[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                     
          
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                   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.]
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