Wells Fargo’s investments in three Community Development Venture Capital (CDVC) funds have allowed us to earn meaningful economic and social returns on our investments while helping to fulfill the bank’s obligations under the Community Reinvestment Act (CRA).
If sports are the metaphor of business, the comparison between CDVC funds and traditional venture capital funds is similar to that of college sports compared to pro sports. While the same rules of the game apply to both, the appeal of college athletics is that it enriches the lives of the young people who play the sports and the fans who root them on, thereby serving a higher mission beyond competition for competition’s sake. The same holds true for CDVC. To be sure, it is a business whose primary goal, like any business, is to make money or to win. But CDVC is also about the promise of serving a higher purpose. Besides providing much needed growth capital, CDVC funds exchange something else of incalculable value with the companies they support – a common vision of shared prosperity for lower income workers and economically distressed communities.
It is in this context that CDVC funds, like college athletics, inspire our imagination and attract the involvement of deeply committed people. Despite the analogy with college sports, fund managers that run CDVC funds are every bit as professional as their counterparts at conventional private equity funds. However, in addition to being financial experts, the people running CDVC funds are typically drawn to this line of business because they have a passion for the mission.
In the case of CDVC funds, the mission is community development, most often through equity investment in, and business development support for, small lower middle-market companies. CDVC funds provide equity capital to businesses in under-invested markets, seeking strong financial returns as well as the creation of good jobs, wealth, and entrepreneurial capacity. The companies they serve are generally located in low-income or under-served areas, or may serve as employment engines and a rung on the economic ladder for lower skilled workers.
Wells Fargo is attracted to CDVC fund investments because they create and retain jobs, and, they create wealth for underserved employees in low-income and rural communities – all challenges that face many different communities in our market area. Just as communities differ, so do the capital needs of small businesses. For these reasons, Wells Fargo has deliberately spread its CDVC investment activity across a broad spectrum of funds that meet the demands of emerging businesses while diversifying risk.
Wells Fargo began investing in what is broadly defined as CDVC funds in 1999. Since then, we have committed more than $10 million in four CDVC funds with three different sponsors. These funds represent a more focused mission-oriented investment approach that complements Wells Fargo investment activity in small business investment companies (SBIC) and other mission-oriented small business investment funds that are not specifically designated as CDVC funds, as well as our support of various micro-lending and other community development financial institutions (CDFIs) intermediaries.
Below is a highlight of three CDVC or economically targeted, “double bottom-line” fund investments that Wells Fargo has made to date:
Pacific Community Ventures
In its first investment, Wells Fargo was the largest and founding institutional investor in Pacific Community Ventures (PCV), a fund targeting companies with the potential to bring significant economic gains to underserved communities in low-/moderate-income (LMI) communities. Initially PCV targeted the Bay Area, but with continued support and encouragement of Wells Fargo and the balance of its investor base, PCV has broadened its geographic scope to include all of California with regional offices in San Francisco, Los Angeles, San Diego, and Fresno.
In addition to receiving equity investments, the companies funded by PCV also gain access to a unique business advisory network of several dozen industry experts and practitioners that offer one-on-one guidance around a specific business objective through consulting engagements that can last for up to a year or more. PCV seeks to create individual wealth for employees of the companies in which it invests via stock options and individual development accounts. Throughout the process, PCV uses social benefit metrics that it has developed and refined over the years as instruments for measuring the positive community outcomes of private equity investments or the "social return on investment."
Like most venture capital funds, PCV’s funds have up to a more than 10-year duration. Although as a commercial bank that is generally funded with short-term deposits (and Wells Fargo would prefer to place capital in an investment vehicle with a shorter life cycle), this is inherently a business with a longer life cycle. However, projected risk-adjusted rates of return are designed to compensate for the longer term. While investors cannot significantly influence that investment horizon, they can put as much discipline as possible around those investments by defining the length of time the fund has to deploy its capital, what type of companies will be targeted for investment, where risks will be concentrated, and by examining the track record of the fund’s management. (For more information on due diligence, see CDVC checklist.)
In the years since PCV made its first investment, it has had several companies successfully exit the fund. The recent sale of one of PCV’s portfolio companies shows just how successful the CDVC model can be. The company, Timbuk2 Designs, manufactures custom messenger, garment, and computer bags from a factory in San Francisco. When the company was sold to a private equity investment group in 2005, the transaction generated a substantial financial return on investment for PCV and its investors, helping to validate the viability of the CDVC investment model. Timbuk2’s low-income, non-management employees also shared in the financial success, earning cash bonuses of as much as two-times annual pay, a deal negotiated by PCV when it first invested in the company.
New Mexico Regional CDVC Fund
Wells Fargo has taken a more active role in the New Mexico Community Capital Fund, which focuses on providing equity capital and management resources to qualifying businesses throughout New Mexico, particularly in rural and under-invested areas. Wells Fargo was an early investor in the fund, and worked in collaboration with the fund manager to help raise additional institutional investment from other banks, foundations, and “fund of funds,” most of which were first-time investors in a CDVC fund. Wells Fargo’s early involvement helped the fund attract other investors and today the fund has allocated not less than 40 percent of its more than $12 million in capital to finance the growth of rural businesses in the state.
One recent New Mexico Community Capital Fund investment illustrates how the fund helps increase jobs in the communities in which it invests. The fund invested in Santa Fe Ingredients, a local chili producer grappling with labor and immigration issues, changing weather patterns, and competition from global growers. The company’s rural location made it a challenge to secure resources to increase its production, even though the company has solid relationships with Fortune 500 brands, like Hormel, and holds five patents, including a mechanized harvester.
In addition to its capital infusion, New Mexico Community Capital Fund collaborated with Santa Fe Ingredients to create a growth plan, provided management assistance, and even helped bring in a new chief operating officer and a veteran chief financial officer. Today, Santa Fe Ingredients has grown into a nearly year-round operation that has added dozens of new jobs to the rural, southwestern New Mexico economy.
Near Equity Fund
Wells Fargo invested in a third CDVC fund called the Montana Fund (TMF). The fund is a subsidiary of the Montana Community Development Corporation (MCDC). It offers near-equity loans priced at prevailing commercial rates, with an additional payment based on the company’s sales revenue. These loans are geared to established companies with rapid growth that need equity, but can’t offer returns at the scale demanded by conventional venture funds.
TMF is only one part of MCDC’s small business lending and consulting operation. Since its inception, MCDC’s conventional revolving loan fund has provided more than $10 million in micro and small loans to several hundred western Montana-based businesses. Additionally, its Small Business Development Center helps hundreds of businesses each year tackle marketing, financial, and strategic challenges, while its Advanced Business Consulting (ABC) Network connects ambitious growth companies with legal, financial, and marketing assistance.
Among TMF’s success stories is its financing of Poly Warehouse, a company. The Montana Fund provided $250,000 to Poly Warehouse in rural Ravalli County, Montana, in 2005. Owner Neil Sheldon built Poly’s sales of high-density plastic pipe to more than $7 million over the next 18 months. MCDC introduced Poly Warehouse to another private equity fund that ultimately placed $1.5 million in venture capital in the company in late 2006. This TMF deal created about 15 good-paying jobs in a rural Montana county, and helped Poly Warehouse and its management rise to a whole new level of entrepreneurial achievement. At the same time, it yielded handsome financial returns to Wells Fargo and other Montana Fund investors.
The Long View
During the last 100 years, entrepreneurialism in the U.S. economy has created more wealth, produced more opportunity for advancement, and reduced more poverty than in the previous 1,000 years. CDVC or the community development investment capital is a powerful tool to attract private capital and entrepreneurialism to low-income communities. The movement is gathering steam, and for good reason. Companies that care about wealth creation for its employees are learning that there are benefits to the bottom line. Similarly, community groups are seeing how much the success of local businesses can help neighborhoods.
From its early orientation as socially-minded investment programs, CDVC has spawned numerous investment models that collectively have evolved into an economic imperative thanks to a growing awareness of the economic clout of underserved communities, including LMI areas, urban cores, rural communities, and women and ethnic minorities. CDVC funds are uniquely positioned to tap into this deal flow, providing a long-term source of patient financial capital and equally important intellectual capital to nurture worthy companies and help create wealth in predominately LMI areas and with companies whose workforce has a strong LMI component. When it’s working at its best, investments in CDVC funds result in solid financial returns while yielding measurably positive community impacts. That is the second bottom-line, that Wells Fargo believes can be part of a diversified CRA/community development portfolio.
For further information about Wells Fargo’s investment strategy, contact Lee Winslett at: email@example.com or (619) 699-3037.