Julia Sass Rubin

Community development financial institutions: current issues and future prospects

ABSTRACT: Community development financial institutions (CDFIs) help to address the financial needs of under-served, predominantly low-income communities. CDFIs include community development banks, credit unions, business and microenterprise loan funds, and venture capital funds. Although CDFIs are a rapidly growing and an increasingly important area of community economic development, they have not received proportionate attention from academic researchers. This article begins to address the gap. It outlines the history of the CDFI industry and details how CDFIs are responding to three specific development needs: basic financial services; affordable credit for home purchase, rehabilitation, and maintenance; and loan and equity capital for business development. The article then considers the strengths and limitations of CDFIs, concentrating especially on the relationship between CDFIs and conventional financial institutions. It concludes by examining the impact that these alternative financial institutions realistically can hope to achieve.

The Viability of the Minority-Oriented Venture-Capital Industry Under Alternative Financing Arrangements

The minority business-oriented venture-capital industry grew rapidly in the 1990s, as did its target market of large-scale minority-owned firms. This niche of the venture-capital industry traditionally relied upon the U. S. Small Business Administration (SBA) for funding and guidance. In the 1990s, another branch of the minority venture-capital industry arose that was funded largely by public pension funds. The authors’ comparative analysis of the SBA and pension fund branches of this industry indicates that the former is stunted while the latter is thriving. The analysis indicates that the SBA is too unstable an agency for promoting the minority venture-capital industry. In contrast to the SBA’s propensity to alter policy based on shifting political priorities, the pension funds have been a stable source of support for the growing minority venture-capital industry.

Developmental venture capital: conceptualizing the field

Developmental venture capital is the financing of businesses with equity and near-equity in order to achieve both social and financial objectives. The social returns include economic development of distressed urban and rural geographies; creation of high-quality jobs for low-income populations; building wealth for women and people of color; and creation of products that benefit society, such as those that lower poverty or contribute to a cleaner environment. This article introduces a conceptual framework for the developmental venture capital industry based on the social objectives of individual funds. The framework distinguishes between funds that have corrective versus additive objectives. Funds with corrective objectives are designed to address inadequate access to traditional venture capital by specific geographies and populations. Funds with additive objectives are meant to further specific social goals, such as fighting poverty or environmental degradation. This framework further differentiates between two forms of corrective venture capital, based on the capital access obstacles that each is trying to address and whether the resulting economic models require subsidy.

Venture Capital and Underserved Communities

Access to equity capital is critical for the growth of businesses, especially for young companies, which lack the cash flows necessary to repay loans. To meet this need, a thriving venture capital industry has evolved, fostering job creation, economic growth, and innovation in the United States. Not all companies, however, have been equally able to access such investments. Firms owned by women and people of color and those located in rural and distressed urban regions of the country have been underserved by the venture capital industry. This note analyzes the factors responsible for this and proposes policies designed to ensure a more equitable economic landscape.Access to equity capital is critical for the growth of businesses, especially for young companies, which lack the cash flows necessary to repay loans. To meet this need, a thriving venture capital industry has evolved, fostering job creation, economic growth, and innovation in the United States. Not all companies, however, have been equally able to access such investments. Firms owned by women and people of color and those located in rural and distressed urban regions of the country have been underserved by the venture capital industry. This note analyzes the factors responsible for this and proposes policies designed to ensure a more equitable economic landscape.

Adaptation or Extinction? Community Development Loan Funds at a Crossroads

ABSTRACT: This article examines community development loan funds (CDLFs), a type of community development financial institution that provides financing and technical assistance for businesses; for-profit and nonprofit real estate and housing developers; nonprofit organizations looking for facility or operating capital; and low-income individuals looking for financing to purchase or rehabilitate their homes. Like many nonprofits and social enterprises, CDLFs have experienced a worsening political and economic environment since 2000, leaving many of them struggling to stay alive as the subsidized capital necessary to fund their operations largely has evaporated. The article reviews CDLF origins, structures, and current activities; discusses the field’s historic sources of subsidized capital and why they have shrunk; reviews potential new sources of capital and the organizational ways that CDLFs are responding to their changed environment; and makes recommendations for CDLFs, funders, and policy makers. It is based on organizational-level data from annual surveys of CDLFs conducted by the CDFI Data Project and the Opportunity Finance Network; on two dozen interviews with CDLF, foundation and bank officers and staff and policy makers involved with the field; on documents from individual CDLF institutions; and on contemporary press accounts.

Countering the Rhetoric of Emerging Domestic Markets: Why More Information Alone Will Not Address the Capital Needs of Underserved Communities:

This article critiques the idea that the private sector can take the lead in addressing the capital needs of underserved communities, focusing specifically on the emerging domestic markets approach advocated by Milken Institute researchers. This approach has three limitations. First, it treats all underserved communities as interchangeable, ignoring that they differ in important ways in the nature and causes of their capital constraints. Second, it claims that underserved communities lack access to capital primarily as a result of information failure, overlooking numerous other obstacles that discourage investment in such communities. Third, its overarching assumption that the private sector can take the lead in meeting the capital needs of underserved communities is unrealistic because it fails to address these additional barriers to investment. The article recommends a more individualized approach to understanding the capital needs of underserved communities and recognition of the need for public sector leadership in solving this problem.This article critiques the idea that the private sector can take the lead in addressing the capital needs of underserved communities, focusing specifically on the emerging domestic markets approach advocated by Milken Institute researchers. This approach has three limitations. First, it treats all underserved communities as interchangeable, ignoring that they differ in important ways in the nature and causes of their capital constraints. Second, it claims that underserved communities lack access to capital primarily as a result of information failure, overlooking numerous other obstacles that discourage investment in such communities. Third, its overarching assumption that the private sector can take the lead in meeting the capital needs of underserved communities is unrealistic because it fails to address these additional barriers to investment. The article recommends a more individualized approach to understanding the capital needs of underserved communities and recognition of the need for public sector leadership in solving this problem.

Ethnic Minority Entrepreneurs and Venture Capital

Because the traditional venture capital industry is less likely to invest in minority-owned businesses than in businesses owned by white entrepreneurs, two types of specialized venture capitalists have emerged: minority-focused venture capitalists (MVCs), who invest primarily in minority-owned enterprises, and community development venture capitalists (CDVCs), who invest in firms (many of which are owned by ethnic minorities or women) that are likely to produce high-quality employment for low- and moderate-income people.Following a brief history of these two forms of capital, the author offers a lengthy analysis of both industries and compares them to other forms of venture capital. This comparative analysis incorporates data from a 2000 study of 24 firms that invest mostly in minority-owned firms and a comprehensive study of all existing domestic CDVC providers. Although both MVCs and CDVCs are fairly new industries that are still evolving, the research suggests that they have a social impact in ethnic community development and offer investors a potential for a reasonable rate of return on invested capital.(SAA)

New Jersey Charter School Funding

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