Passage of the 2017 Tax Cuts and Jobs Act, a bipartisan bill that created new tax incentives for investors looking to invest in underserved communities known as Opportunity Zones (O-Zones), is a boon for investors from a capital gains perspective, and for communities in need of economic relief and attention. To date, there are 8,700 such zones and many venture capital firms are said to be racing to develop multimillion-dollar O-Zone Funds.
Accounting Today reports that investors in O-Zones benefit from “deferral of capital gain; possible reduction of the amount of gain realized through a basis adjustment; and possible permanent exclusion of gain on the appreciation for the interest in a qualified O-Zone.” Moreover, there is no cap on the amount of money that can be invested in a Qualified Opportunity Fund.
Marlon Nichols, co-founder of Cross Culture Ventures, an early-stage venture capital firm based in Los Angeles, Calif., says he has no immediate plans to invest in an O-Zone. His company already has a policy of investing in tech companies around the country that are creating solutions for undeserved communities. He cites as examples Ready Responders, a response team based in New Orleans that picks up medical emergency calls through the Cloud and dispatches them to off-duty doctors, nurses, and EMT workers; and Catalyte, a consultancy that uses artificial intelligence to leverage talent.
Marlon has ideas about investing in O-Zones the right way, however. In a recent interview with The Network Journal, he shared five tips that can help venture capital firms preparing to invest in O-Zones avoid mistakes that could harm, rather than help, their beneficiary communities.
Avoid gentrification and “the Bodega effect.” A startup named Bodega was called out last year for admittedly seeking to displace local workers at bodegas, who often are people of color and/or immigrants. The owners of the startup, who created vending machines to replace bodegas, failed to research and understand what those stores meant to residents. No one bought into their idea. The lesson: Surround yourself with a diverse team and listen to them. And remember, the best people to solve a challenge in any community are people who have lived there, because they understand what’s real in that community.
Build and hire local. The new businesses, restaurants, and condos in Harlem, New York City, are great, but longtime residents can no longer afford the rent. If you’re going to create businesses in an O-Zone, recruit from that neighborhood so residents can make the wages necessary to continue living there. By building local off ices and hiring local talent, you will be injecting capital into the local economy, further revitalizing the area.
Accelerate entrepreneurs. Starting an accelerator in an O-Zone helps to build efficiencies. Advertise that you’re seeking local residents who have certain talents. This is what Catalyte does. They don’t recruit from Ivy League schools; they advertise on Craigslist and at community colleges. Help develop the local business and tech ecosystem by partnering with the local government or organizations to create startup accelerators for local entrepreneurs.
Create local wealth by addressing the skills gap. If you’re creating a company in an O-Zone, you don’t always have to bring in the talent. Startups are quick to say, “We want to hire the people that live there, but they’re not skilled.” Figure out what skills are missing for the kinds of companies you want to create and establish programs that can build those skills. Invest in training programs, coding academies, or whatever will be the focus of your business. New industries won’t flourish if there’s no one to hire. Teaching local workers new skills through technology and business boot camps will revitalize an entire generation of workers and will help fill your jobs.
Have eyes and ears on the ground. Have “buy-in” in a community where you plan to build, by people who can give you the facts on the ground. Employ a dedicated team tasked with protecting the community — a queue of local employees on call to make sure the community is safe and happy.