Regenerative Finance: A Path to Economic Justice
On Monday, June 29, 2020, Janice sat down again with Teresa Chahine of Yale School of Management, this time as part of a panel with Anna Blanding of ConnCAT and ConnCorp and Michael Shuman, one of the go-to voices on local investing and community economics. This panel discussion was about finance and economic justice.
The transcript of the discussion is below.
Teresa Chahine: Welcome, everyone. We're so excited to have you here today on this SOM exchange webinar about regenerative finance, the path to economic justice. I want to thank the alumni office for organizing this. As you all know, Yale SOM exchange is the Yale School of Management series of online conversations. This series provides alumni and the entire Yale SOM community with opportunities to keep learning about faculty research, current events and career strategies.
I am Teresa Chahine, the Sheila and Ron 92 BA Marcello senior lecturer in social entrepreneurship at the Yale School of Management. Today I'm joined by three amazing panelists, and I'm so excited to learn from their work in the coming hour.
I'd like to introduce Anna Blanding, SOM class of 2009. Anna is the chief investment officer at ConnCAT and ConnCorp, a New Haven-based community development organization where she leads their impact investing strategy. ConnCAT's mission is to change lives through workforce development. In 2007, ConnCAT formed ConnCorp to invest in and revitalize the New Haven community.
Anna is a double alumna, having graduated from Yale College in 2003 and Yale SOM in 2009.
We're joined by Janice Shade, SOM class of 1994. Janice is an entrepreneur, financial innovator and author with 30 years' experience building brands, businesses, and movements. Her most recent venture is the Initiative for Local Capital, a nonprofit innovation lab and investor education resource that promotes democratic access to capital and economic justice for all.
Her entrepreneurial and capital-raising experiences are the basis of her latest book, Moving Mountains: The Power of Main Street Americans to Change our Economy, where she explores the impact of traditional capital markets on social entrepreneurs, and provides a vision for how citizen investors can be a positive force for change in their communities.
We're also very lucky to have with us here today, Michael Shuman, an economist, attorney, author and entrepreneur, and a leading visionary on community economics. Michael is director of local economy programs for Neighborhood Associates Corporation, and an adjunct professor at Bard Business School in New York City.
His two most recent books are Put Your Money Where Your Life Is: How to Invest Locally Using Solo 401ks and self-directed IRAs, and The Local Economy Solution: How Innovative Self-Financing Pollinator Enterprises Can Grow Jobs and Prosperity and Local Dollars, Local Sense: How to Shift Your Money from Wall Street to Main Street.
We're going to leave plenty of opportunity for you all to ask questions from these inspiring practitioners. I'm just going to kick off the conversation with a couple of questions. First, if you wouldn't mind each taking a few minutes to tell me more about your most recent work and about how you're deploying regenerative capital as a path to economic justice.
Anna Blanding: Great. Thanks, Teresa. Again, I'm Anna Blanding, and I'm chief investment officer of ConnCorp. We are a New Haven-based impact investment organization that started in 2011, really with the mission to redevelop the historically African American section of New Haven.
Just to orient this, since we're mostly Yalies on the call. If you're on Broadway with the Yale bookstore, if you go a block west you're at Payne Whitney gym. If you keep on going west, you're immediately into the new hall [inaudible 00:04:02] well section of New Haven, which is traditionally African American part of the city. It has a rich history of arts and jazz and innovation and culture.
But over the past probably 60 or 70 years, there has been a divestment of social capital from the community, but also financial capital. The stretch on Dixwell between where Yale ends and Hamden begins is really void of a lot of entrepreneurship and innovation and business investment.
So we decided to invest there, and we're doing multiple strands right now of our work. Our signature piece is actually on Dixwell Avenue with the strip mall. That's about four blocks from Yale, and we actually... Last year or two years ago, we started acquiring the property. It's an eight-acre parcel of land. That's the largest developable site of land in New Haven. Then we began acquiring property.
The plan right now is to raise that and to develop a mixed-use, live, eat, work, play destination place in Connecticut. We will have 200 units of housing that will be apartments, market rate, as well as an affordability component to it. There will also be grocery store and a food court. There is a food desert in that area. There'll be childcare as well as an emphasis on having office space and business incubator space and retail space.
We really want to have that be our catalytic investment in that community. However, it's not our only investment. We also, another line we're doing is having a lot of strategic real estate acquisition in that neighborhood, commercial as well as residential, to really look at keeping the level of affordability and vibrancy and history in that community.
We're also doing a lot of business acquisitions. We have a market we started that actually services the Yale community by the two new dorms at Yale undergrad, as well as some cafes and other businesses that we're investing in, mostly early-stage or growth.
So that's really our multiple-pronged approach right now to investing in the new hall build Dixwell area. We are in an opportunity zone, so we do actually have a qualified opportunity zone fund that we have attached to our work, and [inaudible 00:06:29] opportunities.
Really, I think our mission is really about, how do we really reimagine Black communities? Not just as communities of poverty or police brutality, but really ones of innovation and business development and all the vibrancy and excitement. That's what we're really doing.
Our economic development work actually sits on the non-profit arm of our organization as well. They did a lot of job training for people in the New Haven area, equipping unemployed and underemployed people in the medical field as well as the culinary industry.
Teresa Chahine: Awesome. Thank you, Anna. Janice?
Janice Shade: Hi, I'm Janice Shade. My path to where I am today with the Initiative for Local Capital started really when I was an entrepreneur myself and raising capital for my first startup, and bumping up against not only gender bias that was deeply entrenched, and still is today, but also contending with the very real reality of the great recession of 2008. And learned a lot of lessons the hard way about how to be scrappy and raise capital for a business that was really built to last. I call it, you know... It was a built to last, not built to grow fast and be spun off to the highest investor. And realizing that there was a great disconnect between traditional forms of capital and the kind of business that I, and many others, were trying to start and run and get financed.
That work evolved into the creation. I was a co-founder of one of the first equity or investing crowdfunding platforms in the country in 2015. Started an intrastate crowdfunding platform up here in Vermont before the JOBS Act was enacted and allowed for crowdfunding on the national level. Through that experience of doing state-based crowdfund, recognized the very real desire by everyday Vermonters to invest in local businesses, and yet the difficulty with just actually transacting the investment.
Which eventually led to... I spun off the investor education piece that we had been doing with the platform into the Initiative for Local Capital. A lot of what I'm working on now through... I call it Local Cap for short. Through Local Cap is trying to put out as much education to folks who are interested in investing, putting their money where their life is, as Michael's book says. And also doing a lot of work realizing that a pathway toward this type of investing is doing it together, and being able to aggregate our investment capital into pooled investment funds within a community to invest in communities, to community owned businesses.
I mentioned the JOBS Act before, which opened up a lot of opportunities for doing this kind of direct investing between citizens and business owners. There's another act that's out there. That revised the Securities Act of 1933. There's this other act called the Investment Company Act of 1940 that hasn't been touched in 80 years and needs some revision.
So a lot of the work that I'm doing now with Local Cap is advocating for policy change with the SEC to allow for easier... Easier in terms of regulatory burden and compliance burden. Ways to set up these community investment funds to allow communities to aggregate capital from citizen investors, to then invest into an opportunity such as Anna was describing.
We've made some great strides with the SEC. We think that these changes are coming. When, when those changes are made, I'm also working on creating an accelerator for communities that want to start these kinds of funds within their communities to help them get the resources they need to manage it, do the portfolio management, the back office and that kind of thing. So that's a lot of what my nonprofit Local Cap is doing.
Teresa Chahine: Okay. Thank you. Michael?
Michael Shuman: Great pleasure to be with everyone today. I would say for the last 30 years or so, I have been on a mission to try to support local businesses, in part because I recognize that local businesses are critical to any community's success. Quite remarkably, they account for 60 to 80% of the jobs and the output in our economy, so they're a huge part of the success of any community and a huge part of environmental success and social equality.
But here's the paradox that I discovered about 10 years ago. That is that even though these businesses comprise 60 to 80% of the economy, almost none of our retirement savings touches these businesses. I mean, before COVID, the most recent data said that we had $56 trillion locked up in long term savings and stocks, bonds, mutual funds, pension funds and insurance funds. And yet that 56 trillion is going to a small segment of the economy, which is around global, publicly traded companies. [crosstalk 00:12:44].
So how do we fix this? I've been interested in identifying and knocking down obstacles. One obstacle was the law. So many of us over the last 10 years worked to change federal law and state law in 37 states around crowdfunding. That's beginning to happen. We can talk more about that.
The second obstacle is really what Janice identified, which is that it's really hard. It takes a lot of time and effort for people to do local investing, even when it's legal. That's why getting funds established, more funds established, where a trusted manager can create portfolios of local businesses, is so important.
Janice did not mention that she and I and two other people, Brian Beckon and Amy Cortese, did a handbook on community investment funds that came out in January. It's free, and I'll put in the chat where you can download it.
The third obstacle... And this is the one that really intrigues me now, is that most of us who want to do local investing have our money locked up in pension funds. 401(k)s, 403(b)s, IRAs, and almost all of our pension fund policies give us Tweedle Dum, Tweedle Dee options for investing in global companies. You cannot invest locally with it.
My latest book, which came out about three weeks ago, called Put Your Money Where Your Life Is, really the details about how you can use solo 401(k)s and self-directed IRAs to move your money from Wall Street to Main Street.
Teresa Chahine: Okay, awesome. I see a lot of questions coming in already, but I'd like to ask the first question myself, which is zooming in on race. How can we use regenerative finance as a path to economic and racial justice? In your own work, how is this being applied?
Anna Blanding: I'll start. I think that what the pandemic of COVID as well as the George Floyd protests have shown us is that we really do have two pandemics. We have, obviously, the health pandemic, the crisis of the COVID. But it's also really exposed the pandemics of racism and of poverty.
One hopefully we'll have the vaccine for by next year. But this idea of this pandemic of poverty has been around for 400 years plus in the US. I have the view that you cannot really have true racial justice unless you have economic justice. They really do go hand in hand.
I think that there's a lot of research around the racial wealth gap in America, where an average white household has $171,000 of net worth. That's maybe 2016 numbers. Whereas the average Black household had $17,000 of net worth.
So we're talking really about a 10 times multiple there. We have other data that talks about, I think 46% of black households have either zero or negative net worth, which is huge. It goes on and on and on.
Some other data that talks about that if we actually eliminate the racial wealth gap by 2028, we would actually contribute four to 6% in our GDP. So when we look at this and we realize that it's not just a moral imperative, but it's actually an economic imperative. When we don't do it, we're actually leaving alpha and money on the table.
My background is in venture capital and private equity, and so I approach things through that lens. There's a lot of research around how I think non-white male-led hedge funds outperformed by two to one on average. Now, that's nothing about white males, because I love white males. [inaudible 00:17:10]. They are my colleagues and best friends.
But the idea is that, how do we actually give money to emerging managers, to women-run firms, to minority-run firms? Really this idea about going from really examining our implicit bias, because the data speaks for itself. So if we don't give funding or money or things like that into more diverse-led firms, we're really not even having economic optimality.
So how do we address our implicit biases and begin to have other funds and organizations manage and control our capital? I'm on the board of a foundation and we've been doing a lot of work with our [inaudible 00:17:56] to make sure our [inaudible 00:17:58]'s really in line with our grant making. We've been intentionally looking at our investment practices and in investing more in impact funds and funds that are run by women and minority founder or leaders.
Janice Shade: I'd like just to build on all of that great stuff that Anna was just talking about, and the need for investing into these types of marginalized business owners that has been going on for so long and say, the next step beyond that is to engage those same marginalized audiences in the investment process.
I'll introduce a concept here that may be new, or not, to many of you out there. The idea of extractive capital. This is something that we're really trying to work to eradicate, the idea of money coming in from outside of a community, building wealth that is then extracted back out to absentee investors. This whole notion of community investment funds that are inclusive of the citizens right there in their communities, to be able to invest into those very businesses that they want and need to be building up within their communities... It's an important piece that is still being developed.
I mean, we're still trying to develop the ways to allow for investment into these marginalized communities and now to engage the marginalized communities in their own wealth-building is important. That's a big part of what I talk about in my book, and trying to get across that notion that we don't need to wait for the super-rich to come in and save us, or the government or anyone. We have the power ourselves to make this change.
That's why Michael's book is so important, because so much of our capital is locked up in those pension funds and retirement funds. Here's a way to unlock some of it and redirect it. And so, Michael, I'll let you take it from there.
Michael Shuman: Well I think we all understand that poverty and communities that have long lacked income, lacked wealth, have been excluded from financial markets for 50 years. We've known this is true with redlining from banks. I think one of the things that's very important now is to make people aware that the investment system outside of banking, that is everything we do with securities, similarly excludes people of color and women from finance.
I mean, it's just overwhelming, the evidence, the way in which the current system, which rewards big publicly traded companies and the largely white males who lead them, how that sucks money away from communities.
The flip side of that is we also know that when we focus on community capital, it can be enormously beneficial to communities of color. For example, two of our colleagues, Amy Cortese and Arno Hesse have a wonderful website called Investibule, which studies crowdfunding issues.
What they found last year is some of the most successful beneficiaries of crowdfunding... And I'm not talking about donation crowdfunding. I'm talking about Title III investment crowd funding on federally licensed portals. The best beneficiaries have been women and people of color, precisely those people who have been excluded from the mainstream financial system.
I think, as we'll talk about, there's a growing number of investment funds all over the country that are focused specifically on communities of color that are exceedingly important. I mean, the last thing I'll say is just in terms of action. I think all of us, really, if we want to be allies in fighting racism, all of us should be moving some percentage of our life savings, start with even one or 2% out of global companies into businesses run by people of color in your community.
Second thing is for your city. Really encourage your city to do banking at local banks and credit unions, to move the capital, again, into the communities that can most use it, and change some of the laws that limit the ability of, say, city employees to only invest in publicly traded companies. I'll stop there.
Teresa Chahine: I think that probably one of the main questions that's on everybody's minds is, this money is in those large funds because that's where the biggest profit is. Will we take profit loss by moving it into the community fund? So the first question for the Q&A here is, how have you balanced the desire of investors to have liquidity in their investments with the need to have patient money in order to take new developments through acquisition, development and business opening, housing, [inaudible 00:23:38] phases and into the operating phase?
Michael Shuman: Well, I'll jump in there and say that it's important to distinguish between returns and liquidity. Returns of local businesses are actually quite good. I mean, the studies that we have of the profitability of local businesses, at least those that are not the tiny percentage that go into the category of start-up, are actually better, or at least comparable, to Fortune 500 companies.
The problem is, is that the marketplaces we have organizing our investments are really immature. We don't know how to create a lot of funds and diversified portfolios and good methods of evaluating these companies. I mean, that's the hard work we have to do.
It is true that for the moment, a lot of local investments are illiquid, even if they have good rates of return. That's why I think among the things that we're all working on in this field is local stock markets and other ways of creating greater liquidity. Good investment funds, community investment funds, could in theory offer you some of that liquidity.
Janice Shade: Yeah. I'll jump in to say, there are some investment vehicles that are available right now today to folks for investing in the form of charitable loan funds. A lot of charitable development financial institutions have set up these charitable loan funds that do provide some liquidity, as well as a stated return. There are loan funds there. You can think of them more akin to like a money market type of investment. That's something that is available today.
A few others that are starting to become more available to address the return issue, not necessarily the liquidity issue, to Michael's point, are funds that focus on real estate, real estate investment trusts, that do provide... The way their investments into the community are structured, they're structured such that they provide a more regular return. Unlike a more typical equity fund where, the return would not happen until there's an exit strategy, with a real estate investment trust, or other types of funds that use a revenue-based mechanism, there are ways to at least start to address the return issue until we can figure out how to crack the nut on the liquidity issue.
Anna Blanding: Right. And just to add to that, I know in CDFI space, there actually is a big... And CDFIs, if we just take a step back. They're community development financial institutions. Really, almost think of it like a nonprofit bank. A bank that really focuses on a lot of investing, usually in under-capitalized communities. So a lot of housing and business investments.
CDFIs are throughout the country. Most states have them, and there's several national ones as well. But when I was at the Annie E. Casey Foundation, their investment office, we began to look at how do we actually help bring more liquidity to this market?
There are a couple of examples of some actually liquid invest vehicles that you can invest in as a retail investor and be able to pull your money to be able to do some of the work the CDFIs are doing. I think the first deal was done a couple years ago with a large CDFI. So that's been really exciting, that liquidity piece.
But I agree that the liquidity piece is a challenge. However, I think the return piece is really not a challenge. There are many impact funds, venture funds, real estate funds, that have very, very competitive and attractive terms compared to, let's say, I say more traditional or [inaudible 00:27:38].
I think Janice made a really great point earlier about extractive capital. I think we have to make some decisions that by investing in certain vehicles that I will get a return, knowing that it might be locked up for a while. So I think the CDFI angles are really great.
I think the opportunity zone funds are also an interesting angle as well. Something that was started under, I think, the Obama administration, but now under the Trump administration, we're really looking at how do you capitalize in urban communities?
I think with the recession and COVID and things like that, there's been more attention paid to opportunity zone funds, and how can they really be vehicles for capital coming into communities. But I think the big takeaway is, how do we make sure that we're investing in communities in a partnership-type style. It's not coming in and swooping in and getting my return, but yet leave the community completely depleted.
That really is, I think, the partnership that's needed. But I think that there are a lot of vehicles in which to do that.
I also think too, that for many of us on the call... I'm on the board of a foundation and we intentionally think about how are we investing our endowments. So for those of us on the call that actually manage pools of capital, whether it's an endowment capital or an investment vehicle... Usually if you go into [inaudible 00:29:03]... You're going to be locked up for 10 years anywhere, seven, 10 years.
So why don't you look at, then, how are we really investing? I think there's some very amazing and strong impact investment funds that also are run by women and people of color that are... Really, not only are they as successful. They're actually outperforming.
Janice Shade: I'm so glad you brought that up, Anna. Just one last little piece is that I think community foundations and other foundations that have a mandate or at least a desire to invest some of their endowment into their community can be really strong players in helping to seed some of these community investment funds as they're starting to bubble up.
I always think of them as like the anchor investor. That could be the ones that really get the ball rolling with aggregating that capital. So a very strong role for those organizations to play.
Teresa Chahine: Before I ask the next question, I'm just going to ask the panelists. If you don't mind, if you have citations or resources at the tip of your fingers, please do share them in the chat, like examples of funds or citations. Somebody asked about the four to six points on GDP, Anna, and local businesses are outperforming Fortune 500 companies that Michael mentioned.
Don't dig them up right now if you don't have it at the tip of your fingertips. But if you do, just go ahead and type it into the chat. People are really interested in following up on this. So the next question is, how do you involve the community where you are doing this work?
Anna Blanding: I'll take that first, because we really do have a model of regenerative economic development. Not just coming in at... Let's say we're going to save the New Haven landscape. But really everything that we're building in the project I mentioned, it really was about having community feedback.
So looking at something either the community [inaudible 00:31:07] the community needed more daycare. The community was a food desert. So these are things that community members said they actually really wanted. More business opportunities.
I think this idea, more the old-school community development model is, we're going to have a savior mentality. I think the current model is really around, how do we actually have partnership in a way that brings not only financial return to all, but also that brings social return as well?
Like I said, for us... We've been painstakingly having community meetings in town. Not now, of course, but before everything, we were having community meetings in town halls. We actually brought the architect up. Our architect for our project is the gentleman who was the lead architect on the African American Smithsonian in DC. He's the lead architect on this project, and we brought him up and he laid out plans for the community.
So sometimes it actually goes a little slower because you really want to have community feedback and involvement, but it's a richer process, and a richer project at the end, and one that is truly meets the needs of everyone.
Michael Shuman: I see as a good example of community engagement, the Ujima project, which is in Boston. One of the things I like about what they're doing is that it's really quite holistic.
I mean, you can't really just pull one thread of community capital and solve the problem. You have to redefine economic development not as, "attract and retain outside companies," but of nurturing local entrepreneurship. It's about nurturing people's understanding of how to buy local more of the time. It's about changing the purchasing behavior of anchor institutions. And it's about creating this grassroots movement of capital to go into the right businesses and the right other things.
The other thing that I'll mention is that as important as local businesses are for community development, we also need to think about putting money into people, right? Tens of millions of Americans are emerging out of the COVID crisis more significantly in debt with credit card debt and defaulting on student debt than they were before.
So creating mechanisms whereby maybe an investment that we make with our pension fund is to pull people that we know and we love out of credit card debt, pull our children out of student loan debt, help people pay down their mortgages faster so they're secure owners. Those are all options of what we can do with our money that actually has significantly better returns than Wall Street.
Janice Shade: I'll just, I'll say something here about... To those community organizers out there, or those who are looking to, "How do I get one of these in my community? Where is a place to start?" Just in my experience, seeing so many groups that do get started this way, come from the non-profit or the community foundation role within their communities.
But a way to get that jump-started, if you want. I did put in the chat, there's a community investment fund survey. I'm heading up a task force on community investment fund acceleration, and the survey is designed to get a sense of what is already out there in folks' communities.
If you're interested, there's a place where you can send me your email and we'll set up consultancy on how to get that started, because a big part of what we're trying to do with this accelerator is to help communities identify the resources they already have in their ecosystem, what resources they might need to develop or go discover within their ecosystem, and then how to harness that all together into the creation of community investment funds.
Teresa Chahine: So tying together these two threads that we've already discussed, the next question is, as we work to create more liquidity in markets for community investments, what kinds of policies or practices do we need to implement to prevent the rise of high-frequency trading or other arbitrage and maintain community control of the funds?
Janice Shade: Oh, that's a good one.
Teresa Chahine: I mean, I could go by something in ConnCorp or ConnCAT Plaza, right? As someone who lives in East Rock, New Haven, I could say, "What a great investment [crosstalk 00:36:00]-"
The purpose of creating this new real estate development near Dixwell Ave is not for someone from East Rock to go make that investment there, but rather to build wealth within the local community. That's just one example, I think, of what we're trying to avoid here.
So how do we maintain a community control, build community capacity and wealth, while also changing policies and practices that help with the liquidity aspect?
Janice Shade: Yeah, it's a delicate balance, this need for liquidity and yet this need for patient capital. I think these are going to continue to evolve together. For now, the way the policies stand, the balance is tending toward the patient capital piece, because liquidity is such an issue.
But part of it, I think, is also to get at... I can't remember which of you brought up the term or the concept of social ROI, and starting to educate folks on the benefits, the long-term benefits, of that social return on investment that could, at some point, translate into a financial metric.
I worked with a group up in the rural northeast corner of Vermont on setting up a community investment fund there. We talked a lot about the social ROI, and how do we communicate that to potential investors?
Part of it was, if we can start to demonstrate how these funds are contributing to job creation and business creation, that then lead to a stronger tax base within a community, that could, over the long period of time, have some positive financial impacts to everyone involved, whether it's through lower social services that are needed, or even lower tax rates, because the business tax rates are growing.
The more we can start to quantify those potential impacts of these types of investments, I think will help people to understand that it's not all about just the dividend rate I get, or what's my alpha? Let's start thinking about how a financially measurable impact could come through other means.
Anna Blanding: I just want to talk about this idea of community. I think we have to make it slightly more expansive. I can give some examples. When COVID... I [inaudible 00:38:51] answer your question about, can a person from East Rock invest in somewhere, Newhallville. I would say absolutely. Absolutely we need people in East Rock to invest in something in Newhallville.
I was thinking about the example of COVID. When COVID struck our organization, we actually decided to... I [inaudible 00:39:10] say pause, but really focus on the immediate needs that were [inaudible 00:39:14] community.
We raised money and basically put out an email to some friends and people that we trusted. Really, how can we actually help people that were in the neighborhood who were lost jobs, dealing with COVID and things like that?
We actually raised almost a million dollars in two weeks from foundations, as well as from about 200 individual people, many of whom lived in East Rock and lived in other parts of New Haven, and [inaudible 00:39:47] this idea... We [inaudible 00:39:48] have this idea about what really is community and who really is your neighbor. I think it sometimes expands. Because say, okay, if I live in East Rock, which is really six blocks from Newhallville, why would they not be my neighbor?
So it was really a great testament to see how many people responded. What we did with the money, we actually began to give out cash debit cards to Newhallville and Dixwell residents, no strings attached, that they could then use, used to pay their rent and their medicine and their utilities and buy food and things like that.
It was a great exercise of people expanding their view of what community really is, and what being neighborly really is. Even in our project that we are doing now, we do have impact investors who are definitely not of the community, but yet who have very much aligned with community and really have this commitment to wealth generation in the community.
But it is. It is patient capital, and we have a very large investor who has probably funded about 20% of the project. It's basically a person who wanted to have their legacy be to invest in this community with the promise that the money would be regenerated and recycled in the community for years to come.
Reality is that some communities in of themself, they might not have the capital at this time to have a $200 million investment. It really may take other... What's it called? Friends and patient investors to help start. Well, hopefully the goal is that if we look at five years from now or 10 years from now, then you do have more capital in the community itself.
Michael Shuman: ... three really easy policies that most cities can take to facilitate local investment. One is, while funds can and should be done privately, a city actually can manage a fund. There are a ton of funds that cities do manage, but almost none of them are open to grassroots investors, and they can be.
The second thing a city could do is just on its website, put a tab of all the businesses that are currently seeking investment. There's some reforms that are coming down the pipe with the SEC that will allow more discussion between businesses and investors on a website like this.
Then the third thing is to create a tax credit. The state of Michigan just introduced, in the state legislature, the idea of a 50% income tax credit for local investment. That could be done at the local level with things like property taxes, as an incentive for people to keep their money local.
Teresa Chahine: All right. I need to make a decision between whether we're going to talk about policy or individuals. Guess what? We're going to do both. So really briefly, because I definitely want to end on the note of what can people on this call do right now after they hang up. But I think we have time for one more question, which is related to policy. It is, which organizations and institutions are your allies in advancing policy, and what are the challenges and opportunities in getting changes in place?
Janice Shade: Well, I'll speak to that, because I'm kind of neck deep in some proposed policy changes right now. After long discussion with folks on this taskforce that I'm working with, some deep experience, we decided to go towards policy change with the regulatory agency instead of legislative change. The federal legislature's got enough going on right now.
So we're doing some work with the SEC to get some changes made to the Investment Company Act of 1940 to allow for easier and less expensive creation of grassroots community investment funds. We're partnering with some great organizations to help make that happen. The National Coalition for Community Capital, which Michael and I both helped to found... Three years ago? Four years? I can't remember. Has been a strong supporter of this. Cutting Edge Capital is a legal firm based in Oakland.
Brian Beckon was one of the co-authors on that Community Investment Fund Handbook and is just... In my mind, he is the leading legal scholar on community investment funds, the legal structure that is allowable under the current 1940 act, and also becoming the author of the policy changes that we want to see made at the SEC level.
The next step, when those changes happen, will be to start working at the state level to create more liaisons between what can be done at the state level. We'll be working with and starting to talk with folks at... I always love saying this doing some more work with NASAA. But it's not that NASA. It's the North American Securities Administrators Association.
Teresa Chahine: Awesome. I'm going to squeeze in one last question before I get to the action items, because this kind of speaks to a thread that we've had going on throughout this talk about the trade-offs.
We have an attendee who's saying that he was on a webinar last week and someone who had been at Goldman had an investment company that was trying to consolidate small local businesses to scale them into a single entity and make them public.
The question is, how can we overcome this desire to be big and publicly traded and be satisfied with a good local company? Sometimes the supposed inefficiencies of scale often means giving up what specific community you need. Sorry, efficiencies of scale. Maybe a little economic inefficiency is fine if other social and environmental issues are being addressed. Question mark?
Janice Shade: This whole question of scale I think is going to be the subject of my next book because I think it's one that's so important. There's this over overriding drive of grow or die. I mean, there are books. I think there's a book by that title of Grow or Die, and this kind of never-ending quest for scale.
Yet we're seeing now some of the negative impacts of getting to business that are too big to fail. Banks that are too big to fail, in someone's mind, and the negative social impacts that then translate. There is economic impact to some of those.
Michael can probably speak more to that. You have some data around that. But I think the key takeaway, in my mind, is that there is such a thing as a sustainable scale, and we need to start thinking about, what does sustainable scale look like?
If it means giving up... I wouldn't say necessarily economic impact. It means often giving up productivity or efficiency. Efficiency is really, I think, at the root of this quest for scale, is trying to get so efficient that we can squeeze the last dollar out of productivity of our workers, and starting to realize the economic impact of that quest for efficiency.
Then we start to see a trend toward sustainable scale. That could be a whole separate webinar, I think, but I'm sure Michael will want to say some things on that.
Michael Shuman: Well, I, the way that I think about the entire community development movement, local economy movement, is about humanizing the economy, trying to replace long-distance, opaque, hard-to-understand relationships with personal relationships, and getting personal relationships between investors and companies and workers and their owners.
All of these things are important for people to behave in a more civilized way. So I think you can create certain kinds of tools that are big, big scale, but still retain elements below that are really quite personal and local.
I mean, I'll give you a good example. Bendigo Bank in Australia is one of the largest publicly-traded banks in the country, but they created a kind of just add water setup so that small rural communities could pony up a little bit of money and a good board and set up, in short order, a community bank with the money 95-plus percent retained locally, with the support of Bendigo. If that's what a larger institution looks like, and you still preserve those local relationships, I'm totally with that.
Anna Blanding: Right. Also, I think Michael and Janice made a great point. I remember I was at a conference one time with Nancy Pfund, who runs Double Bottom Line Equity, which is really the premier, probably, pioneer. Double bottom line social venture capital firm. I remember I went to her and said... I think the question was, "Are you growing?"
She really said, "Absolutely, I'm not growing after this fund." She said, "I really, instead of having a bigger me, there should be 10 more of me’s."
I really took that to heart. For the venture capital world, and this is where I come from, 97% of venture capital dollars, they either stay in Silicon Valley, Boston or New York. So you have this whole other part of America that's really not having [inaudible 00:50:45].
So when you have funds that are $5 billion funds... Let's say if I'm the the fund manager, I'm going to go to the most efficient place where I know I can go to Silicon Valley, or go to Boston... I'm not going to go to Oklahoma. I'm not going to go to New Haven, Connecticut. I won't go to Detroit.
So this idea about when you have such a large-scale enterprise with funds, you really often time very unintentionally overlook other places. [inaudible 00:51:10] Think you have more localized, sustainable level of scale investments, you really can then find those gems that really do have the same level returns, but yet you might not know about it if you don't live there or you're not in that region.
So I'm definitely a proponent now of having investment vehicles where really you have the flavor of the region and [inaudible 00:51:36] be able to have the due diligence to find companies that may be overlooked if you have such a large scale.
Janice Shade: I sat in on a webinar probably about two months ago, an SOM exchange webinar on the venture capital market. I'm trying to remember what the name of it was. It was a couple of venture capital, people ran VC funds, and where they thought things were going next.
They both made the point that the evolution of venture capital over the last 20, 30 years has brought it to a point where these funds are so big, they can only make investments at a certain level. And there are fewer of those that they can find.
I think it was something like 95% of the venture capital funds out there are not returning what their promised rate of return was supposed to be, and it's because they've gotten so big. Just to underscore Anna's point that having lots of smaller funds instead of a few big ones can help to solve a lot of those problems and fill the gaps.
Anna Blanding: Right. And it's also where a lot of CDFIs really, I think, come in great play, because they're able to do more investment at an earlier stage of business, which often requires more underwriting.
I'm not going to say the word handholding, but I think just more underwriting and support. A lot of entrepreneurs that may be at a early stage or pre-seed... You know, that kind of [inaudible 00:53:14]. They really do maybe need support such as even something as simple as back office accounting. All these kind of things.
So a lot of CDFIs are really good at playing in that space so a company can, let's say, be seeded by a CDFI and hopefully then can grow to a larger scale. Also, I think CFI play a great space in that. Also, ESOs play a [inaudible 00:53:37] great work in that role as well of finding local businesses.
Teresa Chahine: I'm getting a lot of great comments and questions from the audience, and I'm sorry that I won't be able to speak to them all. One person said, "I feel like I'm trying to drink from a fire hose. There's so much information. Could we get a list of some of the vehicles that you've mentioned, like the CDFI funds, loan funds, et cetera?" So please do type them into a chat, both participants and speakers.
Another person said, can we have a next step, a follow-up webinar? This is quintessentially SOM and such opportunity to engage folks across sector in this critical work.
So my closing question to you, the panelists, and you each have somewhere between a minute or two to answer it, is very action item steps and specific tasks and to do when people hang up in five minutes. What should they do? How can our listeners today get involved and put their money where their ears are for now?
Janice Shade: Well, my non-profit Local Cap, just recently acquired a website six months ago that we're completely revamping and adding to. It's localinvesting.org, and on that website, we've started a directory for people to find investment funds and networks, and constantly adding to it all the time. It's based geographically.
I do want to just address a point that I just saw come in from Ali about defining community geographically. Another way that we are trying to figure out how to segment this, this directory, is to define community not just by geography but also by affinity, whether you want to be investing in women, or if you want to invest in veterans, or you want to invest in people of color. Whatever it is.
And also another resource that was put up before, investibule.com. I think it's investibule.co. They have a way to segment your community interest along non-geographic lines, so that's another one.
Teresa Chahine: Michael, did you want to add anything or is it all in the chat already?
Michael Shuman: Well, I just, I did want to say that I recommend that everyone listening to this webinar adopt their favorite local business. My partner and I did this about a month ago. We reached out to my favorite person of color entrepreneur in Washington, Andy Shallal, who runs Busboys and Poets. I said to Andy, "I want to make sure that your business survives this COVID pandemic. I estimate that I'm going to spend a thousand dollars at your restaurant over the next year. I'm giving it to you all now as a prepayment."
He was so thrilled, he gave me a 20% add-on bonus. So I just got a 20% rate of return on my investment. That's the beginning of the way of thinking about local investment, is that underlying relationship.
Teresa Chahine: Anna, what is your to-do action items, or what are your to-do action items for the audience?
Anna Blanding: Yeah. Michael, I love that point you made. I would say that my to-do action items... I'm going to bifurcate this for people that have capital, but also people that have influence.
I think for those of us who have influence, and I think many of us on the call do, really look at your hiring practices and your retention and recruitment practices and your, who are you doing business with? Let's say, can you hire a new catering company or a new supplier that is more diverse? Because that is a way of putting capital into communities by actually helping...
Minority women business owners have to be able to provide for their family and grow their business. So that's a huge thing. [inaudible 00:57:50] Say make those decisions around that.
For those of us who have capital, I would say, really I would look at... Like I said, my organization, ConnCorp, we have a qualified opportunities zone fund. We're starting another impact investment fund as well for the strategies I mentioned earlier.
I also think that CDFIs are great. I mentioned CDFIs because it's really open to non-accredited investors. You can invest as little as $1,000, as much as several hundred million, so I think that's a great place if you're maybe on the younger end and want to do something, but don't really have a huge amount of capital or accreditation to do.
I would also say again, if you manage pools of money, whether you're managing an endowment or you're on a board of or trustee of an endowment, or you are a fund manager, really looking at, I think [inaudible 00:58:41] call. Having a concrete strategy around investing in local businesses, and particularly investing in minority and women founders.
Teresa Chahine: Please do contact our panelists. Their emails are publicly available. Mine is too. Contact me. Contact the alumni office, and let's keep this conversation going. They will have a lot more actionable to-do lists for you, and we would love to create a community out of this. So thank you so much to our panelists and our listeners and the alumni office.