You shop locally, you buy locally, so why don’t you invest locally? Why not invest your assets in your favorite small business just down the street from where you live? Truth is, it’s not as easy as it should be, says Amy Cortese, a veteran business journalist and author of the new book Locavesting, which takes a look at the local-investing movement and how individual investors can participate.
While Wall Street is back in stride after the financial crisis, Main Street has lots of cracks in the pavement. That’s because our financial markets aim to serve “too big to fail” corporations, while labeling small businesses as unlikely to succeed. Instead, we should be doing a better job investing in locally-owned companies, says Cortese, and financial regulators should also be doing a better job in allowing us to do so.
I talked with Cortese about her book, the state of local investing today, and steps that investors of any net worth can take to support their local business.
What was your inspiration for the book?
In the wake of the financial crisis in 2008, it was clear the financial system had major flaws and that people were looking for alternatives. That’s what I found at the inaugural national conference of Slow Money, a group with a sort of a Slow-Food-meets-finance focus on bringing money back down to earth. I was writing about sustainable business, food, and venture capital, so all these things came together. I too was looking for investing alternatives and when I looked around, I was amazed at all the grassroot organizations across the country.
Why is it so important to invest in small businesses?
Jobs are key. Small businesses create two out of every three jobs in this country. Multi-national corporations are net job destroyers, but ironically that’s where we have most of our money invested. Small businesses provide a lot of benefits that big companies don’t. They tend to keep more money circulating in the local economy. It’s called the “local multiplier effect.” They spend more locally in terms of wages, and spending on professional services like accounting and web design. They support the Little League teams, advertise in local media, give to local charities, and most of their employees are local. Every dollar spent at a local-owned business generates, on average, three times the economic benefits for a local community than one dollar spent at a corporate-owned chain store.
So why don’t more people invest in them?
The U.S. securities laws tend to hinder investment in local companies. A hundred years ago, industries were built up through local stock exchanges, but in the race to globalize and be more efficient, we’re leaving that behind. When it comes to Securities Exchange Commission (SEC) laws, it boils down to two sets of rules – one set for “accredited” wealthy investors who can invest in anything they like, and another for those who don’t have that net worth of $1 million, not including your home value. The SEC is trying to protect the latter from shady investments, but we’re not being protected by the high-frequency trading on the New York Stock Exchange, so you can argue the wisdom of those laws. There are exemptions and exceptions in securities laws that allow some local investing to be done but it’s complicated. Even many legal experts who advise small business don’t know all the laws.
But when most people think of small businesses, they think of that oft-quoted statistic that half of them fail in their first five years. So why make such a risky investment?
Yes, when people think of small businesses, they think of the mom-and-pop shop. But a small business can also be a high-growth startup, or a company that employs hundreds of people and makes millions of dollars but is locally owned and has a stake in its community. These businesses make community decisions as a stakeholder, not as a distant company solely focused on maximizing profit. The investment returns may be more modest, but some have good revenue models and growth prospects. The point is, which is more risky? You drive by that business every day and read about it in your local paper, so there’s an information flow, there’s trust and accountability. You don’t have that with giant corporations and conglomerates halfway around the world that could be investing in derivatives and leveraging themselves to the hilt.
When you were researching the book, what were your most inspiring examples of locavesting?
I love the story about the Cops & Doughnuts bakery in Clare, Michigan. What I love about this example: Here’s a mom-and-pop shop that’s been in business for 100 years on the verge of closing, but a bunch of residents - – policemen, in this case — took a risk, invested in it, were wildly successful and as a side effect, revitalized the downtown.
I also like the story of the Greenlight Bookstore in Brooklyn. The owners raised $70,000 from two dozen residents. That’s not huge amounts of money, but the people wanted a bookstore in their neighborhood so they lent money, feel like they have some ownership in the place, and they’re the bookstore’s best customers. Greenlight was profitable after just one year.
So what are the best steps people can do to be locavestors?
If you’re a wealthy investor, the sky is the limit. But for the rest of us, the easiest way to start is move your money to a local bank, community bank or credit union, because they are much more likely to be investing in and giving money to businesses in your area.
Community development loan funds are region-focused funds that invest in underserved regions and businesses that can’t get bank loans. You can invest in one with as little as $20 at MicroPlace.com. You can also search for a community fund in your state at the Opportunity Finance Network. Some good groups to check out are Slow Money and Business Alliance for Local Living Economies, which have chapters across the country – so join or start one.
Another option is creating a local investment club. In my book, I wrote about a group called Local Investing Opportunity Network (LION), which revitalized the town of Port Townsend in Washington and has become a source of inspiration for lots of other communities nationwide. LION has information about how to start a local investment club on its website.
People can also join a food co-op or energy co-op in their area. You get a “patronage rebate,” which is the excess profit gets distributed to members asa rewards program, but the framework lets a business raise money for expansion capital from its members. Organic Valley Co-op in Wisconsin raised $43 million from investors over a few years and gave them back annual returns of six percent, even while the stock market was tanking.
A new method is “crowdfunding,” done through peer-to-peer lending sites like Prosper and Lending Club, which started as offering personal loans but has now moved into offering them to small business. Interest rates average 10 percent, which is good for investors and borrowers alike because it cuts out the middleman.
Now that the book is done, have you become a locavestor?
I started by going to the Move Your Money website, entering my zip code and putting my money in the nearest local bank. I also put some money into a local community development loan fund through the Calvert Foundation, and I’m a member of the Slow Money NYC group. And if this book becomes a bestseller, I’ll have more money to invest!
Vanessa Richardson is a freelance writer in San Francisco who writes about small business and personal finance.