CFFP moves to Philanthropy Northwest

Slow Money Northwest has been successful in developing innovative approaches to financing regional food and farm businesses. Our latest innovation, the Cascadia Foodshed Funding Project (CFFP), has brought different types of investors together, particularly foundations and individual impact investors, to focus on using market-based strategies to grow the regional food economy. Our innovation and action-based strategies has garnered the interest of Philanthropy Northwest to help facilitate growth of project.

Slow Money Northwest is excited to hand the project over to Philanthropy Northwest to expand the success of what is now called the Cascadia Foodshed Financing Project. From their announcementWe are excited to introduce Cascadia Foodshed Financing Project, the latest project to join Philanthropy Northwest’s incubation platform and regional impact investing network. So what is it, and why does it matter? In his first of many blog post for our readers, Tim Crosby, CFFP’s founder, explains how this project has come together with support from a range of Northwest funders, and what they aim to achieve.

CFFP has become the main focus of Slow Money Northwest’s tight resources. The core SMNW players will continue to connect sustainable food and farming business to sources of business development and financing assistance. If you would like to help advance these efforts and help steer SMNW forward please contact Tim Crosby via email: tim*at*slowmoneynw.org.

Thank you for helping move the nexus of food/farm/financing/philanthropy forward!

USDA Announces $78 Million to Boost Local Food

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Regional food received  an impressive new spurn of funding from the USDA last week. The money is split between the Rural Development Business and Industry Guaranteed Loan Program ($48 million) and available grants from Agriculture Marketing Services ($30 million) targeted at giving much needed federal investment in “food hubs, farmers markets, aggregation and processing facilities, distribution services, and other local food business enterprises.” 

Locally sourced food now accounts for roughly $7 billion a year  in sales but with any emerging sector, cash investments are needed to continue its growth, and its exciting to see the USDA taking a proactive approach and creating new funding options for farmers, growers, and sellers of locally sourced food.

This comes in tandem with the 2014 Farm Bill tripling the funding for and renaming the existing Farmers Market Promotion Program (FMPP) to allow grants to support regional food system infrastructure, as well as direct marketing programs for farmers.

These new funds are available to a wide variety of regional food stakeholders including; cooperatives, non-profit organizations, corporations, partnerships or other legal entities, Indian tribes, public bodies or individuals.

The USDA is accepting applications for the funds on a rolling basis, so our Northwest regional food developers should get their applications in ASAP.

You can read all the details in the USDA’s press release here.

Early Registration for Food Systems Financing Web Course

cdfa-logoThis Friday (May 9th), is the last day of early bird registration for the Intro to Food Systems Financing Web Course from the Council of Development Finance Agencies.

This 2 day full immersion course (June 4-5), will address the financing challenges associated with growing, processing, distributing, marketing, and selling food. This is an opportunity for those looking to better understand financing options available to new and emerging food entrepreneurs. The course will discuss capital investment opportunities from federal, state and local governments, tax credits, loan and grant programs, as well as ways to build partnerships in your arena.

During each session, attendees can raise their hands, ask questions, comment on presentations and take interactive polls. CDFA’s Course Advisor moderates the WebCourse to ensure speaker and participant interaction throughout.

The early bird price is $550.00 for members and $675.00 for non-members and goes up $50.00 after this Friday.

This is a great opportunity to learn about how to catalyze your endeavor and find the type of funding designed for your specific needs.

For more information and to register for the event click here.

Investing Without Zombies

BY MICHAEL “LUNI” LIBES – LUNARMOBISCUIT.COM

The results of an investment (in an early-stage startup) depend not only on the success of that startup, but also on the form of the investment.

A sophisticated investor is going to be nodding right now, thinking about liquidation preferences and other common add-on’s to equity investments. But at the same time, those sophisticated investors likely have a majority of their investments in a state where they are worth somewhere between nothing and a 1x return.  A state often called a “zombie” investment.

The root cause of “living dead” investments is not the high failure rate of startups.  Failure leads to truly dead companies.  These zombies are not only still running, but earning revenues or even profits.

The actual root cause is the traditional structure of equity investments.  Take a step back and look at the assumptions of such deals:

  • Investors buy P% of the startup for $X
  • The entrepreneur uses $X to earn $R
  • If $R is sufficiently large, an acquirer buys the company, returning the investor $10X

This is the basic formula for success as an Angel or venture capitalist.  The problem is that successful investors only see this story play out 1 out of every 10 investments, plus 2 investments with a $5X return, a few more with a $1X return, and 4 or 5 that are total losses.  Unsuccessful investors never see the $10X, and without that, have a loss across their portfolio.

I look at this and wonder why the investment structure is optimized for the least likely case, rather than the most likely case.  Is there not an alternate investment form that boosts the returns of the majority of deals above $1X?

Traditionally, the only other form of investment is debt.  It works for homes, cars, Fortune 500’s and the U.S. Treasury, but traditional debt does not provide enough reward for the risk of early-stage investments.  When debt terms are adjusted for investors, the results are too much risk for entrepreneurs.

Looking around the fringes of the financial world, I found a structure that does work.  Revenue-based financing (a.k.a. Royalty-based financing).  This comes in a variety of forms, but in general it works like this:

  • Investors provide $X
  • Entrepreneurs use $X to earn $R
  • Investors receive Z% of $R, until a total of $2X-$4X is returned

The two main variables here are the percent of revenue (Z%) and multiple of return.  Typically the revenue-share is 3%-9% of “top-line revenues”, a metric that is easy to define and compute.  The multiple is commonly $2X for growth-stage investments, and $3X-$4X for early-stage.

This basic structure provides a few benefits for investors.  First, it provides a built-in “exit”, one that doesn’t wait until the entrepreneur has build up enough value to either attract an acquirer or launch an IPO.  Second, it aligns investor interest and entrepreneurs, earn revenues.  Third, it makes no assumptions about when the revenues will arrive, nor requires negotiation on when to issue dividends.  Fourth, it leaves the company management free to operate in whatever manner they please, e.g. management worries about growth vs. profits.  Fifth, it eliminates “zombies” as either companies are alive and earning revenues, or dead (or soon dead) earning nothing.

In short, it provides a reasonable payment for the use of investor capital, while providing a relatively high IRR (with a big boost of that IRR due to the quicker repayments vs. equity).  Plus this structure boots the odds of at least a $1X return, as the investee begins repayments as soon as revenues are earned.

The drawback?  The upside of the investments are capped.  If the structure asks for $4X, then the maximum return is $4X.  However, there are multiple fixes for this issue: tack on some warrants, or toss in some traditional equity.  Do something that adds back in some of the upside.

I discovered this structure while researching the business model for Fledge.  Fledge, in addition to a business accelerator, is also an investment fund, one that targets “conscious” companies, a market with few exits and few comparables.  Fledge uses RBF for its investments, roughly as described above, and so far after 19 such deals, we think it’s not only the right structure for impact investing, but a potential fix for the broken venture capital market everywhere.

 

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

Funding Available for Northwest Food and Farming Businesses

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We are pleased to announce the opening of the application period for the  Cascadia Foodshed Funding Project.  This project brings together a unique group of foundations and investors who are seeking to create a positive impact through a combination of grants, equity, loans and assistance to food and farming businesses in Oregon and Washington.  Up to five separate investments of between $25,000 and $250,000 are expected in 2014.Candidates for investment should be:
  • located in or provide substantial benefit to Whatcom, King, or Pierce counties; Eastern Washington; or Multnomah County in Oregon;
  • improve measures of health, social equity, family wage employment, and rural community resilience;
  • seeking funding of $25,000 to $250,000.
We will accept applications until February 28, 2014, and deploy funds on a rolling basis throughout the year. All applications will be received through Slow Money Northwest’s Gust portal at https://gust.com/organizations/slow-money (select food/drink as your industry). Your application should include at a minimum:
  1. Your business plan in enough detail to show how this investment will help you succeed;
  2. Financials, past and projected, that match your business plan and funding need;
  3. Your funding need, and how it will help accomplish your business goals; and
  4. A statement of benefit (500 words maximum) describing how your enterprise can help improve one or more of the following impact areas: Health, Social Equity, Family Wage Job Creation and Preservation, Rural Community Resilience, and Ability to Influence Policy.  For more detail on the impact areas,click here.
We will review applications and reply within 30 days with our initial response. Please don’t hesitate to contact us with any questions about the project or application process.
Email: cascadia@slowmoneynw.org
Phone: Japhet Koteen at 206-326-9828.