Slow Money, Local Business, and Social Capital
Posted by: John Tozzi on September 10, 2009
Could slow money help your business?
CNN Money has a good story by Helaine Olen today about local businesses raising money from their customers. It’s an idea our own David Gumpert wrote about even before the acute phase of the financial crisis. He drew a parallel to Community-Supported Agriculture, in which customers pay up front for a share of a local farm’s harvest throughout the season.
Coincidentally, there’s a conference going on in Santa Fe this week about Slow Money. The idea behind slow money, modeled on the 20-year-old slow food movement, is to create an infrastructure for investing in local food systems.
These are both efforts to rethink how capital flows through a community. Financial markets exist to connect people who have extra capital (in retirement accounts, pension funds, nonprofit endowments, personal savings, etc.) with people who need it (to go to college, buy homes, start and expand companies, buy inventory and equipment, etc). In the old model, a bank, fund, or other institution is usually the intermediary in the marketplace. That intermediary invests capital from savings wherever it has the greatest return for the institution’s shareholders — and sometimes that meant a lot of money flowed to destructive assets, like subprime mortgages.
The new model is a way of allocating capital that accounts for other factors, like how it affects the local community. When businesses borrow or get investment directly from their customers (in the CSA model, for example), that means that customers’ interests are aligned with creditors’ or shareholders’ interests — they’re the same group. In a local economy, they’re part of the same community, too, so they have incentives to create value beyond just pure financial returns, by doing things that benefit the local environment and community. (E.g., a farm chooses not to use pesticides that pollute the local water system — a benefit local shareholders see.)
Real hurdles keep many businesses from doing this. For one, it’s difficult to actually raise small amounts of equity from a large group of customers because of SEC rules that rightfully guard against investment schemes. (More on private placements here.) It’s also tricky because for-profit companies that take into account social and environmental benefits don’t easily fit into the existing corporate legal structures in the U.S., although that’s beginning to change. And individuals lending directly to businesses aren’t necessarily equipped to service small loans.
There are workarounds, like some of the ones outlined in the CNN story. Businesses can raise capital by selling VIP memberships with benefits to customers, or offer gift certificates at a discount (essentially borrowing from their customers against future sales). Localities can even create local currencies to encourage spending within the community, and those can carry a discount too.
These are all ways of slowing money down. For a practical example of how it works, look at this profile by NPR’s Laura Conaway of a small organic dairy:
[Dante] Hesse is offering 6 percent interest for an unsecured loan of $1,000. His business plan taps into a pair of burgeoning movements — the first characterized by an interest in organic, locally grown food; the second by an environmental approach to economics.
The idea of investing in a farmer like Hesse, who’s got no collateral to back up a loan, might seem overly risky to some. But one customer at the market stops to ask Hesse about the deal.
Josh Goldstein of Brooklyn says he and his wife are interested in lending money to Hesse. They’ve lost faith in the stock market, and are ready to put their faith instead in a business and product they can see — and taste.
(Also check out the book excerpt at the end of the NPR piece.)
The company gets access to capital that the existing financial markets won’t provide. The customer/lender potentially gets a return he can’t get from a bank right now (while taking a bigger risk of course). At the same time the loan supports a product that the lender himself wants to buy. The marketing opportunities here — chances to authentically connect with customers — are tremendous.
Some people say that deliberately keeping money in a local economy isn’t the most efficient use of capital. But given what’s happened in the global financial markets over the past two years, it’s hard to say that they’ve been the most efficient at allocating capital either.
These efforts channel funding to new types of enterprises that the existing system doesn’t support, and that’s what interests me most. It’s a nascent effort, but one that’s clearly gaining momentum. I’m curious to hear your ideas, observations, or examples of what happens when you slow money down.