Locavesting: 6 Ways To Pool Your Local Resources For Funding

What is locavesting and how can it help you start a business? Here are six ways the new trend can help entrepreneurs.
July 22, 2011

Small business owners looking to raise money are still finding it tough. Bank loans continue to be hard to come by. Venture capital is available only to a tiny percent of cutting edge companies. And many business owners’ friends and family themselves are struggling financially.

There’s an alternative, in the form of “locavesting,” a new movement aimed at supporting and investing in small businesses. “We’re seeing more companies veering away from conventional ways to find money and, instead, tapping their biggest supporters: Their customers and their community,” says Amy Cortese, a Brooklyn, NY-based small business expert, who coined the term and is author of Locavesting: The Revolution in Local Investing and How to Profit from It.

Sounds interesting. But, how to go about finding locavestors who might be interested in your business? Cortese suggests taking these steps:

1. Approach your customers

If you’re running your business well, chances are your most avid supporters are the people buying your product or service. For that reason, a good place to start is with your own customers. In some cases, that can even work before you open your doors. Cortese points to Brooklyn-based Greenlight Bookstore, which had trouble raising enough money to get started during the recession. But the owners, realizing how enthusiastic the neighborhood was to have a new independent bookstore in the area, decided to approach local residents about giving them a loan. They raised $70,000 from about two dozen neighbors and opened for business in October 2009.

Should you go that route, remember to stay within Securities and Exchange Commission (SEC) rules, according to Cortese. If you have a pre-existing relationship with an individual, you can raise money directly from them without having to fall under the SEC’s regulatory jurisdiction.

2. Look for local small business investing clubs

You know all those Beardstown Ladies-style stock market investment clubs? According to Cortese, there are now a handful of clubs in such communities as Port Townsend, Wash., and Madison, Wis., through which members make loans or equity investments in local businesses. In some cases, people invest individually, in others, they pool their money together. Generally, members already know the business owners making a pitch, so they meet SEC rules.

3. Try a new form of crowdfunding

Sure, you can use such sites as Kickstarter. But, now, a site called Profounder allows small businesses to tap crowdfunding to reach out to their own social circles. Entrepreneurs upload a pitch and create a term sheet using templated forms. Then you get a webpage where you can invite anyone you want to invest directly in your company. Ultimately, investors don’t make loans or take an equity stake. Instead, they get a percentage of revenues.

4. Investigate the Slow Money Alliance

Pioneered several years ago by Woody Tasch, the founder of Investors Circle, an angel group for social enterprises, this organization advocates for strengthening communities by making small investments in local food-related companies. Many of the organization’s 16 chapters hold showcases for entrepreneurs based in their areas, in which they can make presentations about their companies. In addition, there’s an annual national conference—the next one will be held in October in San Francisco—where entrepreneurs can showcase their businesses, as well.

5. Organize yourself as a cooperative

It’s easy to do so if you confine yourself just to your state. Then, you can raise money from your members. Cortese points to Black Star Co-op Pub & Brewery, a microbrewery in Austin, Tex., that raised $600,000 from more than 2,000 members last year, offering them a 6 percent yearly dividend.

6. Look into direct public offerings or local stock exchanges

If you have a strong following and higher capital needs, there’s also the possibility of a direct public offering. “That’s like an IPO, but without a high-priced investment banker between you and your customers,” says Cortese. According to Cortese, such companies as Ben & Jerry’s and organic food maker Annie’s raised funds this way. If you limit the offering to the state you operate in, you’ll also cut out a lot of SEC red tape.

In addition, a handful of communities are developing locally-based stock exchanges, focusing on companies in their area. “They’re carving out a safe space where people can make long-term, local investments,” says Cortese. Perhaps the furthest along is an exchange in Maui, Hawaii, where the state legislature is considering ways to introduce such an enterprise, according to Cortese. Lancaster, Pa., and Toronto also are developing their own exchanges. “Global stock exchanges are efficient, but they don’t serve the needs of a great many companies,” says Cortese.

Image credit: dwwebber via flickr