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Is Venture Capital a Tool in Community Development?

In 2003, the Over-the-Rhine district in Cincinnati, OH experienced 90% vacancy, high crime and blight. Enter: the Cincinnati Center City Development Corporation (“3CDC”). As a non-profit organization, the 3CDC has managed two major mostly-private investment funds (the Cincinnati New Markets Fund and the Cincinnati Equity Fund) to land bank properties and redevelop the spaces into trendy, inhabitable mixed-use housing.1 “[C]ompanies financed by government-backed [venture capitals] outperform as long as the share of funding from non government-backed funds is large enough,” and as a product of the government’s creation, the 3CDC owes much of its success to over $717 million in investments over the life of the organization.2

The 3CDC does not fit a traditional venture capital role. Instead, it falls in the more specific category of Community Development Venture Capital (“CDVC”). In fact, CDVC funds have seen brief historical use in alleviating poverty, with “many [community development corporations] funded under the Housing and Community Development Act of 1974.”3 As a source for CDVC, the 3CDC does not serve to make gains on its contributions, and instead has provided a medium for other investment in the area. At a time when were not living in Over-the-Rhine, there was no customer base to support restaurants and retail. With CDVC spent mostly on developing the physical lease space, the infrastructure was created for proprietors and their investors (traditional venture capitalists) to come in and open up businesses such as a donut shop, a pizza restaurant, and niche clothing outfitters.

The venture capital model typically relies upon “the alignment of incentives so that all parties benefit from the same outcomes at similar times.”4 However, this model has been challenged in a community development setting in which investors seek a financial return, while the community at hand is only most interested in realizing social returns. This point is where we see a departure from the arguments proposed by the Federal Reserve Bank of New York and the reality of the 3CDC. The research compiled by the Federal Reserve Bank of New York covers organizations that are attempting to bring in investment from major industries such as computers, communications, electronics, and healthcare. In the 3CDC case, the industry is real estate from a macro perspective or consumer goods and services from a micro level.

Regardless of the industry split, the research identifies a geographic trend that is significant in the case of Over-the-Rhine. Venture capital firms prefer to be in geographic locations where many other venture capital firms are located, like Silicon Valley for example.5 The presence of other venture capital in the area indicates “high success rates of [venture capital]-backed investments.”6 Risk is a major part of all venture capital, and any mark of a higher success rate will draw more venture capital. However, the absence of all venture capital from an area need not preclude the entrance into that market, which leads to the role of CDVC. With a larger focus on social implications than returns on investment, CDVC is less concerned with meeting investors’ financial expectations, so a CDVC can be successful without yielding much profit, and still serve as the beacon of support that traditional venture capital expects as it considers entering a market. As with 3CDC, a restaurant proprietor may be wary of opening a gastropub in Over-the-Rhine, but in a place where there are filled residential units and packed restaurants and bars, clearly there are consumers available, and the investment is much safer than the pre-3CDC days of 90% vacancy with no new restaurants opening.

The report suggests that CDVC would be most successful in a non-metropolitan setting, but the city of Cincinnati is evidence that the proposed venture capital model can be applied just as well to an economically depressed metropolitan area. Regardless of the type of location CDVC is being applied, it is promoted by the federal government as $10 billion in tax credits were granted in the American Recovery and Reinvestment Act of 2009 to compensate for investment in community development. CDVC is a growing model that may even find heavy use in a post-bankruptcy Detroit.


  1. 3CDC: Who we are, http://www.3cdc.org/who-we-are/ (last visited Oct. 24, 2013); 3CDC: What we do, http://www.3cdc.org/what-we-do/ (last visited Oct. 24, 2013). 

  2. Anna Kovner & Josh Lerner, Doing Well by Doing Good? Community Development Venture Capital 4 (Fed. Reserve Bank of N.Y. Staff Reports, Paper No. 572, 2012) (citing Brander), available at http://www.newyorkfed.org/research/staff_reports/sr572.pdf; 3CDC: What we do, supra note 1. 

  3. Kovner & Lerner, supra note 2, at 8. 

  4. Id. at 2. 

  5. Id. at 18. 

  6. Id

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David Rood

Vol. 3 Associate Editor
University of Michigan JD Candidate, 2015 BSE in Naval Architecture & Marine Engineering, 2012

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