Frontiers of Entrepreneurship Research
1996 Edition
SUMMARIES

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INVESTING IN NEIGHBORHOOD ENTREPRENEURS: PRIVATE FOUNDATIONS AS COMMUNITY DEVELOPMENT VENTURE CAPITALISTS


Ross Gittell
Jeff Sohl
Philip Thompson

Whittemore School of Business and Economics
University of New Hampshire
McConnell Hall
Durham, NH 03824

Telephone/Fax: (603) 862-4468 / (603) 862-3340

Principal Topic

There is much documentation of the problems encountered by prospective entrepreneurs in low-income and minority neighborhoods in securing traditional sources of capital. The explanations include their limited experience and savings/wealth and discrimination. Given their lack of access to traditional sources of capital, there may be benefit from non-traditional sources --including private and institutional venture capital investors-- funding "neighborhood" entrepreneurs. However, it is most common for venture capitalists to come into contact with prospective entrepreneurs through professional and/or informal networks and unfortunately, neighborhood-based and minority entrepreneurs have traditionally been outside these networks, and unable to connect with these investors.

To fill this "gap" this paper considers a new role for private foundations as community development venture capitalists. There can be great variety of investments made by private philanthropic organizations to foster community development which fall within their fiduciary responsibilities. The target of investments, we are suggesting here, would be private ventures with special skills and commitment and with significant potential for generating benefits beyond personal/firm profit in low income and minority communities. For example, benefits from increased entrepreneurial activity in low income neighborhoods could include general community improvement (e.g., reduction in crime) as more local residents are employed in local business establishments and as the entrepreneurs become neighborhood leaders and mentors for their employees and neighborhood youth.

Other investment avenues for private foundations funders could be more similar to traditional equity positions. For example, program-related investments could be used to take an equity stake in promising neighborhood-based entrepreneurs. This would help the new ventures overcome the problem of limited access to capital, effectively spread risk between entrepreneur and foundation-funder, and at the same time allow for the recycling of investment money.

Method

This paper will use a unique case study to explore the potential role of private foundations as community development venture capitalists. Many of the lessons from the value-added component of venture capitalists will be considered, including how foundations might draw on their expertise and professional contacts (e.g., with financial and legal institutions), as well as their own financial resources to contribute to entrepreneurial efforts in the inner city. The target of investments would be private entrepreneurs with special skills and commitment to inner city neighborhoods and with significant potential for their activities to result in the realization of private and community-wide benefits.

The case study will involve an in-depth examination of a highly innovative privatization initiative in New York City in which city-owned housing is being transferred over to neighborhood-based entrepreneurs. The Neighborhood Entrepreneur Program (NEP) is a joint effort of the NYC Partnership (a non-profit privately-funded organization whose membership includes many of the Fortune 500 companies headquartered in NYC), the City of New York, and the Rockefeller Foundation. With the NEP, the city is selling some of its in rem properties (property which the city took over ownership after non-payment of taxes) to private businesses. The city has restricted this privatization initiative to neighborhood-based entrepreneurs who must meet specific criteria indicative of their potential to provide long-term benefits to the communities in which they would own property. The Rockefeller Foundation invested in the entrepreneurs through their participation in NEP and have helped neighborhood entrepreneurs establish industry knowledge and contacts, in a manner similar to the way the many successful private venture capital funders work with the companies they invest in.

Major Findings

Initial findings indicate that the return from the investment and related activities by Rockefeller Foundation will be viable businesses: serving an "underserved" population; helping to enhance the quality of life of residents; increasing employment opportunities for residents; and contributing to community improvement.

Implications

The experience with the NEP suggests that there are potential lessons from the venture capital market which are useful for inner-city development. More specifically there are potential benefits from private foundations and other supporters of community development complementing their traditional grantmaking to service oriented non-profit community organizations with indirect and direct investment in private ventures.

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