Locavesting

Show your supply chain? No sweat.

2013-05-20T10:09:00.000-04:00

The recent collapse of a garment factory in Bangladesh, which killed or injured thousands of low-wage workers, shined a harsh light on how and where much of our clothing is made. And working conditions aren't the only problem: fashion often comes at a high cost to our health and the environment, with finishes, fabrics and dyes that involve a laundry list of toxic chemicals. In fact, consumer goods of all kinds—whether clothing or cosmetics or processed food—are the retail equivalents of the global financial system, characterized by long, complex and opaque supply chains that are hard for companies, much less consumers, to keep track of. That is, until some tragedy, scandal or recall brings the details to the surface (horse meat, anyone?).

In the wake of the Bangladesh incident, companies from Nordstrom to Walmart have indicated they would take steps to make their supply chains more transparent. We've heard that before. But corporations have been slow to back up their promises. In the meantime, a new generation of socially-minded companies is showing the way.

In North Carolina, T.S. Designs makes organic cotton t-shirts "from dirt to shirt" in the state. The organic cotton is grown, spun, knit, finished, sewn and printed all within 700 miles—compared to the 16,000 miles that a typical globally-sourced t-shirt travels. The t-shirts are also printed with water-based ink and no harsh chemicals. When T.S. Designs president Eric Henry set out on this mission, there was no organic cotton being grown in the Carolinas. But with the help of a $30,000 loan from Slow Money NC, Henry was able to persuade (and pay up front) a handful of cotton farmers to make the switch to organic. In late 2011, the state's first organic cotton crop was harvested and ginned. Henry also helped found Cotton of the Carolinas, a collaboration of farmers and manufacturers dedicated to growing, making, and selling its t-shirts in the Carolinas. Each t-shirt from the Coalition comes with a tag that lets you track the entire supply chain, from farm to finish.

I was recently introduced to another supply chain pioneer, S.W. Basics, a small but ambitious Brooklyn startup that makes a line of wonderfully simple skin care products, each with just five or fewer ingredients. No scary, unpronounceable names, chemical fragrances or fillers made in a lab. Just pure, ethically-sourced ingredients like shea butter, avocado oil, rosewater, coconut butter, and sea salt. S.W.'s founder, Adina Grigore, says all of the ingredients are either certified organic, Fair Trade, or sourced from small, family farms. And she wants you to know! Grigore and her team have launched a Kickstarter campaign to help the company film and document its suppliers, from the family that sustainably harvests its witch hazel in the Ozarks to the small Iowa firm that makes its lip balms and the women's cooperative in Ghana that suppliers its shea butter.

The idea, says Grigore, is to celebrate S.W.'s suppliers and help them perhaps attract more business so that they can thrive. But it's also about creating new standards for doing business and encouraging people to be curious about how their products are made.

"For me, it's about being truthful to what we're doing, and not in a way that's token, like putting our ingredients on the front label, but in a way that is completely transparent," she says. In other words, "Proof, not just words."

Grigore believes that if supply chains were more transparent, people might make different purchasing decisions. After all, would you knowingly buy cosmetics that have lead or endocrine disruptors in them? Or a t-shirt made in a sweat shop? No wonder the big conglomerates are so slow in responding to pressure.

As consumers, we have power. In addition to buying local and ethical, we can demand information from the retailers and manufacturers whose products we choose to buy. Or not buy, as the case may be.

Happy Anniversary, JOBS Act!

2013-04-05T12:39:00.000-04:00

In case you missed it, today marks the one-year anniversary of the JOBS Act. For those assembled in the Rose Garden for that momentous signing and for millions of entrepreneurs who would benefit from the law, hopes were high. A year later, we're still waiting for key provisions of the Act, notably crowdfunding and (Title III) and the lifting of the general solicitation ban (Title II).

There's been plenty written about that in the days leading up to the one-year anniversary (see links below) and several events today to commemorate the one-year mark (I participated in one in NYC yesterday). But I am reminded of the words of Bill Gates, who sagely observed that when it comes to disruptive technologies, we tend to overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. The revolution, apparently, will wait.

Happy anniversary JOBS!

http://www.forbes.com/sites/ryancaldbeck/2013/03/16/happy-first-birthday-jobs-act/

http://www.washingtonpost.com/business/on-small-business/for-brokerdealers-crowdfunding-presents-new-opportunity/2013/03/28/bb835942-8075-11e2-8074-b26a871b165a_story.html

http://www.inc.com/candace-klein/the-regulations-that-ate-crowdfunding.html

http://www.forbes.com/sites/devinthorpe/2013/04/03/anniversary-of-jobs-act-finds-investment-crowdfunders-champing-at-the-bit/

http://www.crowdsourcing.org/editorial/conference-to-bring-crowdfunding-leaders-to-silicon-valley/24856

Crowdfunders to SEC: Bring it On

2013-02-19T12:31:00.001-05:00

I was in the Rose Garden that exhilarating, giddy day last April, when President Obama signed the JOBS Act into law. And I can tell you with relative certainty that everyone present, including the President, thought that it would be implemented by now. Instead, as we approach the one-year anniversary, key pieces of the JOBS Act —namely Title II and III, which eliminate the restrictions on advertising private securities and allow for investment-based crowdfunding, respectively— are still just a rosy dream. That's because the SEC, the agency charged with writing the rules that will govern these new provisions, has been moving at the speed of molasses.

Here's a not-very-well-guarded secret: the proposed rules for crowdfunding have been written by the SEC staff and finished for some time. What's holding it up? Well, apparently the commissioners have been sitting on the rules for reasons spanning wariness of leaving themselves open to criticism from opponents of crowdfunding, to turmoil at the agency: former SEC chairwoman Mary Schapiro resigned late last year. Elisse Walter — one of four remaining commissioners, was named interim chairwoman. Then President Obama nominated Mary Jo White to head the agency, although she has yet to take over the role. In the meantime, it's a power vacuum. For crowdfunding advocates and startups, it's like waiting for Godot.

And that's a shame, because the delay is holding back regulatory progress that could deliver much needed relief to small businesses seeking capital and begin to bring the transformational power of the Internet and social networks to a broken financial system.

It's against this backdrop that some of the leaders of the nascent crowdfunding industry decided to take a stand. This morning, the Crowdfunding Professional Association staged a press conference at the National Press Club in Washington, before heading off to meet with various officials in the Office of Science & Technology Research, Treasury and, yes, SEC. Their aim, it seems, was to dispel some of the misperceptions about crowdfunding and put pressure on the SEC to act.

One of those misperceptions is that crowdfunding is about get-rich-quick schemes. Instead, speaker after speaker talked of helping Main Street businesses. Woody Neiss of Crowdfund Capital Advisors summed it up when he said that crowdfunding is not about "finding the next Facebook" — Silicon Valley does a robust job of that already. It's about finding and funding "the next 1 or 10 or 100,000 Main Street startups" that will create jobs and help build strong and prosperous communities. "It's social media meets community finance," he said.

Readers of this blog and my book will know that this is long what I have been preaching. To me, crowdfunding makes the most sense when there are social bonds and relationships that connect investors and entrepreneurs. As Warren Buffet has long advised: it makes sense to invest in what you know!

Crowdfunding is also an opportunity to take a broken financial system and make it better. To wit: Sarah Hanks, a former securities and corporate lawyer who is now the CEO of CrowdCheck, is offering a private market solution that addresses regulators' fraud and risk concerns. Her disclosure and due diligence system walks investors through the investment process, presenting them relevant information in plain understandable English. Compare that with the typical phone book-sized prospectus filled with legalese that no one in their right mind reads. "We've thrown that out the window," says Hanks. "The best disclosure is the kind that someone is actually reads and understands."

Crowdfunding is in its infancy and will continue to evolve to address market needs. As Chance Barnett, founder of Crowdfunder.com pointed out, Crowdfunding 1.0 was about transactions, often undertaken on impulse. But with the JOBS Act, we're on the cusp of Crowdfunding 2.0, which will be based on building long term relationships and community ecosystems.

In a world of speculation and short term trading, that is something to celebrate. That is, if the SEC ever makes a move.

The Real Risk With Crowdfunding

2013-01-07T14:32:00.001-05:00

When the JOBS Act was signed into law last April, entrepreneurs were elated, even giddy, at the prospects. They and other supporters saw it as a democratizing force that could unlock new sources of capital for job-creating entrepreneurs, boost the economy and give Wall Street-wary investors a profitable alternative. It was one of those disruptive innovations that comes along once a generation and radically transforms the competitive landscape. It was so potentially revolutionary that pundits and financial pros alike predicted it would put many venture capitalists and banks out of business—in other words, exactly the sort of game-changing opportunity that makes entrepreneurs dream big.

Well, ten months later, the enthusiasm has cooled. Not for the potential of crowdfunding, but for the realistic chances that it will be enacted anytime soon and in a form that honors the original intent of legislators to ease the bottlenecks that prevent so many entrepreneurs and small business owners from obtaining the capital they need to grow, hire and thrive. The SEC, which was charged with writing the rules that will govern the nascent crowdfunding industry by year-end, has missed that deadline (not surprisingly–the agency is concerned about the potential for fraud and has a lot on its plate already). Most people now believe true investment crowdfunding will not get underway until 2014. At the same time, it appears likely that the rules will require the new crowdfunding portals to be regulated much like conventional broker-dealers—in other words, more Merrill Lynch than eBay, as one observer put it. For better or for worse, crowdfunding may turn out to be a game not for idealistic entrepreneurs but for well-capitalized investment pros.

As I wrote in my recent feature for the New York Times, despite the uncertainty, the outlines of a new industry are beginning to take shape, and with it a glimpse of what a crowdfunding future might look like: promising young companies able to get funding from people who believe in them, regardless of those investors' net worth; new jobs being created by the availability of growth capital; and more broadly shared prosperity and economic opportunity. Sure, there is a risk of fraud and loss with crowdfunding. But then, that takes place every day on Wall Street. As Thom Ruhe, vice president for entrepreneurship at the Kauffman Foundation, told me, with the economy stuck in limbo, the bigger risk to the economy is to do nothing at all.

Kickstarting the Indie Food Scene

2012-11-28T11:01:00.001-05:00

I've been a bad blogger, I know. I will not even tally up how many weeks have passed since my last post! So thank you for hanging in there. I intend to revive this blog - and indeed build it into something much bigger - in the coming months. In the meantime, let me ease back in by sharing a story I recently wrote for Edible Manhattan about Kickstarter and its role in funding a new crop of indie food entrepreneurs:

THE EDIBLE ECONOMY: RAISING DOUGH
First published in the November-December 2012 edition of Edible Manhattan

When Dan Maniaci and Piergiorgio Maselli were Boston College students with an appetite for more than knowledge, burgers were a shared obsession. Sliders, Big Macs, Shackburgers, animal-style In-N-Outs—they devoured them all (Maniaci earned the nickname “Tapeworms” after scarfing 11 cheeseburgers in one sitting).

Still, for all the great burgers they could order while out, the two undergrads lamented the pathetic state of patties made at home: overcooked and drowned in ketchup. So they began making their own burger sauce in an effort to resuscitate the home burger experience.

From their tiny dorm kitchen, the pair experimented with recipes and tried them out at tailgate parties until they hit on their Top Secret Burger Sauce— Maselli likens it to “a zesty mayonnaise with some spice.” After graduating in 2010, they moved to New York (“burger nirvana,” says Maniaci) with big plans to launch Gotham Sauce Co.

But, like many would-be food entrepreneurs with little credit history and no collateral, they found the up-front costs—renting a commercial kitchen space, contracting with a manufacturer, securing the right permits—were out of reach. “We didn’t even bother going to a bank,” says Maselli.

In years past, their story would have ended there. Instead, this September, Maniaci and Maselli turned to Kickstarter, a three-year-old company on the Lower East Side whose Web site lets ambitious but underfunded entrepreneurs appeal directly to friends, fans and future customers who believe in their idea. They put together a video pitch explaining their quest “to give the homemade burger a better life” through their secret sauce. And they promised perks to anyone who made a donation—from “a warm and fuzzy feeling” for a $1 contribution, to a bottle of Top Secret Burger Sauce for a $10 pledge, all the way up to a gourmet tailgate party cooked by the two 24-year-old entrepreneurs for a $2,500 pledge.

On September 15, just four days into a monthlong funding campaign, they hit their $5,000 goal—modest seed money that would allow them to start commercial production and shop the product around. But contributions continued to pour in, from friends, family, classmates and random burger lovers. With more than a week to go, 950 people had chipped in a whopping $18,500.

Maselli, a New York native now in law school at St. John’s, called the tremendous response “a vindication” of the venture. He and Maniaci are finalizing arrangements with a co-packer and plan to ship their first products in December. Armed with bottles, they can also begin calling on specialty stores and supermarkets, he adds.

Welcome to the Kickstarter economy.

Read more here or go to http://www.ediblemanhattan.com/featured-article/raising-dough/

In Defense of Crowdfunding

2012-03-16T13:28:00.001-04:00

Crowdfunding legislation is tantalizingly close to becoming reality—the Senate is expected to pass a version of a bipartisan House bill within days. But a rash of negative publicity threatens to derail this important update to antiquated securities laws that hamper small business capital raising.

The problems stem from the Jump-Start Our Business Start-Ups act—JOBS, for short—a House package that rolled together a number of largely uncontroversial bills aimed at spurring small business capital raising, and added some new ones. JOBS has provoked a fierce outcry from consumer protection groups, regulators and pundits, who evoke alarming images of coke-snorting boiler room operators, Nigerian scammers and pump-and-dump research analysts. It seems this bill will make "Muppets" of all of us.

Let's all take a deep breathe and consider this.

The elements of JOBS sparking the most backlash are provisions that loosen regulations on public and pre-IPO companies, including exempting publicly traded "emerging growth companies" from certain reporting requirements, and letting issuers and financial firms peddle securities to accredited (aka wealthy) investors. Fair criticism. I don't see anyone taking issue with other elements of the bill, like raising the ceiling for Reg A offerings and increasing the number of shareholders (from 500 to 1,000) a private company can have before it is considered public.

The other key element of the package is a crowdfunding bill that had previously passed the House with near unanimous support. Crowdfunding has its share of detractors, for sure. But much of the recent criticism seems to be unfairly tarring crowdfunding and other good elements of JOBS with the same broad brush. In the Times, Floyd Norris declared crowdfunding "a major victory for Wall Street."

That couldn't be farther from the truth.

Crowdfunding, as most people by now know, is a fundraising model where lots of small sums are aggregated from lots of people. Think Kickstarter.com, Kiva.org, and President Obama's initial presidential campaign. Crowdfunding legislation would move that model into the investment sphere, so entrepreneurs could tap into their social networks to raise capital, and allow those investors to share in the profits. It's Kickstarter with a financial return.

Under existing rules—rules that were crafted in the 1930s, in the age of ticker tape and telegraphs—that is illegal. Private companies may only raise money from accredited investors. If they want to reach out to their customers, their friends and family, their neighbors or social networks—a perfectly natural impulse—they must hire lawyers and accountants to guide them through a registration process and produce a bulky prospectus that hardly anyone reads. This process can easily cost $1 million or more—making it a non-starter for small firms that only need $10,000 or $100,000 or even a million.

These small firms are shut off from a huge pool of potential capital, at a time when bank lending and seed funding is down dramatically. And ordinary Americans are unable to invest in companies that they know and love and support.

Having spent the past two years talking to small businesses and investors, I can tell you that people want to invest this way. They would like to put their money in companies that they know, that are part of their community, or doing things they believe in. Just look at the success of Kickstarter, which has raised tens of millions of dollars in contributions for creative ventures. The site logged $1.6 million in pledges in a single day this week.

Before it shut down last month under pressure from regulators, ProFounder.com—a crowdfunding platform cofounded by a founder of Kiva—helped dozens of small businesses raise money from friends and family. This kind of capital is supportive, nurturing capital. It's the antithesis of vulture capital or "ripping the eyeballs out" of Muppets.

In fact, crowdfunding presents a badly needed alternative to Wall Street-style investing. Just as Kickstarter allows independent artists to bypass the traditional gatekeepers like record studios and publishers to get their works produced, crowdfunding can help entrepreneurs with good ideas or promising growth potential get funding that is not forthcoming from banks or VCs. Millions of Americans have moved their money out of big banks to credit unions and community banks; many may want to do the same with some of their investment dollars.

Yes, there is risk. Investors could lose money or be victims of fraud—just as they can in the stock market. Most of the proposed crowdfunding bills limit the amount that individuals can invest in a crowdfunded venture—the highest allowable amount among the bills is (the lesser of) $10,000 or 10% of their annual income—so the amount any one investor could lose would be limited. (In comparison, there is no limit to what they can lose in the stock market or at the casino, for that matter). The amount a company can raise is also limited, to $1 million (or $2 million with additional disclosure).

It is the risk of fraud that has most critics' knickers in a knot. Without a doubt, hucksters will ooze out of the ether. But there are commonsense measures included in the crowdfunding bills that can address the risk. For example, the Senate bills require companies to go through a crowdfunding intermediary to raise funds. The intermediaries (the equivalent of a Kickstarter or eBay) must register with the SEC. And they must hold funds in escrow until the money is released to the company raising it. In addition, state regulators can prosecute any offenders if someone manages to pull off a fraud.

The crowdfunding intermediaries will also perform a basic level of vetting of the companies they list on their sites, such as background checks of principals and the like. And let's not underestimate the power of hundreds or thousands of people dissecting a business plan and crowd-vetting an idea or a company. The Internet brings a new level of transparency to investing, in ways that the framers of the 1930s securities laws could never have imagined. In fact, crowdfunding has the potential to be more transparent than many other investments we can routinely make. Do you know what's in your emerging market mutual fund, or what the hidden fees are, for example? Do you really know what is going on inside that blue-chip bank whose stock you own? (Here's a hint)

Crowdfunding has been taking place for nearly two years in the UK without a hitch, funding hundreds of local businesses. Luke Lang, a cofounder of Crowdcube.com, which has raised more than £2.5 million in equity capital for more than a dozen companies since it launched a little over a year ago, fully expects some companies to fail; that comes with the territory. But so far there has not been a whiff of fraud. Likewise, on Funding Circle.com, British investors have lent more than £23 million to about 600 local businesses in the less than two years, with nary a Nigerian scammer or boiler room creep.

The bottom line is, the financial system is broken. Small businesses—which create the majority of jobs, contribute half of private GDP and provide the biggest economic boost for their communities—are going begging for capital. Investor protections are predicated on the public markets, yet those markets are closed to 80% of the companies that need them, according to a report by Grant Thornton (pdf here). Small firms are simply priced out. The median IPO size has risen from $10 million 20 years ago to roughly $140 million today.

We need alternatives. Done sensibly, with the right precautions built in, crowdfunding could unleash a new wave of innovation and job growth. The potential rewards vastly outweigh the risks. I hope Congress and the pundits will separate this issue from some of the more problematic proposals in the JOBS package.

Starbucks Revisited

2012-03-02T14:06:00.005-05:00

Remember Starbucks' Create Jobs for USA program?

The java giant launched the program last fall in an innovative effort to help stimulate the economy by getting money into the hands of micro-entrepreneurs and small businesses that could create jobs—if only they had access to funding. The program is sort of a "counter-to-community" model: Starbucks customers are encouraged to donate a few bucks after buying their Caramel Macchiatos. The aggregated funds are then funneled to community development loans funds, which make loans to entrepreneurs in low-to-moderate income areas that conventional lenders deem too risky. These loan funds have an impressive record of success and job creation. (See my previous post on this)

The program is off to a promising start. Since November 1, customers have donated more than $2 million. Assuming an average donation of $5, that's about 400,000 customers. Add in the $5 million that Starbucks kicked in, and we're looking at $7 million being injected into underserved communities. The money is leveraged by the community loan funds for maximum impact: every $5 from the Create Jobs for USA program translates into $35 worth of loans.

Those are the numbers, but here's what it looks like in action.

In Elkins Park, a tree-lined Philadelphia suburb, Starbucks customers are helping to fund a new food cooperative called CreekSide Co-op. The Reinvestment Fund, a Philly-based community loan fund that is one of the 63 such organizations to receive funds from Create Jobs for USA, is making a $2.2 million bridge loan to the coop. That will allow it to complete construction, after which it will qualify for a USDA loan guarantee program. In addition, CreekSide Co-op has raised $280,000 from its members, who earn up to 6% on their money, in an ongoing member loan campaign.

The CreekSide Co-op is expected to create 47 fulltime positions and 28 construction jobs. And locals hope it will help revive the area's flagging retail district, which has suffered since a popular, locally-owned grocery store sold out several years ago and foot traffic trailed off. Jon McGoran, a Creekside Co-op board member and Elkins Park resident, notes the experience of Mount Airy, another Philadelphia neighborhood. When the Weavers Way food coop opened a few decades ago in a quiet spot there, other businesses soon followed, including a bookstore, a yoga studio, a creperie and an architectural salvage shop, creating a vibrant retail center and what is today one of the area's most coveted neighborhoods. McGoran, who works at Weavers Way, said Mt. Airy coop is also lending money and expertise to CreekSide.

In Buffalo, New York, a community health center is another recipient of a Starbucks-supported community loan. After several hospitals and primary care facilities in the area were shuttered, patients visits at the Community Health Center of Buffalo swelled. The center was able to expand to 50,000 square feet thanks to a $450,000 loan from Primary Care Development Corp., a New York-based community development financial institution (CDFI). The expansion enables the center to provide primary and preventative medical care, dental and behavioral health services more than 12,000 low-income residents, and has created jobs across a spectrum of skill levels, ranging from entry-level clerical to licensed professionals, in an area that badly needs them.

These are just a couple of examples of how the spare change donations of ordinary citizens can have a real impact on neighborhoods in need. Better yet, many community development loan funds allow individuals to invest directly in their own communities, in return for CD-like returns in the low-to-mid digits. To find a loan fund in your own area, check out the Opportunity Finance Network's CDFI locator.

The Future of Crowdfunding

2012-02-23T11:30:00.004-05:00

This past weekend, crowdfunding pioneer ProFounder.com shut down. Hopes has been high for ProFounder, which set out to help entrepreneurs and small businesses raise money from their friends, family, customers and community. One of its founders, Jessica Jackley, was a cofounder of Kiva.org, the wildly popular microfinance site that has raised hundreds of millions of dollars for micro-entrepreneurs throughout the world since it launched in 2004. Could ProFounder do the same for the many entrepreneurs and small businesses held back by a lack of capital in the U.S.?

In its first six months, ProFounder raised more than half a million dollars from 302 investors for 18 companies, including a Hawaiian "shave ice" shop and an electric motorcycle maker. Sadly, Jackley and cofounder Dana Mauriello, who met at Stanford Business School, found that U.S. securities laws made it difficult for them to proceed. Despite their best efforts to comply with state and federal regulations, they drew the ire of the California regulators, who issued a cease & desist order in August. A message on their web site explains:

Despite our progress, the current regulatory environment prevents us from pursuing the innovations we feel would be most valuable to our customers, and we’ve made the decision to shut down the company.

Observers pointed out the irony that, just a week before ProFounder's demise, the crowdfunding world hit a major milestone: two separate deals raised more than $1 million each. In a Kickstarter campaign ended on Feb. 11th, Elevation Lab raised just under $1.5 million for a new docking device for the iPhone, while Double Fine Adventure, an adventure game, is poised to blow past $2 million with more than two weeks to go.

Uncle Clay's House of Pure Aloha raised money on ProFounder

Crowdfunding is clearly striking a chord. On Kickstarter, people are pledging more than $2 million a week to projects they support—a figure approaching the entire annual operating budget for the National Endowment for the Arts!

But ProFounder was different. Site such as Kickstarter and Indiegogo raise money mainly for artsy projects like documentary films, music CDs, and computer games. Small businesses have been turning to these sites more and more with some success—La Casa Azul, a bookstore in East Harlem, raised nearly $40,000 on Indiegogo to open a bookstore that would cater to the Latino community there. But it's not always a good fit.

ProFounder, in contrast, was designed for small business entrepreneurs.

The other main difference is that Kickstarter, Indiegogo and their ilk raise money from supporters with no expectation of a financial return. In other words, people donate money to projects they want to support in return for an in-kind reward, like a CD, a t-shirt or a credit in a film. It's arts patronage in the digital age.

Meanwhile, on Kiva.org, the microfinance site Jackley co-founded, loans are paid back (the site has a 99% repayment rate), but without interest.

There's more than altruism going on. If a financial return were introduced, these transactions would become securities subject to federal and state securities regulations. And those regulations make it illegal for privately-owned businesses to seek money from ordinary investors without first spending a massive amount of time and money to hire lawyers and accountants to register the offering with the SEC and relevant state agencies. The cost of registration typically swamps the small sums being sought, so it is not a viable option for most small businesses.

Yet that is the realm that Jackley and Mauriello bravely entered with ProFounder (this kind of fundraising is often called Crowdfund Investing to differentiate it from donation-style crowdfunding). Their vision was to help entrepreneurs reach out to their social networks—friends, family, neighbors, fellow students or loyal customers—to raise money in return for a small share of the revenue.

They called their brand of crowdfunding "community-funding," since it is a much more intimate form of investing than tapping an anonymous crowd. Although regulators are rightly concerned about protecting small investors, this kind of community-funding is much less vulnerable to the charlatans that troll the Internet, precisely because of the social bonds and accountability that exist in these networks.

Like many crowdfunding advocates, Jackley and Mauriello were hoping that legislation working its way through Congress that would make it legal for ordinary Americans to invest in small, private businesses would pass, opening up new opportunities. Yet, despite strong bipartisan support, the legislation is currently hung up in the Senate and is facing strong resistance from state regulators.

(To learn more about these bills and voice your support for crowdfunding, see legalizecrowdfunding.org and WeFunder)

The result is that innovation in a vital area—the intersection of social media and finance—that could create jobs and rebuild local economies and Main Streets is being stifled.

While we dither, Crowdfund Investing is taking off in other areas. In England, for example, securities laws are more accommodating and crowdfunding sites have been operating for more than two years now with no fraud, scams or wiped-out investors. Funding Circle, a two-year old London-based website, has rased more than £25 million in loans for British small businesses, earning investors average gross yields of 8%. Crowdcube, an equity-based crowdfunding site also based in London, just marked its one-year anniversary with £2.7 million raised in equity for 11 companies, including Kammerling's, the maker of a ginseng-based artisanal spirit, and The Rushmore Group, which owns three clubs in London. It even crowdfunded itself to the tune of £300,000.

And herein may lie the ultimate irony. As Americans, we pride ourselves on being innovators, the home of companies like Apple, Google and Facebook that are admired around the world. Yet when a Facebook for Finance emerges, it is not likely to be in California or New York or any other U.S. city. As one British crowdfunding entrepreneur told me: "It used to be that you came up with a good idea over here and the first thing you did was hop on a plane to the U.S. to get it funded." In fact, when developing Seedrs.com, a soon-to-be launched equity crowdfunding site, he considered the U.S. but concluded that securities laws made it impossible to operate there. Now London and other European cities, he says, are becoming new centers of innovation.

I hope our leaders are listening.

Paradise at a Crossroads

2012-02-15T17:31:00.005-05:00

I didn't have to think very long when I was asked to be a presenter at TEDx Maui. Hawaii in January? Are you kidding me? Beyond escaping New York in the depths of winter, I was truly excited about this event, Maui's first TEDx. And in doing some research for my talk, I began to appreciate just how fragile these majestic islands are.

Despite being blessed with an abundance of natural resources—volcanic soils, a year-round growing season, plenty of sunshine and cooling breezes—Hawaii imports roughly 90 percent of its food and energy. The lush land that conjures up visions of pineapples, coconuts and mangoes even imports 65 percent of its fruit! And Hawaiians pay the highest prices for gasoline and electricity in the country.

This dependency on imports is, in many ways, a legacy of Hawaii's colorful, controversial history, starting with the missionaries who came to the islands in the early 1800s. Their mission was to convert Hawaiians to Christianity, but they eventually became wealthy businessmen controlling huge tracts of land on which laborers toiled to produce sugarcane and pineapples for export. Today many of those plantations are idle, since sugarcane and pineapples can be produced more cheaply in Central America and elsewhere. The question—like the one faced by George Clooney's character in the movie The Descendants—is what to do with that land. The all-too-easy option is to turn it over to deep-pocketed developers eager to build more houses, resorts and shopping malls, which create more demand for food, energy and water.

A smarter approach would be to preserve the land for small farms, renewable energy projects and other ventures that can help make Hawaii more self sufficient and sustainable. I met many smart, committed and passionate people in Maui who are working towards those goals, from fellow TEDx speakers including Vincent Mina, an organic farmer and organizer, and Arthur Medeiros, a biologist working to restore Hawaiian ecosystems. Others, such as Dr. Pualani Kanaka'ole Kanahele and musician Paula Fuga, are at the forefront of a renewal of native Hawaiian culture and wisdom.

One challenge in creating a more robust local economy is capital: where does the funding come from? Here again, Hawaii is blessed with abundance: there is a lot of wealth on the islands. Yet much of it is invested on the mainland. That's why one of the most exciting initiatives underway is an effort to create a local stock exchange that would bring together Hawaiian investors and entrepreneurs. A local exchange would allow Hawaiians to keep more capital local, where it could be put to use funding homegrown companies that can lessen their dependence on imports—companies such as Pacific BioDiesel, which makes biofuel from local restaurant refuse (and powered the Jetta I rented from Maui's;Bio-Beetle), and the HaliiMaille Pineapple Co., a newly formed, locally owned venture that grows pineapples for the local market.

A legislative working group recently concluded a several-month study on the viability of a Hawaii stock exchange. The working group has given a green light to the Friends of Hawaii Local Stock Exchange to create an "alternative trading system" for accredited investors (people with a net worth of $1 million or more, not including primary residence, or over $250,000 in annual income for each of the prior three years). Of course, the real value in a local exchange is when everyone, rich or poor, is able to have a stake in the local economy and be part of its growth. And that's the ultimate goal for the Friends of Hawaii Stock Exchange. But many regulators are wary of local exchanges and other new funding platforms and want to see them tested in a low risk environment first.

The old Honolulu Stock Exchange

Ironically, the concept is not new: Hawaii, like dozens of regions across the country, had its own stock exchange for decades. The Honolulu Stock Exchange was instrumental in establishing the local economy and infrastructure, financing companies including Maui Telephone, the Bank of Hawaii, and Honolulu Rapid Transit Co. before it closed its doors in 1977 amid financial market consolidation.

As one of the most geographically isolated places on earth, Hawaii may be an extreme example. But in this age of globalization, climate change and scarcity, many communities across the country, and indeed the world, can relate to the need to become more self sufficient, to keep more capital local, and to rebuild their local economies. If Hawaii can do it, we all can. And I'm rooting for Hawaii.

This Holiday Season, Think Outside the Big Box

2011-12-18T15:29:00.000-05:00

Here's a post that I wrote for American Public Media's Marketplace on shopping local, with an intro by Marketplace's economics editor Chris Farrell:

It matters where we spend our money. For instance, I like supporting local entrepreneurs whenever possible -- especially small business owners active in the community. Engaged entrepreneurs can make a big difference to the health of a neighborhood.

I learned a lot about the benefits of local from reading Locavesting: The Revolution in Local Investing and How to Profit From It by Amy Cortese. "Just as 'locavaores' eat mostly foods that have been raised or grown in a radius of 100 miles or so, some people are investing the same way," she writes. "I call them locavestors."

As we head into the last weekend for holiday shopping, I thought I'd ask Amy for insight about buying local.

Read the full post here.

Cheeseheads, Unite

2011-12-08T12:54:00.005-05:00

The Green Bay Packers are the envy of the NFL, but for more than their undefeated record. They are also self-funded. When the Packers need money for stadium improvements or to get them through a rough patch, they simply turn to their fans—who also happen to be owners.

Green Bay is the only team in the league that is owned by its fans, dating back to 1923. It has sold shares four times in its history and today is owned by 112,205 fans. On Dec. 6th, the team launched its fifth stock sale—its first in 14 years—to help pay for improvements at Lambeau Field, the stadium named for the team's legendary manager (not a promotion-hungry corporation).

Shares are being offered for $250 a piece, with a $25 handling fee. The shares do not earn dividends. Nor can they be traded, and they will not appreciate (or depreciate) in value, other than on the collectibles market. Nonetheless, the official Packers web site, packersowner.com, was deluged with fans buying—and crowing about—their new shares.

"I'm an OWNER!!!!!!! One of the BEST days of my life......" wrote a fan who goes by the name CHEESEHOUND on the site.

For some investors, that may seem like a raw deal with little pay-off. And perhaps the Packers should be offering some sort of upside or profit participation (although technically the team is a nonprofit). But fans—and all of Green Bay—benefit in very real ways.

For one, there is the revenue that a popular team brings to the area. In 2009, the Packers and Lambeau Field contributed approximately $141 million in economic benefits to Brown County, where Green Bay is located, as well as 760 jobs and $80.6 million in wages, according to an economic impact study. That's in addition to $5.7 million in taxes to local and state coffers (see a pdf of the study here).

And the community-ownership structure has ensured that the team has stayed put in a small town, rather than follow the money to a glitzy new home like so many sports franchises have done. A big reason is a clause in the team's articles of incorporation that stipulate that, if the team were to be sold, any profits would go to the Green Bay Packers Foundation, which makes donations to charities and institutions throughout Wisconsin. That has effectively stymied any attempts to cash in.

Ownership by fans may also account for the extreme loyalty inspired by Green Bay, where the open-air stadium is regularly packed with "cheeseheads" despite freezing temperatures. (The new funding will help pay for seating for an additional 7,000 people).

Finally, while the fans may be largely funding their team's capital expenses (the Packers also have a bank loan and government incentives that help pay for the current round of stadium improvements), at least it is voluntary. Most major sports franchises end up wrangling millions of taxpayer dollars to build or refurbish stadiums. In fact, taxpayers frequently foot the bill for these boondoggles whether or not they ever step foot inside the new stadiums or can afford their luxury-priced seats. And often the debts drag on for years. A New York Times article last year examined how New Jersey residents are still paying for the old Giants stadium, which carries $110 million in debt even after it was demolished to make way for the new Meadowlands stadium.

Often, the publicly-funded stadiums are used to steal a team away from their home. As the Times article explains: "politicians and business leaders pushed for taxpayer-financed stadiums to lure teams. To name a few, New York built Shea Stadium for the expansion Mets, Atlanta put up Fulton County Stadium to lure the Braves from Milwaukee, and Oakland built a stadium to entice the Athletics to move from Kansas City, Mo."

So, Packers fans may not get rich on their shares, but this little town of 100,00 still has a team to call its own. As Wikipedia reminds us, "Today 'Green Bay Packers' is the oldest team-name still in use in the NFL, both by its nickname and by virtue of remaining in its original city."

By the way, you don't have to be a cheesehead or even a sports fanatic to benefit from community ownership. Today the model is being applied to everything from department stores to renewable energy projects—with winning results. Now that's something to root for.

The Un-Walmart

2011-11-23T17:06:00.001-05:00

A few weeks ago, I boarded Amtrak's Adirondack train and headed to Saranac Lake—or at least as close as I could get to the isolated village in the Tri-Lakes region of upstate New York. I went to cover the opening of the Saranac Lake Community Store, a department store that was organized and financed by residents who raised more than $500,000 from the community by selling shares in the store. The village badly need a general store: its lone Ames department store had closed, and while there was a vibrant mix of merchants on Main Street, certain items such as bed linens and underwear required a 50 mile drive to the nearest big box store. Yet the only retailer interested in locating in Saranac Lake was Walmart, which wanted to build a supercenter there. Many locals rightly feared that a store that huge would swamp their village, with its year round population of 5,000. So they took matters into their own hands and decided to open their own.

As I wrote in my story for the New York Times, it's the retail equivalent of the Green Bay Packers: a department store that won't pick up and leave when a better opportunity comes along or its parent company takes on too much debt (as the bankrupt Ames chain did).

The story was the #2 most-emailed story in the Times for much of the day, which I think reflects how the idea of community ownership and initiative resonates in these days of protest and unrest. Last week, I heard from Melinda Little, one of the organizers of the store and the current president of its board, who said that her phone has been ringing off the hook since the story ran with calls from "folks all over the country who want to invest and/or want to emulate the model." One local small business owner made a $6,000 investment. (The share offering closes in December).

Community-owned stores are not unfamiliar in the American West, where towns with dwindling populations have a hard time attracting and retaining businesses. They are also thriving in the rural UK, where villagers have banded together to create their own general stores, pubs and post offices when faced with shutdowns. There are now over 260 community owned shops in England, Scotland and Wales, according to the Plunkett Foundation, a UK organization that helps rural communities combat decline in their areas by setting up community enterprises. Each year, some 400 village shops are shuttered, with community owned ones replacing about 5% of them, according to Plunkett. These enterprises are often more than just a shop, they are the beating heart of village life.

They have also proven to be quite resilient. Community shops have a 97% success rate, compared with a national UK business survival rate of 46.8%, according to a report produced by the Plunkett Foundation last year (a pdf of which can be found here). The shops operate with an average gross margin of 21%, in part due to the a large reliance on volunteers, and 22% of net profits are reallocated to community projects.

Retailing is a notoriously tough business, especially in an age of mega-retailers who wield their clout to demand price concessions from suppliers. Yet that model may be running its course: Walmart's same-store sales in the U.S. have been down for 9 consecutive quarters, and behemoths like Borders and Blockbuster have gone bust. And as the success of 'buy local' campaigns has shown, people may be tiring of the soulless, cookie cutter big box shopping experience.

A community-owned enterprise, in contrast, is about more than commerce, it is about relationships and a sense of place. And that engenders loyalty and trust that a big box will never have, even if profits are modest. The Saranac Lake Community Store shows that alternatives are possible. And for that we should be thankful.

Update: Port Townsend, Washington—a town north of Seattle with a strong local investment ethos—plans to open a community-owned store to replace a general store that recently closed. Read the Seattle Times article here.

CDFIs: Under the Radar No More

2011-10-24T14:18:00.000-04:00

There are so many interesting issues brought up by the Starbucks "Create Jobs for USA" program, the subject of my last blog post. As noted, Starbucks will take donations from customers and pass them along to the Opportunity Finance Network (OFN), a network of community development financial institutions, or CDFIs. OFN will then make grants to individual CDFIs that apply for the funds. Joe Nocera of the NY Times points out that CDFIs, which lend to underserved communities and entrepreneurs, operate "mostly under the radar." Starbucks CEO Howard Schultz had never heard of them before an employee proposed the partnership. Nor have most people.

That is a shame, because these organizations do an enormous amount of good. In particular, community development loan funds, a type of CDFI, engage in the sort of relationship-based lending long abandoned by big banks and even many smaller ones. Rather than simply rely on credit scores and cookie cutter lending models, CDFI officers meet face to face with entrepreneurs and assess whether they have the knowledge, character and business savvy to succeed. The 180 CDFIs that are part of OFN have lent more than $23 billion to entrepreneurs and individuals through 2009. In 2008 alone, they made $2.3 billion in loans, including to more than 51,400 micro-businesses that created or maintained 223,738 jobs.

All the more amazing, they did that with a minuscule charge-off rate—1.3%—that would make Bank of America green with envy.

How are they so successful? For one, because CDFIs focus on a particular region, they are intimately familiar with the neighborhoods they are lending into. And, when a borrower runs into trouble, they work with her to avoid a default. (Imagine your megabank lender doing that!) They also seem to be pretty good judges of character.

Community development loan funds get their capital from big banks, which give them low-interest loans as a way of fulfilling their Community Reinvestment Act mandates to lend locally (something the big banks are no longer equipped to do well themselves). They also receive grants from foundations, to help pay for operating expenses or create reserve funds for losses. Although they haven't marketed themselves, many community loan funds also take investments from individuals.

Typically, individuals can make an investment—usually a minimum of $1000, but sometimes lower—for a period of one to several years. In return, they receive a modest fixed return, typically 1% to 3% for a short term loan and up to 5% or more for a 10-year loan (based on current rates), with principal returned at the end of the loan period. It's like a locally-focused CD, except that the funds are not FDIC insured. But then, it is rare, if not unheard of, that a loan fund does not return capital and keep to its promised rate of return—even throughout the financial crisis. Best of all, as an investor, you know that your money is going to work in your community and helping budding entrepreneurs get a foothold—not generating trading profits or lining some fat cat banker's pockets.

The Starbucks campaign is shining a light on these under-appreciated financial institutions. But if you'd like to do more than donate a five-spot, consider investing in a CDFI in your region—there are more than 800 certified CDFIs across the country, so most regions have one. The Coalition of Community Development Financial Institutions offers a search tool on its site at CDFI Coalition www.cdfi.org. The Opportunity Finance Network offers one as well at opportunityfinance.net.

Another easy option is to invest in Calvert Foundation Community Notes, which invests the money in CDFIs across the country (you can choose which region you prefer). An advantage of the Calvert Notes is that they are available through most major brokers (I bought mine through Charles Schwab—and it's about the one thing in my portfolio that hasn't lost money this year!) For more information, go to www.calvertfoundation.org/invest/how-to-invest/community-investment-note. You can also invest in community development loans funds, including Calvert Notes, on www.microplace.com/.

And, if I may close with a shameless plug, if you are interested in learning more, I devote a chapter in my book to CDFIs. I call it "The Biggest-Impact Financial Sector You've Never Heard Of."

A "Grande" Idea - Let People Profit From Crowdfunding

2011-10-24T10:50:00.002-04:00

Starbucks' recent announcement that it will start taking donations from its tens of millions of customers to help fund small businesses was a grande - no, make that venti-sized - idea. As the NY Times' Joe Nocera explained in his recent op-ed, "We Can All Become Job Creators," Starbucks will act as the middleman, passing along the donations to the Opportunity Finance Network, a group that represents 180 community development financial institutions (CDFIs), which lend to communities underserved by traditional banks.

With tight credit still holding back many small businesses that might otherwise expand and hire, Starbucks and its CEO Howard Schultz have been rightly praised for this innovative program. It will be interesting to see how many caffeinated customers step up to become small business donors, or "Americans helping Americans," as the wristband they will receive for donations of $5 or more reads.

If the experience of sites like Kiva, Kickstarter and IndieGoGo is any indication, there is a lot of pent up desire among Americans to help out entrepreneurial ventures that they care about. Kiva allows people to make small loans to micro-entrepreneurs around the world and in cities like Detroit, while the other two sites are a conduit for donations to artists and entrepreneurs, such as musicians and filmmakers. Kiva has facilitated nearly $250 million in loans from more than 600,000 individuals, and Kickstarter users are pledging funds at a rate of $2 million a week.

That's impressive. But to really crack the small business capital market open, we need to make it part of the mainstream financial landscape. In other words, let people earn a profit on their money. Donations and no-interest loans are great and have helped a lot of people, but they cannot serve the vast demand for small business capital in this country. That's why I advocated in my own recent NY Times op-ed for changes to our securities regulations that would allow businesses to raise funds from many small investors—a practice known as crowdfunding.

As I wrote in that op-ed:

[Crowdfunding is] the sort of person-to-person (or P2P, in industry jargon) funding that characterized financial transactions for millennia, before our mediated, securitized financial system took hold. Crowdfunding has the sort of populist, common-sense appeal that resonates with free-market libertarians and champions of the working class alike. By marrying online social networks with finance, crowdfunding offers a more democratic model of finance, in which individuals can directly fund other individuals or businesses that they deem worthy, without going through a bank or Wall Street middleman.

Unfortunately, in this country, it's illegal to raise funds this way in return for a profit. Once a financial return is promised or implied, the offering becomes a security in the eyes of the Securities & Exchange Commission (SEC) and the legal hurdles go way up—putting public capital out of reach for most small businesses.

The laws, put into place after the 1929 stock market crash, were intended to protect investors from unnecessary risk. But the effective result is this: wealthy investors can invest in pretty much anything they like: private equity, hedge funds, venture capital. But ordinary investors (the 99%, you might say) must stick to publicly traded securities.

The problem is, most small business can generally not afford to go public—consider that the median IPO size was $140 million in 2009, up from $10 million twenty years ago! Nor do many want to, given the market volatility and Wall Street's fixation with short term results. (There is also a certain irony to this. In order to protect "unsophisticated" investors, the SEC confines them to the public markets. How safe do you feel about your stock market investments these days?)

So, no surprise, the financial landscape today is dominated by big business investment options. Think about your 401K (if you are fortunate enough to have one of those employer-sponsored plans). These plans offer a menu of funds that invest in the stocks and bonds of large companies (even a "small cap" firm falls between $50 and $300 million—the size of a large cap in the 1980s!). There may be some government bond or emerging market funds thrown in as well. But what you will not find is a small or local business fund. Those things do not exist.

Eight decades after the legal framework of securities law was put into place, the Internet and social networks have transformed the way we do everything, and the regulations look wildly anachronistic. And the vast majority of Americans are prohibited from investing in small and local businesses they want to support, and these firms in turn are cut off from a huge pool of badly needed capital.

That's why there is so much excitement about the growing bipartisan support for a crowdfunding exemption. President Obama has championed crowdfunding through his Startup America initiative, and House Republican Patrick McHenry has drafted a bill that is winding its way through the House. There are also grassroots petitions calling for a crowdfunding exemption before the SEC. The proposals vary in their details, such as the caps on the amount individuals could invest in each deal, but all would allow ordinary investors to put small sums of money in small businesses without requiring the business to go through a long and costly registration process with the SEC.

Yes, small businesses can be risky, but the small sums involved would ensure that no single investor could lose the farm on an investment. And here at Locavesting Central, we believe that community-based crowdfunding—where businesses are reaching out to their customers, neighbors and supporters— would further mitigate the risk. That's because local business owners have a reputation in the community, and potential investors have a greater knowledge of the company and the market it operates in—a key concern of the SEC. (ProFounder, an interesting crowdfunding startup in Los Angeles, is promoting such a "community-funding" model). What's more, I believe that this kind of investing—where individuals have a literal stake in their local businesses and therefore their communities—can help in the renewal of democracy and civic engagement.

Of course, there is no guarantee that anything will come of these crowdfunding proposals, that's why it is so important to speak up. So sign the petitions (links below), call your elected representatives, and drop a few coins in the donation can at Starbucks.

The Sustainable Economies Law Center has filed a petition with the SEC that would allow individuals to invest up to $100 in small companies. Details, including how to post a comment with the SEC can be found here.

Startup Exemption is another campaign to change the law—add your signature here.

Community Capital

2011-10-01T11:28:00.000-04:00

It’s not fun being an investor these days. The options are pretty stark: parking your savings in an inflation-lagging money market fund or T-bill (or under the mattress), or rolling the dice in a stock market that has careened wildly amid global uncertainty.

But a growing number of investors are discovering alternatives in the small businesses in their own backyards. Just as locavores eat a diet sourced close to home, these investors—call them locavestors—are investing that way. The idea is to earn profits while supporting your community.

Read the rest of my guest blog post for American Public Media's Marketplace, with an introduction by Chris Farrell, here.

Pennies From Many

2011-09-26T09:31:00.000-04:00

AS Congress considers President Obama’s job package, one measure seems to have rare bipartisan support: a proposal to loosen some of the outdated securities regulations that hamper small businesses in raising capital.

The Obama administration, not surprisingly considering its own success in gathering small donations during his campaign for the presidency, is supporting crowdfunding, a financing model that relies on collecting small sums of money from many people over the Internet.

Read the rest of my op-ed in today's New York Times here.

A Grassroots Stimulus Program

2011-09-24T15:25:00.001-04:00

In a deeply divided nation, the one thing we can agree upon is the need for jobs. The economy cannot recover until millions of people are put back to work and consumer spending once again flows. But it’s doubtful that any meaningful job-spurring policy will surmount the political gridlock in Washington.

Don’t look to Corporate America for salvation either: our biggest and most profitable corporations are sitting on piles of cash pile while focusing their investments overseas. And Wall Street is too busy chasing trading profits to engage in the kind of productive capital-raising that was once its mainstay.

So how are we going to begin rebuilding the broken economy and creating jobs? Where is the investment going to come from? One answer is taking shape in dozens of towns and neighborhoods across the country, as citizens from Brooklyn, NY to Port Townsend, WA are figuring out ways to invest in the local businesses that create jobs and help build strong local economies.

Read the rest of my guest blog post on CNBC's Bullish on Books.

Extreme Financial Markets are the New Climate Change

2011-09-12T12:09:00.000-04:00

The front page NY Times story today, Market Swings are Becoming the New Standard, wasn't exactly a revelation—anyone who has watched their life savings whipsawed by global macro trends and speculation over the past few years knows that the markets have become unnervingly volatile. But what struck me about this article was the similarity to global climate change.

Listen to Andrew Lo, professor of finance at the M.I.T. Sloan School of Management:

“The last few years have been the most volatile for all of recorded history,” noted Lo. For evidence, he says that 10 of the biggest 20 daily upswings and 11 of the largest 20 daily drops since the beginning of 1980 to the end of last month have occurred in just the last three years.

Similarly, the past decade has included 9 out of the 10 hottest years on record, going back to 1880 when global temperatures were first tracked. As wild fires rage in Texas and the northeast recovers from epic flooding, extreme weather has become the norm. Now, it seems, we can add extreme markets to the new normal.

Certainly some traders are profiting richly off the volatility, but for most individual investors, it is stomach churning to watch their investments swing so wildly (and mostly downward). As the Times points out, volatility is a problem because it scares investors and companies alike from the markets and undermines confidence, which can reinforce negativity. Global events—from Europe's debt crisis to U.S. political dysfunction—have contributed to the volatility. So have high frequency trades fired off by computer algorithms and exchange-traded funds that can be flipped like pancakes. In other words, global financial change has manmade causes, just like climate change. And the perpetrators, whether polluters or high frequency traders, foist their external costs onto society at large.

Against this backdrop are increasing calls for market reforms. Some observers are even suggesting the creation of a safe market for long term investors that would be walled off from high frequency traders and market manipulators. As I detail in my book, Locavesting, one way to do that is through the reintroduction of local stock markets like the ones that used to flourish across the country until technology and globalization made them obsolete. There are efforts to launch local exchanges in Lancaster, PA, Hawaii, and Toronto, among other places. They all seek to bring together a region's long term investors with its small businesses and entrepreneurs to create strong local economies. Think of them as little bastions of productive calm amid a raging global storm.

What's wrong with this picture?

2011-08-04T10:35:00.000-04:00

Luxury goods are flying off the shelves as revenues at Tiffany, BMW and LVMH soar, the NY Times tells us in a Page 1 story today. Turn to the business section, and we learn that American fast food companies are investing in Russia, where—as in China and India—the middle class is growing. At home, however, the diminishing middle class is hunkering down for a potential repeat of 2008. Meanwhile, despite the hit the S&P has taken over the past week, corporate earnings are the highest they've been in four years, fueled by growth in overseas markets.

Is there a better argument for supporting our tax-paying, job-creating locally-owned businesses?

Community-owned Post Offices

2011-08-01T14:34:00.001-04:00

The financially strapped U.S. Postal Service is planning to close thousands of low-traffic post offices across the country. Some are in big cities like New York and Chicago, but many are in sparsely populated rural areas such as Waverly, Washington and Mountain City, Nevada. In all, 12% of the nation's post offices could be closed. The U.S. Postal Service is looking to partner with small businesses to fill the void, reports MSNBC.

There's another model that communities about to lose their snail may want to consider. In the U.K., where hundreds of rural shops, pubs and post offices (or combination of the three, as is common) have closed in recent years, communities are banding together to own and operate their own shops and post offices, which are at the center of village life.

The village of Berrynarbor in Devon (population: roughly 750) is one example. In 2004, it was faced with the closing of its only shop and post office when the postmaster was to retire. Today, the post office—which also sells groceries and operates a cafe—is owned by the community and staffed by nearly 30 volunteers. There are around 250 such community-owned shops in the U.K., including 40 that opened in 2010 alone, according to the Plunkett Foundation.

In these cost-slashing days, it's a model to keep in mind.

"Systemic Risk" in the Supply Chain

2011-08-01T11:53:00.000-04:00

There's been a lot of talk about systemic risk since 2008, when we abruptly learned that the concentrated power of a handful of financial institutions could blow up the global economy. But systemic risk is not confined to the financial system. It has also become embedded in our global industrial system, as a smart story by Matt Stoller in The Nation points out. We witnessed this recently when the double-punch of an earthquake and tsunami in Japan knocked out a major supplier of auto parts, causing shortages that torpedoed sales at major auto makers.

The disaster also affected other, less publicized areas, such as the market for video tape, when a Sony plant was taken offline. Next time it could be life-saving medicine or the ubiquitous consumer electronics we take for granted. (China, for example, controls production of 97% of the world's rare earth metals, which are critical to many manufactured goods, from cell phones to hybrid cars).

There's a reason why a "smart" energy grid is distributed, and the most resilient computer networks (like the Internet) spread processing across many computers. When we become reliant on one "node" in a system - whether it is an electric grid, a computer network, or an economy - the system is vulnerable to disruption.

The article, "How America Could Collapse," explains how our industrial supply system is full of systemic risk that could disrupt the flow of everything from food to smart phones. The problem: American corporations have outsourced so much manufacturing and production to other countries that we are dangerously dependent on foreign suppliers and imports. We have hollowed out the economy (just ask one of the 25 million un- or under-employed).

Stoller says we need to re-engineer our global supply chain, re-orient the economy towards manufacturing and rededicate our corporations to productive uses. Good luck with that last one.

In the meantime, the localization movement taking place across the country is beginning to rebuild local economies from the ground up. By nurturing and investing in homegrown enterprises, organizations like the Business Alliance for Local Living Economies (BALLE), the Transition Network and Slow Money are helping communities become more productive, prosperous and self sufficient—and perhaps less likely to be broadsided by the next global disaster du jour.

Local production will never completely displace our global economic system. But it can reduce our vulnerability to systemic shock. And in these volatile times, wouldn't it be nice to have a back up plan?

Beware politicians protecting "small business"

2011-07-26T20:30:00.005-04:00

Here we go again. Every thorny issue facing Washington—from financial reform to taxes to the current debt ceiling debacle—eventually becomes framed as doing what is right for small business. Which would be fine, if it weren't so often just a flimsy cover for a Big Business agenda. The latest example: House speaker John Boehner's rebuttal speech on raising the debt ceiling (to pay for expenses that Boehner and his fellow members of Congress have already approved, it bears repeating).

Boehner sprinkled his address with references to small business. Referring to President Obama's plan to cut spending while also closing corporate tax loopholes and letting tax breaks expire for the nation's wealthiest citizens, he said: "Having run a small business, I know those tax increases will destroy jobs."

Not so, according to some business leaders. As the American Sustainable Business Council, a coalition of business networks, pointed out in a letter to Boehner:

"Please understand that not all business leaders agree with many of the points you make daily in the name of defending the private sector. It is inaccurate to lump together large and small business—and businesses in every sector of the U.S. economy--as if
all of our interests were exactly the same. Some might see this as a strategy to use the halo of small business to camouflage the excesses of big business."

The Council goes on to state that many business leaders believe raising revenue must be part of the solution, and that government services are critical for economic health.

"Cuts to programs for the young, old, disabled and unemployed will hurt not only our customer base, limiting their capacity to buy our products, but our nation as a whole. Further, we disagree with the perspective that any tax increase destroys jobs. We believe that there are important distinctions to be made between good taxes and bad taxes, between incentives that create jobs and real value for the economy and those that don’t. There are expenditures that are critical to improving productivity and the nation’s infrastructure and those that are a waste of money. Removal of certain subsidies for mature industries, in our view, does not constitute a tax increase but rather a smart business decision. This is how we run our companies – moving resources towards areas of greatest need in a constantly changing marketplace. "

The letter, written by executive director David Levine, points out that during the 1980s, Reagan raised taxes many times while unemployment continued to fall. Ditto Clinton in 1993. And that corporate taxes as a share of federal receipts are at an historic low—all facts Boehner conveniently omits.

The Council raises two other important concerns: that the largest corporations rarely pay the statutory tax rate —after all, that's what their armies of accountants are for. Instead, the tax burden falls to small businesses who, despite creating almost all net job growth, are left footing the bill. And second, that job creation is the number one priority, so reduced tax rates should encourage jobs to be created here at home, not shipped overseas. The Council's recommendations are a sane counterpoint to the shrill voice of the multinational-dominated Chamber of Commerce (although it would like to preserve Big Business tax breaks, even the Chamber insists the deficit ceiling must be raised).

Will Boehner take note? He may have once run a successful small business, but his sympathies seem to lie more with the deep-pocketed corporations that are filling his campaign coffers (and the Tea Party freshman that have hijacked the Republican party). Consider the following:

Three of the Speaker's five biggest funders this year are employees of three Wall Street firms: the hedge fund Paulson & Co., Moore Capital Management of New York, and Cantor Fitzgerald, reports Boston.com.

Securities and insurance firms were among his top donors last year, according to the Sunlight Foundation. (The Sunlight Foundation, a nonpartisan organization that advocates for more transparency in government, provides several handy tools to do your own sleuthing, by the way).

Not to pick on Speaker Boehner—he's just using the standard playbook for politicians these days. But when you hear an argument wrapped in the patriotic banner of small business, consider carefully the source.

Science can be crowdfunded, too

2011-07-12T20:50:00.000-04:00

Interesting story today in the Times about scientists turning to crowdfunding to finance their research. Now there's an experiment to watch...

Credit Unions Want to Lend

2011-07-12T18:23:00.000-04:00

Credit unions are expanding their business lending to fill a void left by banks. As USA Today reports: "Over the past year, credit union business lending is up 5%, while bank business lending is down 3% — a decline of about $95 billion, according the Credit Union National Association." So what do banks do? They fight a proposal that would allow credit unions to lend more to small businesses, naturally.

Right now, commercial lending by credit unions is limited to 12.5% of their total assets - a threshold that many credit unions are reaching. Bills in the House and Senate would raise the limit to 27.5% of assets, which credit union officials figure could unleash $13 billion in new small business lending in the first year.

The bankers argue that lifting the ceiling on commercial lending would put credit unions, which are tax-exempt and subject to different regulations, on unfair footing. Well, let's take a closer look.

Credit unions are exempt from federal income tax because they are non-profit cooperatives: owned, controlled by, and managed on behalf of their members. As such, they are governed by elected directors who serve as unpaid volunteers. Like other cooperatives, they distribute excess earnings back to members in the form of better rates and lower fees. Bank profits, in comparison, largely go to fat bonus payouts for execs and dividends to outside shareholders - you can bet Jamie Dimon is not returning it to you, dear customer! Capital standards for credit unions are more strict than banks, one factor that explains why relatively few were affected by the leverage-fueled meltdown of 2008. Credit unions are also constrained in how they can raise money. By law, they are barred from issuing stock, so the only way for credit unions to accumulate capital is through earnings - that is, the old fashioned practice of making good loans.

If banks think credit unions have it so good, Mark Wolff, a spokesman for the Credit Union National Association, urges them to go ahead an become a credit union. "You'd have to stop paying your directors, your CEO would have to take a steep pay cut... but hop on board!" Somehow, he told me, "they never seem to take us up on it."

Slow Money NYC

2011-07-06T16:34:00.000-04:00

My piece on the recent Slow Money Entrepreneur Showcase is in the current edition of Edible Brooklyn!