Seattle Investing Group Models How to Start Your Own Fund

IMG_0011-1Last fall, the Seattle Impact Investing Group launched a unique collaboration through a Local Food Fund. The group brought together ten impact investors, both experienced and new to the field.  After three months of reviewing applications and business pitches, the fund agreed to invest $50,000 in each of three businesses: Viva Farms, a farm incubator in Skagit County; Better Bean, an innovative bean company in Multnomah County, Oregon; and Cattle Producers of Washington, a cooperative meat processing facility in Lincoln County. The Better Bean investment has been made and the fund is currently working through the details of the other two deals.

Elise Lufkin acted as manager of the fund and recently sat down with Slow Money NW to share their experience with starting their own fund.

First, why are you excited to do this work here in Seattle?

Seattle is becoming recognized as a leader in impact investment. Funds and firms are locating here because of the large impact investor community. National funds are starting to make Seattle a stop on their fundraising tours. Impact Hub has also brought a lot of entrepreneurial energy and buzz around social enterprise. All of these players are helping to creating a virtuous feedback loop that is helping everyone succeed. We are excited to play a small part in that.

This fund marked an evolution of Seattle Impact Investing Group. Why did you decide to evolve?

Originally we were a group of impact investors that got together to discuss our investments and provide support on due diligence. Members began to informally co-invest in deals and eventually a desire evolved to invest together more formally. We wanted to learn by doing together, with the understanding that none of us knew everything. A fund became a vehicle to drive ourselves to push our learning and hold each other accountable.

What were your shared goals for the project?

A healthy local food system is important to each of us, so it became the focus of the fund. Beyond strengthening our relationships through shared experiences, we wanted to create a model that others could take and customize for their own goals, hopefully improving it! While the fund is not about making the most money possible, financial returns are important if the companies we invest in are to be successful long term. It was clear for us that this project was not a philanthropic one.

We too hope that others will be inspired to start their own funds. So, how did you decide on the amount of money each person invested?

We wanted an amount that would be large enough so that people would come to the meetings but small enough so that if we lose everything people can still pay their mortgages. In hindsight, I don’t think it was the size of the investment that kept folks coming to the meetings, but rather their commitment to the shared goals.

Each investor originally pitched in $11,000, $10,000 to be invested in the business and $1,000 to cover the administration of the fund over its 10 year life span. In the end, each business needed a full $50,000 to be successful so each investor pitched in an additional $5,000.                                                                                                                

Beyond the financial commitment, what was the time each member agreed to meet?

We met in person every week for at least two hours, sometimes three. From the beginning it was clear that this was going to be about showing up. It was a big commitment and people took it seriously. We had a one-month period in which we accepted applications and then three months to whittle down the applicant pool. We started with 39 applicants and selected 17 to interview over the phone. The 8 semi-finalists were given the opportunity to pitch the group in person and then the final 3 businesses were selected for deep diligence. In the end, the finalists had to be agreed upon by all investors.

Was reaching that consensus difficult?

Not really. We worked hard to ensure that everyone was heard, and we relied on the opinions of the members who were most familiar with the particular investment we were discussing. To move discussion forward we used a system of post-its as votes. Each person got a set number of post-its and was told to distribute them as they chose among the companies we were discussing. This allowed us to quickly eliminate the companies that no one was interested in, so we could spend more time on the ones still in contention.

Additionally, everyone in the group respected the opinions of the others, which made our discussions very productive.

What criteria did you use to guide the conversations?

We wanted companies that would be successful so we looked for the things all angel investors want – a good idea and the ability to execute on it. In addition to being financially sound, we were looking for companies who are providing a key piece of infrastructure in our regional food system. Each of the businesses we selected is doing that in an exciting way. And lastly, the size of our investment needed to be suitable to their needs.

How did you determine how to structure the financing?

Each deal is structured on a case-by-case basis, based on what makes most sense for the business and the entrepreneur. One of the loans is a basic loan with reasonable interest, one is an equity play and the other is a revenue-based loan. We worked with each of the businesses to come to those decisions.

What is your involvement in the businesses moving forward? Are you providing any ongoing business advising or support?

Each business that received an investment has someone from the fund that is checking in with them on a regular basis to see how the business is doing and to provide advice as needed.

There’s buzz that this fund catalyzed a lot more than the $150,000 invested through the LLC. 

Yes, all told the fund catalyzed investments of $1.5 million. This included monies directed by SIIG members to companies that didn’t make it to the final round and additional investments made to the selected companies beyond the $50,000 they received through the LLC.

So, will you be doing another fund soon?

Yes, we are exploring the possibility. We do not yet know what the focus will be. It may be food again, though it may be something else.

What would you do differently in the next round?

There was a healthy tension between giving companies the time and attention they deserved and the need to move forward in the three-month time frame we committed to. Ideally we’d slow the process down, though as we are volunteers, it’s hard for people to commit more time than they did. We would love to be able to spend as much time on the businesses we won’t be investing in as those we will. This would ensure better feedback to the business and would help us solidify our understanding of the system and where our money can be best invested.

Who should reach people reach out to if they want to learn more about starting their own fund?

For more information on the group or to access the materials that we developed, reach out to Ammen Jordan at ammen@energyfriendly.com.

EDITORS NOTE: The Seattle Impact Investing Group is currently researching investment opportunities that provide, through a fund structure, both social and/or environmental impact, and current yield. To learn more go here: http://www.seattleimpact.com/2014/03/call-for-current-yield-investments.html

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