The irony of the venture capital industry is that, for all its efforts to fund revolutionary business models, the VC model itself has remained unwaveringly static. The process of raising money, sourcing deals, investing, then nurturing portfolio companies while hoping beyond hope that at least one makes it big (ideally, before it's time to raise another fund) is no different today than it was when Arthur Rock, Silicon Valley's seminal VC, was investing 40 years ago.

The absence of consternation about the model's efficacy derives from the phenomenal relative performance that VC funds have offered institutional investors, especially over the past 15 years. In other words, the lack of necessity has precluded the need for invention. However, the combination of recession and the broader technology crisis has some VCs quietly contemplating new and innovative ways to offer returns to limited partners.

One new approach is that of Village Ventures, which has spent two years building a national network of early-stage VC funds in emerging technology markets. The idea has resonated with investors and partners alike. In addition to persuading Bain Capital, Highland Capital Partners, Janus Capital, and Sandler Capital Management to invest $100 million, Village Ventures has launched 16 of the 30 affiliate funds it expects to seed, alongside which it has helped raise nearly $200 million in local capital.

The seeds for the model have been germinating since cofounders Matt Harris and Bo Peabody graduated from Williams College in 1994. While Mr. Harris, now Village Ventures' CEO, headed to Boston to work for the management consultancy Bain & Company, Mr. Peabody, currently the VC firm's chairman, stuck around Williamstown, Massachusetts, to focus on his idea of a Web-based community site for young adults. In 1997, Mr. Harris returned to Williamstown as founder of Berkshires Capital Investors, a venture fund chartered to invest in companies in remote Berkshire County. One of his first investments was in Mr. Peabody's company, Tripod, by then one of the most popular sites on the Web. A year later, Lycos (now part of Terra Networks) acquired Tripod for $58 million, making Mr. Peabody a very rich 20-something and ensuring the success of Mr. Harris's first fund.

Fueled by their belief that entrepreneurial companies, like Tripod, can succeed in overlooked markets, like Williamstown, and content to let the innumerable VCs in hotbeds like Silicon Valley, Seattle, and New York City duke it out over a limited number of deals, Mr. Harris and Mr. Peabody set out to develop a new model. Their first step was to define the "ideal market"--one with a relative lack of competitive sources of venture capital (though having no source at all is considered bad, as that may indicate a lack of opportunity); a readily accessible source of intellectual capital (like a university or Fortune 1,000 company); a low cost of doing business (low rent or a well-developed communications infrastructure); and a high quality of life (good climate or other livability factors). They then built an algorithm to rank cities that fit the bill. The model identified more than 150 qualifying communities, ranging from the predictable (Providence) to the seemingly absurd (Amarillo, Texas).

The process begins with a locally based VC interested in raising a fund. After the investment team passes a rigorous Village Ventures approval process and is granted affiliate status, Village Ventures helps the new firm raise a minimum of $10 million in local capital. Once fund-raising is complete, Village Ventures places one of its own VCs as a general partner of the firm, commits $0.50 for every dollar the new fund invests (increasing the affiliate fund's pool of investable capital to a minimum of $15 million), and reserves the right to invest directly in portfolio companies beyond its $0.50-per-dollar commitment.

Village Ventures also provides what Mr. Harris refers to as "the nitty-gritty"--writing contracts, filing tax returns, managing technology infrastructure, and tending to all the lawyers, accountants, and service providers. In exchange for its services, Village Ventures charges a handsome fee--up to 40 percent of the profits of the affiliate funds. Though a steep price, there's no shortage of VCs eager to join the network. One of the first was Mark Solon, the managing director of Highway 12 Ventures in Boise, Idaho. A native Boisean, and previously a private-equity investor with the Atlantic Capital Group in Marblehead, Massachusetts, Mr. Solon wholeheartedly endorses the concept: "Their history of success and credibility of their investors is essential to fund-raising in small towns."

Of course, this VC firm will be measured by the same yardstick as every other firm: the returns on investment to its limited partners. Though the network has made investments across a range of industries--from biotech to communications and media--and a handful of its portfolio companies have received attention--Streetmail.com and Blue Tarp, among others--to date, neither the firm nor any of its affiliates have had a significant liquidity event. That said, Village Ventures plans to close on a round of funding by July that will double its current capitalization.

"There hasn't been very much sophisticated thinking in the asset class," says Mr. Peabody, "and most recent innovations in VC--incubators, for example--have been characterized by the loss of extraordinary amounts of money." In order to avoid the ignominious fate of the CMGIs of the world, Village Ventures must demonstrate that its theory--investing in small markets lacking venture capital though rife with intellectual capital--is a practical reality.