by Neal Andrews
For the last several decades, most growth in the City of San Buenaventura, Calif., had been either residential or retail/commercial. The only middle class jobs that had been growing were in public employment. The industrial base of the city workforce had long ceased to grow and was rapidly disappearing, consistent with the national trend toward a service economy. Moreover, even the service sector, while growing, was concentrated largely in a limited market spectrum, mostly financial services, health care, and communications services. The high technology industry appeared to have passed us by entirely, as had biomedical sciences, the defense industry, and pharmaceuticals - all natural growth areas, given our regional economic environment.
We needed to develop a strategic plan for economic development and set aside funds to implement it. A $5 million loan pay-off from the Redevelopment Agency was to be the seed money for this plan.
The concept was to create a revolving fund that could be used to entice growth businesses undergoing expansion to locate new operations or relocate existing operations to Ventura or, more likely, to create a fertile environment to grow our own.
The Jobs and Investment Fund (JIF) would be used to provide "mezzanine capital" to expansion projects or venture capital to new projects as either loans or direct investments on favorable terms compared to the typical deals available to such projects in the market, but with the prospect of much higher return potential (albeit of course with commensurate risk) to the city than was commonly available in our standard investment portfolio with its very strict regulations and risk controls. The return on investment, minus administrative expense incurred, would be re-deposited in the revolving fund, thus assuring its development over time into a powerful economic growth tool.
Since we did not have and did not want to hire the quality technical staff such an investment program required, we partnered with a venture capital firm to act as managing partner. The firm would allow us to invest in a $60 million investment pool as an equal partner, so our funds would be highly leveraged. The only snag was that we could not get an ironclad agreement that the entire fund would be invested in our city. Instead, we compromised on a best efforts clause for $3 million worth of our investment, and we split $2 million off into a separate pool dedicated only to businesses located or locating in the City of Ventura.
Of the latter sum, we broke off a little over $400,000 to create a business incubator to house and support any start-up or expansion project one of our fund recipients might establish here. This incubator is also available to other start-ups that may wish to locate within our City, irrespective of whether they receive any of these JIF funds, and is managed through a cooperative agreement with the local Chamber of Commerce.
The goal of JIF is to identify companies with an excellent business proposition or an established and successful business model in a high growth mode that would establish operations in our city. They would be required to have a sound and credible business plan and market strategy, as judged by a panel of appropriate experts, and the practical capabilities to carry it out. To receive funds they would have to be able to ramp up operations rapidly (within 18 months), expect to achieve break-even on operations within three years, and achieve substantial profitability within five years.
We identified an array of industry sectors that we felt were most desirable within our city and that appeared to have the highest prospects to be able to comply with these terms of investment. Applicants did not absolutely have to be within the business or market sectors we identified as preferred, but in all cases they would have to have the promise of producing a significant number of high quality, high paying jobs. They would also have to meet the investment criteria of our managing partner, whom we required to make investments from its own funds at least equal to that which the city might be asked to make. Our expectation was that we would divest in most cases within seven to 10 years and return the funds and earnings, if we were so fortunate, to the pool for reinvestment.
The major issue we continue to contend with, and which has become more significant with the severe economic downturn, is concern among our citizens that we have too great a risk exposure in these investments. There are requests that we re-direct the money from the fund back to general government operations each time we face additional budget cuts, but due to political will and improved communications with our constituents, so far we have been able to maintain funding. I feel strongly that this program is precisely the kind of program that will ultimately help us get through this recession and return to healthy economic growth.
Neal Andrews is a councilmember from San Buenaventura, Calif.; he can be contacted atNAndrews@ci.ventura.ca.us.