Investing in small-town companies across America, two young venture capitalists are trying to discover–or create–the next Austin, Tex.

It’s not an everyday scene at the Grove Hotel in downtown Boise, Idaho. Instead of tourists and mountain bikers the place is packed with suits for the town’s fifth venture capital conference. “San Jose hasn’t cornered the market on smart people,” says Matthew Harris, 30, the keynote speaker. “Silicon Valley is so yesterday. Boise is tomorrow!” The crowd cheers.

Harris, chief executive of Village Ventures in Williamstown, Mass., has given this speech before. His little VC firm, which has raised $225 million in 15 funds, specializes in finding investing partners and startups in small, out-of-the-way places, where overhead is low and competition almost non-existent. “The economic logic is simple,” says cofounder William (Bo) Peabody, 32. “If you want to catch fish, you go where the fishermen ain’t.”

Certainly a different approach–maybe the only one open to folks who are virtually locked out of Sand Hill Road in Palo Alto and Route 128 in Boston. Venture capital is an inside game these days: 80% of funds go to ten metropolitan areas; most new capital supports existing ventures. “The business hasn’t changed in 40 years,” says Harris. “It’s time for some fresh thinking.”

Which carries some risk, of course. Village Ventures looks for areas near a large tech company or research lab, with low costs of living and low crime rates, a net influx of people, a thriving arts community and lots of outdoor activities. Such categories correlate with a high percentage of folks aged 20 to 44. Boise scored high on most categories: two tech giants (Hewlett-Packard and Micron); two engineering schools and a national research lab nearby; natural beauty; a ballet company, opera house and a symphony; and housing and business costs, respectively, 5% and 14% below the national average.

Key to this process is the way Harris and Peabody go about investing. First they identify a homegrown affiliate. In Albany, N.Y., for instance, it’s High Peaks Venture Partners, which is seeding nanotech companies spun out of research labs in upstate New York. Solstice Capital, a partner in Tucson, Ariz., invests in life sciences outfits, many hatched at Arizona universities. Village Ventures helps to raise money–$26 million in the case of Boise–as well as handling back-office chores and offering access to a network of funds and investors. The firm puts in 20 cents for every local dollar invested, more into deals it really likes. In exchange it takes an eyebrow-raising 33% of the affiliate firm’s carried interest (defined as 20% of the fund’s profits).

This pair stumbled on the idea six years ago. Peabody was running Tripod, a personal Web site service launched in his dorm at Williams College, when the president of the college, hoping to spark economic development in the area, asked a few alumni for ideas. Peabody referred him to Harris, a former college roommate who was then a 24- year-old associate with Bain Capital. Weeks later Harris was raising $5 million for a new VC firm called Berkshire Capital Investors and digging up deals in rural western Massachusetts. He invested $350,000 in Tripod and, when Peabody sold the company to Lycos for $58 million a year later in 1998, netted three times its money. If it worked in the Berkshires, Harris argued, it might fly elsewhere. In January 2000 he and Peabody set out to raise money–$20 million from Bain, Highland Capital Partners and Sandler Capital Management, then $25 million from those investors plus Janus Capital Group. Harris and Peabody cut a deal for an annual management fee during the active investing years of 5% of the $45 million fund–more than twice the industry average.

So how has Village Ventures done so far? So-so. It has written off $2.2 million in 4 of 40 investments. The fund has seen but one cash-out: Okena, a network security company that sold to Cisco in April, returning 5.5 times the fund’s $2 million investment. The internal rate of return, a mathematically flaky (and, for portfolios that include private companies, subjective) measure of performance, is running at -18% a year.

But there are signs of life in Boise. Village Ventures’ affiliate there, Highway 12 Ventures, has backed six young companies, including Dedicated Devices. Founded by Micron Electronics’ former chief of technology, Jeffrey Moeser, this outfit makes home networking equipment to cut the tangle of thermostat, speaker, TV and burglar alarm wires that snake through houses; it will start selling services next fall.

Half of Highway 12’s deal flow still comes from out of town. In October the firm invested in a $12 million deal to back Mountain View, Calif.-based Attensity. The company makes software that helps computers detect hidden patterns in text. The CIA, for instance, uses it to analyze communications among suspected terrorists; corporations to analyze customer complaints.

Highway 12 also has money in Telemetric, a firm in Boise that uses wireless communicators, mounted on utility poles, to alert power companies to outages. The three-year-old company is supposed to bring in at least $1 million in revenue from 110 customers this year.

Village Ventures plans to raise another $50 million to play with by year-end. But payday may be eons away. “It’s a long road to take a cow town to a tech center with big dollars,” concedes Harris. Then he brightens. “But 20 years ago Austin was nowhere.”

Bringing Up Boise

Idaho’s capital scored high on Village Ventures’ screen. Low costs of doing business and natural beauty helped.

Population 404,000 | Average home price $129,000

Income growth 2.9% | Days of sunshine/year 234

Job growth 3.3% | Cost of living 95% of national average