. BAIRD. So the Small Business Investment Company Fund out of SBA is a fund of funds that seeds funds across America like we all are excited about. It makes money for the government. It was 2 billion. A few years ago you extended it to 4 billion, but the private sector does not ever come close to asking for that 4 billion because it is a debt investment vehicle. And most risk capital are either equity funds or quasi-equity funds like the Fin Gourmet idea. So no one wants to raise debt and then uninvest equity. And if you are raising senior debt as Ms. Gales said, it is actually relatively straightforward and much easier to raise. So I think changing clarifications on how the SBIC funds could use I think would be a lot more responsive to the private sector as one strategy you might pursue. Mr. LAWSON. Okay. Thank you. And I yield back, Mr. Chairman. Chairman BRAT. Thank you very much. I think maybe we can do a short lightning round. I will just make a couple comments. Ms. Gales, your comments on technical assistance I think very interesting and provocative. Having taught freshman economics for 20 years, I always ask myself, what would the world look like if we taught our K-12 kids about business ahead of time? Right? So they start doing internships and being creative and looking at technical assistance early on in life. Right? While they are in high school even. And then they move on to business certificates and technical education and all that. And they are working on that the whole time. Right? The kids coming out of K-12 right now, it is not the fault of the teacher. They do not know what a business is at all. They do not know a price, a cost, a profit, zip. So we spent 13 years, $14,000 per year, and that is what we got. And then colleges, some of them are hostile to business and free markets, et cetera. So if you want to make a dent, I think there is a lot of resources in those channels. We could turn a world around. It is like turning a battleship around. But we could turn the world around. And then finally, I kind of gave my little architect there with Smith and Madison or whatever, but I want to give a cautionary note. When you come up here on the opportunity zones, real estate, whatever, and the same thing. It kind of has to do with the kids. We got $4 trillion that comes up here. Right? $20 trillion economy. $4 trillion comes up here. And then who controls that pot? The small guys? Right? Everybody knows. And so that is the tricky part, is how do you keep these things from getting gamed and captured? And there is economic literature on all this stuff. And so the clearest example for me, right, we have got $21 trillion in debt right now. We have got $100 trillion in unfunded liabilities. And that is going to affect who? The one major group in our country that has no lobbyists, the kids. So that is just a cautionary note on working up here instead of keeping it down there. Or whatever we write up here, better send it all back home, right, to the states and localities, et cetera. And so I kind of started the last section of what can we do on a big scale? And I got to Mr. Baird and Mr. McKenna, and Ms. Donohue and Ms. Gales, if either of you want to weigh in on what we can do better big time. Not just on this issue, but overall, to have the government be a fair broker as we try to adjudicate between these groups who have been left behind. Ms. GALES. I would comment on rural youth. We have got a lot of blue jackets in the room, and rural and urban youth are going to be the future of our United States. And so you start looking at what are some of the opportunities for youth? And there are so many great projects, like Campus Kitchen program, or I look at what 4-H is doing, the other organization that I was a part of. But Scouting for Food, Campus Kitchens have been a real success. So I look at not only technical assistance but how are we working with youth who are the entrepreneurs or future entrepreneurs that are really going to help us do a better job bringing capital and ideas and keeping them in rural America. Ms. DONOHUE. It is very difficult to get a first-time venture capital fund off of the ground. Less than 100 are created every year. That is especially difficult in the Midwest. Lifting the Volcker Rule I think would be very important and have a significant impact on the Midwest. Prior to the Volcker Rule, banks played a very critical role in the creation of venture capital funds in Ohio. We do not have the stacked LP base that our partners on the coast do. We are very limited as to the number of institutional investors who can invest in venture capital and who are educated on venture capital. So banks not only made up a significant amount of the fund; they were the first investor in providing confidence for subsequent investors. So for us in Ohio, the Volcker Rule is very critical. Mr. MCKENNA. Just repeating what I said before, the opportunity for small venture capital funds exists. They are out there. They just need a little bit of push. And most of that push is going to come from the private sector. But from an SBA perspective, having the RBICs gain a little bit of access there would be, I think, a helpful push. Chairman BRAT. Great. Mr. Evans. Mr. EVANS. Thank you, Mr. Chairman. Chairman BRAT. Anyone else that wants a second crack? Mr. EVANS. I want to follow up with Ms. Gales. You mentioned in your testimony that CoBank is working with minority groups and farmers to help them get a leg up in agriculture. What types of programs are they doing? And who are you working with to ensure that everyone is getting fair access to capital? Ms. GALES. Thank you for the question. We work with our Farm Credit partners who are responsible for working with small, beginning, and startup companies and minority companies. And so we have a program that I would like to just highlight called Farm Start that is in our East Coast office that we work with our Farm Credit East, Farm Credit partner and Yankee Farm Credit partner in Vermont and Massachusetts. And so they identify small, beginning, new farmers, minority farmers that need some additional help. And we support that program with some equity capital. They make the analysis. They are the farm lenders. They make the analysis on the loan product that we provide, but there is another program where we do not follow traditional underwriting standards in many cases to give those individuals a leg up. Mr. EVANS. Thank you, Mr. Chairman. Mr. Baird, I want to go back to something I heard you mention. This is a follow-up to Mr. Lawson. Could you discuss the potential problem created if opportunity zones are used for real estate investment only? I heard Mr. Lawson raise some questions about opportunity zones. Mr. BAIRD. Yes, thank you, Congressman. I think this goes back to a theme of this which has been the big versus small. So opportunity zones investment, I like it a lot because it is private sector totally. It is no government capital, so it is the private sector driving it. However, today, the way the regulations are interpreted, you have to, if you sell a stock, if you own stock and then want to invest it in an opportunity zone, you have to sell it and invest it within 6 months. And the larger the investment, the bigger tax benefit you get. So it is a lot easier to invest it in a $10 million real estate project than 10 $250,000 growth equities and small entrepreneurs. And so we are seeing communities--I was just in Central Valley of California, where we are seeing farm communities collect and syndicate groups of small investments, and that is the kind of thing the private sector is doing, which is encouraging. But right now, the way regulations are interpreted, it is a lot easier to invest in one big project than a number of small entrepreneurs that are trying to compete in the economy. There are a number of---- Mr. EVANS. That were counter to the overall mission of opportunity zones? Mr. BAIRD. Potentially. I think that the idea of opportunity zones is to create economic dynamism in economically distressed areas. And if you invest in real estate only without investing in businesses that are creating jobs, creating growth, creating churn, it is unlikely that you will see net economy activity. And I have put this in my testimony. There are a couple of open questions on regulatory clarity that would be very, very helpful for small entrepreneurs that we keep hearing from the field that I would take a look at. Chairman BRAT. Mr. Schneider, any further questions? Mr. SCHNEIDER. Yes, thank you. I want to go back to this idea of creating ecosystems or environments where entrepreneurs can achieve success. Last year, I introduced AOSA, the Accelerate Our Startups Act. The idea is to invest in these incubators and accelerators, particularly in communities, whether it is rural or economically distressed communities. I love your perspective on what impact that might have of having incubators, of having places where entrepreneurs, small businesses can come, learn from each other, get resources, besides just access to capital, but resources of understanding how to read a P&L or how to reach a new market. Mr. MCKENNA. I would take a look at the land grant system. Every land grant school I visited has an environment, a room, a building that encourages that. And whether they call them accelerators or incubators or regional investment councils, that feeling is present in every land grant campus that I have been to. And it is often staffed by a professor, by a team. Sometimes that team is funded partly through the USDA funding. Sometimes funded through state funding. But it is an incredibly valuable tool. It is on the university. The university has access to R&D. And it marries both the technological side and also the investment side. So I think the land grants hit the ball out of the park as far as that is concerned. Ms. DONOHUE. Density is a critical component of a healthy entrepreneurial ecosystem. Getting all the entrepreneurs in the room together, they can feed off of each other, the energy, the excitement, teach each other new things and just offer a support system is very important. Also, bringing in those mentors. And to my point earlier about us just being kind of new, we do not have a lot of mentors. We do not have a large number of people who have successfully grown and exited a tech company or whatever, life sciences company, whatever it may be. So I think we need a lot of time. But getting mentors from all over the country and bringing them to smaller areas, parts of Ohio, teaching them the ropes and how they were able to achieve success in California I think could be great. I love the program. I love the idea. Ms. GALES. I also believe the co-op business model plays a role with a long-term perspective, and cooperative development centers across the United States have been very instrumental in helping those cooperatives get started, whether it is a food cooperative, some sort of a technology-type of cooperative. I mean, there are many places where that type of model really is worthwhile. And so I look at, again, what is the technical assistance, getting people together, coming up with ideas, understanding best practices, knowing where to find capital. There is just so much information that a young entrepreneur needs to start a business, and I think the cooperative business model is one area that can serve a very important purpose. Mr. SCHNEIDER. Mr. Baird, last word to you. Mr. BAIRD. I had not heard of AOSA, but Congressman, I think it is the right idea. I mean, one of the things in the Kauffman Foundation, I have looked at all kinds of government funding to try and increase access to capital. And the evidence is pretty clear that direct funding of businesses from the government actually does not provide good outcome. It is kind of neural. People in Ohio, or people in Indiana are better placed to decide who to support and incubate and invest in businesses than people here or in New York or Silicon Valley. And so things like the EDA i6 grant which seeds fund managers instead of investing directly in businesses has had good outcomes. Things like investing in incubators, accelerators. You know, Ms. Donohue stat that fewer than 100 new venture funds are starting, I think that is probably a contributor to the lack of economic dynamism because you do not have people close to businesses being able to support those businesses. So Congressman, I am encouraged by that line of thought and encouraged to hear about your thinking on that. I think you are on the right track and the evidence would support it. Mr. SCHNEIDER. Thank you. I yield back. Chairman BRAT. All right. Mr. Lawson? Mr. LAWSON. Thank you very much. I keep hopping on Georgetown. They have got a new coach over there. I hope he does well. How can we help universities partner with rural community development? You hear presidents oftentimes talk about this area, but how can we help them to close the skills gap? What can we do to encourage the universities to close the skills gap so many industries can prosper? Mr. MCKENNA. The example I have seen that has been successful I think is what the Department of Agriculture does. And through their Regional Community Development program where they have teamed up with four land grant schools and divided the country into a series of sectors where those schools lead local regional economic development activities. A little bit of money comes from the Federal government, not very much, but it is enough to create a very vibrant, local examination of those issues. And I agree with the comments before. Not much happens in Washington as far as that traction is concerned. The traction has to take place in the local community. They know what the businesses are. They know where the economic demand is. And the more situations where the money can flow down to those organizations, land grant--there are others, but land grant is an example that is up and running--the better, I think. Mr. LAWSON. Anyone else care to comment? Ms. GALES. I will comment that I think private industry also has a role in that. In the case of CoBank, we have partnerships with universities, primarily land grant universities since we are rural focused, where we are working together to identify where those needs and how can we work together, and also put money where our mouth is. Mr. LAWSON. Mr. Chairman, can I ask one more question? Chairman BRAT. Yeah, sure. You bet. Mr. LAWSON. Mr. Baird, you mentioned about Dodd-Frank. And there was a great deal of discussion about whether you help the small commercial banks and credit union with the undue regulation. And I think in your testimony you stated that if we move some of the regulations, then we need to hold their feet to the fire. Can you comment on that a little bit? Mr. BAIRD. Sure. I mean, I think that obviously, macroeconomics is very complicated, and I think that there are very sophisticated arguments on both sides of the recent bill you passed as well as Dodd-Frank. But the legislation that has passed, the argument at least from small and medium-sized banks was if you pass this, we will lend more to small businesses. And I would keep an eye on that. It remains to be seen whether this is the right or the wrong legislative decision. I think it is not my role to comment on that, but I do think that if banks say pass this and we will help small businesses more, you should gather evidence and ask questions and invite people to a hearing like this for a follow up of we did this; are you doing what you said you would do? Mr. LAWSON. Okay. Thank you. I yield back. Chairman BRAT. I like the ``gather evidence part.'' All right. I want to thank you all for being here. I think we are all very happy with the way this went today. Tomorrow, the New York Times, the headline I am sure will be republicans and democrats united with a great panel of articulate hosts all in favor of helping the small guy, the small gal, the small firm. It was all good news. Right? Good news never makes the paper. That is what is wrong. Right? I mean, we have got to make that make the paper someday. Right? So I want to thank my democrats. There were three in here versus one at one time, and I am walking out of here smiling. So it is a good day up in D.C. So with that I will ask unanimous consent that members have 5 legislative days to submit statements and supporting materials for the record. Without objection, so ordered. This hearing is now adjourned. Thank you all very much. [Whereupon, at 11:23 a.m., the Subcommittees were adjourned.] A P P E N D I X [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] [all]