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Entrepreneurs Turn to a New Source of Funds: Their Neighbors

| Written by ILSR Admin | No Comments | Updated on Jun 11, 2014 The content that follows was originally published on the Institute for Local Self-Reliance website at https://ilsr.org/entrepreneurs-turn-source-funds-neighbors/

Wall Street Journal, June 11, 2014

It’s the kind of story people hear all the time.  Two years ago, Rick Stender found out that a local business he liked—a custom-bike maker—was in big trouble. The shop needed money to import extra bike parts for the holiday rush. And banks wouldn’t extend any credit to such a young company.

Many people would have tried to give the store some extra business by buying a new bike, or urging friends to stop in. Many others would have simply shrugged.

Mr. Stender wrote a check for $20,000.

The loan helped the shop, Affordabike, weather the holidays. It has since grown so much that the owners have launched a new bike brand and qualified for bank loans. Mr. Stender, meanwhile, got his $20,000 back, plus a $4,000 profit.

The rewards weren’t just financial. “You can see your money going to work,” says Mr. Stender, a lifelong resident of Charleston, S.C., where Affordabike operates. “You don’t get that warm, fuzzy feeling following a stock ticker as you get when you invest in your backyard.”
The People in Your Neighborhood

Everyone’s heard the call to “buy local.” Now a growing movement is urging people to take grass-roots support even further—and invest local.

The idea: Instead of putting their investment dollars in big, distant companies, people should bet on the shop around the corner, by giving it a loan or buying a stake in it through a special stock offering. Small businesses, for their part, should lobby their neighbors and customers for support if banks don’t come through with financing.

Everybody wins, advocates say. Investors can see a modest profit on their money, and businesses can get badly needed cash. What’s more, the community itself benefits from added jobs and the presence of a healthy business in town.

“It just keeps so much more wealth in the community than a typical arrangement with a professional investor or a large bank where the payoff may not stay in the community,” says Jenny Kassan, chief executive of Cutting Edge Capital, an Oakland, Calif., firm that helps small businesses raise money.

By all accounts, local investing is still a small movement. But advocates and other experts say more people are starting to take the same steps as Mr. Stender. There’s an increasing desire to “start and grow companies regionally,” says Diana Kander, a senior fellow at the Ewing Marion Kauffman Foundation. “It’s a growing phenomenon throughout the country.”

Local-investing advocates say they’ve seen hundreds of cases of people putting money into local businesses. And groups that help local companies raise money say they’ve seen growing interest. Since its inception in 2009, Slow Money, a network that links investors with small food businesses, says it has helped more than 300 businesses raise $35 million. Cutting Edge Capital says it has completed 10 public offerings of local businesses since 2012, with 25 more in the pipeline.

The biggest spur for the movement, experts say, has been the financial crisis. Lenders have tightened their standards, so local companies face a tougher time getting cash. At the same time, advocates say some individual savers are looking to diversify their portfolios, wary of putting all their money into traditional investments.

“More and more entrepreneurs are looking to customers and neighbors for financing,” says Stacy Mitchell, senior researcher at the Institute for Local Self-Reliance in Portland, Maine. “Meanwhile, a growing number of people are looking to move some of their savings out of Wall Street and into their local economies.”

Michael Shuman, director of community portals for Mission Markets Inc., which connects investors with sustainable businesses, adds, “What the financial crisis did was raise skepticism about business-as-usual investing, and there’s a sense of urgency and excitement about what we can do to change this.”

Another spur for local investing has been the Jumpstart Our Business Startups Act, which eased some laws around small-business funding in 2012. The new laws will give small businesses another option to sell equity stakes to investors of modest means, instead of just sophisticated and wealthy “accredited” investors. “The JOBS Act will mean that there will be new individuals investing that don’t fit the old requirements for accredited investors,” says Ms. Kander of Kauffman. “We’ll likely see a significant growth in the number of people entering this marketplace.”

However, like any speculative investment, local deals are not without risks. Problems have been limited so far because many deals happen between two parties who know each other. But if local investing starts to gain widespread traction nationally, experts say, it’s unclear what types of protections investors have if a deal goes south.

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While loans are the most common type of local investment, some investors prefer equity investments because they can be a part owner and have a bigger say in how the business is run.

The Securities and Exchange Commission allows small companies to seek shareholders on their own through direct public offerings, or DPOs. It’s an easy way for companies to raise money without facing the expensive regulations of an initial public offering. A company has to register with the state where it’s planning to sell shares and file a disclosure document letting potential investors know the business plan and potential risks. The company may also have to file with the SEC.

Because DPOs go through a less-extensive vetting process than IPOs do, experts say reputation and word-of-mouth are especially important for potential local investors to consider before buying shares.

James Gordon, who lives just outside Boise, Idaho, bought $6,000 of shares in a local brewery called Boise Brewing last summer. Mr. Gordon, a craft-beer lover and part-owner of a trailer manufacturer, was one of 232 community investors who pitched in $450,000.

“My heart was leading me to want to support something local with the money I had saved up,” Mr. Gordon says. “A lot of Idahoans want to support other Idahoans and see a business do well in downtown Boise.”

Although the brewery isn’t expected to generate returns for investors for at least four years, Mr. Gordon says his dividend is having a brewery where he can go to grab a drink. Plus, every investor in the brewery gets a free mug and special beer deals.

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