Small Dollars: How I Built Investment Muscle Part II

Inner Peace, Morning Bliss Tea. Free tea samples equal small dollars aggregating in the alternative economy.
Samples! ©2013 Sonora Ortiz

For many of us the word, ‘investing’ conjures big money and important people willing to wield their dollars for change.

Rockefeller?

Buffett?

Gates?

But maybe our first feelings are wrong.

That a little amount of money can mean so much to our entrepreneurs is sometimes difficult for us to get our heads around.

I assure you, it does.

 A Few Dollars Can Mean A Lot

Whether $100 to a business in an informal global economy or a $500 investment to a business in the U.S., these dollars can mean a lot.

In the food businesses I’ve worked with, $1500 might buy a much-needed cooler, $2500 might be the down payment for working with a co-packer, moving to a commercial kitchen or expanding warehouse space.

These are actual experiences I’ve encountered with Slow Money entrepreneurs.

In one example, a borrower took a $500 Kiva loan to pay for vegan and jazz festival entrance fees throughout the summer.

The loan provided even more value as it positioned her for a second $5,000 loan. By paying back the first loan, she improved her creditworthiness.

Strategically placed, small dollars make a big difference for growing businesses.

I believe we need to tell these stories more often.

Visceral Feel

For you as an investor, small dollar investments are part of your strategy to build your What I Know (WIK) instincts. These small investments help you become familiar with your neighborhoods and help you better know your shared-values communities.

In addition to improving your WIK, direct investments deepen new and existing relationships with small business owners while bringing these entrepreneurs much needed capital.

In other instances, crowdfunding platforms can lead to the same results while making your transaction easier.

Through this blog, I’ll share some of the ways you might improve your own WIK by using crowdfunding platforms. We’ll examine concrete ways to

1.      Get invested!

2.     Benchmark and gauge impact metrics

3.     Start framing an impact investment thesis

Crowdfunding

The crowdfunding movement epitomizes the crusade to democratize finance.

When a social entrepreneur steps outside formal institutions (nonprofits, banks or M&A firms) they rally the crowd to move money toward their great idea.

The community decides the merits of the business and the investment. Not the grantee, the bank or the investment banker.

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From the investor side, crowdfunding helps you mitigate risk through:

1.      Smaller dollars–at $25 what’ve you got to lose?

2.     The wisdom of the crowd–the crowd ferrets out losers

3.     Relationship with the entrepreneur–yes, you may simply scroll through a   website finding raises that catch your eye, but often you build on an existing relationship.

These platforms can help you both index opportunities and facilitate your financial transaction.

That smaller dollars still have a significant impact through a crowd raise is reassuring as we develop WIK intuition.

Crowdfunding as double duty

Advocates for crowdfunding also understand there is more to completing a raise for an entrepreneur than funding a small business. A crowdfunding raise can be an integral part of a marketing campaign.

This rings true for me. I’m much more excited to tell stories about my entrepreneurs when I join in a crowd raise.

Just as there are several ways to channel your money to an entrepreneur, there are several fundamental ways to deploy money through crowd raises. These are:

1.      Rewards

2.     Loans

3.     Equity

Rewards

The most popular is a rewards campaign. You donate your money and get early access to the product, or a thank you gift often called a perk.

Made famous by Kickstarter and Indiegogo, rewards campaigns are familiar.

Rewards platforms are one way we can start to intuit a feel for the marketplace.

In the WIK spirit, my friend, a crowdfunding coach, experimented by putting the minimum allowed towards different rewards-based crowdfunding campaigns over the course of a year.

At year-end, she looked back to examine her portfolio.

The small amounts let her readily see where both her money and her heart had landed.

Through the experience, she gained valuable insights for future, bigger investments.

Accountability

But, if you want to go beyond donations and experience the energy around more financial accountability, crowd raised loans or crowd raised equity are better options.

Loans

Less conventional than crowd raised equity, crowd raised loans have a long history. The crowd raise granddaddy of all time is Kiva. With zero percent loans to entrepreneurs, Kiva lets you experience how you feel while giving your money and expecting to get it back.

To gain even more WIK experience, use the Kiva website to stay mindful. The dashboard allows you to track investment performance of your Kiva loans. It allows you to see a breakdown by gender and country as well as track your defaulted loans.

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Kiva’s mission is to alleviate poverty through lending.

For Kiva US, a mandate to hold their default rate to 10% is an important indicator of their community commitment. Any less than 10% and they realize they missed honoring their impact metric.

Benchmarking

Another way I develop my WIK barometer is by benchmarking the underwriters for institutions known for their work in the impact space. By reading their blogs and finding opportunities to network, I gauge the way institutions integrate impact metrics with their underwriting standards.

Watching their work helps me to take a mindful look at the fuzzy line between investment and philanthropy. Their work becomes a valuable way to help me consider the role of impact in my investment policy statement.

This is an easy way you too can start to develop an impact thesis as part of your investment policy statement.

My Portfolio Default Rate

My default rate for Kiva is running at 6%. A few of these defaults are from loans I’ve done through a group of former Kiva Small Business Advisors. We often lend to save raises for a project from our fellow advisors.

With small dollars, these ‘investments’ lie outside my current investment policy impact mission. However, they serve my journey in other ways:

1.      They create social capital in a community beyond my usual network

2.     They increase opportunity for success on our local raises should we need a boost

3.     They give me access to understanding missions and best practices from community groups across the U.S.

4.     Occasionally, a raise needing support gets an advisor to ask for help early in the process. The ensuing discussions with my colleagues help to hone my WIK insights

You may not have access to this group, but you can create a similar group on the Kiva website.

Kiva allows groups to make teams. You can create your own team, participate in others or do a combination of both. In addition to this informal group, I’m party to eleven Kiva teams.

Equity

The final approach to work with crowd raise platforms: equity raises. These only became legal in May 2016. I’ve participated in one to date.

And, asked by entrepreneurs to join in many more.

The fundraising platforms used by social entrepreneurs in my immediate circle include:

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1.     Wefunder

2.     Republic

3.     Crowdfund Main Street

Whether I choose to invest, exposure to these raises continues my WIK learning journey.

Reviewing these raises also leads me to consider the different financial instruments available through the equity crowd raise platforms.

Primarily, Crowd Safes.

Developed by the fundraising platform Republic, Crowd Safes are financial instruments tied to a business value, aka valuation.

First found in the tech venture marketplace, as SAFES, I’ve had some thought-provoking conversations around the transparency of these instruments for community-supported crowdfunding.

Crowdfund Mainstreet, a project led by Jenny Kassan, just came out with a choice for using equity, debt, convertible notes or pretty much any financial instruments as a better approach to protecting investors from misunderstanding the nature of their return on investment.

Wefunder is another popular fundraising platform for social entrepreneurs. Similar to Republic, Wefunder supports Crowd Safes.

Wefunder is a B Corp.

Former Kiva Director, Jonny Price serves as their Business Development Officer.

How the Platform Works

Dollar amounts for any platform-based equity raise range from $25 (Everytable) to $500 to $1000 or more. Most entrepreneurs ask for $1000.

Using an equity raise platform as an intermediary makes your investments easier to organize and measure than a direct investment to an entrepreneur.

The platform does the work to:

1.      set terms for the investment

2.     escrow investor money until the raise meets a pre-determined threshold

3.     collect payments and distribute payouts.

That said, you may choose the direct method and bypass the platform for other reasons, including your relationship with the entrepreneur. There is no right or wrong choice, it’s a matter of values.

Like all investments, crowd raised equity investment entails risk. Let your invested dollars reflect your ability to absorb a financial loss.

Also, remember, just as rewards platforms plan for a broad spectrum of for-profit businesses and social enterprise, not all equity platforms strictly condition for social enterprise.

Wrapping It Up

I think crowd raising is a great way to raise your WIK sense geometrically.

You get experience moving dollars to projects, seeing a return for your investment (rewards), of your investment (loans), if not a return on your investment (equity).

How about you?

Have you ever considered participating in crowd raising to up your WIK sense?

I’d love to hear your thoughts or experience in the comments below!

 

You might also enjoy: How I Built My Investment Muscle Part I: A Case Study of Slow Money SoCal

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