Rather than demanding that his money help bankroll the next Google or Microsoft, Dwight happily wrote out a $100,000 check to cover his capital commitment. This was, after all, exactly what he sought when he invested in Pacific Community Ventures’ PCV Investment Partners III fund this year.

Like the 70 other funds classified as community development venture capital, PCV backs small businesses, and in doing so tries to help individual communities or society as a whole. According to Kerwin Tesdell, the president of the New York–based Community Development Venture Capital Alliance (CDVCA), this breed of fund has big aspirations but accounts for only $2 billion in assets—roughly 0.2 percent of the total venture market in the United States. Still, investor demand for these smaller funds (with assets between $10 million and $100 million) is growing.

The recent successes of these funds reflect the heightened interest in venture capital since the tech boom of the 1990s, as well as a movement to apply business principles in philanthropy. Over the past decade, investors began recognizing that businesses attempting to do good can also do well. Assets in socially responsible mutual funds jumped to $46.5 billion by 2006, up from about $6.5 billion in 1996, according to the Chicago-based fund tracker Morningstar. Examples of the expansion in community development venture funds include the New York City Investment Fund, which has raised more than $110 million, and Bridges Community Ventures in London, which attracted more than $150 million in June for its second fund, surpassing its target amount by 50 percent. Traditional investors are also joining the effort. Henry Kravis, a founding partner of Kohlberg Kravis Roberts & Co., conceived of the New York City Investment Fund and serves as cochairman. Bud Colligan, Macromedia founder and a partner at Accel Partners, also cofounded Pacific Community Ventures.

Not the Same Old VC
This represents a shift from the early days, when the first community development venture capital funds were nonprofit venture capital pools designed to bolster specific communities but not necessarily enrich their financial backers. Today the funds seek competitive market returns for investors. They target community development in cities like Boston and New York, as well as less economically effervescent locales such as northwestern Wisconsin and western Maryland. The funds also might focus on broad regions. For example, the Southern Appalachian Fund emphasizes early-stage and growth companies in low-income areas in Alabama, Kentucky, Tennessee, Mississippi and Georgia.

TOP VIEW Community development venture capital funds offer investors the potential for both financial and social returns. Recent successes among the funds reflect the heightened interest in venture capital since the tech boom of the 1990s, as well as a movement to apply business principles in philanthropy. A composite portfolio of first-generation funds produced a 15.5 per-cent internal rate of return. Although finding the right fund can sometimes prove challenging, today 70 such funds, with assets totaling $2 billion, invest in local businesses.

Although community funds often consider a second bottom line that entails such criteria as job creation or environmental impact, they must focus squarely on the bottom line to remain competitive with traditional venture funds. David Kirkpatrick, the managing director of SJF Ventures in Durham, N.C., downplays the term "community development" because it sends the message of being a "do-gooder" who sacrifices financial returns, he says. He counters that suspicion by calling his Sustainable Jobs Fund simply SJF to appeal to investors.

The biggest differences between typical venture funds and those with a stated community mission are the size and location of the investments—which may affect investment performance. The traditional venture capitalists will argue that the investments they make and the counsel they provide are economic engines, boosting employment and adding wealth to the economy. The community funds also emphasize job creation, but their aim is to create opportunities for low-skilled workers, as opposed to the typical venture capital mold of companies staffed by engineers, computer programmers, PhDs and MBAs. And although community development investment funds now tend to focus on major metropolitan areas, many still prospect in secondary towns and rural regions. Like Dwight’s bakery and pharmacy, they may also consider industries overlooked by traditional venture capital.