It once seemed stories of venture capital and investment funds were the lore of Wall Street lenders and Silicon Valley tycoons. But now, with the state’s growing economy, and improved communication tools among investors, North Dakota lenders are beginning to take chances and make profits on local startups as well.

“We’ve invested in five entities in the past 15 months or so,” said Jerry Renk, leader of the Northern Plains RAIN® fund in Bismarck. “The common industries in which we invest are software, manufacturing and medical devices; similar to national trends. Some of the software and medical devices we have seen are amazing.”

RAIN funds are local investment groups operating under the umbrella of RAIN® Source Capital, based in the Minneapolis area. RAIN funds have operations throughout Minnesota, Iowa, South Dakota, Montana, Idaho, and other areas. In North Dakota, Bismarck, Fargo and Minot have established RAIN funds.

As leader of the Northern Plains RAIN fund, Renk helps organize about 20 investors in the Bismarck area, including a screening committee that is first to review and perform due diligence on proposals from prospective entrepreneurs.

Before investing in startup businesses, venture capitalists look closely at the proposed business plans.

“We look to see if the business’s leaders have thought about how much it will cost to buy raw materials and purchase the product versus projected revenue, whether they have created a marketing plan, and other factors,” Renk said. “If we have to spend a lot of time coaching them through the business plan, we probably wouldn’t consider it a safe investment.”

Renk, who is also president of BNC National Bank, North Dakota Market, is careful to point out that the investments he makes through the RAIN fund are personal ventures, independent from the banking business, and fundamentally different from traditional banking, as well.

“Venture capital is money that is not available through the normal financial investment channels,” he said. “Young entrepreneurs sometimes have trouble acquiring capital because the amount of risk is too high for banks. By acquiring partners and venture capital, however, entrepreneurs can raise the equity to get loans or start businesses.”

The RAIN Source Capital parent network assists local RAIN funds by providing an infrastructure that includes additional capital, legal templates, management expertise, workshops and networking opportunities, according to the Web site, rainsourcecapital.com.

RAIN® Street is a Web-based tool to help RAIN funds in different areas communicate with one another and discuss potential investments online.

For example, Renk said the Northern Plains RAIN fund might listen to a proposal and perform background research. Then, if the board decides it needs more capital or just wants to open the opportunity up to other RAIN funds, they can post the proposal and solicit responses from other RAIN Street users.

The RAIN funds in North Dakota especially stay in touch regarding ventures within the state.

“All of the entities we have invested in are in North Dakota, and some are from Bismarck,” Renk said. These new businesses create new employers, new tax payers, and it all trickles down to sustain economic growth in our communities, he said.

Within the venture capital industry, lenders are often called “angel investors,” a term that initially struck me as strange because I have never envisioned angels being wealthy business people who give people money to solve their problems, but Mr. Renk helped me see things a little differently.

“The reason I love my job is that I get to meet so many people (who) have great ideas, but sometimes they don’t have the funding to take that idea to market,” he said. “It’s rewarding to give someone who has an idea a chance to succeed. Hopefully, when these businesses grow, they reach out to the next round of startups, and the wheel keeps going around.”

In Fargo, one group of investors is starting to give back. James Burgum, former president of private equity firm Advenio Partners LLC and Doug Burgum, former chairman and CEO of Great Plains Software Inc., and Sr. Vice President of Microsoft Business Solutions Group, are co-founders of Arthur Ventures.

The group, which includes other investors, wants to invest in startup information technology, life sciences and clean or “green” technology, especially in the energy industry.

James Burgum, managing director, Arthur Ventures, uses Great Plains Software Inc., as an example of how difficult it can be to start a business. He said the software company’s executives struggled through 17-18 years of scary times before the business was stable, but now they can use that experience to help others succeed.

“We want to invest in technologies that have the potential to spark growth in entire industries,” Burgum said.

I have to take this time to admit that I once stayed up far too late watching a rerun of 60 Minutes, featuring Tom Perkins, former Hewlett- Packard (HP) executive and co-founder of venture capital firm Kleiner Perkins Caufield & Byers, and his 290-foot, $152 million yacht, which he built using the fortune he earned investing in startups like Amazon.com, America Online, and Google. Perkins’ story made me wonder if I might soon hear about North Dakota venture capitalists sailing big yachts.

Burgum admitted the business of venture capital in North Dakota has not reached the same level as the capital funds in Silicon Valley or some East Coast areas, but he said capital within the state has recently become more abundant, more accessible and more organized thanks to groups like RAIN Source Capital and other angel investor networks.

“Capital investment in North Dakota means building a partnership with the business,” Burgum said. “In addition to providing money, we also want to offer our expertise to help the company succeed.”

Burgum said these partnerships may mean one of the Arthur Ventures partners takes a seat on the company’s board of directors or at least observe board meetings.

Arthur Ventures recently made its first investment in Intelligent InSites, a Fargobased software company that makes all-in-one wireless nurse calls, security and access controls, and safety and assets management devices for the healthcare industry. As part of the partnership, Doug Burgum will take a seat on the Intelligent InSites Board of Directors.

James Burgum said that while he and his partners are very pleased with the business they have created and what they plan to provide the North Dakota economy, there are plenty of other lucrative projects in the state and a variety of financing methods to help get them going.

With energy and agriculture playing such large roles in the North Dakota economy, ethanol refi neries have become an investment type involving both those industries.

Ethanol plants in North Dakota vary in their financial structures. Some plants are owned by large corporations like VeraSun, based in Brookings, S.D., which owns an ethanol refinery in Hankinson and Archer Daniels Midland Company, based in Decatur, Ill., which owns the Walhalla facility.

In other cases, smaller investors like Harold Newman, Jamestown, and Gary Tharaldson, Fargo, have organized partners and capital to build refineries.

Newman, of Newman Signs fame, operates the oldest ethanol plant in the state, Alchem in Grafton, which opened in 1983 and produces about 10 million gallons of ethanol per year.

Newman also has plans to build a $260 million refinery near Jamestown and Spiritwood with help from partners and public investments such as the Jamestown/Stutsman Development Corporation. The 100 million-gallon-per-year facility would be located in the newly developed Spiritwood Energy Park with a proposal to use a nearby coal-fired power plant to generate steam to cook corn into ethanol.

Tharaldson began construction on his ethanol plant in Casselton in June 2007. The $200 million, 110 million-gallon-per-year facility is expected to open later this year.

In addition to these methods of raising capital, Frank Kirchenheiter, a rancher from southwest North Dakota, helped organize 800 farmers, ranchers and business people and raise $40 million in equity to build the Red Trail ethanol refi nery near Richardton in 2005.

While it does have a large number of member investors, the Red Trail plant is not technically a cooperative because it allows non-members to deliver commodities for refinement. Therefore, the company is structured as a Limited Liability Corporation (LLC).

In January 2007, the $78 million Red Trail facility began producing 50 million gallons of ethanol from 18-20 million bushels of corn annually, and Gov. John Hoeven named it the 2007 Project of the Year.

Now, other plants in development are being modeled after the Richardton refinery. These prospective projects include Yellowstone Ethanol, near Williston, and a plant near Gascoyne to be operated by Buffalo Creek Energy.

Of course, the ethanol industry has its skeptics. Uncertainty about government subsidies and volatile commodity prices have made people question whether the industry can sustain itself over the long-term.

Most recently, skeptics have questioned where ethanol fits in America’s quest for energy independence. After all, 2007 motor gasoline consumption in the United States was 3.4 billion barrels per year, according to the Energy Information Administration, and the estimated production of ethanol will be about 210 million barrels next year, according the South Dakota-based American Coalition for Ethanol. Therefore, it is a question whether ethanol can ever be a feasible replacement for fossil fuels.

Randy Schneider, President, North Dakota Ethanol Producers Association, said it is important to remember, however, that ethanol was never intended to be the one-size-fits-all answer to the energy crisis.

Ethanol production first took off in 1990, when Congress required oxygenates, like ethanol or methyl tertiary butyl ether, be added to fuel mixes to reduce pollution. Then, in 2003-2004, states started to ban MTBE because it was seeping into groundwater through underground gas station tanks, and ethanol became the additive of choice.

At that time, North Dakota farmers were also looking for a way to bring the price of corn at their local elevator closer to the price listed on the Chicago Board of Trade. Creating new markets with ethanol refi neries seemed like a perfect solution.

“In those days, fund drives used to be just an ad in the local paper and a meeting at the school gym,” Schneider said. “It didn’t take much for a gym full of checkbooks to raise capital.”

Today, as with most industries, debt and capital are harder to come by and people are more cautious about investing, Schneider said, but there are also new applications for ethanol being developed, including use in nanofiber technology, that are making the product an even more lucrative proposition.

Of course, alternative fuel is still a promising application for ethanol. While ethanol and bio-fuels may not completely eliminate U.S. dependence on foreign oil, Schneider believes it can come close.

“I think people sometimes look for a single ‘magic pill’ to fix our energy crisis, and that just doesn’t exist. A policy of energy independence will need to include, nuclear, wind, coal and natural gas power, and ethanol will play a major role as well,” he said.

Schneider said construction of pipelines would greatly benefit ethanol production because current transportation of ethanol by truck and train costs 10-20 cents per gallon, but a pipeline could reduce transport costs to 1-2 cents per gallon. He said once that technology is in place, investments in ethanol could become very lucrative.

Like corn farmers raised money for ethanol plants, in 1990, about 1,000 farm families, led by current Lt. Gov. Jack Dalrymple, pledged $12.5 million to build a $40 million durum mill and pasta plant near Carrington.

Dakota Growers Pasta was originally built as a cooperative to combat falling commodity prices and open trade policies.Dakota Growers Pasta company’s original growers’ agreement was for members to deliver one bushel of durum wheat for $3.85 in stock value.

In 1996, 1,085 members contributed $9.7 million equity at $3.80 per share toward an expansion to double durum capacity.

The company has since been privatized and has grown to become the 3rd largest pasta manufacturer in the United States, with plants in New Hope, Minn., and Minneapolis.

In addition to the eight workers who won the $200,000 lottery prize in December 2007, Dakota Growers Pasta has been profitable in other ways.

In 2001 and 2006, the company paid cash dividends to its members, and from 2003 to 2007, annual net revenues increased from $136 million to $191 million, and earnings per common share rose to 52 cents, up from a three-cent loss.

Dakota Growers Pasta company’s assets include an elevator, mill, four pasta production lines, and a warehouse – a model of vertical integration.

Vertical integration is the key component for any cooperative business because the more pieces of the supply chain members can control, the more value they can add to their product and the more they will profi t as a result.

The Dakota Prairie Beef Co-op, near Scranton gives ranchers more control over their cattle through the fi nishing process.

It was once a custom to haul cattle and feed to more southern states where they were closer to many processing and packing plants. However, the high costs associated with shipping feed and a growing number of processing plants in and around North Dakota made ranchers realize it would be more profi table to open a feedlot closer to home and ship the feeder cattle.

Planning for the feedlot began in the mid-1990s. Throughout one year, project organizers staged community meetings in North and South Dakota and Montana.

Ranchers could choose between two types of shares depending if they would be delivering a yearling or a spring calf. Between 145 members who initially purchased feeding shares and other preferred stock sold, the initial capital drive raised $500,000.

Farm Credit Services also lent $900,000 to get the project off the ground, and in 2000, the fi rst deliveries of cattle arrived.

Moving farther down the supply chain, the North American Bison Cooperative formed in New Rockford in 1993. The cooperative specializes in the processing of all-natural bison products.

About 330 ranchers in the United States and Canada purchased shares and promised to deliver animals to the co-op. NABC also invested in-kind funds equal to 10 percent of the ownership of the company.

NABC now operates in partnership with North Dakota Natural Beef (NDNB), LLC, Fargo, and the North Dakota State University Beef Systems Center of Excellence.

Although all-natural beef and bison are relatively small, niche market products, Dieter L. Pape, president/CEO of NABC and NDNB, said the company’s consumer research, combined with the North Dakota name have resulted in marketing success.

“Part of the allure is that we are North Dakota companies, and consumers trust North Dakota ranchers and farmers,” Pape said. “Understanding our customers has led us to develop brands and packaging that the consumer can identify with and meets their needs when they make their purchase decisions.”

Pape said NABC earned its fi rst profi t in 2007, and members were paid a patronage of 10 cents per pound.

“Both North American Bison Cooperative and North Dakota Natural Beef add signifi cant economic benefi t to North Dakota. For every $1 spent on harvesting, processing, and distribution, the state benefi ts with over $4 added back to the economy,” Pape said.

Even food retailers are getting into the cooperative capital investment business.

This summer, the Michigan Job Development Authority, Michigan, N.D., organized a fund drive to buy the property of Johner’s Fairway grocery store, which closed this spring.

The residents of Michigan, population 345, raised more than $163,000 to buy and reopen the store, which they lease for free to Fred Wangler of Casselton, who has experience operating six similar small-town stores.

Similarly, the people of Bowden, population 139, are trying to buy the town grocery store and run it as a cooperative rather than have people travel to purchase food. According to the Bismarck Tribune, a Bowden co-op board has taken over the lease, but would like to raise $62,500 at $50 per share to purchase the store and inventory and operate it as a formal cooperative.

From venture capital in high-tech industries, to helping to keep open a local store in order to buy groceries, these are just a few examples of North Dakotans exhibiting confi dence in their communities and local economies and fi nding ways to invest There are many other stories of successful cooperatives, equity fund drives, and capital investment in all corners of the state.

If North Dakota hasn’t been historically known as having the largest economy in the nation, I think its safe to say that its people and businesses have learned how to work together to invest and build for a better future. As our economy continues to grow, the lessons in cooperation that we learn now can only lead to better things in the years to come.