Green Backs for Green Firms

rom the outside, the Agriculture Department's South building is a monolith, spanning more than a block on Washington's Independence Avenue. Its long, meticulously polished halls are home to the Food Safety and Inspection Service, the Farm Service Agency, and other government agricultural offices.

But in one tiny stretch of hall, with just a few offices tucked in the basement, sits a venture capital corporation, investing millions of government dollars each year in small environmentally friendly businesses.

The Alternative Agricultural Research and Commercialization Corporation (AARC) is a wholly owned government corporation that invests in and promotes small businesses that manufacture natural products. In the long run, AARC hopes its efforts will promote environmentally preferable purchasing in both the public and private sectors.

The corporation was created in the 1990 Farm Bill. In 1993, Congress awarded the office its first appropriations, and in 1996 it became the government's first venture capital corporation. "We're really a test," says Ron Buckhalt, AARC's marketing director.

The test is whether the corporation will see a return on its investments over the long haul. Buckhalt says this depends on whether the small companies blossom into money-making ventures. "In the venture-capital industry, you don't expect the payments to start next month, like buying a house."

Each year Congress allocates money for the program, and AARC invests those dollars in the businesses and universities it considers to be the most promising.

"The most important thing we look at is what kind of a management team they have in place," says Robert Armstrong, AARC's acting director. "It is a fact of life that companies fail not because of lack of capital or because it's a bad idea. They fail because of bad management."

Since 1993, AARC has invested about $30 million in 60 businesses. Investments range from less than $100,000 to $1 million. In its four years of operation, AARC has invested about 25 percent of its capital in businesses that produce alternative building materials, such as Agriboard wheat straw building panels. Other areas of investment interest include seed-based machinery lubricants and absorbents.

Bio-Plus Inc., which produces absorbents made from peanut hulls, was one of the first companies to begin repaying a portion of AARC's investment. "Without AARC's contribution and participation, we were at the end of our rope, simple as that," says Rete Odom, the company's president and CEO. "Now we are finally a profitable company."

Buckhalt says AARC is "on schedule and slightly ahead" in terms of recovering investments. Typically a venture capital investment will return money in about six years. However, AARC's more immediate goals are to create jobs in rural America and to promote environmental awareness in the federal government.

"We were looking for a way with bio-based products to put rural towns to work and establish jobs," AARC board chair Jeff Gains says.

AARC has the backing of the 1996 Farm Bill, which allows executive agencies to establish procurement set-asides and preferences for businesses capitalized by the corporation. "One of the biggest markets is government, period, for all kinds of products," says Buckhalt. "We have stock in these companies. We are equity owners. So, we'd like to see that those purchases are accelerated by the government."

AARC officials admit they're off to a slow start in getting government agencies to buy from the businesses in which the corporation invests. "We're still in the process of getting the word out that we exist," Buckhalt says. In addition, AARC's funding is often in jeopardy with Congress, because the corporation works from a revolving fund. "They created it but they really don't understand it," he says.

According to the 1996 legislation, AARC is scheduled to be privatized by 2002. "We're not sure how this will take place, but that's part of our mission over the next few years," says Armstrong. Regardless, AARC officials argue that their efforts have already been successful. "In light of the current trends, AARC will be successful, and this will be good for the federal government, the environment and increased economic opportunities," says Gains.