Of course, there is no guarantee that community funds will pay off handsomely—or at all. But with some due diligence, investors can improve their odds of a good return. They benefit from low minimum investments, often less than Moore’s $200,000 and sometimes as little as $50,000. Getting into the newer funds is also not as competitive as entering older, established VC firms. As with all venture capital funds, investors underscore the importance of finding a solid management team that is comfortable working together and has applicable experience in both venture capital and community development investing. And Tesdell cautions against considering funds influenced by a town council or economic development agency, as politics can trump objective decision-making.

"Venture capital is a tough business. And if you’re worried about what’s going to be in the papers the next day, it’s harder to do that," Tesdell says. "So we recommend that—even if government is involved in helping to organize the fund—that a significant portion of the capital come from private investors."

Finally, investors need to decide if they are willing to give up some financial return to give back to their local communities. After all, funds that focus exclusively on one locality may not produce the highest returns, because the best investments are not always next door.

"The idea of using your personal wealth not just to give away your money but to invest your money in ways that will sort of bring together your investment portfolio and your charitable giving is a new idea that’s becoming more and more current," Tesdell says. "There are not a lot of opportunities out there to do that."

Social Gains
Quantifying investment performance is easy, but gauging how well a fund fulfills its stated social mission requires more careful analysis. The Community Development Venture Capital Alliance’s publication, Measuring Impacts Toolkit, provides investors with a framework for assessing social return. This includes:

• Job growth: Are there more jobs? How many part-time workers converted to full-time equivalents?

• Improved job quality: Are employees receiving better benefits and more training opportunities?

• Economic gain: Are the portfolio companies employing "target" employees—those whose income is 80 percent or less of the area median income?

An example of this type of framework is the Southern Appalachian Fund, based in London, Ky., which was established in 2003 and seeks to invest from $200,000 to $1 million in each of its portfolio companies. In May 2005, the fund made its initial investment into SemiSouth, a silicon carbide manufacturer based in Starkville, Miss. At the time, there were 21 employees; in a year, that number had tripled. Nearly 90 percent live in a low-income census area.

Illustration by Ken Orvidas.

Lee Gimpel is a business and technology writer based in Richmond, Va.