In an effort to prove venture capital isn’t just for the big cities, Dogwood Equity is about to close on an $80 million fund for investments in companies located in North Carolina’s 94 rural counties.
The North Carolina Economic Opportunities Fund grew out of a recommendation two years ago by the N.C. Rural Prosperity Task Force, which was created by former Gov. Jim Hunt to devise strategies to spread the growth and wealth the state’s three urban areas had enjoyed across the rest of North Carolina. The task force was headed by Erskine Bowles, the Charlotte investment banker who now is running for U.S. Senate.
Bowles recruited former North Carolina Commerce Secretary Rick Carlisle to form Dogwood to manage the new venture fund, and Bowles then used his connections to get major banks to invest in it.
And those efforts are paying handsome dividends.
Bank of America, Wachovia, BB&T, RBC Centura, First Citizens and East Carolina Bank ponied up about $30 million for the fund, and the North Carolina Treasurer’s Office chipped in another $7.5 million, using the leeway state legislators granted it last year to invest more state retirement system money in venture firms. A few smaller investors whom Carlisle declines to name helped the fund reach its $40 million internal goal.
Additionally, Dogwood will obtain its Small Business Investment Corporation license from the U.S. Small Business Administration within three weeks, which will give the firm access to another $80 million in federal money to invest, Carlisle says. But the firm plans to take only half of that to start so it isn’t sitting on too large a pile of uncommitted capital, he says.
Unlike most other SBICs, which pay interest on the SBA money they borrow to make investments, Dogwood is using a change in federal law to sign up the SBA as a preferred limited partner, Carlisle says. The government will be first in line to collect its returns as the investments are cashed out in exchange for giving up some of the later profits, which in turn will be divided among the other investors, he says.
Deals on horizon
Dogwood’s three partners, which also include BofA veteran Dabney Smith and Steve Buchanan, formerly of Charlotte venture firm Kitty Hawk Capital, already have reviewed about 70 business plans and are discussing deals with a few manufacturing firms, according to Carlisle.
“We’re not looking at start-up IT firms,” he says, noting the fund’s ideal investment would be in a company with $1 million to $10 million in annual revenue. Initial investments will run between $500,000 and $3 million.
Although Dogwood will look at technology companies outside the Triangle, Triad and Charlotte areas, Carlisle predicts most of the portfolio will be in the manufacturing, distribution and service sectors, where companies have applied technology to create a niche for themselves.
“Old-economy firms are looking more interesting to investors today than they were a few years ago,” he says. “There are enough solid companies out there with experienced management teams that we don’t foresee a problem finding good opportunities.”
Dogwood will try to entice other SBICs and venture firms to co-invest on deals, but Carlisle says his firm may have to go it alone for a while until it shows investing outside the mainstream can be successful. Most venture capitalists don’t have any incentive to look outside big cities for deals because there are so many right down the street, he says.
Hard-to-serve market
“This is a harder market to serve because it takes time and energy to build a network and find deals in a corner of the state,” he says. “This is why we were created, so we have the incentive to go after those kinds of deals.”
Carlisle now is putting his own connections to work, using contacts from his three years in charge of the Commerce Department and his time in Hunt’s office prior to that to spread word about Dogwood to economic development officials statewide.
But Thompson Greenwood, executive director of North Carolina’s Eastern Region, which coordinates development activities for 13 rural counties in the east-central part of the state, isn’t convinced of the need for Dogwood’s services.
“I’ve been doing this seven years, and I’ve never run across a company that we weren’t able to finance” through commercial banks, Greenwood says. “We’ll just have to see. Maybe there are high-risk ventures out there that will need this option.”
Carlisle says many firms don’t have the cash flow to get the bank loan they need to grow and must have the alternative of exchanging equity for financing. Without that choice, rural North Carolina might lose needed jobs and investment.
“This is one part of the answer,” he says of the Economic Opportunities Fund. “Access to capital can’t solve all of the problems of the rural areas itself, but it’s an important step.”
