This second post in the “Creating Good Work” series proposes new financial models for investing in local small and micro enterprises.
By Greg Wendt And Ron Schultz
When was the last time you asked a financial advisor to put your money in a financial fund that would support environmental and social concerns only to be met by a blank stare, because the advisor had no knowledge of that such a fund existed?
Or perhaps you went to your advisor and said, “I’d like to invest my money locally, in small businesses that are struggling here in our community and help them improve our local economy. Do you have a fund that will do that?”
Did the blankness of the stare deepen?
As a financial advisor I regularly place my clients in vehicles that might fundamentally change the way the economy works and at the same time provide a competitive return on investment. Unfortunately, there are simply few if any local choices that will satisfy such needs.
As a member of the California Financial Opportunities Roundtable, we ran into similar problems around providing access to capital locally. With SEC regulations and government investor protocols, targeting investments within a community through traditional financial vehicles is often difficult -- but not necessarily impossible.
Needed: Local And State Support For Small Business And Micro-Enterprise
We know that many Community Development financial institutions have been flooded with available funding lately, which says that the local interest exists, but the money is not yet flowing out for investments in small local businesses and startups.
Getting money into the hands of those who can help build a healthy economy requires an economic development strategy at both the local and state levels that supports small business and micro-enterprises.
Our visions of global grandeur have often redirected our focus away from investing and buying locally, often fueled by the possibility of windfall profits in larger markets. But that focus has pulled us away from the richness of our community businesses and the economy they support. These businesses operate adjacent to the multinational big boxes that can sell for less, but become extractive from the local economy rather than generative.
Transforming Our Finance and Securities Laws
In the book, Creating Good Work: The World’s Leading Social Entrepreneurs Show How to Build a Healthy Economy, (Palgrave, 2013) I wrote in my chapter about the transformation required to see money as part of the natural biosphere in which it operates. If we can transform our perception of money, we can simultaneously address issues such as the needs of communities, quality of life, human justice, food quality, education, infrastructure, energy security, and soil fertility.
The issue, of course, is that our securities laws and our financial vehicles operating under those laws don’t always allow us to invest our money in ways that can have an impact on these very important living issues.
This is especially true for those unaccredited investors whose net worth is less than $1 million. Equity crowdfunding may allow for more of this kind of investment to take place in the future, but we still run up against the lack of financial vehicles that would allow us to direct investments toward environmental and social issues in our local communities.
In addition, financial advisors are also limited in this arena by the choices available through traditional channels. These investments are equally as prudent as others on the market while at the same time improving the quality of life in the communities. The problem is they are rarely offered because in many cases the traditional marketplace doesn’t know they exist.
Alternative Funding Sources
Getting funding into the hands of local businesses that are doing good work is a real challenge in this climate. However, instead of relying on traditional bank loans, alternative funding sources could be created for locally-owned businesses.
One new model could leverage network thinking and connectivity to create scale. It would be transparent so it could deliver the desired social, economic, financial impacts for its stakeholders. It would also be a true “neighbor to neighbor” investment experience, allowing local investors an opportunity to achieve a “living return” while at the same time supporting the locally owned businesses and enterprises in their community, and for that matter, communities all over the country.
Living Economy Fund Model
One model we are developing based on this thinking is what we're calling a “Living Economy Fund,” which would be open to all investors. It would provide support to locally-owned, mission-driven businesses nationwide, while at the same time offering the necessary liquidity, transparency and security to retail investors so they could achieve a living return. Currently, such investments are only available to accredited investors.
A key element would be an eligibility requirement so that it could be offered through retail investment platforms with a low to moderate investment minimum, commensurate with mutual fund minimums and experience. Additionally, the investments would need to be structured so that yields would be high enough to offer a growth of investment for savings, while at the same time offering an affordable borrowing cost to local businesses.
A core component of such a fund’s management and purpose would be embedded within linked networks of businesses (for loan sourcing and review) and an online community to connect businesses with their investors, much like Kiva or Prosper.com. Communities such as Green America, BALLE, and Slow Money, all have aspirations to create such an experience.
A fund like this can then be simultaneously offered in different contexts as a “white label” experience, and also offered on a national basis to fiduciaries nationwide. Thus, community organizations can brand the fund for their constituents, while investors can enjoy the benefits of national diversification.
In addition to its direct benefits, the creation of funds based on a “Living Economy Fund” model would enable others within the financial services and impact investing community to leverage and utilize the business model created to further harness the estimated $120 billion in demand for impact-oriented community investing.
As is stated throughout Creating Good Work, we have to be willing to apply the notion of deliberate disruptive design to any situation that is not delivering the impact required. This is true whether we are trying to end childhood hunger, creating more collaborative solutions to climate-based influences, or building a health local economy.
More of the same simply won’t carry the day. It’s time to build something new.
Next: Shifting The Unshifting – The Course Of Social Innovation
Previously: Creating Good Work: A New Series on Social Innovation by Social Innovators
About Greg Wendt:
Greg is currently Senior Wealth Advisor and head of the West Coast Office of StakeHolders Capital, a boutique wealth management firm specializing in Impact Investing.