Community Investment Models to Address the Capital Gap Amongst Early Stage Small Busi

[Community Development Banking List]

Original message from: msable@gmail.com

Hi:

I have encountered a gap in small business financing in Santa Fe, New
Mexico. Banks do lend to established small businesses with track records,
but bankers do get a lot of requests for funding that they have to turn
down, due to the small business not having enough historical financial
information and/or equity in the business. What’s missing seems to be more
risk-taking capital for early-stage small businesses. This isn’t venture
capital – these are small businesses that do not have the high growth
potential that VC requires.

I am curious as to whether anyone knows if there are community investment
models that address this gap, through loans, equity, or quasi-equity /
equity-like investments.

Any assistance would be greatly appreciated.

Thanks.


Michael

[Community Development Banking List]

Original message from: hhlibry@hazelhenderson.com

Hi Michael:

I recently found ENTREX ( the entrepreneurs exchange ) at
www.entrex.net <http://www.entrex.net/> ('http://www.entrex.net/>')

They have a very innovative approach to financing small businesses and
growing local economies : their Private Company Index ( PCI) which shows
how small private companies out-perform all the publicly -listed stock
indexes . And they have created a new asset class the TIGRcubT which
allows companies to get working capital without giving up equity .

Check them out and tell them Hazel Henderson recommended you contact
them. They are in Chicago.

HAZEL HENDERSON, D.Sc.Hon., FRSA, author, futurist, president - Ethical
Markets Media, LLC

Ethical Markets: Growing the Green Economy has won a 2007 Nautilus Award for
Conscious Business/Leadership and a 2008 Axiom Award for best business book.

Visit
<file:///C:\Documents%20and%20Settings\Hazel.ETHICAL.000\Ap plication%20Data\
Microsoft\Signatures\www.EthicalMarkets.com> www.EthicalMarkets.com,
<file:///C:\Documents%20and%20Settings\Hazel.ETHICAL.000\Ap plication%20Data\
Microsoft\Signatures\www.EthicalMarkets.tv> www.EthicalMarkets.tv,
<file:///C:\Documents%20and%20Settings\Hazel.ETHICAL.000\Ap plication%20Data\
Microsoft\Signatures\www.hazelhenderson.com> www.hazelhenderson.com and
<file:///C:\Documents%20and%20Settings\Hazel.ETHICAL.000\Ap plication%20Data\
Microsoft\Signatures\www.calvert-henderson.com> www.calvert-henderson.com
for the latest information on socially responsible investing, green
technologies and global corporate citizenship.

Ethical Markets Media, LLC; PO Box 5190, St. Augustine, FL 32085; Phone:
904/829-3140, Fax: 904/826-0325
_____

From: bounce-3867983-8709253@list.cornell.edu
[mailto:bounce-3867983-8709253@list.cornell.edu] On Behalf Of Michael Sable
Sent: Wednesday, April 29, 2009 4:15 PM
To: communitydevelopmentbanking-l@cornell.edu
Subject: Community Investment Models to Address the Capital Gap Amongst
Early Stage Small Businesses

CDB list instructions http://www.runonthebank.net/cdblist.htm ('http://www.runonthebank.net/cdblist.htm')

[Community Development Banking List]

Original message from: paul5glover@yahoo.com

I've devised the Philadelpha Regional and Independent Stock Exchange (PRAISE) http://www.greenjobsphilly.org/static_praise.php ('http://www.greenjobsphilly.org/static_praise.php') and am marshalling resources to begin.


Paul Glover
(215) 805-8330
http://www.paulglover.org ('http://www.paulglover.org')




________________________________
From: Michael Sable <msable@gmail.com>
To: communitydevelopmentbanking-l@cornell.edu
Sent: Wednesday, April 29, 2009 4:14:32 PM
Subject: Community Investment Models to Address the Capital Gap Amongst Early Stage Small Businesses

Hi:

I have encountered a gap in small business
financing in Santa Fe, New Mexico. Banks do lend to established
small businesses with track records, but bankers do get a lot of requests for
funding that they have to turn down, due to the small business not having
enough historical financial information and/or equity in the business. What’s
missing seems to be more risk-taking capital for early-stage small businesses. This
isn’t venture capital – these are small businesses that do not have the high
growth potential that VC requires.
I am curious as to whether anyone knows
if there are community investment models that address this gap, through loans,
equity, or quasi-equity / equity-like investments.
Any assistance would be greatly appreciated.
Thanks.

Michael

CDB list instructions http://www.runonthebank.net/cdblist.htm ('http://www.runonthebank.net/cdblist.htm')

[Community Development Banking List]

Original message from: clearned1@gmail.com

Michael and all,

We have a team building out a model for funding enterprises as you describe
in our case we will be requiring the enterprises and projects to become
involved in triple bottom lines. We will offer our membership capacity to
help them achieve those 3BL goals. It will be a non profit that operates
LLC's to channel investments

*Mission**: Re-inventing Investment With a Local Focus*

We invest in local ideas and enterprises that provide well-paying jobs,
enhance community and environmental integrity, and offer reasonable
financial returns. We use roll-up-your-sleeves leadership, community
involvement, and investment to realize our vision.


It is our desire to lure people away from investing outside their locality
and to build out the commons we desire through local 3BL investing. In our
case we view investing as more than money as people are capable of offering
ideas, skills, networking and commitments. Philanthropic gifts or
investments can play a key role as well. We hope to offer:

- Community Investment Notes akin to The Calvert Foundation. We hope to
place those investment notes into local banks, credit unions, CDFI's that
are open to 3BL requirements and we will support the lenders and their
customers. Our members can play a roll here as well both as investors,
borrowers, supporters and service providers.
- Direct lending and guarantees as traditional lenders do not cover all.
In our case building local 3BL jobs and building local prosperity is our
priority so we have different goals and a membership invested in each others
success.

*Equity and Equity/lending Equity-revenue relationships*. So this is the
territory that is the new ground so to speak at least from my research. Our
membership will have investment teams looking at each opportunity from a
perspective of how can we help and what is needed here and how can combine
things to close natures loops in the enterprises. We will also start new
ventures that flow from formative conversations around our mutual desires.
They will require us working out equity liquidity.

*Lending/Equity and local Exchanges*
I am interested in the entrex concept and look forward to learning from
them, thanks Hazel. I would like to hear more from people who are thinking
about and working on local exchanges that would support equity revenue
relationships. I am very interested to learn more I have been taking in
Chris Cooks thinking around this topic.
http://www.opencapital.net/co-ownership.htm ('http://www.opencapital.net/co-ownership.htm')

Chris who is based out of England talks about the co-ownership model where
all parties interest are represented in a LLC or in England LLP. It seems
to allow say an occupant of a property to pay the "rent" rate or interest
only and they can choose at any time to pay over the rent and gain equity or
set money in a holiday fund to cover times well like we are in right now, to
cover the payments. What I like about this as long as the investment is
indexed for inflation there is no particular need to address equity as long
as the revenues cover the investors expected returns. It does however bring
up the liquidity issue which I am wondering if we work within:

- A membership where we are not advertising to the public a specific
opportunity rather it is just members buying and selling equity interest
from each other and the risks are fully disclosed and
- The member is required to sell the equity at the same value that they
purchased it plus pre-established inflation indexing.

Would these two conditions allow for SEC exemption in a member exchange
assuming the membership rules are clear such as in Islamic finance? The
Ameen Housing Coop.
http://www.ameenhousing.com/homefinance/hbbenefits.html ('http://www.ameenhousing.com/homefinance/hbbenefits.html') seems to operate
this way however I do not see an exchange, the members just withdrawl their
funds.

I am seeking examples or clarity in how to operate a legal member exchange
of equity. As I see it, this would promise to handle many community based
equity revenue sharing relationships. Examples out there???

I would also like to have a means for say venture investments to be
converted to safer equity investments within the membership when the venture
investments are ready for growth or exits. I am wondering if the equity
revenue sharing parties could buy out the venture equity folks by
establishing a pre-determined return for the venture group to be made
available to the lower risk investors when deemed appropriate on this member
exchange. Is anyone doing this now?

Regards,
Chuck Learned
Madison WI
608 712-2679


On Wed, Apr 29, 2009 at 3:14 PM, Michael Sable <msable@gmail.com> wrote:


I am curious as to whether anyone knows if there are community investment
models that address this gap, through loans, equity, or quasi-equity /
equity-like investments.

[Community Development Banking List]

Original message from: jhamilton@vestedforgrowth.com

Michael and Chuck et al,



Yes, we see a financing gap that is similar to what Michael described
-small businesses that don't meet the credit standards of a bank, yet
they have a strong team/product/market and have a good growth
proposition. They are also not interested in or appropriate for equity.
We have built a program to provide mezzanine or royalty financing up to
$500k to this group of businesses in NH. It is called Vested for Growth
(www.vestedforgrowth.com) The deal structure may also resolve the equity
liquidity issue that Chuck raised...



We recognize that while equity can be a useful tool, not every business
is interested in being sold in the short term or wanting to dilute their
ownership. Others don't have a large enough market opportunity to
motivate the equity investor. Here in NH, the backbone of our economy
is built on companies with sales of $2-$10 million who have been around
for 2-25+ yrs. They can't always get everything they need from the bank
- particularly after this recession many will have had a "hiccup" with
sales or have insufficient collateral to take on any additional bank
debt. Yet the best of these companies have learned lessons from the
recession and may need additional capital to become more "value added"
for their customers. This may require an acquisition or new product.
To get this financed will require risk tolerant capital.



The traditional alternative has been equity. But some companies need a
non-dilutive way to raise capital that does not require them giving up
control or being in a position to create an "exit" event in 3-5 yrs.
The owners may want to build their company long term and need relatively
patient capital. This is when it would be helpful for investors and
companies alike to consider bringing mezzanine financing down market to
these small businesses.



Vested for Growth has just completed a PILOT of 8 investments. We
believe that this market holds promise and are beginning to attract
Angels as co-investors in our royalty deals. This offers Angels a "high
touch" investment relationship, a similar net return but a more
income-oriented investment structure. Instead of getting nothing for
while and then an eventual pay day, royalty offers a return starting the
very next month. This payment stream provides a "natural exit" so the
requirement that the company prove that there is an "exit" is
eliminated. Instead, they have to prove that their sales pipeline and
gross profit margins are sufficient to support the royalty payments
(based on a % of future gross revenue). Thus this is not a good match
for start up or even early stage businesses. It is a good match for
development and later stage businesses.



The deal structures can vary. If the risk profile of a company prospect
requires a 20% return, 10% may come from debt and 10% may come from
additional royalty payments. The debt piece can be repaid without
penalty but the royalty must stay in for a minimum period to be
negotiated. Otherwise the portfolio is simply made up of "the dead" and
the "living dead"...Another deal structure is to have no debt and the
entire return built upon a royalty payment. This is based on
negotiating out the overall return multiple (1-4 X return) and the % of
gross sales that will be paid monthly. When the aggregate payments
total the overall multiple return, the royalty payments stop. If the
company outperforms the projections, the Internal Rate of Return (IRR)
goes up. If it underperforms, the investor eventually gets paid but the
IRR goes down. That is the risk.



I meet quarterly with a group of community development entities
throughout New England (MA, Vt, NH, CT) that are at various stages of
learning and beginning to add royalty investing to their offerings.
This is a great forum to share lessons learned and spread best practices
around this type of financing. It is much more akin to venture
investing than banking. It involves in depth due diligence, and "roll up
your sleeve" partnering so this should not be done with systems that are
built for retail volume lending. For example, staff are likely to be on
site on a monthly basis. If people in New England area are interested,
just email me and I can provide you with the logistics for our upcoming
meeting.



Best regards,





From: bounce-3883140-9678170@list.cornell.edu
[mailto:bounce-3883140-9678170@list.cornell.edu] On Behalf Of Chuck
Learned
Sent: Sunday, May 03, 2009 11:16 PM
To: Michael Sable
Cc: communitydevelopmentbanking-l@cornell.edu
Subject: Re: Community Investment Models to Address the Capital Gap
Amongst Early Stage Small Businesses



Michael and all,

We have a team building out a model for funding enterprises as you
describe in our case we will be requiring the enterprises and projects
to become involved in triple bottom lines. We will offer our membership
capacity to help them achieve those 3BL goals. It will be a non profit
that operates LLC's to channel investments

Mission: Re-inventing Investment With a Local Focus

We invest in local ideas and enterprises that provide well-paying jobs,
enhance community and environmental integrity, and offer reasonable
financial returns. We use roll-up-your-sleeves leadership, community
involvement, and investment to realize our vision.



It is our desire to lure people away from investing outside their
locality and to build out the commons we desire through local 3BL
investing. In our case we view investing as more than money as people
are capable of offering ideas, skills, networking and commitments.
Philanthropic gifts or investments can play a key role as well. We hope
to offer:

* Community Investment Notes akin to The Calvert Foundation. We
hope to place those investment notes into local banks, credit unions,
CDFI's that are open to 3BL requirements and we will support the lenders
and their customers. Our members can play a roll here as well both as
investors, borrowers, supporters and service providers.
* Direct lending and guarantees as traditional lenders do not
cover all. In our case building local 3BL jobs and building local
prosperity is our priority so we have different goals and a membership
invested in each others success.

Equity and Equity/lending Equity-revenue relationships. So this is the
territory that is the new ground so to speak at least from my research.
Our membership will have investment teams looking at each opportunity
from a perspective of how can we help and what is needed here and how
can combine things to close natures loops in the enterprises. We will
also start new ventures that flow from formative conversations around
our mutual desires. They will require us working out equity liquidity.

Lending/Equity and local Exchanges
I am interested in the entrex concept and look forward to learning from
them, thanks Hazel. I would like to hear more from people who are
thinking about and working on local exchanges that would support equity
revenue relationships. I am very interested to learn more I have been
taking in Chris Cooks thinking around this topic.
http://www.opencapital.net/co-ownership.htm ('http://www.opencapital.net/co-ownership.htm')

Chris who is based out of England talks about the co-ownership model
where all parties interest are represented in a LLC or in England LLP.
It seems to allow say an occupant of a property to pay the "rent" rate
or interest only and they can choose at any time to pay over the rent
and gain equity or set money in a holiday fund to cover times well like
we are in right now, to cover the payments. What I like about this as
long as the investment is indexed for inflation there is no particular
need to address equity as long as the revenues cover the investors
expected returns. It does however bring up the liquidity issue which I
am wondering if we work within:

* A membership where we are not advertising to the public a
specific opportunity rather it is just members buying and selling equity
interest from each other and the risks are fully disclosed and
* The member is required to sell the equity at the same value that
they purchased it plus pre-established inflation indexing.

Would these two conditions allow for SEC exemption in a member exchange
assuming the membership rules are clear such as in Islamic finance?
The Ameen Housing Coop.
http://www.ameenhousing.com/homefinance/hbbenefits.html ('http://www.ameenhousing.com/homefinance/hbbenefits.html') seems to
operate this way however I do not see an exchange, the members just
withdrawl their funds.

I am seeking examples or clarity in how to operate a legal member
exchange of equity. As I see it, this would promise to handle many
community based equity revenue sharing relationships. Examples out
there???

I would also like to have a means for say venture investments to be
converted to safer equity investments within the membership when the
venture investments are ready for growth or exits. I am wondering if the
equity revenue sharing parties could buy out the venture equity folks by
establishing a pre-determined return for the venture group to be made
available to the lower risk investors when deemed appropriate on this
member exchange. Is anyone doing this now?

Regards,
Chuck Learned
Madison WI
608 712-2679



On Wed, Apr 29, 2009 at 3:14 PM, Michael Sable <msable@gmail.com> wrote:



I am curious as to whether anyone knows if there are community
investment models that address this gap, through loans, equity, or
quasi-equity / equity-like investments.





CDB list instructions http://www.runonthebank.net/cdblist.htm ('http://www.runonthebank.net/cdblist.htm')