By Amy Cortese, author of Locavesting
Here\’s a quiz: if a particular sector of the economy employed half of all private workers, generated half of private GDP, and created more than two out of every three jobs, how much would you say we should be investing in it? Two-thirds of our investment dollars? Fifty percent? Ten percent?
Try close to zilch.
I\’m talking about the nation\’s 27 million small businesses. These small enterprises are the nation\’s true job creators. A recent study by Harvard professor Edward L. Glaeser established a direct correlation between firm size and job creation. Analyzing U.S. census data, he found that counties with the smallest firms experienced job growth of 150 percent, compared to 50 percent job growth for counties with the biggest firms. In fact, as average firm size increased, the rate of job growth decreased.
Indeed, U.S. multinationals shed 2 million domestic jobs from 1999 to 2008, an 8 percent decrease. Over the same period, their overseas hiring swelled by 30 percent, aided in part by tax policy that encourages them to keep profits and investments overseas. That trend has only accelerated since the sub-prime crisis.
There\’s another thing about these small fry. Because they are typically private and locally-owned, rather than controlled by absentee shareholders, they benefit their communities in ways that global corporations do not. Studies by Civic Economics have shown that a dollar spent at a locally owned enterprise generates, on average, three times more direct economic benefit to the community than the same dollar spent at a corporate peer. That\’s because money stays local, rather than being sucked out to a distant headquarters. When small business owners need goods or services—web design, accounting or legal help or supplies, for example—they tend to turn to other local businesses, creating and maintaining more local jobs. They also advertise locally, supporting a vibrant independent media, and are active in their communities, sponsoring Little League teams and giving to local charities. And, in contrast to many of their sophisticated global peers, small businesses contribute to a healthy, diversified tax base to pay for local services, such as education.
Yet these small firms are increasingly starved for capital from banks, who consider them too risky; from angels and VCs, who are looking for supersize returns; and from the public markets, which are prohibitively expensive for small companies.
That\’s why the single most important thing we can do to help rebuild our communities and the economy and create a more inclusive form of capitalism is to invest locally. That is the subject of my book “Locavesting” which was published in June 2011 by John Wiley & Sons. It is a call to rethink the way we invest so that we support the small businesses that enrich us economically and culturally.
So what is locavesting? It\’s a term I coined in late 2008 to describe the grassroots financial innovation I saw bubbling up across the country. Not only were people looking for alternatives to Wall Street, they were creating them. Like locavores who eat a locally sourced diet, a growing number of people are investing close to home. From Brooklyn, New York to Port Townsend, Washington, a vast experiment in citizen finance is taking place. Community-financed business, crowdfunding, cooperatives, investment clubs, direct public offerings and local stock exchanges—these are just some of the alternatives taking shape. The idea is to earn profits while creating strong, resilient local economies. After all, without strong local economies, we cannot have a functioning global economy.
Two things I want to make clear: We think of mom & pop shops as the quintessential local business, and that they are. But a local business can also be a company that employ hundreds of people and generates tens or hundreds of millions of dollars in revenue. Or it can be a high-growth startup. The defining characteristic is that it is locally owned and has a stake in the community.
Second, I\’m not suggesting that people rush out and sink all of their money in the local dry cleaner or put all of their eggs in one geographic basket. But local investments can provide some important diversification for investors. Because their business models are more localized, these companies are often buffered from the global disruptions that rock the financial markets with alarming frequency – whether an earthquake halfway around the world or a sovereign default. Local firms are also less vulnerable to spikes in the price of oil and other global commodities.
Most “locavestors” are putting just a portion of their investments—maybe 10 or 20 percent, although I have seen it go much higher—in the local market. But that can still have a significant impact. Just as “Buy Local” programs have found that a 10 percent shift in spending can have a big impact on a community, so, too, can a shift of 10 percent, or 5 percent, or even 1 percent of our investment dollars.
Imagine that: 1 percent of $26 trillion, which is roughly the amount that Americans have invested in various securities, going to local businesses. That\’s $260 billion dollars injected into the Main Street economy. As policy makers have become paralyzed by gridlock and budget-slashing fever, that\’s a stimulus plan that won\’t cost the government a dime.
It will take a lot of work to shift even 1 percent of our investments, in large part because our securities laws make it hard for ordinary Americans to invest in small, nonpublic companies. But it is starting to happen across the country.
I have many examples in my book, but I\’d like to share with one of my favorites: the nine burly cops in sleepy Clare, Michigan that saved their town\’s 111-year old bakery. It\’s a modest, one-off example, but it points to the impact that local investment, and a little wit, can have on a community.
Officer Greg Rynearson was out on a coffee run one fine spring morning when he heard that the town\’s bakery was going to close. For Rynearson, who was born and raised in Clare, it was more than a fixture of his youth. If the bakery closed, it would be yet another shuttered storefront on North McEwan, Clare\’s main drag. Back at the police department over lunch, he convinced eight fellow officers – that would be the entire Clare police force – to chip in and buy the bakery. They tweaked the menu, adding “the squealer,” a doughnut topped with two strips of bacon. And with a nod to the old cop cliché, they renamed the bakery Cops & Doughnuts.
The enterprising officers put billboards on the highway that drew people in from all over. And they created t-shirts and mugs with slogans like “DWI: Doughnuts Were Involved.” The new Cops & Doughnuts was a hit. Now, in the peak summer season, 2,000 people stream through its doors on a typical Saturday, and the bakery employs more people on a fulltime basis than the police and fire departments combined. Its success has spilled over to neighboring businesses, revitalizing downtown Clare and encouraging new shops to open. The cops buy as much as they can locally, from t-shirts to flour to roasted coffee beans. They sponsor a local t-ball team, support the high school band, and give to local charities. Like a low-fat doughnut, it\’s a virtuous loop.
There are many one-off examples like that. But for locavesting to live up to its potential, there must be more mainstream options available to investors —both accredited and unaccredited. And they are beginning to take shape within the narrow openings allowed by U.S. securities laws.
One of the leaders in this movement is Slow Money, the organization founded by Woody Tasch. Slow Money chapters around the country have been devising ways to funnel capital to the sustainable food and agricultural enterprises in their respective areas. Slow Money has organized Entrepreneur Showcases, bringing together local investors and entrepreneurs, facilitating $5 million in investments to small-scale food & agriculture enterprises. Local chapters are also creating investment clubs, local funds, and innovative public-private partnerships that meet the needs of their communities.
Other innovators are looking to harness the power of social media to aggregate small sums from many investors. Kiva and Kickstarter have shown the enormous potential of this “crowdfunding” approach. The catch is that in neither case is there any financial return: Kiva\’s lenders get their principal back (if all goes well) but no interest–that is kept by the microlending field partners. And Kickstarter is pure donations. In its first five years, Kiva has raised $160 million from 500,000 people for micro-entrepreneurs, while on Kickstarter; people are pledging money at a rate of $1 million a week. Imagine what people would be willing to invest if it were possible to make a financial return? Crowdfunding holds great potential to bring critical financing to companies who are unable to attract investment from banks and traditional funding sources.
That is the next challenge for crowdfunding entrepreneurs, such as ProFounder.com, a startup created by Kiva co-founder Jessica Jackley and Dana Mauriello. ProFounder helps entrepreneurs manage the often messy and fraught process of raising money from friends and family. The company prefers to call this “community-funding,” since the emphasis is on an entrepreneur\’s social network, rather than an anonymous crowd. ProFounder uses a revenue-sharing model, which is less burdensome for fledgling businesses than equity or debt.
For now, ProFounder is more or less limited to reaching out to friends and family—general solicitation is banned by the Securities & Exchange Commission. If entrepreneurs want to invite a wider circle to invest, they cannot offer a financial return (thus the approach of Kiva and Kickstarter). There are, however, a number of crowdfunding options for accredited or sophisticated investors, such as WealthForge and MicroVentures.
The situation is different in the UK, where securities laws are more accommodating. And no surprise, that\’s where the real creative ferment is taking place. Funding Circle, a one-year old website, lets individuals lend money to established small businesses that meet strict minimum criteria. Members are encouraged to form “circles” of interest: circles have formed to invest in Scottish businesses, manufacturers in London, eco-friendly companies, and “High Street” retailers, for example. Funding Circle members invested more than $1 million in small businesses in the month of June alone. (The loans are unsecured, as with other peer-to-peer lending sites, but defaults have been rare). A soon-to-launch London-based site called Seedrs will apply the crowdfunding model to let individuals to make equity investments in small businesses.
This is just a glimpse of the innovative efforts that are transforming the investment landscape. And much more needs to be done—not least of which is to update the anachronistic securities laws that hamper small business capital-raising. Investors are fed up with the Wall Street casino and watching their hard-earned savings sucked into a wealth-destroying bubble machine that serves little social good. Locavesting offers an alternative. It is about restoring a sense of connection between investors and companies, with all of the accountability that comes with that. It is about investing for the long term and supporting job-creating businesses. It is a call to invest, once again, in our communities and to rebuild the economy, one Main Street at a time. Because if we don\’t do it, who will?
Article by Amy Cortese, author of Locavesting
For more information on the “Locavesting” book go to http://www.Locavesting.com
