Risky Business

By Newkirk, Kristine M. | Independent Banker, October 1997 | Go to article overview

Risky Business


Newkirk, Kristine M., Independent Banker


Birth of a capital corporation and South Dakota's new opportunity

South Dakota was in need of venture capital. Bankers knew it, civic leaders knew it, and business leaders knew it. They all knew what was already too evident to budding entrepreneurs in South Dakota. No venture capital operations existed in the state in the early 1990s and the cash well for venture capital was bone dry.

Compounding the problem was South Dakota's investment environment, which saw businesses and investors looking to other states to invest about $100 million in risk capital each year. The mass exodus of venture capital created a capital shortfall within the state that will take years to recover from.

Now lenders and other leaders have come together to address the problem by creating Dakota Ventures Inc., a venture capital fund to support business creation within the state. Capitalized by commercial banks and private investors, the community development corporation contributes equity capital to new business ventures within the state of South Dakota. (See feature on community development corporations on page 44.)

To sweeten the investment, the state of South Dakota anteed up a limited-life tax credit equal to about 40 percent of initial investments in the fund. On a $100,000 investment, that equates to a tax credit of $40,000. "While some banks were uncomfortable with the risk, the tax credit was enough to push them over the top and cause them to invest," Don Frankenfeld, chairman and fund administrator of Dakota Ventures, says.

Roger McKellips, president of the State Bank of Alcester, a community bank with $61 million in assets in Rapid City, S.D., knew the risks involved in venture capital but, like 16 other commercial banks across the state, felt the need for the program outweighed the risks. "We knew the success rate would not necessarily be 100 percent," he says. "But by taking an equity position, we felt we could hit one or two out of six-enough to save a community and give young peoplea start."

Dakota Ventures leverages its capital investment into something substantial while limiting its risk.

EARLY HARVEST

Dakota Ventures funded three projects since its inception in 1993. Although risk capital investments generally have long-term turnarounds, one particular investment in a company called Sierra Environmental Systems Inc. is already bringing intended results, bankers say.

Sierra Environmental Systems in Wessington Springs came to Dakota Ventures for financing help to build a larger inventory to meet back order demand of the charcoal activated water filters the company produces. …

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