Nikki Foster - Community Affairs Analyst
Published November 1, 2001 | November 2001 issue
During the past few years, those following rural development trends and strategies have probably heard a lot about the need to encourage entrepreneurial activity in rural communities. Many leading researchers in the rural development field have expressed this need, and as policymakers and rural development practitioners strive to develop strategies to sustain rural economies, increasing entrepreneurship has risen to the top of the list.
For example, in a speech at the Minnesota Rural Summit in July, 2000, Mark Drabenstott of the Federal Reserve Bank of Kansas City's Center for the Study of Rural America included energizing entrepreneurs as one of his primary strategies for revitalizing rural economies. The Kauffman Center for Entrepreneurial Leadership (Kauffman Center), a research center housed in the Ewing Marion Kauffman Foundation, has led numerous discussions about rural entrepreneurship across the country.
A rural highway connects people and services in northeastern Minnesota. As rural America faces mounting challenges, some communities are turning to entrepreneurship as a strategy for success.
According to researchers, while rural communities need entrepreneurs in order to revitalize their economies, entrepreneurs are dependent on the community for access to capital and other professional services. Entrepreneurs and communities are interdependent; the challenge for both lies in their ability to recognize the other's unique needs.
This article seeks to answer some basic questions about entrepreneurship in rural America. Why is entrepreneurship an attractive development strategy in rural communities? What do entrepreneurs and communities need from each other? And what are the challenges that entrepreneurs face in rural communities?
In addition to exploring these questions, the article looks at how rural communities in one state in the Ninth Federal Reserve District—Minnesota—are addressing these challenges. As we focus on a few examples, it is important to remember that rural communities are diverse, and a one-size-fits-all approach to rural entrepreneurship will not work. Each community has to develop its own specific strategies for encouraging entrepreneurial success. This article is an attempt to provide a framework for devising such strategies.
Simply put, many rural communities are struggling. The changes in rural economies are well documented and will not be discussed at length here. In brief, many rural communities have seen industries such as agriculture, mining and lumber stagnate or decline, and the resulting economic downturns have led to "brain drain." Talented young residents have left rural areas in search of better economic opportunities, which presents unique challenges to companies that rely on a highly skilled workforce. The result is that in the 1990s, only 4 out of 10 rural counties kept up with the positive national economic trends. 1/
As rural economies change, new strategies for sustaining rural communities, such as encouraging entrepreneurship, must be explored. Entrepreneurship has the potential to boost local economies by tapping local talent and resources and to help keep rural populations from declining even further. Through entrepreneurial growth, rural economies can diversify and become less dependent on the economic pendulum swings affecting agriculture and other rural industries. In short, entrepreneurs can ensure that rural communities will survive.
Entrepreneurship has always been an important part of America's economic tradition. Generally speaking, entrepreneurship refers to the creation or expansion of new businesses and industries, often by individuals who perceive a new market niche or opportunity and assume the risk of the venture.
Entrepreneurship is an attractive community and economic development tool for a host of reasons. According to Jay Kayne, vice president of community and policy for the Kauffman Center, the most important reason is that entrepreneurship creates wealth, not just wages. The wealth created by entrepreneurs stays in the community through reinvestment. Kayne argues that this is different from job creation, which brings wages to rural communities but does not necessarily keep corporate wealth within the boundaries of those communities.
Entrepreneurship not only helps retain wealth in a community; it also retains talent. Entrepreneurs in rural areas are more likely to become community leaders and reinvest through philanthropy and volunteer work. According to the Kauffman Center, "entrepreneurial behavior generates many outcomes including stronger civic leadership, better students, more productive workers, and enterprise creators." 2/
In addition to the economic benefits of entrepreneurship, there are intangible benefits that can boost a community's spirit. As rural communities experience economic decline, their sense of security, optimism and community pride may wane. A culture of entrepreneurship has great potential to lift those spirits. According to Raymond W. Smilor of the Kauffman Center, in a paper titled "Entrepreneurship and Community Development," this is where entrepreneurship has some real community development potential. Smilor argues that entrepreneurs are ultimate optimists and that their optimism is a "remarkably potent resource for building community." 3/
Improving a community's spirit can lead to other benefits. A community with a strong spirit and an entrepreneurial environment is likely to have the potential to create organizations focused on better health care, childcare and other social services. In fact, the Kauffman Center has introduced the idea of social entrepreneurs, or people who use their entrepreneurial spirit to start organizations that focus on community development.
A custom sign marks the new home of Bare Bones, Ellen and David Cashman's six-year-old interior design studio and retail furniture business in Ely, Minn. Bare Bones recently moved into a building the Cashmans purchased with help from Northeast Entrepreneur Fund, Inc. (NEF). Support from organizations like NEF, which provides loans, training and technical assistance to businesses in Minnesota's Iron Range, can be instrumental for rural entrepreneurs. "I just don't think we could have done it without them," says Ellen Cashman.
Before communities can realize the benefits of entrepreneurship, they must foster an entrepreneur-friendly environment. One of the Kauffman Center's most important findings is that entrepreneurship cannot succeed without community support. While it is true that entrepreneurship fundamentally relies on individuals to be creative and take risks, community support is a cornerstone for success.
According to Smilor, there are four factors in the entrepreneurial process. At each step of the way, communities can contribute something to help create a supportive culture. The factors identified by Smilor are:
Talent,which belongs to individuals who "recognize market opportunities and then create organizations to take advantage of these opportunities"; opportunity,defined as the ability to fill a need in the community; capital,the financial resources to fill such a need; and know-how,or the opportunity to network in order to gain expertise and technical knowledge. 4/
These four factors apply to entrepreneurship in a general sense. The question to consider here is, do these factors transfer to rural communities? In the late 1990s, after scanning the entrepreneurial landscape and finding that there was very little research and information about entrepreneurship in rural communities, the Kauffman Center sought to answer this question.
In order to learn more, the Kauffman Center developed the Rural Entrepreneurship Initiative (REI), a research project to evaluate entrepreneurship in rural America. REI identified four Discovery States: Maine, Minnesota, Missouri and West Virginia. Leaders from rural communities in these four states gathered to discuss challenges and opportunities for entrepreneurs in their communities. These conversations have helped to increase understanding of how communities can achieve entrepreneurial economies.
An important outcome from the Discovery State discussions is a list of the challenges that entrepreneurs face in rural communities. The challenges, stated by Kayne, include:
A culture that does not support entrepreneurship. A supportive culture is vital for encouraging entrepreneurs. Without an environment that values innovation, entrepreneurs will become discouraged. Rural communities do value hard work and individualism, but can be skeptical of the changes and risks that entrepreneurs introduce into their communities.
Distance to market and services. Rural communities are isolated geographically from hubs that harbor large populations and provide services necessary to run a successful business. Technology is making it easier to meet this challenge, but it is still an obstacle for many entrepreneurs.
Gap in capital availability. Most of the capital available for small businesses and entrepreneurs is located in metropolitan areas. Not only are entrepreneurs geographically distant from sources of capital, but the distance to market and services may make investing in their ideas seem unattractive to outside investors.
Threshold of demand to justify location of support services. This challenge is similar to the second and third challenges listed above in that the smaller populations in rural areas make it difficult to access the services entrepreneurs need in order to succeed. For example, high-speed Internet access may not be available in a small town of 500 because the population is not large enough to support the service.
Absence of other entrepreneurs. One of the most important aspects of entrepreneurship is learning from others who are encountering similar obstacles. The importance of networking cannot be stressed enough. From a technical standpoint, networking may lead entrepreneurs to resources they did not know were available. Networking can also offer entrepreneurs encouragement to continue their work, encouragement that may be especially important in a culture that does not value entrepreneurial activity.
Absence of industry clusters. Industry clusters provide a source of competition and support. While these two elements seem to oppose one another, they both bolster the efficiency of businesses. Businesses clustered in the same region and industry compete, which fosters creativity and innovation. At the same time, the companies create opportunities for networking and resource sharing. Rural communities rarely encompass industry clusters and therefore cannot benefit from the resources they provide.
Returning to the four entrepreneurial factors that Smilor outlined, it appears that at each step in the entrepreneurial process, individuals in rural communities encounter many challenges. Talent may not be encouraged, isolation and distance to markets may limit viable business opportunities, capital may be scarce and opportunities to build business know-how may be insufficient or difficult to pursue.
Owner Cameron Peacock displays the merchandise at Range Lock and Alarm, which employs five people in Ely, Minn. Peacock expanded the business with the purchase of a RadioShack franchise. NEF provided loans, to help cover franchise and inventory-purchase costs, and technical assistance in the form of business planning. "It was a tough, long process," says Peacock, "but it was work it because you know so much about your business in the end."
Minnesota is the only state in the Ninth Federal Reserve District to serve as an initial Discovery State for the REI. Minnesota Rural Partners (MRP), the state's rural development council, coordinated Minnesota's involvement with the REI. MRP organized the development of the Minnesota Rural Partners Academy (the Academy), made up of entrepreneurs, venture capitalists, government officials and economic development professionals. MRP facilitated the Academy's discussions, and each sector represented in the group brought a unique perspective to the process.
After examining REI's list of the challenges facing rural entrepreneurs, the Academy developed possible solutions in four key areas: technical assistance, physical infrastructure, culture and education, and capital. The proposed solutions, listed below, were designed to serve as a starting point for communities that wish to attract entrepreneurs.
Technical Assistance. The Academy recommends that technical assistance be provided at the community and the individual level in order to expand entrepreneurship in rural Minnesota. Communities need to assess and plan to strategically encourage entrepreneurship, and individual technical assistance is needed to help entrepreneurs network with one another and access other critical resources.
A number of curricula and programs are available to teach entrepreneurial skills such as business planning. The Academy suggests making these programs widely available in rural Minnesota, targeting them to a variety of age groups and tapping the potential of the new immigrants that have moved to many rural communities in the state.
Infrastructure. Good transport systems and telecommunications are essential to the operations of any business. The Academy recommends strengthening rural infrastructure to make rural communities more business-friendly and more attractive to entrepreneurs. Entrepreneurs are more likely to stay in their rural community to start their business if they feel that their business will have access to the appropriate technology. Suitable infrastructure stretches beyond their business sense to other issues: will their children have good schools to attend? And is there affordable housing available to them and to their workers?
Culture and Education. Entrepreneurs need to feel welcome, but the culture of many rural communities impedes entrepreneurial development. Residents of rural communities may feel that welcoming entrepreneurs will disturb their quiet community and harm their traditional way of life. The Academy points out that it is difficult to create programs that change a community's culture. However, initiatives like public education campaigns can help to increase public support.
Rolls of Polartec® fabric are ready for cutting at Kimberly Renner Bielawski's studio in Ely, Minn. Her company, KMR Designs, sells winter accessories wholesale. Founded 14 years ago, the company has seven employees and sells 75 percent of its products to Japan. NEF provided Renner Bielawski with business-planning assistance and loans for expansion and stabilization.
Capital. As it is nationwide, the capital flow in Minnesota is primarily in urban centers. Rural Minnesotans do not have the same access to venture capital and seed money as their metropolitan counterparts. In order to open the capital pipeline to rural Minnesota, the Academy suggests expanding capital opportunities along each "rung" of a firm's capital "ladder." According to the Academy, a company is on its first rung when it is starting out, and seed capital is critical. On the second rung of the ladder, businesses may need assistance with operating expenses. The third rung on the ladder is venture capital. At this point, companies may require millions of dollars in investment.
As an outcome of the Academy, leaders at MRP developed the Virtual Entrepreneur Network (VEN). This program aims to provide technical assistance to entrepreneurs in rural Minnesota. The VEN will help link entrepreneurs with financial and technical assistance in their region and connect them with other entrepreneurs. A second goal of the project is to build demand for telecommunications infrastructure in rural areas.
Entrepreneurs rely on various forms of capital to help start, sustain, or expand their businesses. Debt capital is capital obtained from a bank or other sources in the form of a loan that must be repaid. Equity capital is the investment an owner or another private investor makes in the business in exchange for an ownership share in the company. If all goes well, investors who provide equity in a firm will receive a return on their investment as the company prospers.
Connecting with an "angel" investor is one strategy for securing equity capital. Angels are individual investors who look for promising young companies to invest in. These investors take on angel status because many of them desire to remain anonymous. Angels not only provide equity capital; sometimes they want to mentor the young company by sharing their individual expertise. According to the U.S. Small Business Administration, 250,000 angels invest $20 billion in about 30,000 small firms each year.
Angel investors do not have to go about their business alone. They can form a network with other angel investors. For example, 17 investors in Alexandria, Minnesota currently make up LVG, one of the organizations profiled in our cover story. The group invests in rural Minnesota companies. Another organization referred to in our cover story, MIN-Corp., looked at LVG and decided to use the group's structure as a statewide model. MIN-Corp. is currently in the process of setting up Regional Angel Investment NetworksSM across the state of Minnesota.
Northeast Minnesota has had little entrepreneurial history. Its residents traditionally worked for the mining industry, which is in decline. The Northeast Entrepreneur Fund, Inc., (NEF) was founded in 1989 in order to revitalize the local economy and teach residents of the community how to realize their dreams of entrepreneurship.
The mission of NEF is to develop the potential of the people who already reside in Northeast Minnesota. Since its founding, NEF has helped 550 businesses to start, stabilize or expand, creating 1,100 jobs in the area. NEF provides entrepreneurs with training, technical assistance and loans as small as $100 and as large as $100,000. According to NEF President Mary Mathews, the organization's customers include newspapers, childcare facilities, small crafts manufacturers, restaurants and graphic design companies. The people who access the fund are typically unemployed or underemployed residents.
Centrally located in Alexandria, Minnesota, Lakes Venture Group (LVG) provides equity capital to companies located in rural Minnesota. It is a limited partnership consisting of 17 individuals. LVG focuses on start-up or early development companies and provides not only the necessary capital for these firms, but also management expertise. This angel network helps to fill the venture capital void in rural Minnesota and provides a networking tool to help entrepreneurs feel less isolated through the support of other entrepreneurs' expertise. LVG also partners with nonprofit organizations such as Minnesota Investment Network Corporation, or MIN-Corp, an equity investor in the firm. LVG has helped seven companies during its first four years of operation.
Entrepreneur Colleen Ray (left) and employee Joni Hanson take a break outside the workshop at Ray Family Farms in Eveleth, Minn. The family-run business creates wreaths from natural materials grown on its 28-acre site. NEF provided co-owners Colleen Ray and her husband, Tom, with start-up financing, business training and technical assistance.
The organizations profiled above have chosen different approaches for increasing entrepreneurship in their communities. The Academy has chosen to encourage entrepreneurs by discussing entrepreneurship needs in rural Minnesota and identifying possible solutions that are specific to the state. One outgrowth of the Academy, the VEN, will act as a coordinator, connecting entrepreneurs with assistance and advice. For NEF and LVG, a hands-on approach is preferred. The two organizations work directly with entrepreneurs to provide technical assistance, training and capital.
Although their focus is limited to Minnesota and their approaches differ, these organizations can serve as sources of information for individuals who wish to develop programs to help rural entrepreneurs in other communities. In a similar way, the research discussed in this article can serve as a foundation for individuals who may be considering entrepreneurship's potential to transform rural communities. In light of the economic changes in rural America, understanding entrepreneurship, with all of its benefits and challenges, may be a first step in securing a bright future for the nation's rural communities.
1/ Alan Barkema, vice president of the Federal Reserve Bank of Kansas City, speaking at the "Building New Economies in Rural America" conference of the Appalachian Regional Commission in September 2000.