I’ve been exploring risk as part of the work for a future blog post as well as a due diligence project I’m doing with the ek4t Inner Circle.
I think as new investors, we often see financial discipline as a test for creating “true investments.”
Especially when we’ve taken an interest in the impact space, it’s like we feel like we have to get the financial part right before we get taken seriously as investors.
As I’ve grown in my investment experience, I’ve discovered a more significant universal mandate than “know your financials.”
Interestingly, it spans both traditional and ethical investing.
There’s hope beyond the spreadsheets and math!
What Warren Buffet Knew Before the Market Crash
Table of Contents
The simple secret:
invest in things you know.
Even the financial gurus invest in what they know before they consider the math.
Warren Buffet famously told people back in 1999 he never invested in technology because he didn’t know enough about it.
Five months later the tech market crashed.
Guess who came out with the fewest wounds?
What is Experiential Learning?
How do you invest in what you know?
How do you know what you know?
Answering these questions is the start of experiential learning.
Experiential learning is:
· Getting out there, trying things
· Being mindful of what you’re doing
· Applying these new learnings
There is room for failure in this experimentation. It’s a cycle that, over time, starts to coalesce into patterns of understanding.
These patterns become the cornerstone for our investment experiences making us better stewards of our financial resources and wiser members of our impact eco-system. This is an idea you’ll see repeated in upcoming posts. I’m calling it What I Know (WIK).
WIK is a feel for our market gained through hard experience and self-awareness. It’s applying what we’ve learned from our successes and our failures. It’s fulfilling work and it will make us wiser impact investors.
Experiential Learning in Impact Investing
We know there is a need for WIK in our values-driven investments. It’s the same in traditional finance.
Financial advisors will tell you new consultants don’t give sound financial advice until they’ve been through an entire business cycle.
You’ve got to experience both the highs and lows of the full business cycle to find your bearings and truly guide your clients. Business cycles last from five to seven years.
Worms Aren’t Great at Assessing Risk
As a former financial advisor, prioritizing experiential learning–WIK– resonates.
Early in my career, I wanted to resist the truth. I thought I could read enough and research enough to be ahead of the curve. However, bookworms aren’t great at assessing risk.
Book learning is fine, to a point.
Knowing the latest thinking on trends in the market or the economy is also fine,
…to a point.
In fact, I think book learning and trend awareness brings the experienced advisor to a higher level. This is not a populous rant.
However, book learning alone can lead to missed opportunities and underappreciated risks.
Trendy assessments of market or economy lead to shallow calculations and a litany of excuses culminating in the chorus, it’s different this time.
Patterns
As I complete my first five years in the Slow Money community, I see the same pattern of highs and lows in the alternative economy.
Starting in 2012, entrepreneurs clamored to be part of our local Slow Money network. We gained a core following of startup entrepreneurs that became an integral part of our Slow Money understanding.
These wonderful entrepreneurs held leadership positions, played guinea pig to our investment ideas, and leaped at opportunities to showcase at our events. Our Slow Money community and our Slow Money entrepreneurs were at a high point in the business cycle.
Closures
In the first three years, as our investor group gained momentum, we saw one of our favorite entrepreneurs go out of business by choice. Weighing the financials of his healthy fast food business against the potential for future revenues, he decided to close his doors. In the business for only eighteen months, we were devastated by this first closure.
Two years following the first closure, we watched as another favorite entrepreneur duo closed their shop. This time the closure came with a nice profit.
Callings for a personal life in disparate parts of the globe forced the sister-owners to make a tough decision resulting in the sale of their then growing restaurant. We watched as moves, engagements, and life shifted their priorities. Thrilled for them, we were also sad to see another one of our Slow Money businesses shut its doors.
These are well-told stories among our Slow Money minded investors with many lessons gained through our small group due diligence review. These business closures served as an opportunity for a deeper understanding of the investment process as well as a turning point in my own experience around the role of philanthropy in eco-system development.
Fail Fast
In other cases, entrepreneurs went out of business or late paid small loans without the luxury of making a formal decision to close their businesses. As Slow Money minded investors, we sometimes took financial risks for entrepreneurs that didn’t pan out. In our experience, losses like these were small in dollars but felt big.
Losses are emotionally painful experiences.
There’s always a matter of pride.
Losses remind us of our role as stewards of our financial resources. As inexperienced investors, we hadn’t been as careful as we might have been in our stewardship.
Losses also remind us of a need to tolerate a certain amount of failure and our role in developing wisdom in field development as veteran members of the good food economy.
Investors co-create with a socially minded entrepreneur. Our goals are about a better world, not merely financial profit. When entrepreneurs outright fail, we need to examine our entire role in participating in the investment process.
Growing Pains
At the same time, these businesses shut their doors, we also saw the highs of exciting growth.
Several entrepreneurs in our Slow Money community began to grow and evolve. Their very real business models began to grow even closer to their authentic values.
In the process of this growth, they understandably began to prioritize the health of their businesses over participating in the Slow Money community.
Slow Money, itself a burgeoning movement, was at a different place in its growth cycle.
We worked in two business cycles, one non-profit and one social entrepreneur. The non-profit existed to connect investors to these small businesses. The social entrepreneur existed to connect with their consumers.
In the short run, the two no longer matched.
Our Slow Money minded membership is happy for these social entrepreneurs. We’re excited when we visit their businesses and thrilled as they jump hurdle after hurdle to realize their visions.
Through our shared experience, Slow Money members gain a better understanding of how we might best support our local small food enterprise. We’ve grown to create a more informed strategy about our continued growth as a nonprofit determined to develop ways for investors to connect their financial resources with these innovative small business owners.
Five Years In
Finally, this year, the five-year mark.
We’ve seen a significant turnover of entrepreneurs in our leadership and our Slow Money community. We stand on ground that feels a bit more solid. We’ve started to look at ourselves with a little more awareness. Positioned to share the stories of our hard-won experience, we’re giving ideas and insights to the new friends we’re making at our Slow Money Gatherings, at the farmers’ markets, and through our referral network.
We’re excited as these new small food entrepreneurs bring us new visions, new passions, and ideas.
We keep growing towards an even more holistic vision.
Older and Wiser
Five years. A business cycle.
I feel older and wiser. I feel more experienced, still experimenting with business models, listening to feedback and sharing ideas. I’ve weathered this five-year period and look forward to growing further in the next five years.
I’ve learned a lot through my experience.
Slow Money is placed-based. It envisions a world with more entrepreneurial longevity than I experienced in the sprawling coastal communities of Southern California. From infrastructure builds, farms and other anchor investments, the Slow Money ideal secures a local economy in a food economy.
The vision is lofty.
We don’t always realize it.
Lessons
My personal experience with early Slow Money type investments showed less rootedness in our businesses and more volatility.
We’ve seen businesses come and businesses go. Despite the sadness, with a practiced awareness framed by values and investment practice, our eco-system and our local economy become healthier over time.
While we’ve touted infrastructure investment, we cut our teeth on due diligence projects for a local café and a tractor for a local farmer. Our money, when it moved, tended to move to local breweries, meaderies, and other high margin alcohol companies. Not always, but often.
A goal of creating relationships between small food entrepreneurs and community members did occur.
Finding it challenging to find the time and the money to realize the Slow Money vision in our fragmented geographies, we looked for more nuanced solutions to help our new business owner friends. Instead of sitting across the table writing notes with conciliatory terms, we often aggregated small amounts of money on crowd raise platforms.
Southern California may always be subject to a fast interpretation of Slow Money as part of our regional heritage, but the investment experience – that experiential learning– itself gives rise to a richer understanding.
Two Sides of the Same Coin
Knowing both spreadsheets and intuitive experiences are essential to a wise stewardship and impact investment practice. This is the essence of experiential learning
I think we can work to develop our investment muscle a bit before we expose much financial capital.
I think there’s a role for experiential learning, that can bring us to a better position to realize our dreams for investing with our values while we figure out the language, ratios and financial analysis we often think of as the ‘true’ investment process.
However, just as a beginning musician starts with basic notes before even considering a vital recital, the rules for getting to Carnegie Hall apply equally to values-driven investment. Practice, practice, practice will have you sitting at the table with knowledgeable angels and impact investors over time. And, unlike the novice musician, I think you might have a bit of fun along the way.
What is your experience with WIK?
Have you seen your investments through a full business cycle?
I’d love to hear what you think in the comments below.