Julia Sass Rubin Edward J. Bloustein School of Planning & Public Policy Rutgers University

1. All Developmental Venture Capital Is Not Created Equal: Why the Rhetoric of Emerging Domestic Markets may be Hurting Distressed Communities Julia Sass RubinEdward J. Bloustein School of Planning & Public PolicyRutgers University

2. Developmental Venture Capital Corrective DVC • address a lack of venture capital for specific geographies and populations • entrepreneurs of color • women entrepreneurs • rural geographies • isolated and distressed urban geographies Additive DVC • produce incremental social benefits • high-quality jobs for low-income populations • products that result in a cleaner environment • wealth creation for women and communities of color Corrective and additive strategies can be combined • DVC funds that address lack of capital in rural or isolated and distressed urban geographies and create high quality jobs for low-income individuals • community development venture capital

3. Corrective Developmental Venture Capital

4. Emerging Domestic Markets “People, places or enterprises with growth potential that face constraints due to systematic undervaluation due to imperfect market information and access to resources. The markets include ethnic- and women-owned firms, urban and rural communities, companies serving low-to-moderate-income populations, and other small- and medium-sized businesses. EDM represents a variety of subsectors including people of color (African-Americans, Latinos/Hispanics, Asian Americans/Pacific Islanders and Native Americans), women and low-to-moderate-income communities (LMI) (both businesses located there and firms owned by LMI entrepreneurs)” Glenn Yago, Betsy Zeidman, Alethea Abuyuan (2007)A History of Emerging Domestic Markets, Community Development investment Review; 3(1)

5. Active diffusion of EDM construct • Center for Emerging Domestic Markets at the Milken Institute: “A clearinghouse for information, a gathering place for education and networking, and a laboratory for innovation in financing businesses in emerging domestic markets (EDM), whose purpose is to increase the flow of capital to America’s emerging domestic markets” (Milken web site 2007) • Presentations and publications • Milken research reports • EDM issue of Community Development Investment Review • Conferences • Consulting work • CalSTRS diversity assessment in 2000 (Hebb 2007).

6. EDM Construct • Worthy goal • convince conventional capital markets that emerging domestic markets represent an attractive investment opportunity • EDM approach effective only if information failure is the sole impediment to investment

7. Different Causes and Levels of Capital Constraints • Across ethnicities and racial groups • Black, Hispanic, Asian and Native Americans • Within ethnicities and racial groups • African-Americans vs. Caribbean Black Americans • Puerto Rican Americans vs. Cuban Americans • Laotian Americans vs. Korean Americans • Between entrepreneurs of color; women entrepreneurs; and distressed isolated urban and rural geographies

8. EDM Construct Concerns • Neglecting variation within and between groups impedes ability to understand and address factors responsible for capital constraints • Can lead to inappropriate and counterproductive public and private sector policies • Addressing information failure requires minimal subsidy • Can confuse investors, increasing fundraising challenge for financial intermediaries trying to serve particular EDM segments

9. CalPERS California Initiative “The California Initiative will invest in traditionally underserved markets primarily, but not exclusively, located in California. The objective is to discover and invest in opportunities that may have been bypassed or not reviewed by other sources of investment capital.”

10. CalPERS California Initiative • State Treasurer Phil Angelides • 1999 - joined governing boards of California California Public Employees Retirement System (CalPERS) & California State Teachers Retirement System (CalSTRS) • 2000 - launched “The Double Bottom Line: Investing in California’s Emerging Markets” initiative • investment capital should be directed “through state programs and the State’s pension and investment funds – to spur economic growth in those California communities left behind during the economic expansion of the past decade“ (Angelides 2001) • drew on Michael Porter & Milken Institute publications

11. CalPERS California Initiative • 2000 • California Initiative approved by CalPERS board as part of Economically Targeted Investment Program. • 2001 • CalPERS selected 10 of 67 venture capital applicants to receive $480 million

12. California Initiative Round 1

13. CalPERS California Initiative Three social return benchmarks: • Providing capital to areas of the state and nation that have historically had limited access to institutional equity capital. • Creating jobs for workers living in economically disadvantaged areas. • Supporting women and minority entrepreneurs and managers

14. California Initiative Round I • Social returns reported in aggregate • 9 direct investments – Pacific Community Ventures • Bank of America Fund of funds -- UNC • Financial returns reported on individual fund basis • Disadvantage for venture funds tackling most challenging markets • Social returns “free ride” • Financial returns individual accountability

15. Recommendations • Recognize and highlight the different causes of capital constraints for underserved markets and the additional costs born by DVC funds that target rural and distressed and isolated urban geographies • Minimize secrecy around social basis of fund selection and social returns • Transparency on individual fund basis • Comparable to CalPERS reporting of financial returns • Conduct research to assess social returns for different forms of developmental venture capital to determine if and how they differ from each other and from conventional venture capital