Editor’s Note: Although this article mostly relates to U.S. investors and beneficiaries, there are many lessons that apply to global impact investors and investees as well.
Working to build triple-bottom-line markets at the SOCAP12 conference. (Image credit: Jayson Carpenter).
Like most facets of our lives, including food, clothing, and jobs, our investments are becoming increasingly abstracted from our day-to-day reality. Very few people have the opportunity to invest in what they can immediately see, feel, touch or taste. The location of our investment dollars is increasingly “elsewhere,” and the sheer velocity with which money moves is mindboggling.
In the meantime, we are losing local community wealth and, concurrently, our sense of place. Historically in the United States, the keepers of place were local banks, chambers of commerce, local governments and local businesses. Over the past decades, local governments are becoming increasingly cash-strapped, local banks are being consumed by megabanks, and local businesses are being subordinated by big box retailers.
Less than 1 percent of Americans’ long-term savings in stocks, bonds, mutual funds, pension funds, and life insurance funds touch local small businesses, even though roughly half of the jobs and the output in the private economy come from them. If Americans shifted just 1 percent of their investments to locally-owned companies, more than $260 billion would be injected into the Main Street economy without costing the government a penny.
To learn more about the local investing movement at SoCap12, which dedicated an entire track to the subject, I spoke with Art Stevens, an impact investing professional and former vice president of marketing, sales and services for Calvert Foundation, one of the largest community development financial Institutions in the country. Stevens is now general manager of Microplace, a PayPal company and registered broker dealer that is democratizing impact investments by bringing simple debt notes to the public that provide both financial and social return (several of which provide local investment opportunities in the U.S.).
Stevens believes that in order to rebuild place, more opportunities are needed for individual investors to put their investment dollars into action locally. “We need to go beyond just shiny personalities and popular examples in impact investing and actually connect the dots in a way that individual people can relate to,” he said.
Stevens said a way to do this is to provide more local equity-based investment opportunities for non-accredited investors (you can find the definition of “accredited” investor here).
Art Stevens, General Manager at MicroPlace, speaks to a SOCAP12 attendee. (Image credit: Jayson Carpenter).
“We’ve really stripped away place – so how do we rebuild it?” he said. “Although a lot of nonprofits, universities and hospitals have stepped in to help ground place, these institutions do not actually create wealth. Goods and services have also gotten cheaper, which has outpaced the loss of equity. But we still need institutions that can grow and create wealth – and for that we need more local businesses.”
Without creating local wealth, local communities are much more susceptible to large-scale financial crises – like the one in 2008.
“For American society specifically, which is so focused on income and spending (and) with the majority of citizens living paycheck to paycheck, local wealth creation can help create a much-needed financial buffer against these larger trends,” Stevens said.
Investing locally may also help solve the issue of impact investing being perceived as a luxury.
“We make so many of our decisions based on our relationships,” Stevens said.
“Perhaps we should start thinking more about providing opportunities for people to actually invest in their local communities. This makes the idea of ’impact investing’ more tangible and concrete to the average Joe.”
Investing Equity in the Local: The Tradeoff in Efficiency
Many people make the argument that investing locally is not as “efficient.” It may take longer to get the financial returns many investors are looking for, and it may take more research to figure out where the opportunities are. But small businesses remain the backbone of the American economy. They help create jobs and healthy, resilient communities. A dollar spent at a local business, on average, generates three times more local economic benefit than a dollar spent at a corporate-owned chain.
“When we invest in our local communities, we are making investments that have ripple effects for us,” Stevens said. “Think of the multiplier effect in spending – it’s the same idea with local investing.”
And what works for one community may not work in another. Prescriptive, top-down economic solutions have a role, but in order to build resilience more bottom-up approaches are needed.
As more and more impact industry leaders think about how to invest locally, and as more people become interested in opportunities to do so, the impact sector has to come up with resources to educate people. It also must offer them opportunities to invest, whether through platforms such as Microplace or through Direct Public Offerings (DPOs).
The Direct Public Offering: One Emerging Opportunity for Local Equity Investment
The number of local equity investment opportunities is growing – from community ownership to crowdfunding (see the end of the article for a list of additional resources). To learn more, I spoke with Jenny Kassan, CEO of Cutting Edge Capital (CEC), which is an Oakland-based consulting firm that is leading the way in igniting local impact investing opportunities for non-accredited investors.
CEC helps small and medium enterprises in the U.S. raise capital through means such as DPOs, which are similar to an initial public offering in that stock is sold to investors, but allows a company to raise capital directly without the assistance of an investment banking firm or broker-dealer. So far, CEC has executed five DPOs.
Creating more investment opportunities is a chicken and egg issue. Businesses require an ecosystem of support, and investors also need to be educated about how to invest locally. There are still a number of missing links, which is where organizations like CEC come in.
“When it comes to DPOs, for example, although most of the laws are in place, for some reason DPOs aren’t done very often,” Kassan said.
She speculates that one of the main reasons for this dormancy is likely to be that, until recently, it was not that difficult to get financing because of the financial bubble.
“This way of getting financing [DPOs] is not the easiest strategy,” she said.
“But people are exploring the option because younger generations especially have also lost a lot of trust in the stock market. Many have not ever lived in a time where the stock market was doing really well.”
Cutting Edge Capital wants to be the Johnny Appleseed of DPOs. Among other initiatives, they are creating software to streamline the DPO process, which is very inefficient. For instance, there is no platform that lists all of the DPOs going on around the country. Most of the current investments in DPOs come from investors that CEC already knows.
One Investment Dollar at a Time
We have a long way to go to regain our sense of place, but we are collectively responsible for changing this – one investment dollar at a time. If you still need more convincing about the value of local investing, check out this presentation “Local Economies: Real Prosperity Starts Here” from SoCap12.
To learn more about the local investing movement, check out these organizations:
- RSF Social Finance: A non-profit financial services organization dedicated to transforming the way the world works with money. In partnership with a community of investors and donors, RSF provides capital to non-profit and for-profit social enterprises addressing key issues in the areas of food & agriculture, education & the arts, and ecological stewardship.
- Social Finance US: A non-profit organization whose mission is to mobilize investment capital to drive social change. Committed to improving the lives of individuals, families, and communities in need, they develop and manage innovative financial instruments that connect the social sector to the capital markets and generate both social benefit and financial return.
- Pacific Community Ventures: Creates jobs and economic opportunity in lower-income communities through the direct support of small businesses as well as advocating for systemic change to increase investment in these vulnerable communities through business advising, capital and research.
- BALLE (the Business Alliance for Local Living Economies): Creates prosperity by connecting leaders, spreading solutions that work, and driving investment toward local economies. BALLE equips entrepreneurs with tools and strategies for local success, and provides the national forum for the most visionary local economy leaders and funders to connect, build their capacity and innovate.
Hundreds of Community Development Financial Institutions (CDFIs) across the US, including Calvert Foundation, offer opportunities to do place-based lending.