On the surface, it seems like a no-brainer easy thing to do. You have capital, you love your community, and you know some business owners have a harder time than others getting the capital they need. State and Federal laws even shifted to open access to investors and investees in the last decade. Problem, solution, done.
So why doesn’t everyone – those with $50 up to those with $50 million to invest – have community investments in their portfolio? And after doing this work for eight years, why is it still so hard for even our firm – some of the most outspoken advocates for local capital circulation – to help our clients invest in their community?
These were the questions swimming in the back of our minds as we planned our 2020 research and development initiatives. Revalue is unique as an impact investment firm in that we study and influence the underlying principles and priorities of the emerging marketplace while we provide direct services to investors. This gives us a rare global view of the ecosystem, how investors are engaging with it, and how it is changing in real time.
In Fall 2019, we were elated to dive into three research opportunities looking at the dynamics in Michigan’s community investing marketplace. This year’s research partnerships included:
- Ann Arbor Area Community Foundation – Studying the flow of capital in Washtenaw County at an institutional and individual level. Questions we set out to answer: How much capital is moving, who is moving it, and where is it going? Get the report here.
- Michigan State University Center for Community and Economic Development – Studying the current state of Michigan’s community investing ecosystem. Questions we set out to answer: Who are the players, what does the supply chain look like, and where are the strengths and opportunities? See the final presentation here.
- The Initiative for Local Capital – Developing a practical toolkit for investment advisors to use with their clients. Questions we set out to answer: What resources currently exist for our peers, what will help them uphold their fiduciary duty, and how can we educate them enough so they can educate their clients? Check out the resource page here (going live Nov 2020).
A few things we learned
For those of you who love to dive into details, we encourage you to check out the links above. For everyone else who is so busy in this #covidlife they are not entirely sure what day of the week it is, here are five insights worth highlighting about our local impact capital ecosystem – much of which I imagine will be applicable to your own backyard if you are not local to us.
- Legal aid services are cost prohibitive. Business owners who need less than $100k pay a hefty price in both time and money to work with an attorney to register a security, increasing the risk that smaller businesses will curtail securities laws and raise capital in the underground economy. This course locks out investment pools that require a custodian, as they will typically not accept an unregistered security, and puts both businesses and investors at regulatory risk. Our ecosystem would benefit from a grant pool to cover legal aid costs for businesses who want to raise community capital.
- There is an across-the-board education gap. We often think of the local capital shift as involving just the people with the capital and the people who need the capital, but there are a variety of influencing stakeholders that sit between those two sides of the equation. Not only do investors and business owners lack access to education about how investing locally works – but technical assistance providers and coaches, accountants, attorneys, bankers, marketing firms, and the philanthropic community all reported a thirst for education suited to their perspective. Our community would benefit from engaging trade associations and university program developers to incorporate this information for various professionals.
- Our County ecosystem moves at least $2 billion in investment capital every year, and 99.4% of it is not mission driven. Our firm is in Washtenaw County, with Ann Arbor as its seat of government. This county is economically prosperous, highly educated, and philanthropically focused. It is also one of the most economically segregated in the U.S. and health disparities are stark, where black and brown residents are expected to live 10+ fewer years than white residents. Despite our collective attention on these issues, when it comes to progressing beyond philanthropy into local impact investment to improve people’s lives, our County is arguably starting from scratch. We need mission driven individual and institutional investors to act and shift the return on investment calculation norm from profit-only to a generative triple bottom line of stewarding people, place/planet, and profit.
- Micro-economy developers play a crucial unacknowledged role. Economic development is a large and thriving industry, which tends to focus on attracting and retaining employers who will bring significant jobs to a given area. However, 70% of our county’s workforce is employed by businesses with less than 10 employees. It is common to find one business owner, community center volunteer, or nonprofit leader who is single-handedly helping people in that neighborhood start and grow their businesses, often without any dedicated resources or technical assistance. Recognizing these cornerstone community members as a legitimate and important part of local economic development efforts by providing them with training, resources, and compensation would go a long way to ensuring that businesses continue to launch and grow directly in (and with the capital from) the communities in which they serve.
- Fear is driving the Investment Advising industry. There is no other way to put it. Our industry has been so damaged by bad actors that regulators have had to erect the most onerous rules and ideals to ensure we could not possibly harm our clients, even by accident. While well-intentioned in the name of investor protection, it has created a situation where Advisors are incentivized to keep assets on Wall Street because the world has generally accepted that Wall Street is risk adverse – even while acknowledging that all investments carry risk, including the risk of loss of principle. Instead of dedicating resources into increasing the accessibility of education and information for both investors and advisors, our industry has gone the other way – just don’t talk about it, don’t advise about it, don’t touch it with a 10-foot-pole, and you’re good. But no, we are not good. Sticking our head in the sand is not how we face the challenges of our day. We are calling upon our industry to step up and accept the challenge to provide meaningful and consistent education for advisors.
To impact change, we must be willing to do things differently. There is always risk in doing things not done before, but that is the learning curve we must adopt if we are to have system impact. When we concluded this year’s research, we took a step back and said, “Aha! This is why it has felt like we have been trying to move mountains for eight years!” Sure, we have seen glimpses of these insights over the years, but to see how they relate to each other and how an ecosystem goes well beyond capital moving from point A to point B was priceless. Now we are taking responsibility for our role in this ecosystem – that of advisor to our investor clients and influencer within our industry. Here are our closing questions for you –
- What is your responsibility in this ecosystem?
- Are you ready to invest in Main Street? If not, what can you do in 2021 to prepare yourself?
- What will you do in 2021 to improve conditions within your industry and sphere of influence so impact investment dollars can more easily flow between those who want to affect change and those who are affecting change?
Time to get to work!
Want to share what your plan is for affecting change in 2021? Drop us a line at email@example.com to put your efforts on our community’s radar!