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
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.
What is entrepreneurship?
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."
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."
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.
What do entrepreneurs need?
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
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
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
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.
The Minnesota experience
The Minnesota Rural Partners Academy
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.
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
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
The Northeast Entrepreneur Fund
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.
Lakes Venture Group
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.
A foundation for the future
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