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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.
Why entrepreneurship?
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." 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.
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.
Investing angels
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.