creating)a)community) investment)fund - cutting...
TRANSCRIPT
Sponsored)By)the)Solidago)Founda4on)&)Lydia)B.)Stokes)Founda4on
Creating)a)Community)Investment)FundA)Local)Food)Approach
A)Grassroots)Guide)—)Version)1.0)June)2013))
A"Project"of"Cutting"Edge"Capital
By)Michael)H.)ShumanWith)Contribu4ons)from)Jenny)Kassan,)Jeff)Rosen,)and)Tom)Willits
Cover&photos&by&Donna&Meller.
Table&of&Contents
Acknowledgments. . . . . . . ..... ...
Introduction!! 3
I. The.Pioneer.Valley.Story.. 9
II. Clarifying.Your.Objectives.................... 12. . GEOGRAPHIC.FOCUS. 12
. . ECONOMIC.MISSION. 12
. . RISK.AND.REWARD. 14
. . PRIORITY.BUSINESSES. 17
. . PRIORITY.BUSINESS.STAGE. 18
. . BUSINESS.NEEDS. 19
. . THE.BASIC.MATH. 19
. . NEEDED.SIZE. 21
. . MISSION.STATEMENT. 23
III. Making.The.Right.Types.of.Investment............. 24. . TYPE.OF.FINANCE. 24
. . SIZE.OF.FINANCE. 25
. . SUPPORT. 26
IV. Choosing.the.Right.Legal.Structure............. . 28. . EXEMPTIONS. 28
. . OTHER.OPTIONS. 29
. . PIGGYBACKING. 31
V. Mobilizing.the.Right.Investors................ 32. . INVESTOR.MOTIVATIONS. 32
. . TRADITIONAL.SOURCES.OF.COMMUNITY.CAPITAL. 34
. . UNACCREDITED.INVESTORS. 34
. . VOICE. 36
VI. Fine\Tuning.......................... 37. . OPEN.VS..CLOSED.FUND. 37
. . LIFE.CYCLE. 37
. . OPERATIONS. 38
. . BUSINESS.FAILURE. 39
. . SUCCESS. 39
Epilogue............................. 41
Appendix.A.....Community.Investment.Worksheet
Appendix.B.....The.25%.Shift.
Acknowledgments
This&guide&describes&the&process&by&which&a&small&group&of&local&food&advocates&began&crea<ng&an&investment&fund&in&the&Pioneer&Valley&of&Western&Massachuse@s.&The&fund&is&yet&to&be&formally&named,&but&we&call&it,&in&these&pages,&the&Community&Capital&Fund.&It&is&a&work&s<ll&in&progress.
That&said,&we&have&learned&much&thus&far.&So&much&that&we&decided&to&prepare&this&guide&so&that&others&could&take&advantage&—&more&quickly&and&inexpensively&—&of&our&experience.&We&hope&to&inspire&others&to&experiment&with&local&investment&funds,&learn&new&lessons,&share&their&insights,&and&join&us&in&building&a&field&together.&Our&ul<mate&aim&is&to&launch&community&capital&funds&across&the&country.&
We&designed&this&guide¬&to&convert&beliefs,&but&to&help&individuals&who&already&believe&in&just,&local,&sustainable&food&systems&to&be&able&to&invest&in&just&that.&&
Many&thanks&to&Jeff&Rosen&of&the&Solidago&Founda<on&and&Tom&Willits&of&the&Lydia&B.&Stokes&Founda<on&for&commissioning&this&work.&Jenny&Kassan,&founder&and&CEO&of&CuSng&Edge&Capital,&wrote&a&series&of&memos&for&this&project&which&provided&the&legal&analysis.&And&very&helpful&comments&on&various&draUs&came&from&the&members&of&the&PVGrows&Finance&Commi@ee:&Rick&Chandler,&Judy&Gillan,&Phil&Korman,&Margaret&Chris<e,&Mary&Hoyer,&Jim&Oldham,&Michael&Abbate,&Chris&Sikes,&John&Waite&and&Alan&Singer.&Thanks&as&well&to&a&team&of&advisors&including&Grant&Abert,&Eric&Becker,&Michael&Brownlee,&Jess&Cook,&Paul&DiLeo,&Anders&Ferguson,&Alex&Linkow,&and&Dan&Pullman.&Special&thanks&to&Sam&Stegeman,&the&PVGrows&coordinator,&who&has&kept&this&process&moving&forward.
We&an<cipate&revising&this&guide&periodically,&so&if&you&use&it,&please&let&us&know&your&recommenda<ons&on&how&to&improve&it&for&others.&
Michael)H.)ShumanSilver)Spring,)May)2013
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Introduction
This)guide)aims)to)help)communi4es)across)the)United)States)create)their)own)investment)funds)to)grow)local)food)businesses.1)It&grows&out&of&the&efforts&of&a&network&called&PVGrows&in&which&local&food&advocates&are&working&together&in&the&Pioneer&Valley&of&Western&Massachuse@s&to&revitalize&the&local&economy,&support&the&agricultural&community,&and&increase&residents’&access&to&healthier&food.&From&the&beginning,&PVGrows&has&given&high&priority&to&raising&capital.&
More)and)more)U.S.)communi4es)are)interested)in)promo4ng)local)food,)and)appreciate)that)a)cri4cal)obstacle)is)mobilizing)capital)for)new)or)expanded)local)food)businesses.&Star<ng&in&2008,&this&movement&also&has&seen&a&drama<c&growth&of&interest&in&local&investment.&That&year&marked&the&“GFC”&—&the&global&financial&crisis&—&when&millions&of&U.S.&investors&saw&a&significant&percentage&of&their&wealth&disappear&as&the&stock&market&and&housing&market&sank.&Americans&are&now&seriously&asking&whether&they&can&con<nue&to&entrust&their&re<rement&and&their&kids’&educa<on&to&such&a&rickety&financial&system.&They&want&to&put&their&money&to&work&in&the&enterprises&they&know&and&care&about,&and&an&increasing&number&have&expressed&interest&in&inves<ng&in&local&farms&and&food&enterprises.&
What)stands)in)the)way)are)obsolete)ins4tu4ons)and)laws)that)make)local)investment)extremely)difficult)and)expensive.)Securi<es&laws&enacted&during&the&Great&Depression&effec<vely&created&a&system&of&economic&apartheid,&with&“accredited&investors”&being&able&to&invest&in&any&business&they&wish&and&unaccredited&investors&being&essen<ally&told&to&get&lost.&Accredited&investors&comprise&the&richest&one&percent&of&Americans&—&those&who&earn&more&than&$200,000&(or&$300,000&with&a&spouse)&or&have&more&than&$1&million&in&assets,&excluding&one’s&primary&residence.2&As&long&as&entrepreneurs&don’t&lie&about&their&business&plans,&governance,&and&numbers,&they&can&easily&approach&any&“accredited”&investor&for&an&investment.&
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1&Prac<cally&speaking,&“local”&has&two&prongs:&proximity&and&ownership.&Proximity&refers&to&the&distance&from&producer&to&consumer.&Thus,&many&locavores&want&their&food&to&travel&a&short&distance&“from&farm&to&table,”&because&proximity&fosters&rela<onships&of&trust&between&consumers&and&farmers,&maximizes&the&level&of&economic&ac<vity&within&a&community,&and&minimizes&the&carbon&footprint&of&shipping.&From&a&local&investment&perspec<ve,&an&equally&cri<cal&factor&is&ownership.&Local&ownership&of&a&business&means&that&a&majority&of&the&shareholders&of&a&company&live&close&to&its&opera<ons.&What&ma@ers&is&control&of&a&business&by&people&who&live&in&the&place&where&it&operates,&because&local&control&increases&the&chances&of&a&business&hiring&locally,&spending&money&locally,&pumping&up&the&local&economic&mul<plier,&contribu<ng&to&local&chari<es&and&civic&society,&and&behaving&responsibly&to&local&stakeholders.&
2&The&threshold&for&an&accredited&individual&is&$200,000,&which&is&earned&by&fewer&than&1%&of&Americans.&See&h@p://poli<calcalcula<ons.blogspot.com/2011/09/distribu<oniofiincomeifori2010.html.&The&threshold&for&an&accredited&couple&is&$300,000.&Under&2%&of&American&households&earn&this&much&income.&See&h@p://www.decisionsonevidence.com/2012/02/wantitoiknowiyourihouseholdiincomeipercen<leiranking/.&Since&households&can&have&more&than&a&couple&as&earners&—&grandparents’&pensions&and&children’s&work&also&might&contribute&to&household&income&—&probably&the&percentage&of&couples&earning&over&$300,000&is&closer&to&1%.&Ins<tu<ons,&such&as&churches&or&founda<ons,&can&achieve&accredited&status&if&their&assets&exceed&$5&million.
The&other&99%&are&“unaccredited”&and&presumed&too&gullible&to&invest&in&a&company&without&massive&legal&paperwork.&In&many&states,&before&a&business&can&make&an&investment&“offering”&to&even&a&single&unaccredited&investor,&it&must&pay&an&a@orney&to&produce&a&private&placement&memorandum&and&various®ulatory&filings&and&documents&that&can&cost&$25i50,000&in&legal,&accoun<ng,&and&government&fees.&If&a&company&wants&many&unaccredited&investors,&it&must&create&a&public&offering&for&which&many&lawyers&might&charge&another&$50,000&or&more.
Here’s)the)stunning)boVom)line:)Even)though)roughly)half)the)jobs)and)the)output)in)the)economy)comes)from)local)small)business,)almost)all)our)investment)dollars)go)into)big)corpora4ons)on)Wall)Street.)The&overall&wealth&of&the&country&is&over&$150&trillion.3&Some&of&this&wealth&is&held&as&land,&buildings,&and&machinery,&and&considered&“illiquid”—¬&very&easy&to&convert&into&dollars.&The&most&liquid&assets&held&by&household&and&nonprofits&are&stocks,&bonds,&mutual&funds,&pension&funds,&and&life&insurance&funds,&and&at&the&end&of&2010&these&totaled&about&$30&trillion.&Not&even&1%&of&these&savings&touches&local&small&business.
Were&local&businesses&uncompe<<ve,&unprofitable,&and&obsolete&for&the&U.S.&economy,&this&gap&would&be&understandable.&But&local&businesses&are&highly&compe<<ve&(their&share&of&jobs&in&the&United&States&is&growing),&and&at&least&as&profitable&as&larger&corpora<ons&(sole&proprietorships&are&three&<mes&as&profitable&as&Cicorpora<ons).4&Our&investment&gap&actually&represents&a&huge &capital&market&failure.&It&means&that&Americans&are&systema<cally&overinves<ng&in&Wall&Street&and&underinves<ng&in&Main&Street.&Were&this&$30&trillion&allocated&efficiently,&at&least&$15&trillion&would&shiU&into&locally&owned&small&businesses.&&In)recent)years,)millions)of)American)have)pioneered)some)intriguing)ways)to)invest)in)local)business.)Here)are)just)a)few)of)the)highlights:
• An&es<mated&two&million&Americans&have&embraced&“Move&Your&Money”&and&relocated&their&dayitoiday&financial&ac<vi<es,&including&their&checking&accounts,&loans,&credit&cards,&and&mortgages,&to&a&local&bank&or&credit&union.&
• Communi<es&have&used&exis<ng&tools&to&facilitate&local&investment,&such&as&bank&CDs&in&targeted&local&businesses,&a&new&genera<on&of&investmentiminded&coiops,&sponsorship&web&sites&like&Kickstarter&and&IndieGogo,&peeritoipeer&lending&sites&like&Kiva&and&Prosper,&investors&networks&like&LION&(the&Local&Investment&Opportuni<es&Network&of&Port&Townsend,&Washington),&and&Community&Development&Financial&Ins<tu<ons&(CDFIs).&&
• The&JOBS&Act,&signed&into&law&by&President&Obama&in&April&2012,&will&soon&provide&a&new&“crowdfunding”&exemp<on&for&companies&seeking&up&to&$1&million&in&capital,&permiSng&all&Americans&to&invest&at&least&$2,000&per&company&per&year.
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3&Federal&Reserve,&“Flow&of&Funds&Accounts&of&the&United&States,”&4th&Quarter&2010,&10&March&2011.
4&Michael&H.&Shuman,&“The&Compe<<veness&of&Local&Living&Economies,”&in&Richard&Heinberg&and&Daniel&Lerch,&eds,!The!Post!Carbon!Reader:!Managing!the!21st!Century’s!Sustainability!Crises!(Healdsburg,!CA:!Watershed!Media,!2010).
Yet)in)one)respect,)the)local)investment)revolu4on)remains)incomplete.)“One&off”&investments&in&local&companies,&like&“one&off”&investments&in&any&company,&are&inherently&risky.&Smart&local&investors&prefer&to&pool&their&money,&diversify&their&risk,&and&hedge&their&bets.&The&problem&is&that&securi<es&laws&governing&such&funds,&star<ng&with&Investment&Company&Act&of&1940,&place&onerous&obstacles&in&the&way&of&unaccredited&investors&—&and&the&JOBS&Act&reforms&do¬&change&these&laws&at&all.&
You’re&probably&thinking&—&well,&I&could&perhaps&ask&my&mutual&fund&to&invest&some&of&my&money&in&my&community.&Think&again.&There&are&7,500&mutual&funds&in&the&United&States,&and¬&a&single&one&invests&a&penny&in&local&business.&This&is¬&because&it’s&legally&impossible&—&mutual&funds&could&invest&in&municipal&bonds&and&direct&public&offerings&—&but&because&mainstream&financial&ins<tu<ons&thus&far&have&lacked&the&interest&in&shaping&themselves&to&focus&on&local&investments.&So&why¬&create&a&local&mutual&fund?&&Eventually,&someone&will.&But&the&legal&expenses&for&doing&so&today&could&be&hundreds&of&thousands&of&dollars.&
Mutual&funds,&however,&are¬&the&only&pools&of&money&in&which&unaccredited&investors&can&par<cipate.&The&Investment&Company&Act&has&more&than&a&dozen&exemp<ons.5&This&handbook&explores&just&one&of&these&—&the&use&of&a&nonprofit&fund&to&support&small&businesses.&
To&be&clear:&There&are&hundreds&of&funds&across&the&United&States,&primarily&revolving&loan&funds,&that&do&support&local&business.&Many&are&run&by&states,&ci<es,&economic&development&organiza<ons,&or&founda<ons,&and&they&are&undeniably&important&tools&for&helping&small&entrepreneurs.&But&nearly&all&of&them&only&tap&investment&dollars&from&accredited&investors.&This&guide&is&about&also&tapping&dollars&from&the&other&99%.
There)are)precedents)out)there,)but)remarkably)few)of)them:
• RSF$Social$Finance,&star<ng&in&1984,&encouraged&followers&of&Rudolf&Steiner&across&the&United&States&to&place&their&money&in&a&nonprofit&fund&that&would&support&Waldorf&Schools.&Over&the&years,&loan&recipients&have&expanded&to&include&businesses&linked&to&food&and&agriculture,&educa<on&and&the&arts,&and&ecological&stewardship.&Consistent&with&the&par<cipatory&philosophy&of&Steiner,&the&fund&accepts&unaccredited&investors&from&nearly&40&states.
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5&Some!of!the!most!common!exemptions!(with!section!numbers!from!the!Act)!relevant!for!our!discussion!are!these:!• (3)(b)(1)!Any!issuer!primarily!engaged,!directly!or!through!a!wholly!owned!subsidiary!or!subsidiaries,!in!a!
business!or!businesses!other!than!that!of!investing,!reinvesting,!owning,!holding,!or!trading!in!securities.!
• (3)(b)(2)!Any!issuer!which!the!Commission,!upon!application!by!such!issuer,!Ginds!and!by!order!declares!to!be!
primarily!engaged!in!a!business!or!businesses!other!than!that!of!investing,!reinvesting,!owning,!holding,!or!
trading!in!securities!.!.
• (3)(c)(1)!Any!issuer!whose!outstanding!securities!(other!than!shortHterm!paper)!are!beneGicially!owned!by!not!
more!than!one!hundred!persons!and!which!is!not!making!and!does!not!presently!propose!to!make!a!public!
offering!of!its!securities.!.!
• (3)(c)(10)(A)!Any!company!organized!and!operated!exclusively!for!religious,!educational,!benevolent,!
fraternal,!charitable,!or!reformatory!purposes.!
Private!funds!most!commonly!use!the!3(c)(1)!and!3(c)(7)!exemptions.!Under!Section!3(c)(1),!private!funds!with!no!more!
than!100!investors!are!exempt!from!coverage!under!the!Investment!Company!Act.!If!a!fund!wants!to!have!more!than!100!
investors,!it!generally!uses!the!3(c)(7)!exemption!which!requires!that!investors!be!“qualiGied!purchasers”!(high!net!worth!
individuals!and!institutional!investors).!
• The$New$Hampshire$Community$Loan$Fund&has&provided&$150&million&to&inistate&businesses&and&individuals&since&it&was&established&in&1983.&Unaccredited&investors&may&place&$1,000&or&more&into&the&fund,&and&receive&1i5%&per&year&depending&on&how&long&they&commit&to&leaving&their&money&on&deposit.
• The$Coopera;ve$Fund$of$New$England+takes&money&from&all&kinds&of&investors,&including&unaccredited&ones,&and&lends&it,&in&the&form&of&conver<ble&debt,&to&promising&coopera<ves&throughout&the®ion.&
• The$Calvert$Founda;on,+a&nonprofit&arm&of&the&Calvert&Fund&(itself&a&pioneer&in&socially&responsible&inves<ng),&sells&Community&Investment&Notes&and&uses&the&proceeds&to&invest&in&community&development&financial&ins<tu<ons&(CDFIs)&and&other&community&friendly&programs&like&community&development&corpora<ons.&Investors&in&49&states,&including&many&unaccredited&investors&who&can&buy&$25¬es&on&MicroPlace,&have&placed&$180&million&into&this&program.
• The$Economic$and$Community$Development$Ins;tute,&based&in&Columbus,&Ohio,&has &14&revolving&loan&funds&to&support&small&businesses&in&the®ion.&The&most&recently&established&fund&allows&unaccredited&investors&to&par<cipate.
• MountainBizWorks,&in&Asheville,&North&Carolina,&provides&small&businesses&loans&ranging&from&$500&to&$150,000,&and&unaccredited&investors&can&par<cipate.
• Common$Capital$of$Holyoke,&Massachuse@s,&just&launched&a&community&capital&fund&that&aims&to&take&money&from&all&kinds&of&investors,&including&unaccredited&ones,&and&invest&in&all&kinds&of&local&businesses&in&Western&Massachuse@s.
• The$Equity$Trust,&based&in&Western&Massachuse@s,&provides&loans&to&farms,&land&trusts,&and&housing&projects&across&the&United&States.&Unaccredited&investors&willing&to&commit&at&least&$1,000&for&a&year&or&more&may&join.
There&is&an&urgent&need&to&create&more&of&these&funds&all&across&the&country,&to&move&more&capital&into&local&businesses&in&a&way&that&brings&down&the&risk&of&inves<ng&in&a&single&company.&And&there’s&a&need&to&make&these&funds&simple&to&understand,&easy&to&invest&in,&and&efficient&to&run&by&professionals,&so&that&investors&feel&confident&that&their&dollars&are&being&stewarded&to&op<mal&community&outcomes.
The)Approach)of)This)Guide
For&several&years,&the&members&of&PVGrows&have&been&trying&to&expand&the&financial&resources&available&for&local&food&businesses&in&Western&Massachuse@s.&They&knew&there&was&a&growing&community&of&consumer&ac<vists&enthusias<c&about&food.&They&also&knew&that&many&residents&supported&the&growth&of&the&local&food&economy&as&investor&ac<vists.&And&they&knew&that&farm&and&food&system&businesses&needed&a&more&pa<ent&form&of&investment&capital&at&certain&stages&
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of&their&business.&Given&the&alignment&of&these&interests,&they&set&to&work&to&create&a&local&investment&fund.&This)guide)documents)PVGrows’)early)thinking)process.)It)is)organized)to)provide)a)roadmap)for)other)groups)interested)in)crea4ng)their)own)local)investment)funds.)
We&hope&that&our&experience&spurs&other&funds&in&other&communi<es,&and&helps&local&investment&prac<<oners&across&the&country&connect&with&one&another.&As&our&body&of&experience&grows,&we&will&put&out&future&edi<ons,&perhaps&through&a&Wiki&page,&with&more&case&studies&and&ci<es,&more&models&to&consider,&and&a&more&detailed&list&of&do’s&and&don’ts.
We&begin&by&briefly&telling&the&backstory&of&PVGrows.&In&the&chapters&aUer&that,&we&lead&you&through&the&basic&ques<ons&you’ll&need&to&answer&to&set&up&your&own&fund.&The&five&big&ques<ons&are&these:
• What+are+your+objec3ves?
• What+types+of+finance+will+best+support+your+highest+priority+businesses?
• What+legal+structure+makes+the+most+sense?
• How+can+you+mobilize+the+right+investors+for+your+fund?
• How+can+you+fine@tune+your+fund’s+business+plan?
The&guide&leads&you&through&these&five&big&ques<ons,&and&the&many&issues&beneath&them,&in&the &form&of&a&decision&tree,&summarized&in&Chart&1.&Throughout&each&sec<on&we&weave&bits&and&pieces&of&our&story.&But&the&big&decisions&concerning&our&Community&Capital&Fund&—&at&least&our&preliminary&decisions&—&are&laid&out&in&the&Epilogue.&You’ll&see&that&PVGrows&is&now&crea<ng&a&pilot&fund&of&$2.5&million.&Most&of&our&story,&however,&is&yet&unwri@en&—&as&is&yours!
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Chart&#&1.&&&A&Decision&Tree
Set"Your"Funds"Objectives
• Geographic$Focus
• Economic$Mission
• Risk$vs.$Reward
• Priority$Businesses$
• Targeted$Business$Stage$(Startup$vs.$Early$Stage$vs.$Mature)
• Capital$Needs$of$Businesses
• Business$Plan$for$Fund$(Costs,$Revenues,$Losses,$Returns)
• Size$of$Fund
• Mission$Statement
Determine)the)Fund’s)Top)Investment)Targets
• Type$of$Investment$(Debt,$Royalty,$Equity,$etc.)
• Size$of$Average$Investment
• Technical$Support
Pick)the)Right)Legal)Structure)for)Your)Fund
• Exemp;ons$from$Investment$Company$Act
• Poten;al$Alterna;ves$to$an$Investment$Fund
• Piggybacking$on$Another$Fund
Recruit)the)Right)Investors)in)the)Fund
• Investor$Mo;va;ons
• Tradi;onal$Sources$of$Community$Capital
• Unaccredited$Investors
• Voice$of$Investors$within$the$Fund
Fine^Tune)Your)Fund’s)Business)Plan)
• Open$vs.$Closed$Fund
• An;cipated$Life;me$of$Fund
• Plan$for$Ongoing$Opera;ons
• An;cipated$Failures
• Indicators$of$Success
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I. The"Pioneer"Valley"Story
The&Pioneer&Valley&in&Western&Massachuse@s&is&a&rich&agricultural¢er&in&New&England.&It&is&made&up&of&three&coun<es&—&Franklin,&Hampden,&and&Hampshire&—&with&697,458&residents&spread&over&1,850&square&miles.&Unlike&many&other&rural®ions&of&the&United&States,&which&lack&vital&infrastructure,&this&one&has&benefi@ed&from&the&proximity&of&ci<es&like&Boston,&Haruord,&and&Albany,&as&well&as&the&presence&of&some&of&the&most&pres<gious&universi<es&in&the &country.&But&its&farmers,&most&of&whom&own&rela<vely&small&landholdings,&have&steadily&lost&compe<<ve&ground&to&largeiscale,&industrial,&and&increasingly&global&agriculture.&
The®ion&is&diverse,&both&geographically&and&socioeconomically.&It&contains&seemingly&idyllic&New&England&towns,&hamlets,&and&small&urban¢ers&that&face&contemporary&challenges&associated&with&the&collapse&of&their&tradi<onal&industrial&base.&The&ci<es&of&Greenfield,&Holyoke,&and&Springfield,&where&huge&tracts&of&former&industrial&complexes&lay&abandoned,&are&struggling&with&the&decline&of&municipal&budgets,&and&their&services&are&stretched&to&the&breaking&point.&Within&just&a&few&miles&of&some&of&the&finest&soils&in&the&world,&residents&of&these&ci<es&live&in&food&deserts,&suffering&the&effects&of&lowinutri<on&diets.
Over&the&past&genera<on&the&Pioneer&Valley&has&given&birth&to&a&robust&local&food&movement.&One&reason&is&that&the®ion&has&excellent&farmland&and&a&variety&of&agriculturalµclimates,&include&fer<le&bo@omland,&sloping&orchard&sites,&and&upland&pastures&that&support&a&wide&diversity&of&agricultural&products.&It&has&enjoyed&a&steady,&if&small,&influx&of&new&farmers,&oUen&with&good&experience&and&training&from&local&farms,&colleges,&and&incubator&or&training&programs.6&With&the&support&of&a&number&of&influen<al&nonprofits,&such&as&Community&Involved&in&Sustaining&Agriculture&(CISA),&public&interest&in&local&farms,&local&farm&products,&and&other&local&food&businesses&has&grown&substan<ally.&And&there&has&been&a&prolifera<on&of&kitchen&incubators,&community&gardens,&youth&leadership&programs&focused&on&local&food,&and&strong&farmitoischool&programs.&
In&2008,&as&the&leaders&of&the&local&food&movement&in&the&Pioneer&Valley&puzzled&over&how&to&scale&it&up,&they&came&to&two&conclusions:&First,&they&needed&access&to&flexible&capital&and&related&business&services&that&could&nurture&missionifocused&food&entrepreneurs&in&the&Pioneer&Valley.&Second,&they&needed&to&collaborate&and&network&be@er&—&but&without&forming&a&new&organiza<on&that&would&compete&with&the&exis<ng&groups&for&scant&resources.&The&solu<on&was &to&form&the&PVGrows&network.&
The&official&mission&statement&of&PVGrows&proclaimed&it&be&“a&collabora<ve&network&dedicated&to&enhancing&the&ecological&and&economic&sustainability&and&vitality&of&the&Pioneer)Valley&food&system.”&It’s&worth&underscoring&that&PVGrows&was&foremost&about&bringing&together&people&already&working&on&the&local&food&system&—not&about&raising&capital.&It&was&and&s<ll&is&a&membership&organiza<on&without&dues.&It&convenes&its&members&twice&a&year&as&well&as&in&
9
6&These&opportuni<es&include&Hampshire&College,&the&Stockbridge&School&at&UMass,&CRAFT,&the&New&England&Small&Farm&Ins<tute,&The&Farm&School,&and&numerous&formal&or&informal&appren<ce&or&employee&training&opportuni<es&on&local&farms.
smaller&working&groups,&where&par<cipants&can&connect&with&others&doing&similar&work.&The&network&began&with&over&thirty&members,&and&over&four&years&has&grown&to&600.&&
The&Finance&Working&Group&(FWG)&of&PVGrows&was&composed&of&members&expert&in&what&was&happening&in&New&England&in&the&area&of&“food&finance.”&Besides&their&own&experience&as&investors,&they&were&inspired&by&Slow&Money,&an&organiza<on&dedicated&to&mobilizing&1%&of&investment&into&local&farms&and&food&businesses.&Slow&Money&had&fastigrowing&chapters&in&Boston&and&Portland,&Maine.&Maine&was&also&home&to&the&na<onally&respected&Coastal&Enterprises,&a&Community&Development&Financial&Ins<tu<on&that&invests&in&local&food&systems.&The&New&Hampshire&Community&Loan&Fund&was&developing&a&number&of&innova<ve&financing&instruments,&including&royaltyibased&finance,&around&a&variety&of&local&businesses.&The&Vermont&Sustainable&Jobs&Fund&was&crea<ng&a&Flex&Capital&Fund&to&help&underwrite&a&statewide&food&economy.&
Despite&these&many&ini<a<ves,&the&Finance&Working&Group&concluded&that&huge&local&financing&gaps&remained,&par<cularly&for&viable&food&enterprises&that&were¬&fully&“bankable.”&So&it&decided&to&launch&a&loan&fund&overseen&by&nine&members.7&FWG&members&called&the&fund&a&pilot,&because&the&primary&purpose&was&to&learn&about&local&inves<ng&by&doing&it.&Though&some&members&had&already&been&making&loans&to&farm&and&food&enterprises,&none&had&yet&done&so&collabora<vely.&Nor&had&they&deliberately&sought&to&work&with&other&community&groups,&philanthropic&organiza<ons,&and&state&and&federal&agricultural&programs.&The&group&raised&$750,000&for&its&loan&pool,&from&both&missionioriented&and&ins<tu<onal&investors,&and&then&collec<vely&made&decisions&where&to&invest&based&on&a&mission&matrix.
Dayitoiday&administra<on&of&the&pilot&fund&was&placed&in&the&hands&of&an&exis<ng&local&fund&in&Holyoke&called&Common&Capital.&If&the&applicant&met&the&mission&objec<ves&and&seemed&viable,&it&was&passed&on&to&Common&Capital&to&undertake&the&due&diligence.&If&Common&Capital&came&to&a&favorable&ruling&on&the&loan&applica<on,&the&applicant&was&funded,&with&Common&Capital&administering&the&loan.&
The&PVGrows&pilot&loan&fund&would&end&up&making&only&two&direct&investments&totaling&$300,000.&But&it&also&indirectly&catalyzed&other&deals&for&businesses&that&didn’t&quite&fit&its&own&lending&criteria.&For&example,&Real&Pickles,&doing&much&of&its&own&legwork&but&also&relying&on&the&assistance&of&CuSng&Edge&Capital&and&PVGrows,&raised&$500,000&in&a&direct&public&offering&to&assist&its&transi<on&to&a&workeriowned&coopera<ve.&Common&Capital&was&also&mo<vated&to&preifinance&a&farmitoicity&CSA&model,&which&then&allowed&its&par<cipants&to&use&U.S.&Supplemental&Nutri<on&Assistance&Program&(SNAP)&debit&cards&to&pay&for&the&fresh,&organic&produce.&
Listening&to&its&members’&own&experience&and&the&wisdom&of&peers&such&as&Coastal&Enterprises&and&the&Vermont&Sustainable&Jobs&Fund,&the&group&recognized&the&need&to&support&its&
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7&The&Finance&Commi@ee&members&were:&Community&Involved&in&Sustaining&Agriculture&(CISA),&New&England&Small&Farm&Ins<tute&(NESFI),&Mass&Department&of&Agricultural&Resources&(MDAR),&Common&Capital,&Franklin&County&CDC&(FCCDC),&Coopera<ve&Fund&of&New&England&(CFNE),&Equity&Trust,&Inc.,&Lydia&B.&Stokes&Founda<on,&and&Solidago/Frances&Fund&Founda<on.
borrowers&with&business&assistance.&Recently,&PVGrows&partnered&with&the&Fair&Food&Fund&to&create&a&$75,000&Technical&Assistance&Fund,&offering&up&to&$15,000&in&direct&business&services&to&help&established&food&businesses&expand&their&opera<ons.&Tapping&these&and&other&technical&assistance&resources&from&the&Working&Group&partners,&nearly&a&dozen&applicants&to&the&loan&fund&—&including&poultry&processors,&dairy&processors,&greenhouse&growers,&beekeepers,&and&local&distributors&—&have&used&these&services&to&move&their&business&plans&forward.&
In&two&respects,&PVGrows&has&unques<onably&succeeded.&A&number&of&important&local&food&businesses,&unable&to&secure&debt&capital&from&banks&or&other&financial&ins<tu<ons,&have&been&able&to&stabilize&and&grow.&And&the&Working&Group&has&learned&how&to&finance&many&more&local &food&businesses&in&the&future.&
Learning,&of&course,&has&meant&surmoun<ng&challenges&too.&One&of&the&biggest&has&been&finding&qualified&entrepreneurs&to&finance.&As&Jeff&Rosen&summarizes,&“We&don’t&know&why&we&are¬&seeing&this&entrepreneur&class&coming&to&us.&It’s&possible&that&people&do¬&know&about&the&fund.&It’s&possible&that&in&its&pilot&phase,&the&fund&does¬&offer&flexible&enough&capital.&It&is&also&possible&that&there&are&too&few&firms&in&the&space&defined&by&viable&but¬&fully&bankable.&Possibly,&as&some&have&suggested,&in&the¤t&economy,&people&generally&and&poten<al&entrepreneurs&specifically&do¬&want&to&take&on&any&debt&or&risk.&Or,&as&some&would&suggest,&we&need&to&do&more&to&train,&mo<vate,&and&a@ract&the&right&kind&of&management&to&the&local&food&economy.&As&one&would&suspect,&the&truth&is&probably&an&amalgama<on&of&all&theories.&But&some&are&easier&to&fix&than&others.&It&is&much&easier&to&change&the&terms&of&the&loan&fund,&or&to&improve&our&outreach.&It&is&much&more&daun<ng&to&think&about&the&body&of&work&and&resources&it&will&take&to&build&the&entrepreneur&pipeline.”
The)charge)to)Cu`ng)Edge)Capital)was)to)explore)these)ques4ons)more)deeply)and)help)the)Finance)CommiVee)come)up)with)an)appropriate)next)stage)for)its)work.))The&presump<on&was&that&another&fund&was&needed,&but&that&it&would&need&a&model&with&the&following&four&characteris<cs:&
• Involve&all&kinds&of&local&investors,&including&unaccredited&investors,&flexibly&in&the&Pioneer&Valley&food&economy.
• Provide&more&pa<ent&capital&to&a&variety&of&businesses,&in&different&stages,&in&partnership&with&other&financial&ins<tu<ons&where&necessary.
• Aggregate&the&risks&in&a&fund&managed&properly&by&investment&professionals.
• Support&this&investment&ac<vity&with&other&forms&of&community&engagement&that&could&grow&a&cri<cal&mass&of&local&investors&commi@ed&to&growing&the&local&food&economy.
The&following&chapters&summarize&our&explora<on.&The&ques<ons&we&review,&and&to&which&we&provide&at&least&provisional&answers,&are&the&same&ques<ons&that&any&investment&fund&must&answer&before&it&is&launched.&
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II.""Clarifying"Your"Objectives
So&you&want&to&start&a&local&investment&fund?&The&very&first&step&in&any&journey&is&to&know&where&your&des<na<on&is:&What&geographic®ion&do&you&consider&“local”?&What’s&the&mission&of&the&fund?&What&kinds&of&businesses&are&you&trying&to&support?&At&what&stage&—&startup&or&mature?&How&does&your&business&plan&pencil&out&cash&flow&if&everything&goes&well?&What&kind&of&risk&are&you&prepared&to&take&on?&What&size&will&your&financial&packages&be?&How&will&you&present&your&mission&to&the&outside&world?
GEOGRAPHIC)FOCUSHow+do+you+define+your+community?
Your&first&task&is&to&choose&how&local&you&want&your&local&fund&to&be.&The&tricky&part&is&to&frame&a&defini<on&that&coincides&with&a&cri<cal&mass&of&investors.&Inves<ng&in&just&your&town&may¬&be&at&a&large&enough&scale&to&facilitate&the&fund’s&financial&success.
PVGrows&was&formed&to&serve&the&Pioneer&Valley,&but&the&difficulty&that&the&ini<al&loan&fund&experienced&in&loca<ng&enough&deals&raised&the&ques<on&of&whether&a&successor&fund&might&need&to&serve&a&larger&area.&Perhaps&the&area&should&be&Western&Massachuse@s?&Or&the&en<re&state?&Or&New&England?
Expanding&the&geographic&range,&however,&carries&risks&and&challenges&too.&You&begin&to&enter&into&geographic&focal&points&of&other&funds.&You&are&less&capable&of&in<mately&knowing&the&businesses&you&are&serving.&
PVGrows&also&considered&other&issues&linked&to&its&choice&of&geographic&scope.&For&example,&might&it&make&sense&to&invest&exclusively&or&primarily&in&lowiincome&neighborhoods&(or&zip&codes)&within&the&Pioneer&Valley?&This&could&make&it&easier&for&the&fund&to&a@ract&investment&from&ins<tu<ons&with&a&federal&designa<on&as&a&Community&Development&Financial&Ins<tu<on&(CDFI).&Or&might&the&fund&want&to&invest&some&of&its&funds&in&local&investment&funds&outside&the&Pioneer&Valley?&One&plausible&ra<onale&would&be&to&diversify&the&poruolio&geographically&—&to&insulate&itself&from&the&ups&and&downs&of&inevitable&local&business&cycles&—&but&in&a&way&that&s<ll&supports&locally&owned&food&businesses.&
ECONOMIC)MISSIONWhich+social+or+economic+problems+are+you+trying+to+solve?+Exactly+what+kinds+of+local+businesses+do+you+wish+to+support?++
Answering&these&ques<ons&inevitably&requires&an&analysis&of&your&local&economy.&PVGrows&already&knew&a&great&deal&about&its&local&food&system,&but&it&s<ll&was¬&sure&how&to&take&that&system&to&scale.&
12
As$Jeff$Rosen$reflects:
Given+all+the+recent+interest,+people+from+all+aspects+of+the+food+system+wonder,+“What+will+it+take+to+scale+up+a+vibrant,+resilient,+local+food+economy?”+Is+it+reasonable+to+assume+that+we+could+increase+our+access+to+healthy+foods,+preserve+farmlands,+generate+decent+jobs,+retain+local+spending+dollars+and+decrease+our+dependence+on+the+fossil@fuel+driven+global+food+system+by+strategic+investments+in+a+revitalized+local+food+economy?+If+the+answer+is+yes,+as+many+of+us+believe,+what+kind+of+investments+do+we+need,+and+where+are+we+going+to+get+those+investments+from?+8+
We&decided&to&study&what&it&might&take&to&expand&the&Pioneer&Valley’s&local&food&system&by&25%.&What&we&meant&by&a&“25%&shiU”&was&that&the&localiza<on&gap&in&every&foodibusiness§or&—&that&is,&the&gap&between&the&level&of&business&that&exists&today&and&the&level&needed&to&achieve&total&selfireliance&in&that§or&—&would&be&closed&a&quarter&of&the&way.&The&25%&goal&was&chosen&to&be&big&enough&to&inspire®ional&mobiliza<on&of&the&business,&policymaking,&and&grassroots&communi<es,&but¬&so&big&to&be&dismissed&as&utopian.&
Our&study&reviewed&the&ra<onales&for&food&localiza<on,&the&emerging&compe<<veness&of&local&food&businesses,&and&the&exis<ng&contours&of&the&Pioneer&Valley&food&system.&To&analyze&the&impact&of&a&25%&shiU,&we&undertook&a&“leakage&analysis,”&which&meant&examining&each§or&of&food&buying,&whether&fresh&food,&processed&food,&or&restaurant&food,&and&determining&the°ree&to&which&residents&were&buying&local.&
A&variety&of&tools&are&available&to&measure&leakage&in&a&given&community.&We&used&IMPLAN,&the&Minnesota&InputiOutput&Model&deployed&extensively&by&economic&development&agencies&na<onwide.&IMPLAN&shows,§or&by§or,&the&exis<ng&supply&and&demand,&as&well&as&the&changes&that&occur&from&“shocks”&to&this&system&—&like&the&shiU&of&consumer&spending&25%&toward&local&food.&
We&found&that&a&25%&shiU&toward&food&localiza<on&would&create&4,030&new&jobs&(including&direct,&indirect,&and&induced&effects),&enough&in&principle&to&put&one&out&of&every&six&unemployed&workers&in&the®ion&back&to&work.&From&a&media&standpoint,&this&was&perhaps&the&most&compelling&finding.&It&underscored&that&local&food&could&deliver&the&one&economic&item&everyone&seems&to&care&about&—&jobs.&It&also&set&a&highly&mo<va<ng&target&for&a&local&investment&fund.&Addi<onally,&we&found&that&a&25%&shiU&would&generate&$128&million&in&new&annual&wages&and&$259&million&in&addi<onal&valueiadded.&
Was&food&too&narrow&a&focus?&It’s&worth&returning&to&the&problem&that&PVGrows&had&with&finding&enough&deal&flow&for&its&first&fund.&The&Finance&Working&Group&overseeing&the&fund&considered&the&possibility&that&it&might&want&to&expand&its&focus&to&other&kinds&of&business,&like&renewable&energy&or&light&manufacturing.&&Some&of&its&members,&like&Common&Capital&and&the&Coop&Fund&of&New&England,&were&already&focusing&on&mul<ple§ors.&The&challenge,&however,&is&that&building&exper<se&and&quality&control&becomes&more&difficult&as&a&fund&moves&into&more&business§ors.&The&decision&was&made&to&s<ck&with&farm&and&food&businesses.&
13
8&Jeff&Rosen,&Can+Investors+Help+to+Bring+the+Local+food+Movement+to+Scale?+Lessons+from+the+Pioneer+Valley,&The&Natural&Farmer&(NOFA,&Fall&2012).
What&were&the&unique&capital&challenges&of&these&businesses&in&the&Pioneer&Valley?&Our&experience&with&the&PVGrows&loan&fund&suggested&that&the®ion&had&more&than&enough&lending&resources.&However,&there&was&no&coordinated&effort&to&provide&farming&and&food&entrepreneurs&with&a&layer&of&capital&that&was&more&pa<ent&and&riskitolerant.&This&was&the&kind&of&capital&needed&to&seriously&scale&up&the&local&food&economy.&We&also&knew&that&a&growing&number&of&local&residents&wanted&to&put&some&por<on&of&their&investment&resources&into&these&kinds&of&business.&We&needed&to&consider,&as&a&core&ques<on&for&our&mission,&what&was&the&right&balance&of&risk&and&reward&that&could&bring&these&businesses&and&investors&together.&
RISK)AND)REWARDHow+much+risk+is+the+fund+prepared+to+tolerate?+How+much+desire+does+the+fund+have@and+really+its+investors@for+poten3al+rewards?+How+willing+are+these+investors+to+lose+money?
Most&investment&funds&are&foriprofit&companies&that&aim&to&maximize&returns,&and&even&funds&run&by&nonprofits&like&PVGrows&have&no&desire&to&lose&money.&In&principle,&then,&an&investment&fund&wants&to&take&on&enough&risk&to&serve&those&who&cannot&access&more&mainstream&sources&of&capital,&but¬&so&much&risk&that&business&failures&wipe&out&the&fund.&Balancing&investor&risk&with&the&community&virtues&of&filling&a&gap&in&the&capital&system&is&the&most&fundamental&design&challenge&facing&a&local&investment&fund
The&en<re&discourse&about&the&“riskiness”&of&companies&sounds&more&scien<fic&than&it&really&is.&No&one&knows&for&sure&how&likely&it&is&that&any&company,&or&any&poruolio&of&companies,&or&any&fund&managing&that&poruolio,&will&fail.&Even&the&best&research&can’t&predict&the&future.&The&success&of&any&company&may&depend&on&unknowable&factors&about&the&market,&the&products,&the&management,&the&consumer&base,&etc.&While&it&is&generally&true&that&investors&demand&a&higher&rate&of&return&for&more&risk,&that&doesn’t&mean&that&the&tools&for&measuring&risk&are&very&good.&Three&factors&underscore&why&projec<ons&about&rates&of&return&and&related&risk&should&be &treated&skep<cally.
First,&consider&what&cons<tutes&a&market&rate&of&return&for&the&tens&of&thousands&of&companies&that&are&publicly&traded.&There’s&probably&no&area&of&finance&in&which&we&have&more&data,&so&we&should&have&no&trouble&discerning&a&“market&rate&of&return,”&right?&Investment&advisers&oUen&imply&that&if&you&leave&your&money&in&a&diversified&stockimarket&poruolio&for&many&years,&for&the&“longiterm,”&you&can&expect&an&annual&return&of&8%,&12%,&even&20%.&In&fact,&over&140&years&of&the&Standard&&&Poors&(S&P)&Index,&the&typical&annual&return&of&the&en<re&market&(adding÷nds&but&removing&the&effects&of&infla<on)&is&2.6%.9&What’s&obvious,&then,&is&that&finance&is&an&area&where&hype&trumps&data.
Second,&while&a&scien<fic&approach&to&finance&would&lead&us&to&believe&that&smart&fund&managers,&aUer&studying&specific&publicly&traded&companies,&can&assemble&poruolios&that&beat&the&market,&this&rarely&turns&out&to&be&the&case.&We&know,&for&example,&that&the&vast&majority&of&
14
9&Michael&H.&Shuman,&Local+Dollars,+Local+Sense:+How+To+ShiS+Your+Money+from+Wall+Street+to+Main+Street+and+Achieve+Real+Prosperity&(White&River&Junc<on,&VT:&Chelsea&Green,&2012).&The&raw&data&come&from&economist&Robert&Shiller&of&Yale.
mutual&funds,&each&managed&with&supposedly&scien<fic&precision,&underperform&the&market.&It&was&this&revela<on&that&led&to&the&speedy&spread&and&use&of&lowifee&index&funds&two&decades&ago.&
Third,&as&one&leaves&the&world&of&publicly&traded&stocks&and&publicly®ulated&mutual&funds,&where&the&repor<ng&follows&legally&dictated&rules,&the&hype&and&unreliability&of&the&data&increase.&While&there&is&no&ques<on&that&some&unregulated&hedge&funds&spectacularly&outperform&the&market,&we&have&learned&that&widely&publicized&good&years&are&oUen&followed&by&underpublicized&poor&ones.&Scholars&who&have&studied&hedge&and&venture&funds&have&found&that&their&overall&performance&is&no&be@er&and&perhaps&even&worse&than&the&market.
The&bo@om&line&is&to&appreciate&that&the&best&that&a&local&fund&can&do&is&dig&deep&into&one&par<cular§or,&learn&as&much&as&it&can&about&applicant&companies&and&entrepreneurs,&specialize&in&one&or&two&styles&of&local&inves<ng,&and&focus&on&firstirate&execu<on.&That’s&why&PVGrows&decided&to&focus&on&the&food§or&and&learn&the&craU&of&inves<ng&before&it&considered&scaling&up&with&a&more&ambi<ous&fund.&Focusing&on&a&small&geographic&community&like&the&Pioneer&Valley&made&it&easier&to&mi<gate&risk&by&understanding&local&market&condi<ons&and&geSng&to&know&the&local&entrepreneurs.
PVGrows&was&also&very&clear&that,&unlike&many&foriprofit&funds,&it&was&seeking&to&achieve&“blended&returns.”&This&term&originates&from&Jed&Emerson,&a&pioneer&in&the&field&of&impact&inves<ng,&who&argues&that&some&social&investments,&even&if&their&financial&return&is&low&or&nega<ve,&might&nevertheless&be&worth&making&because&of&their&posi<ve&social&returns&to&the&local&economy,&to&the&labor&force,&and&to&the&environment.&While&there&are&no&uniform&standards&by&which&to&measure&these&“tripleibo@omiline”&(TBL)&returns,&the&concept&is&a&powerful&one&and&accurately&captures&the&mo<ves&of&many&local&investors.&This&is&another&reason&to&open&the&fund&to&unaccredited&investors&who&may&have&lower&expecta<on&for&financial&returns&than&sophis<cated&professional&investors.&(We’ll&return&to&the&topic&of&investor&expecta<ons&later.)
Jeff)Rosen)suggests)how)this)calculus)influenced)the)par4cipants)of)PVGrows:
Consider+some+dis3nc3ons+between+a+tradi3onal,+sector@specific+equity+fund+(typically,+equity+funds+have+a+sector+focus,+such+as+a+fund+that+invests+in+Biotech+or+Clean+Technology+firms,+allowing+them+to+hire+specific+exper3se+to+guide+investment+decisions+and+shepherd+the+investment+porYolio)+and+a+proposed+local+food+fund.+Private+equity+funds+typically+invest+in+a+management@led+value+proposi3on.+If+they+are+early+stage+funds+(inves3ng+in+startups,+companies+that+have+yet+to+market+a+product+or+are+very+early+in+their+market+penetra3on),+they+expect+a+number+of+failures,+and+the+way+the+fund+(a\empts+to+provide)+investors+with+a+high+return+is+by+be]ng+on+some+huge+wins+(home+runs+in+investor+parlance).+Everyone+wants+to+invest+in+the+next+Apple,+Google,+or+Starbucks,+and+these+high@yield+companies+provide+returns+because+they+explode+onto+the+na3onal+or+global+stage+and+reach+huge+numbers+of+customers;+they+show+astronomical+growth+rates.+Private+equity+funds+will+control+risk+by+deep+engagement:+oSen+they+seek+to+have+a+seat+on+the+board+of+directors+when+the+investment+stake+is+high+enough.+This+leads+to+a+poten3ally+undesirable+outcome,+where+the+venture+fund+
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pressures+a+business+to+pursue+profits+in+a+way+that+maximizes+the+short+term+interests+of+the+investors,+but+not+necessarily+the+long+term+interests+of+the+original+entrepreneurs.+We+have+all+heard+that+story.+
Many+aspects+of+this+model+do+not+fit+in+the+local+food+fund.+Local+food+investors+do+not+want+the+entrepreneur+to+scale+up+in+a+big+way,+and/or+exit+to+a+mul3na3onal.+They+are+invested+in+the+fund+to+create+las3ng+value+in+the+community.+Just+like+the+case+of+the+individual+TBL+business,+you+could+have+a+fund+with+a+number+of+successful+ventures,+genera3ng+las3ng+food+system+impact,+yet+the+fund+will+not+have+the+‘home+runs’+in+the+porYolio+to+carry+the+expected+losses.+This+issue+is+exacerbated+by+the+fact+that+the+fund+will+have+within+its+core+mission+the+preference+to+provide+cri3cal+or+innova3ve+capital.+By+defini3on,+the+investments+will+be+risky.+The+risk+is+exacerbated+by+the+sector+specifics,+the+mission+requirements,+and+the+geographic+focus.+Remember,+any+3me+you+limit+the+pool+of+poten3al+investments,+you+are+increasing+the+risk.
Rosen&argues&that&ul<mately&the&investors&in&PVGrows&should&be&prepared&for&a&rela<vely&low&financial&return,&coupled&with&a&high&TBL&return.&But,&again,&what&is&a&“low&financial&return?”&If&a&typical&market&return&on&a&publicly&traded&security&is&2.6%&per&year&and&we&know&that&funds&rarely&outperform&the&market,&then&a&fund&like&PVGrows&probably&needs&to&set&investor&expecta<ons&at&perhaps&1i2%&per&year,+plus+the+TBL+returns.
The&ques<on&remains:&How&much&risk&is&PVGrows&willing&to&tolerate?&Is&the&PVGrows&fund&more&or&less&risky&than&an&investment&in&the&public&markets?&The&premise&of&the&fund&is&that&it&will&fill&a&gap,&rather&than&compete&with&exis<ng&capital&resources,&and&it&will&likely&take&on&companies&that&banks&have&already&turned&down&or&would¬&even&consider.&So&these&loans&and&companies,&by&defini<on,&are&riskier&than&bank&loans.&On&the&other&hand,&the&public&markets&are &quite&vola<le,&and&increasingly&so,&thanks&to&highifrequency,&computeridriven&trading.&It&could&be&argued&that&inves<ng&in&the&local&food&economy,&with&deep&local&knowledge,&is&less&risky&than&inves<ng&securi<es&in&the&stock&market,&with&almost&no&personal&knowledge.&In&any&event,&investors&need&to&understand&that&a&broad&range&of&returns&is&plausible.
One&of&the&reasons&the&PVGrows&network&decided&to&focus&on&all&aspects&of&the&food&system&was&to&maximize&community&engagement&and&thereby&mi<gate&some&of&the&risk.&While&a&business&may¬&have&enough&collateral&to&be&bankable,&it&may&nevertheless&have&le&community&collateral&embedded&in&the&rela<onships&of&people&who&know&the&businesses.&PVGrows&members&also&can&boost&the&businesses&as&consumers&and&wordiofimouth&marketers.&
In)any)event,)it’s)essen4al)that)the)fund)take)affirma4ve)steps)—)more)than)a)bank)would)—)to)minimize)the)risks)of)failure.)Here&are&some&of&the&recommenda<ons&PVGrows&found&helpful:
• Know&your§or&well&to&maximize&your&ability&to&judge&the&future&performance&of&your&poruolio&businesses.
• Screen&out&excep<onally&high&risks,&like&startups,&or&allocate&only&a&small&por<on&of&assets&to&highirisk&investments.&
• Invest&only&in&entrepreneurs&and&companies&you&know&reasonably&well.
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• Place&clear,&demanding&performance&standards&on&all&clients,&and&develop&clear&plans&for&what&happens&when&clients&fall&short.
• Provide&technical&assistance&to&client&businesses&to&address&poten<al&weak&points.&
• Consider&crea<ng&a&poruolio&of&local&businesses&that&are&buying&and&selling&to&one&another,&so&that&the&success&of&each&generates&mul<pliers&that&propel&the&others.&
• Encourage&your&investors&to&buy&from&the&supported&businesses,&as&a&way&of&increasing&their&chances&of&success.&
PRIORITY)BUSINESSESExactly+which+local+businesses+are+your+highest+priori3es+for+finance+by+your+fund?+How+should+you+decide?
Prior&to&CuSng&Edge&Capital&being&hired,&various&members&of&PVGrows&had&analyzed&the&local&food&system&to&evaluate&what&businesses&were&missing.&In&2011,&for&example,&the&Community&Involved&in&Sustaining&Agriculture&(CISA)&issued&a&report,&Scaling+Up+Local+Food:+Inves3ng+in+Farm+and+Food+Systems+Infrastructure+in+the+Pioneer+Valley.10+The&report&iden<fied&some&of&the&key&new&businesses&required&for&a&more&diversified,&local&food&economy,&including:&meat&and&poultry&slaughter&and&processing&facili<es;&dairy&processing&facili<es;&temperature&and&humidityicontrolled&storage&facili<es&(root&cellars,&refrigera<on,&freezers);&improved&or&expanded&facili<es&for&aggrega<on,&basic&processing,&freezing,&and&coipacking;&distribu<on&and&delivery&serving&a&variety&of&types&of&markets&and&farms;&logis<cs&that&coordinate&ordering,&delivery,&and&invoicing;&and&grain&processing&facili<es&and&equipment.&This&was&a&great&list,&but&it&was&hard&to&know&how&to&rank&these&priori<es.&
Using&IMPLAN,&we&were&able&to&analyze&which&businesses,&if&expanded&to&meet&local&demand&by&25%,&would&create&the&most&jobs&and&the&best&wages.&Here’s&what&we&found:
• Meat$and$Poultry&—&If&land&and&training&are&available,&there&is&great&poten<al&for&new&jobs&from:&raising&animals&like&pigs,&sheep,&and&goats&(327&jobs);&raising&beef&ca@le&(162&jobs);&and&slaughtering&these&animals&locally&(139&jobs).&Addi<onal&jobs&are&possible&from&raising&poultry&and&eggs&(23&jobs),&and&slaughtering&them&locally&(16&jobs).&
• Farming$—$There&is&significant&poten<al&for&new&jobs&from:&growing&fruit&(160&jobs);&nursery&trees&and&plants&(157&jobs);&tree&nuts&(75&jobs);&vegetables&(47&jobs);&grains&(45&jobs);&and&other&crops&(18&jobs).&Another&26&jobs&could&come&from&agricultural&support&ac<vi<es.
• ValueYAdding$Manufacturing$—$The&directly&grown&items&above&could&be&fed&into&various&wellipaying&manufacturing&enterprises,&including:&local&bakeries&(117&jobs);&frozen&food&(40&jobs);&soU&drinks&and&ice&(36&jobs);&confec<onary&products&(32&jobs);&canned&fruits&and&vegetables&(31&jobs);&wineries&(31&jobs);&cookies,&crackers,&and&pasta&
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10&See&h@p://buylocalfood.org/upload/resource/ScalingUp10i17i11lrwithLinks.pdf.
(27&jobs);&snack&foods&(23&jobs);&seasonings&and&dressings&(17&jobs);&and&breweries&(13&jobs).
• Dairy$—$There&are&large&job&opportuni<es&for&raising&more&dairy&cows&(291&jobs),&along&with&valueiadding&local&manufacturing&of&milk&and&bu@er&(34&jobs)&and&ice&cream&and&frozen&desserts&(20&jobs).
• Food$Service$—$Even&though&the&Pioneer&Valley&is&rich&in&food&service,&the&local&demand&is&so&large&that&another&76&jobs&in&this§or&are&possible.+
These&categories&corresponded&with&the&ini<al&analysis&of&CISA&—&but&also&enabled&us&to&iden<fy&some&very&specific&business&opportuni<es&within&each&category.&These&business&opportuni<es&pointed&to&what&the&priori<es&for&the&Community&Capital&Fund&should&be.&
PRIORITY)BUSINESS)STAGEOnce+you’ve+picked+the+kinds+of+businesses+you+wish+to+priori3ze,+how+do+you+pick+the+right+stage+of+business?+For+example,+should+you+priori3ze+startups+or+exis3ng+businesses?
The&business&stage&targeted&may&determine&the&type&of&finance&you&wish&to&provide.&For&example,&small&loans&are&probably&more&appropriate&for&startup&entrepreneurs&than&for&expansions&of&welliestablished&businesses.&The&experience&of&the&pilot&fund&of&PVGrows&was&that&the®ion&already&had&a&significant&number&of&loan&funds&that&could&support&startup&and&expansion&companies&with&loan&dollars.&We&interviewed&the&heads&of&loan&funds&and&other&sources&of&finance&in&the®ion,&most&of&whom&were&members&of&the&PVGrows&Finance&Working&Group,&to&understand&how&much&capital&was&available&—&and&where&the&gaps&might&be.&Essen<ally,&this&was&a&market&analysis,&assessing&the&strengths&and&weaknesses&of&our&investment&“compe<tors.”&
We&found&that&while&the®ion&had&adequate,&tradi<onal&debt&to&offer&farm&and&food&businesses,&it&was&less&able&to&provide&longiterm,&lowicost&pa<ent&capital.&We&also&observed&that&most&local&loan&funds&get&their&money&from&banks&or&government&sources&that&they&must&pay&back.&Furthermore,&they&have&to&cover&their&own&opera<ng&costs&from&the&difference&between&the&cost&of&the&money&they&borrow&and&the&rate&at&which&they&lend&it,&so&it&is&hard&for&them&to&lend&money&out&at&low&interest&rates.
We&found&a&remarkable&number&of&funds&in&our®ion&already&assis<ng&local&food&businesses,&though&none&were&quite&doing&what&we&wanted&to&do.&Two&of&the&small&number&of&funds&na<onwide&open&to&unaccredited&investors,&the&Equity&Trust&and&the&Coopera<ve&Fund&of&New&England,&are&based&in&the&Pioneer&Valley.&But&both&fund&a&much&wider&range&of&businesses&than&food&companies,&and&their&geographic&ranges&are&na<onal&and®ional,&respec<vely.&The&Franklin&County&Community&Development&Corpora<on&has&a&revolving&loan&fund,&locally&focused,&but&supports&a&broader&range&of&businesses&than&just&food&and&farming.&Common&Capital,&based&locally,&also&targets&a&broad&range&of&small&businesses&throughout&New&England&(and&a&few&na<onally&as&well),&and&its&recently&launched&Community&First&Fund&is&open&to&unaccredited&investors.&The&Carrot&Project,&based&in&Massachuse@s,&supports&local&farm&
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businesses&throughout&New&England,&including&in&the&Pioneer&Valley.&While&we&were&undertaking&our&research,&the&Fair&Food&Network,&based&in&Ann&Arbor,&had&just&received&a&major&grant&to&launch&a&new&investment&fund&for&small&food&businesses&based&in&the&Northeast.&In&addi<on,&of&course,&there&was&the&early&lending&experience&of&PVGrows&pilot&loan&fund.
The&en<<es&above&comprise&an&unusually&strong&network&of&funding&mechanisms&for&local&food&business.&Most®ions&in&the&United&States&would&be&lucky&to&have&even&one&of&these&funds.&However,&almost&all&these&funds&focused&on&loans,&typically&(though¬&exclusively)&issued&at&a&very&small&scale.&One&local&fund&manager&confided&having&difficulty&making&loans&during&the&financial&crisis,&because&so&many&local&businesses&and&entrepreneurs&were&already&overextended&with&debt.&This&is&the&reality&everywhere&right&now.&The&en<re&country&is&coping&with&secondimortgages&that&are&underwater,&credit&cards&that&are&maxed&out,&and&rampediup&repayment&demands&by&financial&ins<tu<ons&that&have&caused&a&record&number&of&bankruptcies.&
The&bo@om&line&was&clear:&Simply&increasing&the&level&of&debt&capital&would&do&li@le&to&finance&the&25%&shiU.&A&growing&number&of&entrepreneurs&in&the&Pioneer&Valley&were&looking&for&equity&or&equityilike&kinds&of&finance&that&would¬&put&them&in&further&debt,&or&at&least¬&put&them&in&a&cash&crunch&during&their&early&growth&phase.&Moreover,&many&of&the&businesses&needed&for&the&25%&shiU&—&meat&processing;&food&manufacturing,&packaging,&and&distribu<on;&and&ins<tu<onal&food&service&—&simply&cannot&be&helped&by&small&loans.&The&scale&of&these&enterprises,&and&the&capital&required&for&them,&is&too&large.&
BUSINESS)NEEDSWhat+exactly+are+the+capital+needs+of+your+targeted+businesses?
Even&if&you&know&that&your&community&needs&more&business&in&certain§ors,&you&ul<mately&have&to&evaluate&the&capital&needs&of&par<cular&businesses.&If&you&start&businesses&from&scratch,&there’s&a&greater&chance&that&you&will&be&suppor<ng&businesspeople&or&business&plans&that&are¬&up&to&the&task.&If&you&are&encouraging&a&business&to&expand&—&rather&than&suppor<ng&entrepreneurs&with&wellithoughtithrough&expansion&plans&—&there’s&a&greater&chance&you&might&be&distrac<ng&it&from&its&preference&to&con<nue&business&as&usual.&
The&PVGrows&Finance&Working&Group&came&to&the&conclusion&that&since&it&was&focusing&on&a&small&geographic&area,&it&would&need&to&be&open&to&a&wider&range&of&business&plans&to&ensure&deal&flow.&So&startups,&preirevenue&companies,&and&serious&expansions&of&exis<ng&companies&were&all&welcome&to&apply&to&the&exis<ng&pilot&loan&fund.
THE)BASIC)MATHWhat’s+the+business+case+for+your+fund?+How+can+you+make+sure+that+you+won’t+lose+your+investors’+money?
Even&if&you&envision&philanthropic&or&government&money&suppor<ng&your&fund,&it’s&valuable&to&pencil&out&a&model&that&“cash&flows”&posi<vely.
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Start&with&your&expected&costs.&How&many&hours&of&someone’s&<me&do&you&need&to&a@ract&investors,&to&report&your&progress,&to&vet&poten<al&businesses,&and&to&troubleshoot&those&that&are¬&mee<ng&your&targets?&What’s&the&overhead&required&for&this&person&for&office,&computer,&and&telephone?&What&are&the&annual&costs&for&lawyers,&accountants,&and&tax&form&preparers?&How&about&the&costs&of&le@ers,&annual&reports,&and&other&forms&of®ular&communica<on&with&your&investors?&Experience&suggests&that&even&a&very&modest&fund,&run&by&a&parti<me&staff&person,&is&going&to&have&costs&of&at&least&$100,000&per&year.
If&you&use&1%&of&your&deal&flow&per&year&to&cover&costs,&you&will&need&$10&million&in&deals.&If&you&only&have&$1&million&in&deals,&then&you&need&to&use&10%&per&year&to&cover&costs&—&which&most&investors&would®ard&as&excessive.&
It’s&understandable&why&the&pilot&loan&fund&of&PVGrows,&which&was&merely&$750,000,&had&to&be&administered&by&an&outside&group&—&in&this&case,&Common&Capital&of&Holyoke.&The&scale&was&way&too&small&to&jus<fy&anything&approaching&a&fulli<me&staff&person.
Let’s&imagine&$10&million&as&a&baseline&for&a&single&staff&person.&If&the&typical&deal&is&$100,000,&the&fund&would&require&100&deals.&Even&a&redihot&investment&genius,&however,&could¬&perform&due&diligence&on&100&deals&per&year&—&essen<ally,&two&topitoibo@om&reviews&per&week.&Remember&that&for&every&deal&that&the&fund&agrees&to,&that&genius&will&probably&need&to&look&at&four&or&five&poten<al&deals.&Are&there&even&500&poten<al&deals&in&the&Pioneer&Valley&in&a&genera<on,&let&alone&in&one&year?&A&smarter&way&to&go&would&be&to&find&10i20&deals,&each&$500,000&to&$1&million.&Yet&a&brilliant&staff&person&would&s<ll&be&extremely&challenged&to&approve&one&deal&every&two&to&four&weeks.&
One&can&start&to&appreciate&why&a&fund&might&want&to&find&grant&money&to&underwrite&a&staff&person’s&<me&for&the&first&few&years&as&it&builds&out&its&poruolio&and&hones&its&exper<se.
To)make)the)math)work)reasonably)well,)a)fund)should)strive)for)all)the)following:
• Have&an&exis<ng&fund&provide&administra<ve&services&through&part&of&an&experienced&staff&person’s&<me.&&
• Iden<fy&a&sustainable&overhead&percentage.&(Many&funds&charge&2i3%&per&year&on&assets&under&management.)
• Focus&on&larger&deals&first,&smaller&deals&later.
• Keep&investor&expecta<ons&of&profit&very&modest.
Note&that&we&haven’t&yet&really&considered&any&returns&for&the&investor&at&all.&Suppose&we&have&deals&with&ten&companies,&each&for&$1&million.&If&one&company&goes&out&of&business,&the&other&nine&will&each&have&to&generate&more&than&an&11%&rate&of&return&for&the&fund&to&break&even.&If&two&companies&go&out&of&business,&the&breakieven&rate&of&return&for&the&remaining&eight&companies&will&need&to&be&25%!&
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So)here)are)the)addi4onal)ground)rules)that)a)successful)investment)fund)must)adopt:
• Stretch&out&your&poruolio&over&mul<ple&years&so&that&losses&can&be&spread&out.&If&your&fund&lasts&for&five&years,&for&example,&one&loss&could&be&covered&by&the&other&nine&companies&each&genera<ng&a&2i3%&return&per&year.
• The&smaller&your&fund&and&the&fewer&companies&you&have&in&your&poruolio,&the&more&important&it&is&that&you&minimize&risk,&probably&by&beSng&only&on&mature&companies.
• The&more&small&investments&you&make,&the&more&it&will&cost&to&administer&the&fund,&as&due&diligence&costs&are&rela<vely&similar&for&any&business&borrower&irrespec<ve&of&size.
• Develop&a&good&plan&for&suppor<ng&client&businesses&and,&if&possible,&ask&exis<ng&business&support&organiza<ons&—&perhaps&your&local&Small&Business&Development&Center&—&to&pick&up&the&cost&of&doing&this.&If&there&are&founda<ons&in&your&community&interested&in&your&fund,&this&also&may&be&the&sweet&spot&to&ask&for&grants.
NEEDED)SIZEWhat+size+must+the+fund+be+to+realize+its+mission?+Is+it+realis3c+to+raise+that+much+capital?
To&es<mate&how&much&addi<onal&capital&might&be&needed&for&a&25%&shiU&toward&local&food&in&the&Pioneer&Valley,&we&turned&to&the&most&recent&edi<on&of&Sta3s3cal+Abstract,&which&has&a&helpful&table&called&“Net&Stock&of&Private&Fixed&Assets.”11&Chart&2&below&shows&these&values&na<onally&for&food&businesses,&and&then&scales&them&by&popula<on&for&the&Pioneer&Valley.&Assuming&the&food&system&has&a&constant&rela<onship&between&jobs&and&capital,&we&showed&that&the&addi<onal&capital&required&for&the&25%&shiU&is&$279&million.&This&number&could&be&higher&if&business&expansions&turn&out&to&be&more&capital&intensive.&&
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11&Table&781,&for&the&year&2009.&Foodirelated&wholesale&is&assumed&to&be&10%&of&the&total.&
Chart&#&2.&Capital&Requirements&for&25%&Shift&(2010&Data)
Of&course,&$279&million&is&a&very&large&number.&But&it’s&helpful&to&put&this&in&perspec<ve&with&the&level&of&savings&in&the&Pioneer&Valley.&Chart&3,&drawn&from&the&finance&calculators&of&the&Business&Alliance&for&Local&Living&Economies&(BALLE),&shows&that&residents&have&approximately&$18&billion&of&savings&in&shortiterm&accounts&and&$62&billion&in&longiterm&accounts.&Realloca<ng&less&than&two&percent&of&the&former&or&less&than&half&of&one&percent&of&the&la@er&could&fully&finance&the&businesses&needed&for&the&25%&shiU.&
Chart&#&3.&&&Estimated Household & Nonprofit Capital (2010 Data)
Pioneer Valley ($millions)Pioneer Valley ($millions) SHORT-TERM SAVINGS Checking 6,749 Savings 14,085 Money Market 3,024 TOTAL 23,858 LONG-TERM SAVINGS Corporate Stock 1,719 Corporate Bonds 5,063 Mutual Funds 9,563 Pension Funds 27,522 Insurance Funds 2,860 TOTAL 46,727
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Private Assets for Food Businesses ($millions) Private Assets for Food Businesses ($millions) Private Assets for Food Businesses ($millions)United States Pioneer Valley
Agriculture $493,000 $1,120 Food Manufacturing $238,000 $541 Food Retail & Wholesale $154,000 $350 Food Services $269,000 $611 TOTAL $1,154,000 $2,622
PopulationPopulationPopulation Total Population 307,000,000 697.458 Population % 100% 0.0022%
Food-Related JobsFood-Related JobsFood-Related Jobs Existing Food Jobs Existing Food Jobs 37,825 Additional Jobs with 25% Shift Additional Jobs with 25% Shift 4,026 Percent Expansion Percent Expansion 10.64 Additional Capital Requirement Additional Capital Requirement $279,000,000
For&the®ion&to&amass&$279&million)for&local&food&businesses,&it&might&only&need&to&come&up&with&a&small&percentage&—&perhaps&20%&—&in&equity.&So&PVGrows&concluded&from&this&data&that&a&fund&of&$56&million&might&be&able&to&leverage&the&remainder&in&loans&from&exis<ng&financial&ins<tu<ons&in&the®ion.&That&was,&then,&the&broad&target&we&set.
Should&we&do¬hing&un<l&$56&million&is&in&hand?&If&you&set&the&bar&too&high&before&you&get&started,&it&is&less&likely&that&you’ll&reach&it.&Even&if&you&ul<mately&do&reach&it,&you&won’t&be&able&to&do&anything&with&the&money&while&you&are&fundiraising.&Investors&who&see&their&money&siSng&in&a&bank&account,&doing¬hing,¬&feeding&the&community&development&adver<sed,&get&irritated&—&and&may&wish&to&pull&their&funds&out.&So&we&decided&to&set&the&bar&lower.&We&would&get&started&with&the&new&fund&when&$500,000&was&in&hand&and&seek&a&preliminary&raise&of&$2.5&million.&
How&we&would&amass&that&money&and&more&aUerwards&—&how&we&could&transform&poten<al&local&investors&into&actual&investors&—&is&taken&up&later.
MISSION"STATEMENT
What’s+a+succinct+summary+of+what+you’re+trying+to+accomplish?
A)good)mission)statement)should)4e)together)all)the)points)in)this)sec4on.)Here&is&how&the&PVGrows&Finance&Working&Group&summarized&and&goals&in&a&recent&communica<on:
The&objec<ve&is&to&aggregate&flexible&investment&capital&from&accredited&and&nonaccredited&investors&to&generate&a&flexible&layer&of&capital&for&local&food&and&agriculture&enterprises&in&the&Pioneer&Valley,&placed&by&a&disciplined&financial&ins<tu<on&with&the&capacity&to&provide&ongoing&support&for&investees.&Businesses&supported&would&be&viable,&but¬&fully&bankable,&and&the&fund&would&likely&partner&with&other&like&funds&(including&Finance&Working&Group&Members),&or&more&tradi<onal&ins<tu<ons&in&many&deals.&
ShortYTerm$Goal:&To&connect&a&first&genera<on&set&of&investors,&who&are&eager&to&put&some&por<on&of&their&investment&poruolio&to&work&in&their&local&food&economy,&with&food&and&agriculture&enterprises&that&are&in&need&of&capital.
LongYTerm$Goal:+To&connect&individual&investors&to&a&mature&and&efficient&set&of&investment&vehicles&for&local&economy&inves<ng,&that&will&be&safe,&while&filling&a&missing&niche&in&the&capital&marketplace&to&promote&a&stronger,&larger,&and&more&equitable&local&food&economy.
The$Basic$Vision:$To&coordinate&these&first&genera<on&investment&dollars&in&some&type&of&pool,&so&that&there&is&more&efficient&intermedia<on&and&professional&management&of&investments&across&a&set&of&investments.
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III.!Making"The"Right"Types"of"Investment
You’ve&now&scoped&out&the&kinds&of&businesses&your&investment&fund&should&target.&What&exactly&is&the&best&way&to&assist&these&businesses?&How&can&you&help&minimize&the&chances&that&the&businesses&will&fail?&Below&are&a&series&of&ques<ons&to&answer&about&the&type&of&finance&you’re&providing&to&target&businesses,&the&size&of&the&finance,&the&terms,&and&the&accompanying&technical&assistance.
TYPE)OF)FINANCEWhat+is+the+kind+of+investment+you+intend+to+make+in+the+target+businesses?+Debt?+Equity?+Smething+in+between?+Why?
In&the&world&of&investment&theory,&there’s&a&con<nuum&of&risk&between&secured&loans&in&welliestablished&companies&(lower&risk)&and&equity&investments&in&startups&(higher&risk).&In&between,&of&course,&are&a&variety&of&other&types&of&finance,&including:
• unsecured&loans;
• subordinated&loans&(where&the&lender&takes&a&second&posi<on&in&geSng&repaid);&
• conver<ble&debt&(where&the&lender&has&an&op<on&to&convert&debt&into&an&equity&posi<on&under&certain&circumstances);
• royalty&finance&(where&the&investor&gets&paid&a&percentage&of&revenue&or&profits);&and
• warrants&and&op<ons&(where&the&investor&has&the&right&to&purchase&stock&at&a&specified&price).
Some&analysts&present&these&types&of&investments&as&located&on&different&parts&of&a&risk&con<nuum.&The&truth&is&that&the&details&of&each&type&will&govern&how&risky&each&is.&Unsecured&loans,&for&example,&can&be&very&risky&or&unrisky&depending&on&the&borrower.
The&choice&of&which&kind&of&finance&to&offer&will&depend&on&the&preferences&of&target&businesses &and&of&target&investors.&Ideally,&you&would&interview&representa<ves&from&both&groups&to&test&various&possibili<es.&
While&planning&the&Community&Capital&Fund,&we&were&drawn&to&the&concept&of&royalty&finance.&While&the&idea&has&been&adopted&by&a&number&of&ins<tu<ons,&we&were&especially&intrigued&that&the&Vermont&Sustainable&Jobs&Fund&had&embraced&it&for&its&new&Flexible&Capital&Fund&to&support&valueiadded&agriculture,&sustainable&forest&products,&renewable&energy,&green&technology,&and&waste&management.&Properly&designed,&royalty&finance&can&minimize&payment&burdens&on&businesses&during&tough&<mes&but&pay&a@rac<ve&returns&during&good&<mes.&
The&PVGrows&Finance&Working&Group&members&were&also&drawn&to&royalty&finance&because&of&the&cyclical&nature&of&food&and&farming&businesses.&Even&during&years&of&good&climate,&there&are&seasons&for&plan<ng&and&for&harves<ng&and&selling.&Of&course,&farming&has&bad&years&too.&Food&
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businesses&can&be&seasonal&as&well.&Restaurants&in&the&Pioneer&Valley,&for&example,&do&be@er&during&the&peak&tourist&months&of&the&summer.&It&seemed&that&embracing&royalty&finance,&where&a&company’s&payments&are&calibrated&to&its&cash&flow,&might&be&a&smart&way&of&shaping&repayment&burdens&around&the&specific&needs&of&food&businesses.
It&should&be&added&that&the&exact&details&of&the&royalty&finance&s<ll&need&to&be&decided.&Here&are&some&of&the&ques<ons&that&need&to&be&considered:
• Will&it&be&based&on&revenue&or&profit?&The&argument&for&basing&it&on&profit&is&that&it&ensures&that&repayment&burdens&only&kick&in&when&the&company&is&doing&well.&But&defining&profit&is&tricky.&The&argument&for&basing&it&on&revenue&is&that&the&fund&will&receive&a&more&consistent&and&reliable&stream&of&repayments.&
• Should&the&royalty&payment&be&done&annually,&quarterly,&or&monthly?
• Should&the&royalty&payment&be&capped&at&repayment&of&the&principal&plus&a&certain&rate&of&return?12&If&so,&at&what&rate&of&return?&Avoiding&a&cap&might&increase&the&poten<al&returns&to&the&fund.&But&if&the&fund&is&a&nonprofit,&a&cap&might&be&more&consistent&with&its&mission.&
Another&op<on&we&are&considering&is&whether&to&have&different&investment&vehicles&for&different&types&of&financial&needs.&For&example,&it&s<ll&might&make&sense&to&offer&loans&for&land&and&equipment,&and&then&use&the&physical&assets&as&collateral.&Royalty&finance&could&then&be&focused&on&the&more&uncertain&universe&of&working&capital.&
SIZE)OF)FINANCEWhat+size+should+be+the+typical+financial+package+for+a+business?+How+broad+can+the+varia3on+from+low+to+high+be?
Again,&most&financial&ins<tu<ons&prefer&bigger&deals.&Every&deal&requires&due&diligence,&which&means&many&hours&scru<nizing&the&business&plan,&the&management&team,&the&board,&the&market,&the&collateral,&and&so&forth.&It’s&easier&and&cheaper&to&perform&this&once&for&one&millionidollar&deal&than&100&<mes&for&ten&thousand&dollar&deals.&
A&local&investment&fund&has&to&respect&this&logic,&too,&up&to&a&point.&As&we&saw,&it’s&inconceivable&that&one&parti<me&person,&which&may&be&all&a&local&fund&can&afford,&can&review&dozens&of&deals&in&a&year.&But&a&local&investment&fund&must&also&be&mindful&that&its&mission&is&to&support&the&development&of&many&small&businesses,&and&that&the&size&of&a&financial&package&should&relate&to&the&sophis<ca<on&of&the&business&and&its&stage&of&development.&Small&investments&make&more&sense&for&unproven&startup&businesses,&while&larger&packages&make&sense&for&successful&businesses&that&are&expanding.
In&the&Pioneer&Valley&the&fact&that&mul<ple&small&loan&funds&already&existed&and&arguably&had&exhausted&the&borrowing&demand&of&small&businesses&underscored&the&importance&of&our&
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12&Royalty&streams&that&follow&this&pa@ern&are&really&more&accurately&viewed&debt&arrangements.
crea<ng&a&new&fund&providing&larger&investments.&The&effec<ve&problem&facing&many&entrepreneurs&is&this:&They&are&sick&of&debt,&especially&since&most&small&business&lenders&demand&that&the&entrepreneur&put&his&or&her&house&on&the&line&(SBA&loan&guarantees&require&this,&for&example).&If&the&entrepreneur&promises&his&or&her&spouse&that&this&will&only&happen&once,&it&may&be&hard&to&turn&around&and&put&another&huge&lien&on&the&house&for&another&decade.&
Experience&suggests&that&established&businesses&growing&to&the&next&level&require&something&in&the&range&of&$100,000&to&$1&million.&Since&our&fund&is&targe<ng&established&food&businesses&that&need&pa<ent&capital,&this&was&the&range&of&finance&we&an<cipated&providing.
There&is&s<ll,&of&course,&ten&<mes&more&work&doing&due&diligence&for&ten&$100,000&packages&than&for&one&$1&million&package.&Focusing&on&established&entrepreneurs&and&businesses,&however,&usually&means&that&the&due&diligence&has&already&been&performed&on&each&candidate&business&by&other&financial&ins<tu<ons&involved&in&earlier&stage&finance.&So&a&key&for&our&fund&is&maintaining&good&rela<onships&with&these&ins<tu<ons.&For&its&ini<al&loan&fund,&PVGrows&involved&many&key&local&financial&ins<tu<ons,&as&well&as&nonprofits&like&CISA,&which&helped&to&“ground&truth”&the&investment&decisions.&This&kind&of&oversight&will&be&essen<al&for&the&Community&Capital&Fund&as&well.
SUPPORTWhat+kind+of+technical+assistance,+if+any,+should+accompany+the+financial+package?+Who+should+provide+it?
The&New&Hampshire&Community&Loan&Fund,&men<oned&in&the&Introduc<on,&provides&three&levels&of&funding&for&small&businesses:µloans&under&$10,000;&loans&between&$10,000&and&$100,000,&and&higheririsk&investments&between&$100,000&and&$500,000.&The&qualifica<ons&for&each&level&differ,&as&do&the&requirements&and&due&diligence&required&for&each.&Perhaps&the&biggest&difference,&however,&is&the&technical&assistance&for&each.&At&the&lower&rungs,&entrepreneurs&must&take&formal&training&classes&and&enter&technical&assistance&programs,&whereas&at&the&higher&rungs,&such&exper<se&is&presumed.
Forµloan&programs,&technical&assistance&programs&are&big&expense&items.&It&underscores&why&most&of&these&programs,&run&by&nonprofits,&must&raise&funds&from&founda<ons&and&government&programs&to&cover&the&cost&of&technical&assistance;&and&why&foriprofitµlenders &oUen&charge&very&high&interest&rates&(some<mes&even&higher&than&credit&card&rates)&to&cover&their&costs.&Because&many&communi<es&oUen&have&these&programs&anyway&—&entrepreneurship&classes&at&the&community&college,&businessiplan&assistance&through&the&Small&Business&Development&Center,&mentorship&through&the&SCORE&program&(made&up&of&re<rees&willing&to&share&their&business&experience)&—&a&smart&finance&program&will&harness&as&many&free&or&lowicost&resources&as&possible.&The&quality&of&these&programs&varies,&however,&so&it&is&essen<al&that&the&fund&vet&these&programs&before&requiring&its&investees&to&use&them.&Lowiquality&technical&assistance&is&worse&than&none&at&all,&because&it&wastes&valuable&<me&the&entrepreneur&needs&to&succeed.
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For&the&Pioneer&Valley,&the&decision&to&focus&on&exis<ng&businesses&mi<gated&some&of&this&requirement.&That&said,&even&experienced&entrepreneurs&have&weaknesses.&So&we&an<cipate&tapping&resources&throughout&the&Pioneer&Valley&—&and,&in&partnership&with&the&Fair&Food&Fund,&resources&throughout&New&England&ii&to&assist&the&recipients&of&finance.&Fortunately,&this&is&an&area&where&the&par<cipa<ng&fund&managers&and&nonprofits&in&PVGrows&have&long&been&working.&
27
IV."Choosing"the"Right"Legal"Structure
What&legal&structure&will&you&want&for&your&fund?&To&answer&this&ques<on,&you&must&begin&by&looking&at&the&Investment&Company&Act&of&1940.&Generally&speaking,&the&Act&covers&all&funds.&A&communityioriented&investment&fund&will&want&to&avoid&being&classified&as&an&Investment&Company&under&the&Act,&because&compliance&with&its&many®ula<ons&is&complicated,&difficult,&and&very&expensive.&
What&exemp<on,&then,&might&apply&to&your&fund&and&relieve&the&poten<al&burdens&on&you?&Are&there&other&op<ons&for&crea<ng&a&local&pool&of&capital&that&are&worth&considering?&Might&you&just&piggyback&onto&an&exis<ng&fund?
EXEMPTIONSHow+can+I+ensure+that+my+fund+is+not+covered+by+the+Investment+Company+Act+of+1940?
While&PVGrows&decided&to&use&the&nonprofit&exemp<on&to&this&Act,&other&routes&are&available.&As&discussed&earlier,&you&might&set&up&a&company&that&acquires&local&businesses&as&subsidiaries&and&then,&aUer&developing&them&for&a&<me,&sells&them&back&to&community&investors.&Or&you&might&create&a&fund&with&fewer&than&100&investors,&though&there&are&challenges&to&including&unaccredited&investors&this&way.13&
Another&route&is&to&create&a&company&around&a&specific&community&business,&and&then&carefully&make&sure&that&less&than&40%&of&the&assets&are&used&for&investment&purposes.&In&the&Pioneer&Valley,&for&example,&this&is&the&strategy&used&by&Coiop&Power,&a&consumer&coopera<ve&that&helps&its&400&members&buy&lowicost&energy&efficiency&and&renewable&energy&equipment,&
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13 According&to&the&Hedge&Fund&Law&Blog,&such&funds&face&the&following&difficul<es:&“Many&startup&hedge&fund&managers&want&
to&know&if&their&friends&and&family&can&invest&in&the&startup&hedge&fund.&Most&of&the&<me,&such&friends&and&family&do¬&fall&within&the&defini<on&of&accredited&investor&under&the&Regula<on&D&rules.&The®ula<on&D&rules&allow&a&maximum&of&35&noniaccredited&investors&to&invest&in&any&single&offering.&Because&a&hedge&fund&offering&is&con<nuous,&the&limit&of&35&noniaccredited&investors&is&cumula<ve.&That&means&that&over&the&life&of&the&.&&there&can&be&no&more&than&35&noniaccredited&investors&(as&opposed&to&35&noniaccredited&investors&in&the&fund&at&any&single&point&in&<me).While&some&managers&will&allow&noniaccredited&investors&to&invest&in&their&hedge&fund,&many&managers&will¬&because&of&two&reasons.&&
“The&first&reason&is&that&noniaccredited&investors,&by&defini<on,&do¬&have&as&many&assets&and&therefor&are&unlikely&to&make&a&significant&investment&into&the&hedge&fund.&OUen&the&costs&of&having&an&investor&with&a&small&contribu<on&outweigh&the&benefits&of&having&the&investor&in&the&fund&(especially&if&the&fund&is&nearing&the&99&investor&requirement&under&Sec<on&3(c)(1)).&&Such&investors&also&probably&will¬&fall&within&the&defini<on&of&qualified&clients&so&the&manager&would&probably¬&be&able&to&charge&these&investors&a&performance&fee&which&is&one&reason&managers&will&prefer¬&accept&noniaccredited&investors&if&possible.
“The&second&reason&why&managers&tend&to&disallow&noniaccredited&investors&into&the&fund&is&that&there&is&a&perceived&bias&by®ulators&toward&the&noniaccredited&investor.&In&the&event&that&the&fund&loses&money,&state&securi<es®ulators&are&going&to&be&more&sympathe<c&towards&a&noniaccredited&investor&than&an&accredited&investor&all&things&being&equal.&While&we&have&seen&no&empirical&studies&sugges<ng&this&is&the&case,&we&feel&this&is&probably&a&jus<fied&percep<on.
“Typically&hedge&funds&with&noniaccredited&investors&will&need&to&have&a&yearly&audit.&This&is&in&contrast&to&hedge&funds&without&noniaccredited&investors&which&can,&if&properly&documented&in&the&hedge&fund&offering&documents,&choose&whether&or¬&to&have&an&audit&(although&the&default&for&most&hedge&funds&is&to&have&a&yearly&audit).”&
See&h@p://www.hedgefundlawblog.com/noniaccreditediinvestorsiinihedgeifunds.html.
supplies,&and&services.&It&has&asked&most&of&its&members&to&put&in&$1,000&of&capital,&and&it&then&reinvests&some&of&it&(under&40%)&in&promising&local&companies&performing&energy&audits,&installing&solar&energy&equipment,&producing&biofuels,&or&manufacturing&wood&chips.&One&could&certainly&imagine&a&mul<purpose&food&coopera<ve&deploying&a&similar&strategy.
S<ll&another&possibility&is&to&create&a&Business&Development&Company&(BDC).&BDCs&are¬&exempt&from&the&Investment&Company&Act,&but&they&are®ulated&more&lightly.&To&qualify,&a&firm&must&target&its&investment&dollars&on&smaller&businesses,&and&provide&them&with&significant&managerial&assistance.&Assistance&can&include&recrui<ng&management&personnel,&serving&on&the &board,&and&evalua<ng&acquisi<on&and&dives<ture&opportuni<es.&One&could&imagine,&for&example,&a&business&incubator&being&formed&under&this&provision.&Unfortunately,&legal&compliance&with&the&requirements&for&BDCs&could&easily&exceed&$100,000&annually,&as&these&are&public&companies&and&therefore&subject&to&myriad&SEC&filing&requirements.
AUer&reviewing&these&various&op<ons,&PVGrows&opted&for&the&nonprofit&structure.&It&was¬&interested&in&geSng&into&the&business&of&buying&and&selling&companies,&or&in&crea<ng&another&business&that&would&occupy&most&(>60%)&of&the&capital.&There&was&a&desire&to&recruit&more&than&100&investors&and&to&make&the&offering&to&the&general&public.&The&legal&expenses&of&a&nonprofit&are&much&lighter&than&those&of&a&BDC.&There&is&also&a&state&law&in&Massachuse@s&that&exempts&from&expensive®istra<on&filings&any&securi<es&“issued&by&any&person&organized&and&operated¬&for&private&profit&but&exclusively&for&religious,&educa<onal,&benevolent,&charitable,&fraternal,&social,&athle<c,&or&reformatory&purposes,&or&as&a&chamber&of&commerce&or&a&trade&or&professional&associa<on.”14
This&last&point&is&an&important&reminder&that&besides&federal&law,&you&must&always&look&at&state&law,&too.&State&securi<es&laws&impose&requirements&on&top&of&federal&law.&This&underscores&why,&eventually,&you&must&have&an&a@orney&working&with&you.
OTHER)OPTIONSAre+there+other,+simpler+ways+to+create+pools+of+capital+for+local+investment?
If&you&and&your&a@orney&get&exasperated&by&the&complexi<es&of&investment&companies&and&the&exemp<ons,&you&might&want&to&consider&some&other,&outsideitheibox&alterna<ves.&Rather&than&crea<ng&a&fund,&you&could&focus&on&making&direct&public&offerings&(DPOs)&in&local&food&businesses,&which&would&allow&unaccredited&investors&to&par<cipate.&If&all&goes&as&expected,&crowdfunding&web&sites&will&begin&to&receive&their&licenses&from&the&SEC&in&2014,&which&will&permit&many&small&businesses&to&issue&securi<es&for&purchase&by&unaccredited&investors.&
With&so&many&op<ons,&might&investors&be&able&to&pool&their&money&to&invest&in&a&poruolio&of&small&local&businesses&and&diversify&their&risks?&The&answer&is&a&qualified&“yes.”&As&these&local&public&offerings&proliferate,&unaccredited&investors&will&be&able&to&surf&over&to&a&local&web&site,&review&a&variety&of&local&stock&investment&opportuni<es,&and&then&assemble&their&own&diversified&poruolios.&You&essen<ally&can&become&your&own&investment&manager.&The&challenge&
29
14&950&Code&of&Massachuse@s&Regula<ons,&Sec<on&14.401&(a)&(9).&
is&how&to&sell&the&securi<es&once&you&acquire&them.&Some&local&companies&will&provide&opportuni<es&for&resale,&but&others&won’t.&You&will&therefore&need&to&understand&the&fine&print&of&each&investment&before&buying.
Another&op<on&might&to&use&the&emerging&pooled&products&on&the&fast&prolifera<ng&crowdfunding&portals.&Mission&Markets&in&New&York,&for&example,&is¤tly&considering&crea<ng&special&rela<onships&between&community&portals&and&local&brokeridealers,&where&the&la@er&are&encouraged&to&create&(in&consulta<on&with&the&local&portal&operators)&specialized&poruolios&for&customers.&These&poruolios&are&essen<ally&local&exchange&traded&funds&(ETFs).&So,&for&example,&a&customer&might&be&able&to&buy&a&bundle&of,&say,&municipal&bonds&and&local&securi<es.
A&third&op<on&is&to&form&an&investment&club.&Many&Americans&do&this&already,&though&they&use&the&club&to&invest&in&the&conven<onal&stocks&and&bonds&of&global&companies.&The&basic&rule&of&investment&clubs&is&that&a&group&of&fewer&than&100&adults&can&pool&their&money&and&collec<vely&invest&however&they&see&fit.&When&the&members&contribute&to&the&investment&club,&the&purchase&of&equity&in&the&club&is¬&considered&a&security,&because&all&the&members&are&ac<vely&involved&in&the&investment&decisions.&Therefore,&the&club&does¬&have&to®ister&its&own&offering&to&its&members&with&state&or&federal&securi<es®ulators.&The&moment&one&person&is&appointed&to&make&decisions&for&the&group,&however,&the&SEC&will&deem&investment&in&the&group&to&be&a&securi<es&offering&that&requires&federal&and&state®istra<on.&It’s&also&worth&poin<ng&out&that&collec<ve&decisionimaking&need¬&be&unanimous.&A&smart&investment&club&s<ll&needs&to&put&all&its&decisions&to&a&vote,&carefully&recording&the&involvement&of&members&in&every&investment&decision.&
An&example&of&an&investment&club&that&focuses&on&local&business&is&No&Small&Potatoes,&an&offshoot&of&Slow&Money&in&Maine.&No&Small&Potatoes&is&a&group&of&about&twenty&individuals&who&formed&an&LLC&and&placed&$5i10,000&each&into&a&pot.&Several&<mes&per&year,&they&come&together&to&lend&their&money&(usually&in&small,&severalithousand&dollar&increments)&to&worthy&farmers&or&local&food&businesses.&Between&mee<ngs,&small&groups&of&members&interview&poten<al&candidates&for&funding.
Investment&clubs&are&available&to&unaccredited&investors&as&well&as&accredited&ones.&But&there’s&a&catch.&Investors&cannot&use&these&op<ons&to&circumvent&other&securi<es&law&requirements.&Unless&the&club&itself&is&an&accredited&investor&by&having&more&than&$5&million&in&assets,&it&can&only&invest&in&businesses&that&allow&unaccredited&investors&to&par<cipate&(for&example,&businesses&that&have&gone&through&the&mechanics&of&crowdfunding).&
The&disadvantage&of&all&these&selfimanagement&op<ons&is&that&they&can&require&a&lot&of&work.&The&advantage&is&that&these&tools&invite&more&people&in&a&community&to&take&an&ac<ve&role&in&learning&about&the&local&business&community,&discovering&promising&investment&opportuni<es,&and&developing&tools&for&sound&local&inves<ng.
From&the&standpoint&of&the&Pioneer&Valley,&we&could¬&see&—&yet&—&many&locals&using&these&alterna<ve&tools&for&pooling.&This&was&another&reason&to&create&our&own&fund.&Moreover,&the&
30
spread&of&these&tools&could&bring&more&locals,&especially&those&who&were&unaccredited&and&looking&for&pooled&investment&opportuni<es,&into&our&fund.
PIGGYBACKINGMight+it+make+sense+to+hire+an+exis3ng+fund+to+manage+ours?
If&your&community,&state,&or®ion&already&has&a&fund,&it&might&make&sense&to&hire&them&to&run&your&fund.&The&obvious&advantage&is&that&it&avoids&all&the&legal&hassle&and&expense&of&crea<ng&a&new&en<ty,&and&paying&an&exis<ng&fund&manager&for&part&of&his&or&her&<me&to&manage&a&new&fund&might&be&less&expensive&than&hiring&a&new&staff&person&and&crea<ng&a&new&office&from&scratch.&The&poten<al&disadvantage&is&that&it&may&be&difficult&to&locate&a&fund&manager&who&shares&your&values&and&priori<es.
The&PVGrows&Finance&Working&Group&came&to&the&conclusion&that&geSng&one&of&the&exis<ng&funds&in&the®ion&to&manage&the&new&Community&Capital&Fund&made&sense.&To&make&this&hiring&decision,&we&prepared&an&RFP&for&a&management&team&and&invited&bids&from&these&and&other&funds&in&the®ion.&Among&the&key&ques<ons&asked&were&these:
• Is&the&fund&aligned&with&our&values?&Does&it&share&our&commitment&to&locally&owned&companies?&Our&tolerance&for&risk?&Our&desire&for&blended&returns?
• Does&the&staff&have&the&right&exper<se&to&evaluate&local&food&businesses?&If¬,&will&they&be&willing&to&defer&to&the&exper<se&in&our&FWG&Commi@ee?
• Is&the&fund&administra<vely&sound?&Does&it&a@end&carefully&to&its&repor<ng,&accoun<ng,&legal,&and&tax&responsibili<es?&&Are&its&overhead&costs&reasonably&low?&
• Is&the&fund’s&poruolio&well&balanced?&Or&are&too&many&of&its&exis<ng&obliga<ons&too&risky?&What’s&the&fund’s&track&record?
• Will&the&fund&be&comfortable&with&our&moving&our&business&into&our&own&nonprofit&at&some&point?
31
V. Mobilizing"the"Right"Investors
If&you&build&it,&will&they&come?&Perhaps,&but&you&be@er&have&a&good&marke<ng&plan&for&aggressively&recrui<ng&investors.&Like&any&good&business,&a&local&investment&fund&requires&a&good&sense&of&the&local&capital&marketplace.&A&community&arguably&always&has&businesses&looking&for&more&capital,&but&it&may¬&have&investors&who&are&eager&to&take&money&out&of&their&conven<onal&investment&vehicles&and&invest&locally.&Before&embarking&on&the&crea<on&of&a &local&investment&fund,&it’s&helpful&to&have&a&plan&—&or&at&least&a&design&or&a&theory&—&about&how&you&will&raise&the&funds.
What&kind&of&investors&are&you&looking&for?&Accredited&investors?&Unaccredited?&Ins<tu<ons?&CDFIs?&How&much&do&you&wish&to&involve&them&in&the&fund?
In&the&Pioneer&Valley,&it&helped&that&several&local&business&funds&were&already&opera<ng.&Funds&like&Common&Capital&and&the&Equity&Trust&had&essen<ally&begun&to&develop&the&market&for&local&investment.&We&would&be&building&on&their&success.&
In&addi<on,&individual&investors&in&the&Pioneer&Valley&have&supported&several&local&businesses&in&the&recent&past.&Individual&investors&lent&River&Valley&Market&over&one&million&dollars&to&launch&a&startup&food&coop.&Coiop&Power,&as&referenced&earlier,&has&raised&money&from&individuals&for&a&variety&of&projects.&More&recently,&Real&Pickles&raised&$500,000&from&individual&investors&to&support&its&conversion&to&a&workeriowned&coopera<ve.&These&modest&successes&laid&a&solid&founda<on&for&the&Community&Investment&Fund.
INVESTOR)MOTIVATIONSWhat+kind+of+investors+are+you+looking+for?
Different&kinds&of&funds&look&for&different&kinds&of&investors.&Bank&savings&accounts,&for&example,&are&looking&for&investors&who&are&interested&in&safety&and&are&willing&to&accept&a&low&rate&of&return&for&a&government&guarantee&on&their&money.&Venture&funds,&in&contrast,&are&looking&for&investors&who&want&spectacular,&doubleidigit&rates&of&return&with&companies&promising&high&growth&and&a&public&exit,&but&who&also&understand&that&these&deals&are&extremely&risky&and&they&may&lose&everything.
It’s&worth&recalling&our&earlier&discussion&about&the&expecta<ons&of&investors&versus&the&real&world&of&market&performance.&Many&venture&capital&funds,&for&example,&promise&doubleidigit&rates&of&return&but&underperform&the&market.&Remember&that&the&the&market&itself,&or&at&least&the&stock&market,&is&typically&returning&2.6%&per&year.&Today,&in&a&period&of&rela<vely&low&infla<on&and&low&interest&rates,&most&“safe”&investments,&like&bank&CDs,&are&promising&less&than&1%&per&year.&As&the&risk&increases,&say&for&corporate&or&municipal&bonds,&the&return&rate&increases&to&3i5%.&So&really&smart&investors&in&your&community&should&be&expec<ng&somewhere&around&&1i5%&annual&rate&of&return.&(If&infla<on&or&interest&rates&rise,&these&numbers&will&rise&accordingly.)&
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Part&of&the&job&of&your&fund,&therefore,&is&to&match&investor&expecta<ons&with&what&the&real&world&of&local&businesses&can&deliver.&Our&experience&with&local&investment&in&the&Pioneer&Valley&led&us&to&appreciate&that&our&local&investors&fell&somewhere&in&between&these&two&extremes.&Few&local&investors&(at&this&point)&are&looking&primarily&for&a&high&rate&of&return.&Instead,&they&are&mo<vated&by&the&desire&to&strengthen&the&local&economy&and&prove&models&of&triple&bo@om&line&businesses.&Some&investors,&such&as&those&who&put&in&very&small&amounts&of&money&(say,&$100)&or&those&who&represent&other&missionidriven&ins<tu<ons&like&founda<ons,&think&of&their&investments&more&like&dona<ons.&Others&want&to&see&their&money&do&good&locally,&though&they&empha<cally&do¬&want&to&lose&money.
The&truth&is&that&you&cannot&possibly&know&how&well&you’ll&perform.&Some&businesses&in&your&poruolio&won’t&perform&as&expected&—&that’s&reality.&The&secret&sauce&for&helping&small&businesses&succeed&is,&frankly,&s<ll&a&work&in&progress.&So&the&smartest&strategy&is&to&promise&small,&deliver&big.&If&you&exceed&investors’&expecta<ons,&they&will&be&thrilled&with&you.&If&you&set&investor&expecta<ons&high&and&you&underperform,&they&may&get&scared&and&pull&their&money&out&pronto+haste.&
This&raises&a&second,&related&ques<on&about&investor&expecta<ons&—&exit.&How&long&must&investors&commit&to&par<cipa<ng&in&the&fund?&Again,&most&of&the&funds&we&examined&insist&on&commitments&of&at&least&one&year&and&some<mes&two&or&more&years.&Recall&the&earlier&point&that&asking&investors&for&a&longer&commitment,&even&for&five&years,&is&one&way&the&fund&can&succeed&even&if&one&of&the&businesses&fails.&In&fact,&given&that&food&and&farm&enterprises&really&need&longiterm&investments,&you&may&want&to&offer&some&of&your&investors&an&opportunity&to&invest&on&a&very&longiterm&basis,&possibly&ten&or&more&years.
Your&investors&should&know&that&the&mission&of&the&fund&is¬&to&promote&shortiterm&windfall&profits&but&longiterm&sustainable&growth.&Moreover,&the&businesses&your&fund&is&suppor<ng&need&adequate&<me&to&grow.&Neither&they&nor&you&can&afford&to&have&money&rapidly&flowing&in&and&out&of&the&fund,&unpredictably.
No&one&wants&to&<e&up&his&or&her&money&indefinitely.&So&one&way&most&communityidevelopment&funds&handle&this&is&to&increase&rewards&for&longer&commitments&—&just&like&banks&do&with&CDs.&You&might&promise&a&1%&return&for&a&oneiyear&commitment,&a&2%&return&for&a&threeiyear&commitment,&and&a&3%&return&for&a&fiveiyear&commitment.&This&approach,&however,&should&be&used&cau<ously.&Words&like&“promise”&may&be&inappropriate,&given&how&uncertain&returns&will&be.&It&may&be&be@er&to&use&phrases&like&“We&set&an&annual&payment&target&of….”&
Giving&your&investors&more&op<ons&may&make&investment&in&your&fund&more&a@rac<ve.&Yet&it&can&also&make&your&own&job&more&difficult.&If&most&of&your&investors&opt&for&oneiyear¬es,&you&will&need&to&amass&the&cash&to&pay&them&back&at&the&end&of&one&year.&There’s¬&much&you&can&then&do&with&that&capital.&You&certainly&can’t&make&any&longiterm&commitments&to&companies.&If&you&provide&shortiterm&op<ons&for&your&investors,&you&should&be&sure&to&create&inducements&for&them&to&rollover&their&commitments&before&they&expire.
If&you&issue&your&investors¬es,&you&might&give&them&permission&to&sell&them&to&other&investors&—&though&you&may&want&to&restrict&their&resale&to&other&local&investors.&As&Mission&
33
Markets&and&others&spread&their&community&portals,&you&will&then&have&places&where&you&can&have&your&shares&listed&and&sold&for&a&small&fee.
TRADITIONAL)SOURCES)OF)COMMUNITY)CAPITALGiven+the+mo3va3ons+of+likely+investors,+where+is+the+capital+for+your+fund+most+likely+to+come+from?
It’s&helpful&to&sketch&the&investment&marketplace,&as&we&did&in&Chapter&II.&If&you&expect&a&small&number&of&deepipocket&individuals&to&put&up&most&of&the&capital,&it&makes&sense&to&talk&with&them&personally&first&and&discern&the&depth&of&their&commitment.&If&you&expect&a&larger&number&of&less&wealthy&individuals&to&par<cipate,&it&would&be&good&to&conduct&a&focus&group&to&gauge&their&interest.
If&you&are&forming&a&nonprofit&fund,&many&sources&of&capital&in&the&community&development&world&are&relevant.&For&example:
• Community)Revolving)Loan)Funds&—&Some&exis<ng&revolving&loan&funds&are&looking&for&other&funds&in&which&to&invest&rather&than&just&individual&businesses.
• Program)Related)Investments)and)Mission^Related)Investments&—&You&should&inventory&all&the&founda<ons&that&provide&grants&to&economic&development&and&community&development&projects&in&your®ion.&These&founda<ons&might&be&persuaded&to&invest&some&of&their&longiterm&capital&into&your&fund.
• Community)Development)Financial)Ins4tu4ons&—&Banks,&funds,&and&other&organiza<ons&in&your&area&that&have&the&CDFI&designa<on&from&the&U.S.&Treasury&Department&are&natural&partners&for&your&venture.
• New)Markets)Tax)Credits&—&Another&poten<al&partner&is&the&ins<tu<on&(or&ins<tu<ons)&in&your&area&licensed&to&take&money&from&accredited&investors&and&provide&them&with&seveniyear&New&Markets&Tax&Credits.&
• Community)Reinvestment)Act)Credits&—&Private&banks&in&your®ion,&par<cularly&bigger&and&nonlocal&banks,&may&be&looking&to&gain&credit&under&the&Community&Reinvestment&Act&that&they&can&apply&for&future&mergers&or&branching&decisions.&
In&our&case,&we&knew&that&all&these&sources&had&supported&other&funds&in&the®ion:&the&concept&was&proven.&But&we&were&also&interested&in&grassroots&par<cipa<on&in&the&fund&—&that&is,&the&involvement&of&unaccredited&investors.&
UNACCREDITED)INVESTORSShould+unaccredited+investors+be+included?
A&threshold&ques<on&is&whether&unaccredited&investors&should&be&included&at&all.&Generally,&even&small&funds&exempt&from&the&Investment&Company&Act&—&that&is,&funds&with&fewer&than&100&investors&ii&may&face&more&federal&compliance&challenges&if&they&involve&any&unaccredited&investors&(see¬e&13&above).&You&also&must&analyze&whether&your&state&creates&addi<onal&
34
layers&of&costly&legal&work&if&you&include&unaccredited&investors.&As&we¬ed,&Massachuse@s&law&was&helpful&here,&exemp<ng&securi<es&issued&by&a&nonprofit&fund&from®istra<on&requirements.
One&way&forward&in&some&states&may&be&to&enter&a&direct&nego<a<on&with&the&state&securi<es&department.&For&example,&when&the&Economic&and&Community&Development&Ins<tute,&based&in&Columbus,&Ohio,&decided&to&include&unaccredited&investors&in&its&14th&revolving&loan&fund,&it&worked&shoulderitoishoulder&with&the&state&securi<es®ulators&to&create&an&acceptable&standard&for&par<cipa<on.&That&standard&allowed&many,&though¬&all,&unaccredited&investors&to&par<cipate.
The&decision&to&include&unaccredited&investors&involves&more&than&purely&legal&ques<ons.&Does&a&fund&prefer&hundreds,&even&thousands,&of&unaccredited&investors&rather&than&a&few&dozen&accredited&ones?&The&more&people&involved,&the&more&administra<ve&hassles,&the&more&customers&to&“care&and&feed,”&the&more&things&that&can&go&wrong.&Moreover,&are&there&enough&accredited&investors&in&the®ion&who&share&the&appropriate&mo<va<on&for&the&investment&and&can&tolerate&the&risk?&
Grassroots&par<cipa<on&brings&benefits&as&well.&Genera<ng&community&excitement&about&local&businesses&may&help&recruit&investors&for&the&fund.&Small&investors&might&be&less&demanding&about&the&rate&of&return&—&and&more&apprecia<ve&of&the&community’s&rate&of&return&—&than&wealthy,&professional&investors.&A&grassroots&group&of&investors&also&might&support&the&target&business&in&other&ways.&For&example,&the&Columbus&Invest&Ohio&Fund&mobilizes&its&members&to&support&its&borrowers&with&local&buying,&which&reduces&the&risk&of&the&businesses&failing.
Unaccredited&investors&also&offer&the&poten<al&to&conduct&a&huge&campaign&to&mobilize&residents&to&roll&over&their&taxideferred&IRAs&into&selfidirected&IRAs,&which&in&turn&could&invest&in&your&fund.&Most&IRAs&are&managed&through&mutual&funds&and,&again,&none&of&the&exis<ng&7,500&mutual&funds&invest&in&local&small&business.&But&if&you&move&your&IRA&into&the&hands&of&your&own&“custodian,”&you&can&invest&in&local&CDs,&your&coiop,&local&stock,&other&local&investment&funds,&property,&you&name&it&(as&long&as&the&issuer&has&complied&with&applicable&securi<es&law).&The&only&thing&you&really&cannot&invest&in&is&your&own&business&or&your&own&home&(or&your&rela<ves’&business&or&home).&To&find&a&local&custodian,&just&Google&“selfidirected&IRA.”&The&fee&can&be&as&low&as&$200i300&per&year&(plus,&some<mes,&addi<onal&transac<on&fees).&
For&our&Community&Capital&Fund,&we&calculated&that&one&way&we&could&assemble&$56&million&would&be&to&encourage&residents&to&shiU&part&of&their&longiterm&savings&into&selfidirected&IRAs.&If&two&percent&of&residents&in&the&Pioneer&Valley&—&one&in&twenty&households&ii&shiUed&5%&of&their&longiterm&savings&accordingly,&we&could&easily&amass&the&fund’s&target.&This&kind&of&campaign&seems&like&a&natural&outgrowth&of&more&than&a&decade&of&cuSngiedge&consciousness&raising&and&business&building&in&the®ion&around&local&food.
35
VOICEWhat+level+of+involvement+do+you+want+your+investors+to+have?
Most&investment&funds&have&a&strict&division&of&responsibili<es.&The&managers&invest&funds&according&to&their&best&judgment.&The&investors&leave&the&managers&alone,&read&the&managers’&statements&and&newsle@ers,&and&occasionally&ask&ques<ons&by&email&or&phone.&The&former&are&ac<ve,&the&la@er&passive.&This&framework&is&clean,&simple,&and&standard.
S<ll,&there&may&be&good&reasons&to&engage&your&investors&more&ac<vely.&Some&investors&might&be&more&interested&in&par<cipa<ng&if&they&are&able&to&play&some&role.&RSF&Social&Finance,&for&example,&has&go@en&high&marks&from&its&investors&for&puSng&together&annual&gatherings&where &lenders&and&borrowers&get&together&and&nego<ate&the&appropriate&interest&rate.&And&recall&the&Invest&Local&Ohio&Fund,&which&mobilizes&investors&to&buy&local&from&businesses&receiving&loans.&
Within&the&Pioneer&Valley,&where&grassroots&local&investment&has&reached&a&cri<cal&mass,&there’s&an&assump<on&that&investors&should&be&encouraged&to&par<cipate.&Common&Capital,&for&example,&has&commi@ees&veSng&investments&with&representa<ves&of&the&community.&The&Coopera<ve&Fund&of&New&England&and&the&Equity&Trust&both&are&proud&of&their&levels&of&grassroots&engagement.&The&PVGrows&Pilot&Loan&Fund&was&overseen&by&a&board&involving&the&leaders&of&all&these&funds&plus&other&grassroots&organiza<ons.&
Given&the°ree&to&which&direct&democracy&imbues&Town&Halls&throughout&New&England,&we&too&are&commi@ed&to&weaving&par<cipatory&networks&into&the&Community&Capital&Fund&and&tapping&the&wisdom&of&the&residents&in&the&Pioneer&Valley.&We&have&been&impressed&by&how&Coiop&Power&—&which,&as&described&earlier,&takes&members’&capital&and&places&it&strategically&in&local&firms&involved&in&energy&efficiency,&solar&installa<on,&and&biofuels&—&has&taken&advantage&of&the&exper<se&of&its&members&by&crea<ng&an&elaborate&structure&of&supporters&and&community&councils.&
36
VI.!FineOTuning
)Okay,&if&you’ve&followed&all&the&steps&thus&far,&you’ve&got&a&basic&business&plan&and&a&good&sense&of&your&ideal&businesses&and&investors.&There&are&s<ll&some&nuts&and&bolts&you’ll&need&to&add&to&ensure&that&your&plan&is&a&sturdy&one.&Is&your&fund&going&to&be&openiended&or&closediended?&How&long&do&you&expect&your&fund&to&go&on&for?&Who&will&you&hire&to&perform&dayitoiday&opera<ons?&How&will&you&handle&setbacks&and&failures&of&your&businesses?&What&will&you®ard&as&success?
OPEN)VS.)CLOSED)FUNDOnce+you+hit+your+startup+target,+will+you+fund+be+open+or+closed+to+new+investors?+
A&major&dis<nc<on&in&the&Investment&Company&Act&of&1940&is&whether&a&fund&is&openiended&or&closediended.&Most&people&think&of&this&dis<nc<on&with&respect&to&mutual&funds,&but&it&really&applies&to&all&kinds&of&funds.&An&openiended&fund&allows&new&investors&to&come&in,&and&as&more&funds&are&added&to&the&pot,&more&investments&are&made.&A&closediended&fund&sets&a&goal&for&the&fund&—&say,&$25&million&—&and&once&that&goal&is&reached,&the&fund&is&then&closed&to&new&investors.&Closediended&funds&can&have&provisions&for&new&investors&to&take&the&posi<on&of&old&ones&should&they&decide&to&exit.
Since&PVGrows&chooses&to&operate&both&its&pilot&loan&fund&and&the&new&Community&Capital&Fund&as&a&nonprofit&and&be&exempt&from&the&Act,&the&legal&consequences&of&this&dis<nc<on&don’t&ma@er&so&much.&But&it&is&s<ll&a&structural&and&business&choice&of&consequence.&Part&of&the&decision&turns&on&the&capacity&of&the&fund&to&locate,&vet,&and&manage&new&investments,&and&the&related&concern,&outlined&earlier,&that&having&funds&collected&but&uninvested&could&make&investors&unhappy.&We&decided,&therefore,&to&make&our&fund&closed.&
A&soUer&way&to&make&this&decision&might&be&to&create&“tranches,”&essen<ally&stages&of&development&for&the&fund.&Hence&PVGrows&decided&to&make&its&first&tranche,&for&the&new&Community&Capital&Fund,&$2.5&million.&This&way&we&can&get&experience&with&new&types&of&inves<ng,&beyond&lending,&before&going&to&scale.&Once&we&can&demonstrate&our&ability&to&locate&deals&and&manage&them&successfully,&more&investors&will&feel&confident&puSng&money&into&the&fund.
LIFE)CYCLEHow+long+do+you+expect+your+fund+to+live?+
Your&investors&will&want&to&know&whether&your&fund&will&last&in&perpetuity&or&end&on&a&certain&date.&Many&loan&funds&are&called&revolving&funds,&because&as&one&set&of&loans&is&paid&off,&the&expecta<on&is&that&returned&funds&will&be&lent&again,&forever.&Or,&at&least,&un<l&the&fund&managers&decide&to&stop,&disband,&and&return&funds&to&the&investors.&
37
This&ques<on&is&related&to,&but&differs,&from&that&of&exit&for&investors.&A&closed&fund&can&declare,&as&a&venture&fund&might,&that&its&investments&are&<ed&up&for&seven&years,&and&only&aUer&that&point&might&it&liquidate&all&deals&and&return&funds&to&investors.&Or&it&might&allow&investors&who&wish&to&enter&to&replace&those&who&wish&to&exit.
PVGrows&decided&that&its&ini<al&loan&fund,&being&a&prototype,&would¬&last&forever.&As&the&ini<al&loans&are&being&repaid,&there’s&a&strong&presump<on&against&lending&the&funds&again.&Instead,&the&ques<on&is&whether&to&encourage&investors&to&roll&over&their&investment&into&the&new&fund.&Indeed,&since&many&of&the&ini<al&investors&were&founda<ons&and&economic&development&ins<tu<ons,&the&real&ques<on&is&whether&repayment&from&the&first&fund&should&be&converted&into&new&investments&to&start&the&second.&
OPERATIONSWhat’s+your+plan+for+ongoing+opera3ons?
SeSng&up&an&investment&fund&is&the&easy&part.&Running&it&successfully&is&what’s&tough.&A&successful&fund,&even&if&it&can&avoid&the&onerous&requirements&of&being&an&Investment&Company,&must&keep&detailed&records&of&everything,&especially&the&flow&of&funds.&The&books&should&be&spotless.&Audits&should&be&conducted&annually.&Taxes&and&other&reports&need&to&be&filed&in&a&<mely&way&to&the&appropriate&federal,&state,&and&local&authori<es.&Your&investors&will&require&periodic&informa<on&as&well.&
How&oUen&do&you&want&to&communicate&with&investors?&Most&investors&expect&reports&at&least&quarterly.&Some&might&even&welcome&monthly&reports.&You&also&might&decide&that&these&reports &will&drive&your&company&to&make&unwise&shortiterm&decisions&that&shortchange&longiterm&success.&It&was&this&reason&that&recently&drove&the&head&of&Unilever&to&renounce&quarterly&repor<ng.
What&about&staffing?&Consider&three&very&different&kinds&of&ongoing&ac<vi<es&the&fund&will&need&to&carry&out,&each&focused&on&different&cons<tuencies:
• A&promoter&needs&to&market&the&fund&to&investors&and&businesses.&It&helps&if&this&person&is&a&good&salesperson,&outgoing,&energe<c,&charisma<c,&visionary.&This&person&also&may&need&to&meet&certain&legal&requirements,&such&as&having&a&brokeridealer’s&license,&before&selling&anything.
• A&tough&decisionimaker&needs&to&work&with&the&target&businesses,&gather&data,&assess&risks,&make&deals,&and&enforce&agreements.&This&person&needs&to&be&analy<cal,&communica<ve,&pa<ent,&nurturing,&and&flexible.
• An&accountant&or&compliance&manager&with&a&me<culous&ability&to&capture&details&needs&to&follow&and&record&the&flow&of&funds&and&comply&with&state&and&federal&securi<es,&nonprofit,&and&other&applicable&laws.&This&person&is&usually&inwardifocused,&cau<ous,&methodical.&
38
The&point&of&reviewing&these&job&descrip<ons&is&that&it’s&very&hard&to&find&all&three&skill&sets&in&a&single&person.&In&fact,&it’s&probably&dangerous&to&depend&on&one&individual,&since&a&successful&fund&will&establish&checks&and&balances¬&only&between&the&board&and&the&management&but&also&within&the&staff.&Yet&a&small&fund&might¬&be&able&to&hire&even&one&fulli<me&person.&This&underscores&the&importance&of&having&a&par<cipatory&board.&It&also&suggests&the&wisdom&of&hiring&another&fund&to&manage&your&fund,&which&might&get&you&slices&of&several&people’s&<me.&&
Outsourcing&administra<on&is&just&one&op<on&you&might&consider.&If&you&can&find&funds&doing&similar&work&in&your&community,&you&might&just&place&your&money&into&those&funds&—&that&is,&your&fund&itself&becomes&a&local&investor.&Or&you&might&approach&a&large&local&nonprofit&that&already&is&inves<ng&a&significant&endowment&and&ask&it&to&add&your&funds&to&its&poruolio.
BUSINESS)FAILUREWhat+are+the+best+ways+of+an3cipa3ng+that+your+businesses+are+not+succeeding?+
Business&is&fraught&with&risk,&and&no&investment&fund&has&a&perfect&record&(except,&perhaps,&Bernie&Madoff’s,&before&being&exposed&as&a&Pyramid&Scheme).&A&key&to&your&success&is&to&develop&early&warning&signals,&and&a&series&of&responses&so&that&some&failures&are&reduced&to&qualified&successes.
Every&business&has&strengths&and&weaknesses.&Iden<fy&early&and&oUen&the&likely&weaknesses&of&your&poruolio&businesses.&You&might&withhold&your&finance&un<l&a&plausible&plan&is&in&place&to&address&the&weakness.&So,&for&example,&if&a&company&has&weak&accoun<ng,&you&might&condi<on&your&investment&on&its&books&geSng&cleaned&up&and&a&trustworthy&accountant&hired.
Each&target&business&probably&an<cipates&growth&from&your&investment.&Measure&it&—&growth&in&sales,&net&assets,&media&men<ons,&whatever.&You&and&the&target&business&should&agree&on&which&indicators&ma@er,&and&what&progress&should&be&made&by&when.
When&a&company&is&falling&short&—&even&when&there’s&a&good&explana<on&—&that’s&the&<me&to&begin&preparing&a&plan&to&mi<gate&the&problems.
SUCCESSWhat+are+your+indicators+of+progress?
Just&like&the&businesses&you&are&financing,&your&fund&needs&a&wellithoughtithrough&plan&for&success.&There&should&be&indicators&along&the&way&to&let&you&and&your&investors&know&that&you&are&on&target.&Among&the&helpful&indicators&might&be&these:
• When&do&you&an<cipate&raising&your&investment&capital&and&closing&your&first&tranche?&
• By&when&do&you&expect&to&invest&your&first&tranche?
• What&is&the&flow&of&repayments&or&returns&you&expect&to&receive?
39
• What&is&the&an<cipated&return&you&expect&to&pay&to&investors?
• What&is&your&an<cipated&failure&rate?
It’s&important&—&for&you,&your&investees,&and&your&investors&—&to&meet&or&beat&your&indicator&goals.&Early&success&boosts&your&confidence&that&you’re&doing&something&right.&Early&shortcomings&give&you&guidance&on&what&you&need&to&change.
If&your&investors&didn’t&trust&you,&they&never&would&have&put&money&into&your&fund.&But&you&can’t&take&that&trust&for&granted.&That’s&why&you&need&to&report&to&them®ularly.&Beyond&the&quarterly&reports,&you&might&send&out&a&monthly&or&weekly&eimail&repor<ng&on&new&developments.&If&the&news&is&bad,&your&communica<on&must&be&even&more&frequent.
It&also&underscores&why,&as&we¬ed&earlier,&it’s&wise&to&set&investor&expecta<ons&low&—&and,&if&you&can,&exceed&them.
Once&a&year,&you&might&want&to&hold&a&dinner&or&a&special&event,&to&celebrate&what&you’ve&accomplished&over&the&previous&year,&to&take&stock,&to&reward&hard&work.&If&you&do&succeed,&you&should&take&pride&in&doing&the&essen<al&work&in&building&your&economy&—&and&in&showing&the&way&so&that&thousands&of&other&communi<es&in&the&United&States&and&elsewhere&can&follow&in&your&footsteps.&For&us,&real&success&will&be&measured&by&the&Pioneer&Valley’s&ability&to&scale&up&the&local&food&economy.&
40
Epilogue
You’re&probably&wondering&how&it&all&turned&out&for&PVGrows.&What’s&the&Community&Capital&Fund&doing&now?&
As&of&this&wri<ng,&the&Financial&Working&Group&just&made&several&important&decisions&about&how&to&proceed:&
• The&target&level&of&funding&will&be&$2.5&million,&and&the&fund&will&get&started&—&in&legalese,&it&will&break&escrow&—&at&$500,000.&As&new&deals&emerge,&the&fund&will&expand&by&bringing&in&justiini<me&investors.&This&will&prevent&extra&funds&from&accumula<ng&and&doing¬hing,&and&provide&specific&stories&to&bring&in&new&investors.
• The&ini<al&management&will&con<nue&to&be&done&by&an&exis<ng,&capable,&outside&organiza<on,&enabling&PVGrows&to&minimize&its&own&staff.&&
• The&PVGrows&Financial&Working&Group&will&con<nue&to&play&a&major&role&in&veSng&poten<al&businesses&and&guiding&the&managing&fund.
• Three&types&of&investors&will&be&ini<ally&targeted.&For&the&first&tranche,&at&least&the&first&10%&of&the&fund&will&be&covered&by&philanthropists&and&founda<ons&making&programirelated&investments,&and&perhaps&by&ins<tu<onal&investors&like&the&local&university,&hospital,&and&pension&funds.&The&second&tranche&will&be&covered&by&ins<tu<ons&and&accredited&investors.&A&third&tranche&will&be&available&to&unaccredited&investors,&though&they&would&have&to&invest&at&least&$1,000&($10,000&maximum).&
• The&targeted&returns&for&investors&will&depend&on&the&tranche.&The&an<cipated&payouts&will&all&be&in&the&0i3%&range,&with&longer&commitments&rewarded&with&higher&payouts.&Addi<onal&rewards&will&be&given&to&investors&who&renew&their&commitments&aUer&the&ini<al&periods&expire.
• To&diversify&risk,&the&fund&will&consider&placing&up&to&25%&of&its&capital&in&New&England®ional&partnerships.
• Each&investment&will&likely&be&at&least&$25,000,&though&no&more&than&10%&of&the&fund&will&be&commi@ed&to&any&one&company.&
• At&least&10%&of&the&assets&will&be&invested&in&businesses&serving&underserved&communi<es,&and&at&least&10%&in&businesses&managed&by&people&of&color.&
• PVGrows&will&seek&to&raise&addi<onal&dona<ons&and&grants&to&cover&its&administra<ve&costs&in&the&early&phases.
Stay&tuned&to&the&PVGrows&web&site&(www.pvgrows.net)&for&further&progress.&We&wish&we&were &further&along&in&our&work,&and&that&this&guide&book&could&be&100%&filled&with&retrospec<ve&lessons.&Alas,&the&world&is&moving&too&fast&for&this&tradi<onal,&clunky&approach&to&a&handbook.&We&hope&the&lessons&we’ve&shared&here&inspire&and&help&others,&so&that&we&can&all&begin&learning&together.&For&those&of&you&using&this&guide&to&create&your&own&community&funds,&
41
whether&focused&on&food&or&on&other&local&businesses,&we&look&forward&to&working&with&you&to&coiauthor&Version&2.0.
Our&goal&is&for&successive&itera<on&of&this&guide&to&get&be@er&and&involve&more&people.&We&know&that&there&are&many&people&in&this&country&frustrated&by&their&inability&to&align&their&investments&with&their&values&and&eager&to&create&new&tools&for&local&investment.&We&look&forward&to&working&with&them&to&share&stories&and&grow&our&wisdom.&
We&envision&a&day&where&hundreds&of&communi<es&offer&mul<ple&portals&for&mul<ple&local&inves<ng&op<ons;&where&MBA&programs&offer&curriculum&focused&on&local&investment&funds;&where&policy&makers,&poli<cal&leaders,&and&community&ac<vists&see&these&funds&as&cri<cal&parts&of&their&economicidevelopment&policies;&and&where&consumeriinvestors&everywhere&take&pride&in&crea<ng&their&own&local&food&systems.&
42
Appendix A.
Community Investment Worksheet
We’ve taken the basic ques1ons from the report and gathered them here for your convenience. When you’ve answered these ques1ons, you will be well on your way to crea1ng economic and environmental capital in your community. Good luck with your work.
Clarifying Your Objec3ves
GEOGRAPHIC FOCUSHow do you define your community?
ECONOMIC MISSIONWhich social or economic problems are you trying to solve? Exactly what kinds of local businesses do you wish to support?
RISK AND REWARDHow much risk is the fund prepared to tolerate? How much desire does the fund have-‐and really its investors-‐for poten?al rewards? How willing are these investors to lose money?
PRIORITY BUSINESSESExactly which local businesses are your highest priori?es for finance by your fund? How should you decide?
PRIORITY BUSINESS STAGEOnce you’ve picked the kinds of businesses you wish to priori?ze, how do you pick the right stage of business? For example, should you priori?ze startups or exis?ng businesses?
BUSINESS NEEDSWhat exactly are the capital needs of your targeted businesses?
THE BASIC MATHWhat’s the business case for your fund? How can you make sure that you won’t lose your investors’ money?
NEEDED SIZEWhat size must the fund be to realize its mission? Is it realis?c to raise that much capital?
MISSION STATEMENTWhat’s a succinct summary of what you’re trying to accomplish?
Making The Right Types of Investment
TYPE OF FINANCEWhat is the kind of investment you intend to make in the target businesses? Debt? Equity? Smething in between? Why?
SIZE OF FINANCEWhat size should be the typical financial package for a business? How broad can the varia?on from low to high be?
SUPPORTWhat kind of technical assistance, if any, should accompany the financial package? Who should provide it?
Choosing the Right Legal Structure
EXEMPTIONSHow can I ensure that my fund is not covered by the Investment Company Act of 1940?
OTHER OPTIONSAre there other, simpler ways to create pools of capital for local investment?
PIGGYBACKINGMight it make sense to hire an exis?ng fund to manage ours?
Mobilizing the Right Investors
INVESTOR MOTIVATIONSWhat kind of investors are you looking for?
TRADITIONAL SOURCES OF COMMUNITY CAPITALGiven the mo?va?ons of likely investors, where is the capital for your fund most likely to come from?
UNACCREDITED INVESTORSShould unaccredited investors be included?
VOICEWhat level of involvement do you want your investors to have?
Fine-‐Tuning
OPEN VS. CLOSED FUNDOnce you hit your startup target, will you fund be open or closed to new investors?
LIFE CYCLEHow long do you expect your fund to live?
OPERATIONSWhat’s your plan for ongoing opera?ons?
BUSINESS FAILUREWhat are the best ways of an?cipa?ng that your businesses are not succeeding?
SUCCESSWhat are your indicators of progress?
Appendix B.
The 25% ShiftThe Economic Benefits of Food Localiza:on For The
Pioneer Valley & The Capital Required to Realize Them
By Michael H. ShumanJune 2012
Sponsors:
Solidago Founda:onLydia B. Stokes Founda:on
For Further Informa2on, Contact: [email protected]
Michael H. ShumanCuNng Edge Capital2203 Quinton Road
Silver Spring, MD 20910202-‐669-‐1220
1
Introduction
In recent years, the Solidago Founda:on and the Lydia B. Stokes Founda:on have been working to help the Pioneer Valley spearhead the crea:on of the PVGrows Loan Fund. The Fund works to support local farmers and food businesses by providing financial assistance and business development services to qualified applicants. The founda:ons are now working together to create a much larger fund to help further localize the region’s food system.
Around the world, food-‐localiza:on ini:a:ves like these are gaining momentum. This movement seeks to accomplish three interrelated goals: shortening the distance that food travels between the farm and table; capturing more of the value-‐adding ac:vi:es associated with the growing, sor:ng, processing, packaging, distribu:on, selling, and serving of food; and maximizing the local ownership of all the enterprises involved in these value chains. If achieved, these goals will produce four dis:nct benefits:
• Stronger Community Economies — Local food is a cri:cal economic driver of local economies. Every loaf of bread unnecessarily imported leads to the leakage of "bread dollars" within the local economy and the loss of local bread business that could contribute to community prosperity. Moreover, local ownership of a bread factory ma`ers, because locally owned businesses spend more of their money regionally than do comparable, non-‐local businesses. Unlike outsider-‐owned businesses, local businesses tend to have local CEOs, adver:se in local media, hire local accountants and a`orneys, and reinvest profits in their community. Numerous studies have documented that a dollar spent on a local business yields two to four :mes the “economic mul:plier” – the underlying source of income, wealth and jobs – as an equivalent non-‐local business.1 Addi:onally, there is a growing body of evidence sugges:ng that local businesses are par:cularly good at a`rac:ng tourists and future entrepreneurs, promo:ng crea:ve economies, and s:mula:ng charitable contribu:ons.2
• Ecological Sustainability — Local food promotes not only general economic development but also sustainable economic development. Farmers, whether rural or urban, are among the most important stewards of the land. Because agriculture accounts for approximately 30% of the earth’s land surface, environmentally sensi:ve produc:on of foodstuffs is cri:cal to maintaining the healthy habitats, air, water, soil, and ecosystems needed to support healthy
2
1 The best studies in this area have been done by two economists at Civic Economics based in Aus:n. See, for example: “Economic Impact Analysis: A Case Study,” monograph (Civic Economics, Aus:n, Texas, December 2002); and “The Andersonville Study of Retail Economics,” monograph (Civic Economics, Aus:n, Texas, October 2004). Both can be downloaded for free at www.civiceconomics.com
2 Michael H. Shuman, The Small Mart Revolu4on: How Local Businesses Are Bea4ng the Global Compe44on (San Francisco: Berre`-‐Koehler, 2006), pp. 39-‐62.
people.3 To eat sustainably, moreover, means growing and processing foodstuffs in a sustainable manner. Any community on the planet that cannot sustainably feed itself necessarily places burdens on the ability of other communi:es to feed themselves. Put posi:vely, business models that meet local food needs sustainably can, if shared and mul:plied globally, teach communi:es in other parts of the world to feed themselves sustainably.4 Moreover, since local businesses, including local food businesses, tend to spend their money locally, their “inputs” travel less, use less energy, and thereby emit fewer pollutants and less climate-‐disrup:ng carbon.
• Be5er Nutri7on and Health — Another dimension of economic development is the well being of human capital, and here local food also has much to contribute. Because many foods lose nutrients over :me, local food means quicker delivery of foodstuffs generally greater in nutri:onal value. Moreover, knowing a farmer or rancher tends to enhance a consumer’s trust in the healthfulness of his or her products. Local foods also typically involve less processing, which means fewer chemicals and addi:ves. Replacing processed food with fresh food, as author Michael Pollan argues, is a powerful way to improve consumer health and reduce the incidence of obesity and diabetes.5 Every headline about a breakdown in the mainstream food system – outbreaks of e-‐coli in hamburger meat and peanut bu`er from distant suppliers, for example – is a reminder about the health value of purchasing food from producers who are known and trusted.
• More Civic Engagement — As author Bill McKibben argues, a farmers market experience is fundamentally different from that of a typical supermarket (let alone a Wal-‐Mart). A supermarket is about finding and purchasing foods as quickly and efficiently as possible. A farmers market is about consumers chaNng among, learning from, and developing rela:onships with local food producers, and about neighbors interac:ng with one another. An en:re sociological literature underscores that communi:es characterized by local business result in greater civic welfare, less social strife, and greater equality.6
3
3 World Resources Ins:tute, World Resource 2000-‐2001 People and Ecosystems: The Fraying Web of Life (Washington: Elsevier Science, 2000), p. 56.
4 The growing, harves:ng, raising, or capturing of specific foodstuffs are all dependent on many natural endowments – water, climate, ecology, gene:cs – that are not universally available. But technology is steadily leveling the playing field to the point where there are compelling examples of communi:es feeding themselves in every extreme—cold or hot, wet or dry, high or low, urban or rural. The development and spread of be`er and cheaper greenhouses, hydroponics, rooqop and suburban lawn gardening, and urban farms will hasten this equaliza:on. A further point is that even if a community is capable of producing no raw foodstuff, it s:ll in theory can find, from other communi:es, excellent models for small-‐scale food processing, distribu:on, retail, and restaurants. And from a value-‐added standpoint, these may be by far more important than raw food produc:on.
5 Michael Pollan, In Defense of Food: An Eater’s Manifesto (New York: Penguin, 2008). 6 See, e.g.: C. Wright Mills and Melville Ulmer, “Small Business and Civic Welfare,” in Report of the Smaller War
Plants Corpora4on to the Special CommiNee to Study Problems of American Small Business, Document 135. U.S. Senate, 79th Congress, 2nd session, February 13. (Washington, DC: U.S. Government Prin:ng Office, 1946); and Thomas A. Lyson, “Big Business and Community Welfare: Revisi:ng A Classic Study,” monograph (Cornell University Department of Rural Sociology, Ithaca, NY, 2001), p. 3.
The only plausible argument not to promote local food is a concern that local food some:mes costs more than conven:onal, mass-‐market food. But two points are worth making here.
First, an important reason why local food prices are rela:vely high is that demand exceeds supply; the prices reflect, moreover, a lack of distribu:on and aggrega:on infrastructure, which reduces efficiencies and cost savings in the local food system. As local food businesses grow and spread, par:cularly infrastructure businesses, prices will begin to adjust downward.
Second, economic success does not just occur with provision of the lowest priced goods and services. No one, for example, would cri:cize Starbucks as a failed model because its la`es are the most expensive in town. Consumers of all incomes are not only looking for the lowest priced food but also the best value for a given price. And in many ways, consumers – even low-‐income consumers – are finding that local food, even if it’s nominally pricier, delivers be`er value.7 A recent study by the USDA found that local food oqen provides the cheapest nutrients available, and local food markets like New Seasons have thrived in low-‐income communi:es because they provide be`er bargains than the processed foods available from corner stores and bodegas.
Even on a price basis, the economics of local food is steadily improving. At least five trends are likely to help local food improve its compe::veness over the next decade:
• Distribu7onal Inefficiency – While moving factories to low-‐wage regions with few regula:ons can bring down the produc:on costs of food, global distribu:on of food is becoming increasingly inefficient. Economist Stewart Smith of the University of Maine, for example, es:mates that a dollar spent on a typical foodstuff item in the year 1900 wound up giving 40 cents to the farmer, with the other 60 cents split between inputs and distribu:on.8 Today, about seven cents of every retail food dollar goes to the farmer, rancher, or grower, and 73 cents goes toward distribu:on. Whenever the distribu:on cost greatly exceeds
4
7 A recent study found that 500 South Carolina consumers were willing to pay 27% more for locally grown produce and 23% more for local animal products. Carlos E. Carpio and Olga Isengildina-‐Massa, “Intermediate Economic Evalua:on of the South Carolina Agricultural Marke:ng and Branding Campaign,” working paper, March 2008. Another study of residents in Maine, New Hampshire, and Vermont found that 17 to 40% of consumers in each state were willing to pay two dollars more to buy a locally produced five-‐dollar food item. Kelly L. Giraud, Craig A. Bond, and Jennifer J. Keeling, “Consumer Preferences for Locally Made Specialty Products Across Northern New England” (Department of Resource Economics and Development, Durham, NH), p. 20. See also: "Decomposing Local: A Conjoint Analysis of Locally Produced Foods," Kim Darby, Marvin Ba`e, Stan Ernst and Brian Roe. American Journal of Agricultural Economics, 2008, vol. 90, issue 2, pp. 476-‐486; Gretchen Nurse, Yuko Onozaka, and Dawn Thilmany McFadden, "Understanding the Connec:ons Between Consumer Mo:va:ons and Buying Behavior: The Case of the Local Food System Movement," Selected Paper, Southern Agricultural Economics Associa:on 2010 Annual Mee:ng. h`p://ageconsearch.umn.edu/handle/56494 (Access date: November 5, 2010); and J.K. Bond, D. Thilmany, et al, “Direct Marke:ng of Fresh Produce: Understanding Consumer Purchasing Decisions,” Choices: The Magazine of Food, Farm, and Resource Issues, American Agricultural Economics Associa:on, Vol. 21 (2006), pp. 229-‐235.
8 Stewart Smith, e-‐mail to Michael Shuman, 2 December 2005, upda:ng Stewart Smith, “Sustainable Agriculture and Public Policy,” Maine Policy Review, April 1993, pp. 68–78.
the produc:on cost, there are opportuni:es for cost-‐effec:ve localiza:on. Not just in the United States, but worldwide, local distribu:on offers opportuni:es for reducing the need for, and expense of, every component of distribu:on, including transporta:on, refrigera:on, packaging, adver:sing, insurance, and middle people. The Oklahoma Food Coop, for example, is a no-‐frills, internet-‐based food distribu:on company that has reduced distribu:on costs to 18 cents on the dollar.
• Rising Energy Prices – Long-‐distance food distribu:on will become more costly s:ll when, as most analysts expect, global oil prices rise.9 Adding to these market forces are poli:cal pressures to enact carbon taxes to slow global climate disrup:on. Because foodstuffs have a rela:vely low value per unit weight (except for a few products like expensive wines and spices), they are dispropor:onately vulnerable to rising energy prices and energy taxes (including green and carbon taxes).
• Homeland Security – Global concerns about terrorism have focused the a`en:on of security officials on scenarios that na:onal food supplies could be contaminated or destroyed.10 They are recognizing that the shorter supply lines and community self-‐reliance that come with local food can reduce these security risks. This is transla:ng into a recalibra:on of government policies to impose higher insurance premiums on global food producers and to offer more assistance to local food businesses. Professor David Orr of Oberlin College is consul:ng with the Joint Chiefs of Staff at the White House on the connec:on between distributed and self-‐reliant local food on the one hand and energy systems and na:onal security on the other.
• Telecommunica7ons – The spread of the Internet, affordable computers, and mobile phones provide local food entrepreneurs with informa:on about market opportuni:es that once was available only to larger companies. Even the smallest food and farm entrepreneurs are experimen:ng with no-‐ or low-‐cost social media tools to successfully reach their customers. The millennials, as an emerging demographic cohort, are already mobilizing their purchasing power in favor of local.
• Compe77ve Models – A fiqh factor increasing the compe::veness of local food is that local food businesses themselves are learning from their global brethren how to compete more effec:vely. In fact, in every food category of the North American Industrial Classifica:on System (NAICS), there are more examples of successful small business than examples of successful large business. Even in
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9 See, e.g., Christopher Steiner, $20 Per Gallon: How the Inevitable Rise in the Price of Gasoline Will Change Our Lives for the BeNer (New York: Grand Central Publishing, 2009).
10 Brian Halweil, “Home Grown: The Case for Local Food in a Global Market” (Washington, DC: Worldwatch Ins:tute, 2003) (Worldwatch Paper #163).
rela:vely centralized sectors, like poultry produc:on, there are compelling examples of small-‐scale success throughout the United States that can provide guidance to local food entrepreneurs. As pointed out in a recent study on Community Food Enterprise funded by the Kellogg and Gates Founda:ons, locally owned businesses are deploying more than a dozen strategies – such as low-‐cost technology, the internet, ver:cal integra:on, consumer ownership – to compete effec:vely against large-‐scale players.11 Moreover, networks of local food businesses and non-‐food businesses are forming – crea:ng joint procurement coopera:ves, for example — that are improving their economies of scale. Many local food advocacy groups and intermediaries are deploying peer learning strategies and network “communi:es of prac:ce” to more effec:vely diffuse innova:on for model replica:on.
The emerging compe::veness of local food businesses, while profound, s:ll could result in li`le change in the absence of enough capital to expand exis:ng local food businesses and create new ones. Consequently, a growing focus of the local food movement, thanks to the spread of groups like Slow Money and the Business Alliance for Local Living Economies (BALLE), has been on local finance. A growing number of Americans want to invest in local business, and a growing number of local food entrepreneurs are looking for capital from local investors.
Un:l recently, the barriers standing in the way of local investment were insuperable. Securi:es laws enacted during the Great Depression, for example, made it prohibi:vely expensive for the 99% of firms that are small and local to prepare all the legal documents necessary to take investment dollars from the 99% of investors who are “unaccredited” (that is, not wealthy). Consequently, nearly 100% of Americans’ $30 trillion in long-‐term investments – in stocks, bonds, mutual funds, pension funds, and insurance funds – goes into publicly traded companies or government securi:es. If capital markets were able to work properly, roughly half of this capital, about $15 trillion, would shiq from Wall Street to Main Street, providing ample capital for food localiza:on. Mindful of these opportuni:es, many local business advocates pressed Capitol Hill to pass the recent Jobs Act, which creates some new, low-‐cost, crowdfunding opportuni:es for local business.
Excited about bringing these opportuni:es to the Pioneer Valley, the Solidago and Stokes Founda:ons charged CuNng Edge Capital to explore the contours of a new fund that could support the expansion of local food businesses in the region—a fund that would build on the modest contribu:ons and success of the exis:ng PVGrows Loan Fund, which the two funders helped launch. Three ques:ons in par:cular were considered especially important in determining the shape of the fund:
• How large would such a fund need to be to put the Pioneer Valley on a strong path toward food localiza:on?
• What would be the economic impacts of geNng onto that path?
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11 See Michael Shuman et al., Community Food Enterprises (Wallace Center, December 2009).
• What should be the cri:cal design features of such a fund?
To answer these ques:ons, this paper analyzes the contours, impacts, and investment requirements for a 25% “local shiq” in the Pioneer Valley. What we mean by a “25% shiq” is that the localiza:on gap in each food-‐business sector—that is, the gap between the level of business that exists today and the level needed to achieve self-‐reliance in that sector—is closed a quarter of the way. We envision this shiq occurring over a decade. We believe that this goal is big enough to inspire regional mobiliza:on of the business, policymaking, and grassroots communi:es, but not so big as to be wildly unrealis:c.
In the following sec:ons, we analyze the contours of the food economy in three coun:es that make up the Pioneer Valley: Franklin, Hampden, and Hampshire. We then analyze the economic impacts of a 25% shiq. We go on to analyze the financial requirements necessary to achieve this shiq. Finally, we look at the key design features of a fund to help the region realize a 25% shiq.
Here are the key bo`om lines:• The Pioneer Valley currently has 37,825 jobs in its food economy, more than
half suppor:ng restaurants and other eatery businesses.• A 25% shiq toward food localiza:on would create 4,030 new jobs, enough in
principle to put one out of every six unemployed workers in the region back to work.
• An es:mated $279 million in capital is needed to create or expand local business sufficiently to support this shiq.
• A fund of $56 million, paired with exis:ng lending vehicles in the Pioneer Valley, might be sufficient to capitalize the 25% shiq.
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I. The Pioneer Valley Food System
As of 2010, the three coun:es that make up the Pioneer Valley – Franklin, Hampden, and Hampshire – had 697,458 residents living in 271,433 households. They were spread over 1,850 square miles.
A comprehensive picture of the Pioneer Valley economy is possible using IMPLAN, the Minnesota Input-‐Output Model deployed extensively by economic development agencies na:onwide. The most recent available IMPLAN data from 2010 show that the total value added for the county – the local equivalent of the Gross Domes:c Product – is about $28 billion per year. Of that, $15 billion goes to employees in wages, $1.6 billion to business proprietors as income, and $9 billion to property holders as rent, interest, or profit.12 Another $2.2 billion is paid by Pioneer Valley businesses in state and local taxes. On the demand side, households spend $23 billion per year, state and local governments purchase $5 billion worth of goods and services, and the federal government purchases another $1 billion (largely through hiring, services, and construc:on).
IMPLAN is helpful in drawing an accurate, comprehensive picture of the demand and supply sides of the overall food system. IMPLAN carves up the universe of business into 432 categories, some of which combine the 1,100 categories of NAICS. We focus here only on 57 IMPLAN categories that relate to food either exclusively or primarily. Food, depending on how you look at it, comprises 5% to 10% of the Pioneer Valley economy.
On the demand side, IMPLAN includes not only consumer demand (as covered by the Consumer Expenditure Survey) but also demand by businesses, public agencies, and nonlocal purchasers. Chart 1 presents the food demand picture. It shows household demand for food at $1.7 billion. State and local purchasers of food is another $632 million, which includes everything from school lunches and prison meals to vending machines and commissaries in public buildings. IMPLAN’s accoun:ng system also considers purchases outside the Pioneer Valley of local products as part of the demand picture. It shows that other parts of the United States are demanding $938 million of the Pioneer Valley’s food products and services, and the rest of the world another $61 million.
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12 Property here includes real, tangible, and 5inancial property.
Chart 1.Food Demand in Pioneer Valley Region – IMPLAN Es2mates (2010)
Chart 2 (on the next page) summarizes the top exports by Pioneer Valley food businesses. The biggest export items (by value) are manufactured foodstuffs: ice cream ($178 million total domes:c and foreign exports), milk and bu`er ($106 million), animal slaughter ($71 million), “all other food” manufacturing” ($71 million), bakery goods ($72 million), and breakfast cereal ($54 million). Another high-‐value export item is retail food sales ($167 million), presumably because people living in adjacent coun:es are doing a significant amount of their grocery shopping in the Pioneer Valley.
On the supply side, IMPLAN combines various federal databases on farmers, self-‐employed residents, and public employees. As shown in Chart 3, the “food economy” in the Pioneer Valley currently employs 37,825. More than 60% work in food service, primarily restaurants. About 26% work in groceries and food retail, 6% in food manufacturing, and 6% in farming and primary food produc:on.
Chart 3.Employment in Pioneer Valley Food Businesses (2010)
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Chart 2.Food Exports from The Pioneer Valley – IMPLAN Es2mates (2010)
Chart 4 (on the next page) provides a more specific breakdown of employment and wages in each food sector.
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Chart 4.Food Business Employment in the Pioneer Valley (2010)
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Chart 5 breaks down the $799 million paid out in wages for food businesses. Food service, responsible for 62% of the jobs, pays only 49% of the wages, reflec:ng the rela:vely low pay in the sector. Manufacturing, responsible for 6% of the jobs, pays 15% of the wages, reflec:ng the higher pay in that sector.
Chart 5.Wages in the Pioneer Valley Food Businesses (2009)
Chart 6 breaks out the $1.4 billion in value-‐added by Pioneer Valley food businesses. Maximizing value-‐added is important, because it allows higher wages to be paid and more wealth to be injected locally. Rela:vely high “value” comes from manufacturing, and rela:vely low value comes from retail. Food service generates about half of the value-‐added, because it is such a big part of the food economy.
Chart 6.Value Added in Pioneer Valley Food Businesses (2010)
Chart 7 illuminates what we know about local demand versus local produc:on in the Pioneer Valley, according to IMPLAN. The second column, labeled "Leakage," shows what percentage of local demand is lost to imports of outside goods and services. Almost every category is at or near 100%, sugges:ng the huge degree of “leakage.” The biggest excep:ons are food retail (groceries) and food services (restaurants), which typically are built up to be at or near local demand (though they are spread unevenly, some:mes leaving “food deserts”). Several large manufacturers, which top the export list, also are producing enough in theory to meet a big propor:on of local demand. The first column, labeled “Self-‐Reliance,” is the inverse of the second column.
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Chart 7.Food Business Leakages (2010)
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II. Economic Benefits from a 25% ShiX
In the following pages, we sketch what the 25% localiza:on scenario in the Pioneer Valley would look like in theory and what the consequent economic benefits would be. We assume that food exports remain constant. Instead, the only changes we envision are in the behavior of local purchasers—that is, the buying of local residents, businesses, and government ins:tu:ons. Increasing local demand then expands the size and number of local food businesses in the region.
The principal tool we use to measure the impacts of this shiq is the IMPLAN input-‐output model, which draws from state and na:onal economic pa`erns to model where every dollar of spending goes, and how every dollar is in turn re-‐spent. IMPLAN can model how a change in demand can lead not only to direct new jobs in expanded business ac:vity, but also how the new spending by this business creates new jobs (indirect effects from businesses’ supply chains) and how the new spending by new employees in all these businesses (both expanding food businesses and supply-‐chain businesses) create even more new jobs (induced effects).
A hypothe:cal example illustrates what a 25% shiq looks like.13 (The following numbers are made up.) Suppose breweries in the Pioneer Valley were producing $100 million worth of beer, $10 million of which was sold locally. Further suppose total demand in the region for beer was $200 million, which means that the region was impor:ng $190 million worth of beer. If all local produc:on went to local demand, total self-‐reliance would mean that local breweries could expand by $100 million in annual output. But since we assume that exports are constant – in this case $90 million – poten:al output expansion is actually $190 million. GeNng a quarter of the way to this would imply $47.5 million of new output.
Chart 8 below summarizes the results of the IMPLAN model aqer ramping up the demand in each of the 57 (CK) food-‐related sectors in the Pioneer Valley. A total of 4,030 jobs would be created – 2,243 directly in new food businesses, 1,080 through new supply-‐chain spending (indirect effects), and 708 through new spending by employees in these direct and supply-‐chain jobs (induced effects). To put this in perspec:ve, these jobs would be able to put one-‐in-‐six unemployed residents of the county back to work.14 Addi:onally, the 25% shiq would generate $128 million in new annual wages and $259 million in addi:onal value-‐added. It is hard to find any economic-‐development proposal for the Pioneer Valley, past or present, which would have as significant a job impact as the 25% shiW.
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13 Formally, the Regional Purchasing Coefficient (RPC) within IMPLAN es:mates how much of Total Gross Demand is currently met by local industry. The demand figure includes both local and nonlocal consump:on. Mul:plying Total Gross Demand by 1-‐RPC shows how much addi:onal industry is possible to meet local demand (without reducing produc:on for export).
14 As of March 2012, the state reported unemployment in the Pioneer Valley as 24,607, broken down as follows: 2,376 in Franklin County; 17,972 in Hamden County; and 4,259 in Hampshire County.
Chart 8.Impacts of a 25% ShiX for the Pioneer Valley (2010)
Chart 8 also shows that the 25% shiq would generate an addi:onal $26 million in annual state and local tax collec:on. That means that an annual government investment at somewhat below that level, if it achieves the 25% shiq, would be fiscally prudent.
Chart 9 presents a detailed roster of the job impacts in all the food sectors, compared to the exis:ng number of jobs. Various degrees of local impact are also shown, in case the reader prefers a more or less ambi:ous goal than 25%.
Chart 10 summarizes the jobs impacts by broad sectors: farming and animal growing, manufacturing; food service; indirect; and induced. Rela:vely few new jobs come from food service, because the area already has a full array of local grocery stores and restaurants. A rela:vely large number of new jobs come from expanded primary produc:on of fruits, vegetables, grains, and domes:c animals. Significantly, about two thirds of all new jobs are in high-‐wage manufacturing or spread across the en:re economy in indirect and induced jobs. The common assump:on that most of the jobs resul:ng from food localiza:on pay below-‐average wages is therefore not correct.
Chart 17.Summary Job Impacts of a 25% ShiX for the Pioneer Valley (2010)
Among the top indirect jobs are support ac:vi:es for farming, wholesale trade, management, trucking, and real estate. Among the top induced jobs are restaurants, health services, and retail.
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Chart 9.Job Impacts of Various ShiXs in the Pioneer Valley Food Sectors (2010)
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Charts 10 and 11 (on the following pages) look at the “Top 40” direct job opportuni:es, ranked by jobs and wages, respec:vely. These rankings are important, because they indicate what the priori:es for localiza:on ini:a:ves should be. Based on these rankings, the top five food localiza:on priori:es we discern are:
• Meat and Poultry — If land and training are available, there is the poten:al for new jobs from: raising animals like pigs, sheep, and goats (327 jobs); raising ca`le (162 jobs), and slaughtering these animals locally (139 jobs). There are addi:onal jobs possible from raising poultry and eggs (23 jobs), and slaughtering them locally (16 jobs).
• Farming — There is the poten:al for new jobs from growing fruit (160 jobs), nursery trees and plants (157 jobs), tree nuts (75 jobs), vegetables (47 jobs), grains (45 jobs), and other crops (18 jobs). Another 26 jobs could come from agricultural support ac:vi:es.
• Value-‐Adding Manufacturing — The directly grown items above could be fed into various well-‐paying manufacturing enterprises, including: local bakeries (117 jobs); frozen food (40 jobs); soq drinks and ice (36 jobs); confec:onary products (32 jobs); canned fruits and vegetables (31 jobs); wineries (31 jobs); cookies, crackers, and pasta (27 jobs); snack foods (23 jobs); seasonings and dressings (17 jobs); and breweries (13 jobs).
• Dairy — There are large job opportuni:es for raising more dairy ca`le (291 jobs), along with value-‐adding manufacturing of milk and bu`er (34 jobs), and ice cream and frozen desserts (20 jobs).
• Food Service — Even though the Pioneer Valley is rich in food service, the local demand is so large that another 76 jobs are possible.
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Chart 10.Top 40 Opportuni2es from a 25% ShiX for the Pioneer Valley – By Jobs (2010)
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Chart 11.Top 40 Opportuni2es from a 25% ShiX for the Pioneer Valley – By Wages (2010)
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These are the jobs that are possible with 25% localiza:on. But not all these jobs are plausible. Among the challenging constraints are entrepreneurship training and land, both of which might limit the ability of the Pioneer Valley to seize the opportuni:es above for more farming, dairy, and meat slaughter. A more comprehensive analysis is needed to quan:fy these poten:al constraints and iden:fy tools to overcome them.
That said, the worst case of these constraints – based on similar studies done in regions around the country including greater Cleveland, Denver, Detroit, and Boulder County – is that a somewhat larger area might be needed. In other words, expanding the boundaries of “local” – from three coun:es to ten, or to all of Massachuse`s, or if necessary to New England – inevitably resolves these constraints. The immediate jobs impacts are then lower for the target community, and higher for the region.
There are other economic benefits of this 25% shiq that are harder to quan:fy, but nevertheless are worth men:oning:
• Branding – As the epicenter of a local food renaissance, the Pioneer Valley area would be crea:ng a powerful new magnet for tourism.
• A5rac7on & Reten7on –Becoming a fabulous dynamic region that naturally a`racts and retains non-‐local businesses because of local economic richness and vitality – Richard Florida’s no:on of a crea:ve economy – is economically valuable.
• Entrepreneurship – Nearly all of the food businesses in the region right now are small. Indeed, except for a few food-‐processing businesses, the vast majority of food enterprises, such as farms and food service opera:ons, can be started by a good entrepreneur with modest levels of capital. The 25% shiq would lead to a region-‐wide entrepreneurship revolu:on, with posi:ve spillovers throughout the economy.
• Public Assistance – Increased employment and entrepreneurship would lead to reduc:ons in public assistance outlays in unemployment, food stamps, housing vouchers, health subsidies, and other government supports.
• Fiscal Health – Reduced government outlays and increased tax revenues would improve the fiscal health of various county and local governments in the region. This would improve their credit worthiness, lower the cost of capital, and reduce payments on exis:ng and future bonds and other debts.
• Capital Improvements – The 25% shiq would also allow more investments in public schools (human capital) and infrastructure (built capital), both of which can add to economic vitality, foster entrepreneurship, and increase the a`rac:veness of the region to outside business and investors.
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• Rural Economies – The 25% shiq provides a s:mulus in and around the Pioneer Valley to expand exis:ng farms, diversify farm economies, and revive farms that have gone bankrupt or otherwise been abandoned. By connec:ng urban demand with nearby rural supply, food localiza:on could lead to a renaissance of rural economic life.
• Economic Security – Diversifica:on of the local food system could help inoculate the region against sudden cutoffs in food that could occur because of contamina:on, war, terrorism, or global shortages.
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III. The Capital Requirements for a 25% ShiX
Farmers and small businesses always have some difficulty geNng credit, but the challenges have become especially acute during the recent financial crisis. Even companies with terrific track records for borrowing and repaying are currently having difficulty obtaining credit from mainstream banks, thriqs, or credit unions. This underscores the need for a new mechanism for capitalizing on local food businesses.
The Pioneer Valley has a number of sources of capital that can help, including, of course the PVGrows Loan Fund. Small loans to farmers and local food businesses are available from Common Capital and the Franklin County CDC Fund. The Coopera:ve Fund of New England can provide loans to food businesses structured as coops. RSF Social Finance and the Equity Trust (which are based in the Pioneer Valley), are na:onal funds willing to invest in local food businesses. The Calvert Founda:on could pump capital into Community Development Financial Ins:tu:ons, a designa:on from the U.S. Department of the Treasury indica:ng a focus on low-‐income areas that many of the funds listed here have.
The challenge, though, is that many of these funds are already fully extended. They can expand, of course, but each fund also has a slightly different range of priori:es whose scope reaches beyond that of food localiza:on. The local funds must a`end to businesses of various types. Na:onal funds must a`end to a wide diversity of communi:es. A much larger source of capital is needed in the Pioneer Valley that focuses exclusively on local food.
How much addi:onal capital might be needed for the 25% shiq? The 2012 Sta:s:cal Abstract es:mates the “Net Stock of Private Fixed Assets” in the country in different industries.15 Chart 11 shows these values na:onally for food businesses, and then scales them by popula:on for the Pioneer Valley. Assuming that the food system has a constant rela:onship between jobs and capital, the addi:onal capital required for the 25% shiq is $279 million for the Pioneer Valley. This number could be higher if new businesses turn out to be more capital intensive.
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15 Table 781, for the year 2009. Food-related wholesale is assumed to be 10% of the total.
Chart 11.Capital Requirements for 25% ShiX (2010)
There’s no ques:on that this capital, in theory, is available in the region, as shown in Chart 12. In the Pioneer Valley, for example, residents have approximately $18 billion of savings in short-‐term accounts and $62 billion in long-‐term accounts. Realloca:ng less than two percent of the former or less than half of one percent of the la`er could fully finance the businesses needed for the 25% shiq.
Chart 12.Es2mated Household & Nonprofit Capital (2010)
Of course, for the region to amass $279 million for local food businesses, it might only need to come up with a small percentage – perhaps 20% – in equity. A fund of $56 million might be able to leverage the remainder in loans from exis:ng financial ins:tu:ons in the region.
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This points to another shortcoming with the exis:ng funds in the Pioneer Valley. All of them focus on loans that are typically quite small. As the head of the Franklin County CDC Fund admi`ed, his fund has had difficulty making loans during the financial crisis because so many local businesses and entrepreneurs are already overextended with debt. In fact, the en:re country is overextended with second mortgages that are underwater, credit cards that are maxed out, and ramped-‐up repayment demands by financial ins:tu:ons that have caused a record number of bankruptcies.
A growing number of entrepreneurs are looking for equity or near-‐equity kinds of finance, which will not put them in further debt. Many of the businesses needed for the 25% shiq – meat processing; food manufacturing, packaging, and distribu:on; food service – cannot be done through small loans. The capital requirements for these enterprises are larger, and the scale requires more experienced entrepreneurs who tend to be more interested in equity or near-‐equity.
The exact kind of finance needed by these businesses varies enormously. Some will prefer conver:ble debt, while others will prefer more ac:ve shareholders. Another op:on, being developed by the Vermont Sustainable Jobs Fund, is royalty financing, where repayment and royal:es are :ed to monthly revenues or profits. This is especially a`rac:ve to local food businesses, where the flow of business if oqen seasonal.
As a next step toward assembling a fund of $56 million, the region might encourage residents to shiq part of their long-‐term savings into self-‐directed IRAs. There are many scenarios in which this could happen. If two percent of residents in the Pioneer Valley – one in twenty households – shiqed 5% of their long-‐term savings accordingly, this fund could be put together. This kind of campaign seems like a natural outgrowth of more than a decade of cuNng-‐edge consciousness raising and business building in the region around local food.
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