Consilium Capital, Senior Adviser, Aunnie Patton Power’s article was originally published by ImpactAlpha for details please click here
How can investors and entrepreneurs address systemic inequality? Among the many excellent options: a greater focus on how communities accumulate wealth.
That means reframing how communities participate in local business through financing, due diligence, governance and ownership. We can get everything right at a micro-level, with impact funds and impact-driven deals, but if we don’t address inequity in decision-making and wealth accumulation, we will still perpetuate unequal systems.
The impact investing and social entrepreneurship movements have helped move the population at the base of the economic pyramid from beneficiaries to consumers and producers. Yet, impact investors have rarely facilitated the last stage of empowerment: wealth accumulation through capital ownership. For the most part, the winners of successful impact investments remain a select few: the current owners of capital, often from Western economies, who receive a return on their investment; and the founders of the businesses.
The risks for continuing this dynamic are massive. We know systematic inequality persists in developed and emerging economies. The global pandemic is exposing vulnerabilities of workers and how their interactions with employers amplify inequities. Civil uprising in the U.S. is a reaction to centuries of inequitable policies and attitudes towards Black Americans, as well as other disenfranchised groups.
Many business leaders are seeking actions that can center communities in the push to rebuild global systems better. Fortunately, enterprises at every stage can make choices that democratize collaboration and ownership. (In the spirit of such a collective approach, this piece crowdsources stories from experts leading solutions in each of these approaches.)
The fundraising playing field for businesses is an uneven one. Outside of friends and family rounds, which privilege the elite, consumers have historically lacked the voice and ability to back the development of products, services and solutions they want to see and use. Beyond that, they are almost always cut out of the rewards.
On the enterprise side, entrepreneurs need more flexible capital sources. Businesses that create non-financial value face this challenge more intensely because they tend to be smaller and less profitable.
In the U.S., two innovative crowdfunding platforms are broadening that opportunity to help meet small businesses’ need for working capital, while empowering consumers to invest rather than spend.
The team at Honeycomb Credit, a Pittsburgh-based investment crowdfunding platform, is putting community capital at the center of a new bond solution. Honeycomb’s latest product “Loyalty Bonds” let customers buy in-store-credit and spend it later at a greater value. In short, it encourages consumers to front businesses cash that they need, and gives them 1.3x spending power over a two-year period. Urban Redevelopment of Pittsburgh is partnering with Honeycomb to expand the program to 100 local businesses.
Meanwhile, Steward is building a community-driven financing platform for the rapidly growing regenerative agriculture movement. Steward provides wraparound access to flexible and fast capital for sustainable agriculture entrepreneurs. The platform, founded by the co-founder of Fundrise, one of the largest real estate crowdfunding platforms, is open to any non-accredited U.S. resident. The financing from Steward gives small farms access to needed capital for land, equipment, and operations while giving retail investors access to investment opportunities: typically, small, sustainable farms with direct-to-consumer models and that have regenerative products, sell at high margins, and have excellent relationships with customers.
In emerging markets, crowd finance is positioned to grow as the need for local currency capital, digitised investment processes and smaller deal sizes increases post-COVID. But a lack of enabling regulatory framework has curbed equity and debt crowdfunding’s growth.
The African Crowdfunding Association was established in 2016 to remedy that. The association has developed a pan-African regulatory framework for securities-based crowdfunding and proposes an innovative model of co-regulation with national regulators, as an interim solution. This approach overcomes resource and capacity constraints for national regulators, while maintaining a responsive framework for African crowdfunding intermediaries iterating on their models. The association counts over 30 African crowdfunding platforms and marketplaces, and plays an essential role as the interface between stakeholders and the industry.
Capital allocators are recognizing their own implicit biases in decision making and the need to mitigate them. Inspired by the village banking model in microfinance, Village Capital uses a peer selection process to identify high-performing, investable social ventures. The model convenes a group of 10-12 early-stage ventures in a three-month accelerator program set around a specific problem. Participants use an investment-readiness framework to assess one another’s potential and then ranking their peers over the course of the program. The two highest-ranked ventures at the end receive investment offers from VilCap Investments.
Over the past nine years, Village Capital has hosted more than 90 programs using peer selection with 1,200 entrepreneurs. Participants report more than a three-fold increase in their ability to raise capital versus a control group. Among the 102 investments Village Capital has made since 2009, 86% are still operating, compared to 60-70% on average for VC-backed early-stage U.S. enterprises, and 16 have provided exits with positive returns. VilCap’s portfolio is also more geographically and demographically diverse than traditional VC portfolios: 46% are female-led ventures; 30% are minority-led; and more than 80% come from outside of California, New York, and Massachusetts – the three states that account for roughly half of all venture capital activity worldwide.
There are certainly challenges associated with peer selection, not the least of which is the unusual nature of the methodology. Investors must feel comfortable outsourcing a large component of traditional business due diligence work to external stakeholders. Pre-committing offers of investment to a process – and trusting the outcomes of the process – is a steep ask of investors, particularly given the already high-risk nature of early-stage investing. The idea of peer selection was – and still is – disruptive to the venture capital industry. It is also a time- and cost-intensive process to structure peer-based programs. There are, however, ways for investors to replicate aspects of peer selection by bringing more founder voices into their diligence process.
Even established businesses can incorporate a dedication to their community through democratic ownership that facilitates wealth creation. In an employee buy-out, employees of a business become the business’s new owners through an asset or share purchase. To execute this, the business takes out a loan to finance the transaction, which gets paid back over time from company profits. The most common forms of broad-based employee ownership include ESOPs (Employee Stock Ownership Plans, a U.S.-based model), Employee Ownership Trusts (more common in the U.K.) and worker-owned cooperatives.
Alternative buy-outs are also attractive exit strategies when conditions are not optimal for an acquisition or a public listing, like in emerging markets; for social enterprises or mission-driven companies specifically serving certain populations that they want to further empower; and for business owners looking for a buyer who is “right under their nose” wanting to cement their legacy.
Project Equity promotes this model by supporting businesses transitioning to broad-based, employee ownership. Project Equity’s white paper The Case for Employee Ownership pulls together the latest research on the impacts of employee ownership on workers, businesses and communities and encourages government and philanthropy to invest in expanding employee ownership to enable communities and local economies to rebuild with more resilience.
Recology is one example. The 3,800-person waste-management company, which serves communities across three U.S. states, is 100% employee-owned. Project Equity recently spoke with them about their community support during COVID-19 crisis, where they committed to pay employees’ full salary and health benefits through May, even when they aren’t able to provide full work schedules for everyone. Recology is evidence that employee-owned companies offer higher wages, better benefits, are slower to cut jobs in a recession, and ultimately prove to be more resilient businesses.
Distributed-ownership models also foster company cultures that value voices and strengthen mutual benefit ties. Turning Basin Labs is a cooperative that supports freelancers in order to create economic opportunity that is accessible for all. Turning Basin’s business model encourages member participation because it supports their basic needs; also, profit-share offers a sense of security; joint decision-making promotes a sense of autonomy; and community inclusivity fosters members’ sense of belonging. Turning Basin is committed to building a diverse member base so that they can collectively build inclusive service offerings and benefits to support all workers to succeed.
Every organization impacts its employees and their livelihoods, the people in its supply chains, and the communities in which they operate. This presents every organization, including those that don’t identify as an “impact business,” with choices around their legal structures, capital sources, and decision-making practices that can elevate the well-being of the humans and ecologies they depend on. Entrepreneurs and investors are called to rise to the occasion to do just that.
by Aunnie Patton Power, Senior Adviser, Consilium Capital.
Contributors: Maegan Lillis of London School of Economics, Allie Burns and Rob Tashima of Village Capital, Steward’s Dan Miller, Alison Lingane of Project Equity, Sarah Howard of Turning Basin Labs, Elizabeth Howard of African Crowdfunding Association and Honeycomb Credit’s Topiliztin Gomez.