Posted on November 14, 2011
[This article originally appeared in the November 11, 2011 issue of Cheese Market News]
By Rena Archwamety
MADISON, Wis. — Twin Brook Creamery is a family-run dairy that bottles and sells milk from its herd of 150 Jersey cows in Lynden, Wash., just south of the Canadian border. Since bottling operations began in 2007, demand for the dairy’s rich, fresh Jersey milk sold in traditional glass bottles quickly spread across the state’s west coast and into Seattle and Tacoma markets, and Twin Brook Creamery saw the need to expand its production facilities.
However, the dairy hit some bottlenecks when looking at traditional routes to obtaining a bank loan.
“We had come off a cantankerous couple of years in the dairy industry,” says Larry Stap, owner, Twin Brook Creamery. “Banks were less than friendly about loaning us money because they were terrified.”
To obtain the funds his business needed to expand, Stap went through Whatcom Investing Network (WIN), a community of local investors looking for entrepreneurs in the Whatcom County, Wash., area. WIN members form relationships with these businesses that could lead to investing in them.
“There’s a big move to buy local. There also is a movement now to invest local,” Stap says. “A lot of people who have the money would like to invest it local instead of in the stock market.”
Through WIN, Stap was able to connect with people who were willing to invest in the expansion of Twin Brook Creamery’s bottling operations. He invited all the people who privately invested in the facility to the dairy and gave a full tour. They sat around his kitchen table to drink coffee and milk and do the paperwork.
“It’s a lot harder to default on someone you’ve sat and had coffee with around the table,” Stap says.
• Investing in community
The investing network that Stap approached to find investors for his expansion is modeled after LION (Local Investing Opportunities Network) of East Jefferson County, based in Port Townsend, Wash.
LION of East Jefferson County was formed as a membership-based network in late 2008 with eight investors. LION now has more than 30 members who have done about 33 deals with businesses. All these businesses are in or within 30-40 miles of Port Townsend, a city of about 9,000 people.
“We started right in the middle of the financial crisis. What happened then, with the fallout, made people think harder about where to put their money,” says James Frazier, a founding member of LION who has more than 17 years of experience in the investment industry.
So far, none of the businesses that have entered loan agreements with LION members have defaulted. “People do negotiate collateral sometimes, based on real estate or equipment, but the loans are mostly unsecured,” Frazier says. “What we’ve seen, because people are forming relationships, working with neighbors, and coming in every day to support them, even if a business does go under, they would continue making payments to make it whole,” Frazier says. Businesses funded by LION members include Mt. Townsend Creamery in Port Townsend, which makes French- style cheese, and Mystery Bay Farm in Nordland, Wash., which makes goat’s milk cheeses. Both were funded as start-ups, and Mt. Townsend went through the LION group again for refinancing. LION recently received an application for another start-up goat dairy.
Applications for funding are passed around to LION members, who make their own decisions on what businesses to select. There are no centralized deci- sions on funding approval. Frazier says about a third of the applications LION receives get funded, and most of these tend to be expansions and refinancings of existing solid businesses. However, startups also can be funded if there is a clear plan for success.
“When a startup brings in a busi- ness plan that’s been worked on, has met with an accountant and is bringing a product and it’s delicious, it becomes very compelling to inves- tors,” Frazier says.
More experienced investors in LION tend to lead the charge, and newer investors observe the process for a while and jump in when they feel more comfortable, Frazier says. People work together to determine if what’s out there is a good deal.
“Having that support network is crucial,” he says. “A lot of people wouldn’t invest locally unless they saw other people doing it already.”
Much of what drives investors to be- come involved with local businesses and LION is their commitment to community and the success of local businesses.
“They’re just passionate about supporting businesses right here that are providing services in the neighborhood that they want to enjoy. The investors drop in to ask how things are going and keep tabs,” Frazier says.
“It’s the complete opposite of what you get on Wall Street where you send your money off to who knows what,” he adds. “It’s an antidote to the Wall Street culture that’s taken over investing these last decades since global electronic networks came along. All the investing used to be local, so we’re getting back to our roots.”
• Gaining interest
The “eat local” and “buy local” trends have helped similar groups across the country attract people with the desire to “invest local.” Local networks as well as national organizations such as “Slow Money,” a nonprofit that brings together the Slow Food idea of local food and farming with local investing, have formed across the country.
Rebecca Ryan, an entrepreneur, investor and writer, facilitates a LION group in Madison, Wis., and launched LionInvesting.com to help educate others about local investing concepts. When she started the Madison group, she asked Frazier for permission to use the name “LION” since it represents the same concept of local investing. They agreed that “LION” should not be copyrighted because it’s a free idea that can be used by any community.
Interest in local investing is growing through word of mouth, Ryan says. The Madison LION group, which currently has 10 investors and $700,000 in available capital, just recently started receiving capital requests from businesses, and its investors have helped fund the expansion of a regional butcher shop. The group also is looking at other opportunities, including a request from Clock Shadow Creamery, set to open in Milwaukee this spring. Ryan says one investor has expressed interest in funding this project, and that investor would like to get a couple more investors to join in.
“I think there are LION-type groups popping up all over,” Ryan says. “There’s a lot of interest on the investor side; people seem to really ‘get it’ that when they invest through LION, they have a direct line of sight to their money. We don’t get that through most of our 401Ks or mutual funds. That’s a very attractive feature to local investors.”
She adds that local investing makes local economies more real and accessible.
“I also think the Occupy Wall Street protests have opened people up to looking for other alternatives like LION,” Ryan says. “So I think interest will continue to grow, because LION is a great alternative to ‘traditional’ invest- ing and borrowing.”
Another group of investors interested in local development in the greater Milwaukee area recently formed Fund Milwaukee, which is planning to hold its first formal pitch meeting in January.
Juli Kaufmann, co-founder of Fund Milwaukee, became involved in starting the local investing group when she was looking for investors to fund a green building project being planned by her company, Fix Development LLC.
“I was able to pull together a bunch of investors, and a number of those shared with me interest in finding options and different approaches to putting money into different (local) endeavors,” Kaufmann says. “After a year of investigation and research, we formed a local money group.”
Currently there are about a dozen members of Fund Milwaukee who, like LION members, will decide individually what projects to support. Kaufmann says under the Fund Milwaukee umbrella, investment clubs also are being planned to allow investors with similar inter- ests — such as building, retail, food, or other businesses — to pool their money and make collective decisions on local investments.
Local investors are helpful for busi- nesses because right now it’s difficult for many to access capital, and LION-type groups often have more flexibility to make investments where banks can’t, Kaufmann says. And because the in- vestors often are willing to be more generous with terms, businesses can find more affordable loans and have a longer time to generate returns.
“We are willing to make trade-offs for what we value,” Kaufmann says. “Local investors are really motivated by people and become passionate about the business and making that invest- ment in people.”
Fix Development found four mem- bers of Fund Milwaukee to make investments in its building project, which is expected to be complete in March. Among the tenants in the new sustainable Milwaukee Fix Building will be Clock Shadow Creamery, the new cheese manufacturing plant being developed by Bob Wills of Cedar Grove Cheese; Purple Door Ice Cream, a com- pany that makes and sells wholesale ice cream in Milwaukee; a community clinic; and other retail facilities. Local investors are contributing $5 million of the building project, and another $2 million is coming from a blend of grants and loans. Kaufmann says the project still is seeking a few more investors. The $5 million provided in part by Fund Milwaukee investors is funding only the building, but Kaufmann says the tenants in the building will ben- efit indirectly since the lower returns accepted by the investors will allow for more reasonable rent rates. The building’s tenants also could submit their own requests for loans through Fund Milwaukee.
“People doing this are motivated to invest in Main Street. They can see, feel, touch and believe in the local market and what they are supporting vs. Wall Street,” Kaufmann says.
“I think it would be an amazing day if Milwaukee would invest 10 percent of its annual investment dollars into the greater Milwaukee area,” she adds. “What an impact that would be!”
• Benefits and risks
Members of local investment groups and networks say these are a good alternative for businesses who might have trouble getting credit from a traditional bank, or who are seeking more flexible terms.
“Banks have to meet much higher standards to loan money now vs. before, so LION is a good alternative for busi- nesses who might traditionally get a line of credit from their bank, but can’t now due to heightened regulations,” Ryan says.
“Local investors will listen in a lot of situations where bankers won’t,” Frazier adds. “Bankers usually have requirements imposed on them — a business has to be a certain age, have a certain revenue stream. Local in- vestors won’t necessarily have those requirements. Banks have overhead and charge a higher rate for their business. Local investors are willing to meet in the middle.”
Frazier says with loans directly to businesses through Port Townsend LION members, he typically sees a 5 to 8 percent interest rate. Kaufmann says the terms the Fix Development building project received from the Fund Milwaukee investors have a projected rate of 3 to 5 percent.
Ryan notes that LION investors also can support a business on other levels. “The benefit of having local LION investors is that — as a business owner — these people may also be your customers,” Ryan says. “They really want you to succeed.”
One downside, however, is that both investors and businesses who enter into these more personal lending agreements have to navigate complicated regulations and paperwork on their own.
“It isn’t easy. These models aren’t common yet,” Kaufmann says of loan agreements through LION-type groups. “Finding the paperwork, structure and how to put it together can be more time consuming. It’s cleaner getting a loan from a bank.”
Among the biggest challenges is navigating securities laws, which vary from state to state. Frazier recommends those looking to make or obtain a loan through a LION group consult lawyers, accountants or financial advisors to make sure they are comfortable with the process.
One universal concept among all states regarding securities laws has to do with small businesses and private vs. public offerings, Frazier says. It’s up to each business to decide in what direction to go, but private offerings usually are more feasible for smaller businesses.
“Most businesses sending invest- ment opportunities to us are people within a group we know, so it’s not a public offering,” Frazier says. “If they were to go out, blanket the town and advertise (for a loan), they would have to be registered. That could take months, involve lawyers and be time consuming. … If they do it in more of a private way, it needs to be small and not advertised. The amount can be big, but it needs to be in pre-existing relationships.”
While the more flexible structure and terms offered by local investors make these loans lower-risk for business owners, Kaufmann says from the inves- tor side, it can be incredibly high-risk.
“Banks have people who vet these for a reason,” Kaufmann says. “Private individual investors have to take this risk on their own.”
However, she adds that local invest- ments also can be safer without the wide fluctuations of Wall Street.
“My investors, frankly, feel safer,” Kaufmann says. “Wall Street is risky now. A 3 to 5 percent return is actually better than market. A lot of people say it is a wise financial investment, and some are doing it for that reason.”
Ryan says since all the loans through the Madison LION group include a promissory note, the legal and finan- cial risks are about the same as those through traditional lenders. However, she also notes that local investors also have expressed a feeling of greater security.
“I’ve heard from some companies who’ve borrowed through LION- type groups that they feel a greater obligation to pay back their LION loans, because they know the people who’ve loaned them money, and they want to preserve a good reputation in the community,” she says.