[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
__________
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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
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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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