Money to the People!

I aspire to get back onto regular writing, so much comes by my mailbox these days it’s hard to keep up, not to mention the stack of books I’d like to be reading.  I’ve been gifted with a copy of Piketty’s Capital, but I’m quite excited about reporting back on a much less well known book that I think will yield great insights for impact investing. So stay tuned! More and more my focus is on finance closer to the grassroots and there’s great stuff going on.

First and foremost is the company where I’m privileged to spend two days a week: Community Sourced Capital.  My shorthand is “crowdfunding like kickstarter, but loans instead of donations”.   One of my favorite taglines from co-founder Casey Dilloway is “a community-based line of credit”.  Net: you, dear reader, as a non-accredited investor, can purchase an interest-free “square”, essentially contributing $50-$250 of your capital to support a local business.  Once enough squares are aggregated to cover the loan, the loan is made and the business makes repayments based on their revenue.  Instead of interest, they pay a monthly fee while the loan is outstanding.  Principal repayments go back into my “squareholder” account, and every month I get a chance to roll re-accumulated capital into a new small local business!  I’ve lent to a local small grocer, a vegan deli, a cupcake shop who wanted to purchase a refrigerated trailer for going to summer festivals, I helped Washington State’s first organic cranberry farm buy a juicing machine, and this month I rolled some of that repaid capital into a loan to a ceramicist who makes sauerkraut crocks! (You have until noon July 28th to join in!  Now I just need to go to the Columbia City farmers market to buy one for myself :-)  In less than a year, I’ve directly invested $1600, and I’ve already had $2100 of impact by re-investing $500 of already-repaid capital!

Able is another startup focused on using social capital to de-risk the small business capital space.  Their term of art is “collaborative underwriting”.  Their borrowers aggregate 25% of the target loan from 3-5 personal backers and then Able loans the rest.  One thing I’m curious about in a model like Able is: where’s the risk?  I notice they say that those backers are providing “the first 25%” of the loan – that ‘first’ is a key word.  Another key vocabulary word that catches my attention is “underwriting”.  That suggests to me that those personal backers are bearing most of the risk of the loan – that if there’s any under-repayment, the personal backers will lose all their money before Able loses any.  It’s common in banking to de-risk a loan by stacking capital:  a 10-20% down payment makes sure the borrower already has skin in the game; then a co-signer; then a “first-loss cushion” – basically a layer of capital that will eat losses before the commercial lender suffers any.  20% is a number I see commonly, so a 25% first-loss cushion seems pretty, well, cushy to me.

It’s interesting to me that in their blog they reference other “sharing economy” startups because just yesterday Kamal Patel of UbrLocal was talking to me about how folks are starting to wake up to the fact that the “sharing” economy is really just Peer-to-Peer (P2P) old-fashioned capitalism and isn’t actually about sharing at all.  I would say on my shallow read, Abel strikes me as a killer investment opportunity cloaked in social impact language.  Given they’ve got at least $5M in investor capital to generate a return on, it’s hard to see how they could be other.

Angel Investing is growing in Seattle, and in many ways it’s a good thing. More capital to test more ideas is what will build our economy in the long term. My concern lies with the model of investing that is becoming encoded and passed on to new investors. It’s very much driven by the economics of technology companies: lots of front-loaded investment leading to a payoff or a total loss. The risk of the total loss is pretty high, so for the model to work at a portfolio level the potential payoff also needs to be high. It’s pretty straightforward math: if your investments have a 1 in 10 chance of getting to payoff, then the one that pays off needs to pay 10x or you don’t even break even! It’s not realistic to believe you can guess which ones will payoff, so you need a portfolio approach. When I took the “Power of Angel Investing” class around 2007 they suggested you needed at least 10 companies in your portfolio. In David Rose’s book on Angel Investing that just came out he’s now saying 20. Fundamentally, this is a kind of gambling.
For some angels, it kindof works, but it only works if you stick to the formula: your companies need to have the possibility of paying back 10x. Now maybe one will, and not all will go bust, some will return 1-2.5x and that’s how it makes money. The problem is that possibility of paying back 10x – it only makes sense for high margin businesses like software or healthcare technology (and why margins are so high in healthcare is another interesting systems discussion we could have about why we have all the hottest innovations in the US and broad lack of access or affordability and is that really what we want?). Further, once a business pursues this fundraising path, it’s now under pressure to “swing for the fences” and continue to make high-risk choices as it learns from the marketplace and pivots its business model. A more conservative path that would mean slower growth is no longer acceptable. I believe it becomes self-fulfilling prophecy – that by taking high-risk investor money, the business is driven to become a high-risk business, and may forgo opportunities that would be less lucrative but more likely to generate stable employment or a reliable long-term service to customers. This extends down into business schools and incubators – we are all coached to focus on rapid scale. The primary thing I see driving that is the pressure of the capital providers, and it saddens me to watch angel groups form to reproduce this capital market view unexamined for its larger effects.
Exits often destroy value – acquiring companies are often not thoughtful about who and what they acquire, they instead have money to burn, or are acquiring the people. Larger companies might have higher return goals than a group of small investors might be satisfied with, and they’ll meet those goals by “streamlining operations” – laying off the local accountant, the local support people, discontinuing the local rent and relocating people into their offices.
For many kinds of businesses this kind of high-risk/high reward front-loaded investment with an eventual payoff is not the economics of the business. What then? They need equity too. For me the pinnacle of angel groups over-driving the Capital conversation was when a local farm made the rounds. We need to have much more creative conversations about how to fund business. Hopefully the Element 8 event about Investing Without Exits was a start. We need to think about loans, about patient returns, about lowering risk for ourselves as investors AND for the entrepreneurs, and seeking more reasonable returns. We also need to think hard about what we’re taking risk for and how much we can take– and then apply that budget consciously to buy the kinds of communities we want to live in. You can’t eat software, and I hope it will be many more years before my date nights are the waiting room at Drs office.

Traditionally lenders and insurers mitigate risk by screening borrowers and charging higher-risk borrowers higher rates.  This is done across all types of borrowing and insuring – home, auto, life, business, personal credit. This has always bothered me because it strikes me as self-fulfilling prophecy. Charging higher rates can only increase the risk of default. It’s also penalizing the people who need help the most. This is the opposite of the kind of system Americans like to see; we prefer one that reinforces opportunity for those who work hard, rather than just raising the bar for those who start closer to the bottom.

Recently a friend sent me an NYT article about Bruce Marks and the Neighborhood Assistance Program of America.  NACA focuses on the subprime market and has found a new way to mitigate risk. They mitigate the risk for the borrower rather than mitigating the risk purely for the lender. They do this by working with borrowers to create financial plans as part of the lending process. Instead of making borrowers with low down payments buy mortgage insurance, those borrowers pay into a neighborhood Membership Assistance Program.  Membership in the MAP gives them access to free financial and credit counseling. Further, the MAP can provide up to three months of mortgage payment assistance.  All assistance that protects the mortgage – by protecting the borrower.  Further, they engage the homeowners by creating Peer Lending Committees to review requests for assistance.

This is the kind of risk mitigation thinking we can use more of – ways of working together instead of against each other.  Reading the articles below it seems this hasn’t spread further because the founder is still very much in the culture of working against, he’s just redefined who he works against as other lenders.  Still, the ideas are good ones and remind me very much of grameen bank and their lending circles.

A Nonprofit Lender Revives the Hopes of Subprime Borrowers – NYTimes.com.


I was in a great conversation today among social investors. We hit many becoming-familiar themes and I thought I’d summarize them for a larger audience. A core organizing question: Is it possible to invest in a socially conscious way without a performance penalty? It’s a core question, The Stanford Social Innovation Review issue (http://www.ssireview.org/articles/entry/impact_investing) last fall captured and re-ignited the debate about impact and market rate returns.   This questioner did put money into two funds, one with sustainable & responsible metrics (SRI) and one pretty standard fund.  The SRI investment lagged the standard one last year.  What gives?  As we went around the room, answers include:

  • That was just one year, you need to follow those investments through full cycles and what you should see is that the SRI investments are taking less risk and cut the downswings short.
  • You’re evaluating the success of those two funds by standards that were set by the traditional investment market, so it’s no surprise that the traditional investment wins. The whole point of impact or sustainable & responsible investing is that you’re looking to do better on normally neglected metrics.
  • You just picked two funds, maybe you did a better job picking the traditional fund than you did picking your SRI fund.
  • You’re investing in funds of public equities, which are seeking to meet the overall behavior of already efficient markets.  The world is changing and millions of people are changing their behavior for a better world. If you can invest specifically in good companies offering the new products and services that help people change then you can profit from the move towards a better world.
  • How much is enough? Outperforming some other fund or index is fundamentally a relative measure: what’s the absolute measure of what you really  need?  And further, what’s the sustainable answer? In a world where the economy grows globally at 6%, and people’s retirements need to grow at 8%, investing is fundamentally extractive.
  • For folks who are blessed to feel they already have enough, the question is less one of how much money can I make but how much difference can I make while I invest at a risk I can tolerate.

Lots of fascinating food for thought, hope it can stimulate you as much as it did this group.

My experience with unions is pretty limited. I didn’t grow up in a union family – Dad was a federal government civil servant, Mom was a sales rep for various companies.  I married into a Boeing family but Dad is an engineer who ignored the SPEEA strike that occurred in the ‘90s and has some sort of union-contentious-objector status that lets him pay lower dues.   Brother-in-law worked for Boeing as a machinist for a while but mostly complained about how union rules on being able to run only one machine at a time made for a boring job, and it seemed like he would get into trouble playing gambling games at work to kill time.

Early in my philanthropic years I saw the film “Live Nude Girls Unite” about the unionization of the Lusty Lady in San Francisco. Happy to support women’s empowerment I supported the film.  It struck me at the time that in the little, scrappy situation the union was a great thing.  Up until a couple years ago there was also a Lusty Lady branch here in Seattle.  The director commented on how after the SF location unionized, the same benefits were extended to the Seattle location and so they did not unionize.  A few years later, the director reported, Seattle’s benefits withered away while SF kept theirs. One thing I learned was about the concept of an “open shop” vs a “closed shop”. The latter case means the job itself is defined as union or no, the employee can’t decide (like my in-laws at Boeing.)  The former case, the union needs to keep making a case for its value to the employees or they’ll stop joining.  It seemed to me that it was a great way to keep unions from being encrusted as another layer of management, as long as other rules were changed to make it maximally easy for unions to make that case for employees to join and renew.

My focus in consulting and investing is around entrepreneurship and total start-up companies.  We’re a long way from unions.  However for nearly a decade as an investor I’ve been looking for a way to ensure the companies I invest in will grow up to be good employers and to focus on all their stakeholders including the environment.  I really value the B corporation tool that grew out of folks associated with Investor’s Circle.  I’ve studied up on worker cooperativism and supported a worker cooperative in California and sponsored scholarships to visit The Cooperatives of Mondragon in Spain.   The US Steelworkers signed a memorandum of understanding with Mondragon that they would work together to figure out what the intersection of Unionism and Worker Cooperativism might be, but that was a few years ago and I haven’t seen much since.  My focus on how to measure social impact has continued.

This fall I’m focused on 4 projects: two are related to my condo building; the third is a Social Impact Investment Fund consisting of 10 accredited investors getting down to business of trying to agree on some shared investments and sorting out how we define impact as we go; and the fourth is running for the board of Central Coop, a consumer cooperative grocery store on Capitol Hill.  The combination of the last two is giving me some interesting insight.

For SIIF I interviewed a local entrepreneur and was really gratified to hear the language and commitment I seek around building a company as a community and engaging and respecting employees.  It seems to be very difficult to find this focus in entrepreneurs – there are so many things for them to focus on, especially when they talk to investors and if they have any sophistication (aka acculturation into the mainstream language around scale and financial return.) This entrepreneur also has really good business sense for a passionate farmer who started only a few years ago.  Turns out she was a “shop steward” – a union representative –  at UPS for 6 years and she credits that experience with teaching her good systems for managing people.

This particularly caught my attention because this month is the election at Central Coop and I have been “tabling” in the store. This means I stand near the registers with literature, encourage people to vote and make myself generally available for members who want to meet a candidate.  Many people prefer to focus on their shopping (I thank you for your patience as I sneak up on you and interrupt to ask you to vote).  Each day a few people will stop for a deeper conversation and I’ve noticed that in at least half of those conversations it will come up that this person is a union member/supporter.  How?  Well in one case we were talking about availability of natural foods and I mentioned Whole Foods and was rebuked for suggesting anyone might shop a non-union shop. In other cases it was how someone identified themselves as I asked them what membership meant to them.

Talking to these coop members and talking to this entrepreneur, I hear the passion and commitment around building an economically just, inclusive community that I seek as a social impact investor. For the first time I see that what I’ve been seeking from B Corporations and worker cooperatives– a way to direct both my consumer and investor dollar to building the kind of world I want to live in, is what these folks already perceive from unions.  Buy union not because it’s a tedious obligation of printing your democratic literature but because it guarantees living wages.  Buy union not because they have a monopoly on some service you need but because… well, I don’t know. I’m still more successfully indoctrinated with the image of unions as inefficient and bloated and antagonistic. It makes me a little sad, because perhaps here’s the tool I’ve been looking for but boy it’s looking rusty. But hopeful, because maybe I have many more fellow travelers than I realized, I’ve just been speaking a different language.

Today I finally got to visit Highline park in New York City, one of the top destinations people have mentioned to me as a “must see”.  It really is amazing.  A former elevated railway that “went to seed” it was ultimately embraced and over the course of a decade formalized into a mile-long, elevated, threading amongst tall buildings park. It will be longer when it is finished. Sitting in a spacious section, looking down its length with buildings rising on either side I had a mental flash to a “city of the future” like I’ve seen in Star Trek movies. The only thing missing was the traffic of flying cars overhead.  Suddenly, it clicked: that vision of the future has it backwards – we don’t want to add flying cars overhead, we want to leave them hidden below.  We should build our subway of the future Pioneer-Square-style:  by building new pedestrian walkways over top the roadways and turn them into subways, perhaps someday to be filled with electric, autonomously piloted vehicles.

There has been talk of the Highline as inspiration for what could be done with the Alaskan Way Viaduct, to imitate it in style and materials if not actually in elevatedness.  The Viaduct seems to be more problematic structurally and keeping it was not an option.  More importantly from a use perspective, its simply not well located.  It tracks along the fringe of the downtown residential and commercial core, not through its heart. For me the magic of the Highline is the embededness it has in the city – it’s very easy to imagine it becoming a major pedestrian commuter route. Bicycles & skates are not allowed and are discouraged by the style of pavement.  Walking the length of it seemed like no distance at all because it was so pleasant.

Several years ago the city seemed ready to throw in the towel on the Monorail.  It was completely non-functional for more than a year, but the arrival of the Seattle Center’s 50th anniversary seemed to provide the nudge to get it back working again so we could sigh over Elvis memories and lure downtown energy to the Seattle Center’s year of events.  My feeling is the Monorail has become Seattle’s Lace Doily.  Grandma made it years ago so it is sentimental though archaic and even a little tacky. We keep it out on our coffee table or bedside stand because we don’t have a sideboard or buffet.

Being in NYC really brings  home to me, a 12 year Belltown veteran, how much Seattle’s downtown is lacking for quiet spaces.  The urban geography there has a nice alternation of very busy London-style commercial high-streets with long quiet tree-lined blocks where the noise quickly drops off and one can actually hear the birds.  Our downtown layout doesn’t allow the same escape from traffic – one must go to Queen Anne, Wallingford or Capitol Hill.   We spent a long time in Seattle talking about a cut-and-cover option for the tunnel downtown, perhaps as we envision our future we can skip the cut and just go to cover to bring in more quiet greenery and pedestrian spaces to the sustainable heart of our downtown.

I’ve long passed the limit of what basic contacts functionality can do for me and wished for a CRM system. Customer Relationship Management: companies use such systems typically to track potential sales and then customers and multiple interactions with that customer. A well-used CRM allows the whole to become greater than the sum of its parts – that whomever you talk to from a company can represent the company as a whole to you because they can catch up on your context by viewing your past interactions with the company. That’s the ideal anyway. With the number of companies that re-ask the same information just passing me by phone from rep A to rep B I suspect the ideal is not often realized.
For me as an individual, a system more involved than just google or outlook contacts appeals because I’d like to remember not just individuals but relationships among individuals: who went to the talk given by Roy Messing on converting companies to cooperatives; who do I know who has ever attended BGI past or present? Who has ever attended a Plymouth Housing lunch at my table? Who have I had sushi chats with that would love to check out the new place on Eastlake with me? I’m getting old enough that I can remember the conversation, but I can’t remember who it was with!
I can kindof track info with labels and tagging but the tagging structure gets heavy. It’s also difficult to build queries out of multiple tags and then follow up with people based on those queries. Most importantly, with syncing and upgrading I don’t feel confident that the data will be retained intact and it’s a disincentive to put much effort into it. I decided I wanted a personal CRM.  Unfortunately CRMs seem to primarily be built for sales organizations doing B2B.  Even if they’re B2C, they build in the increasingly outdated assumption that each person has a single employer affiliation.

As a freelancer/consultant/community member, I also connect with people through more than just their employer – I have contacts I know as “fellow board member at X”, or contacts I know as “neighbor”. Again, tagging in theory would help me track all that, but often times I would like a contact for that organization or event itself with more information, and a way to make additional notes about the relationship – staff member, volunteer, investor.  I’m working with a company now to customize a commercial CRM product but this way of thinking seems to be really against the grain.   I’ve realized that the CRM databases put companies on par with people as contacts, in fact often times designing as if my relationship with the Company is the primary, and the people are just additional contacts to be tracked around that company.  I prefer to think of my database as being of people, who have different ways of associating: working for a company, working on a project, associating with a nonprofit or a campaign, attending an event.  Trying to set up my data that way has shown me that there are sometimes when my relationship is more with a company: when I’m getting electrical work done, for example.  I make my appointment with a sales person, then an electrician comes out.  The contact info I have is not for her (usually) or him (usually) but for XYZ electric.  Or a favorite restaurant, for example. I just have “Metropolitan Grill” in my contacts with a reservation line and I don’t know who will answer when I call.  I happen to also have Noi, the waiter we’ve had for 10 years, in my contacts, so I can ask him travel questions, but it’s a personal contact when I contact him, I don’t ask him if he’s got a table friday night.  So sometimes I do have a relationship with a company and not a person, but I guess it’s driven by the company itself being set up that way, and it seems to always be about a relationship that’s more financial than personal…financial first.

Suffice it to say, spending some time focusing on my contact database has drawn my attention to noticing: when do I have a relationship with a person, and when do I have a relationship with a company?



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