I hesitate to start yet one more thread on the possibility that our friend Bee may open another restaurant in Ypsilanti, but there are a few things that have come up since my last post on the subject that I wanted to share here, on the front page. Regardless of whether Bee decides to go forward with her plans to open a 24/7 diner on Michigan Avenue, I think it’s worthwhile for us to have a conversation about how we as members of this community can help to support our local entrepreneurs. And, that’s what I’d like for us to discuss today.
I’d been thinking about the possibility of a community funded startup for quite a while, but it wasn’t until Bee mentioned that she might want to take over the space occupied by the Wolverine Diner, but lacked the funds to do so, that I could envision it actually working. I thought, given Bee’s success with her first restaurant, and the respect that folks here in the community seem to have for her, that this project would be a great test case. So, without really thinking everything through, I suggested an arrangement whereby people in the community could invest in the new entity. If we could get 150 people to invest $1,000 each, I figured, we’d be well on our way to buying a building, and getting a well-run, highly-visible, locally-owned anchor business on the Michigan Avenue… And, then the conversations started.
Whether or not anything comes of this diner, I think there’s something to this idea of local funding. As banks aren’t lending, and as people aren’t getting decent returns on their investments elsewhere, it only makes sense that folks might want to start investing again in their local communities. It’s just a matter, in my opinion, of finding the right entrepreneurs, and the right mechanism by which to allow these people to invest.
In the case of this hypothetical diner that we’ve been discussing, three main models have arisen, each with it’s own benefits and drawbacks.
Model 1: Shares are sold in the company directly. (This is essentially the model that was used to raise the first $80,000 – $100,000 that was used to launch the Corner Brewery.)
Model 2: Ypsi residents invest collectively in the purchase of the building, leasing it at an affordable rate to the entrepreneur for an extended period of time.
Model 3: Community members pre-pay for goods and services, in order to generate immediate working capital that could be used to launch the company.
I was particularly fond of the third option, as it would allow Bee to retain equity and control, even if the amount raised would be considerably smaller. My concern, though, was that having a number of pre-paid cards floating around, could lead to cash flow problems later on. Our friend, Murph, however, found a solution. Here’s his twist.
I’m envisioning “Beezy Savings Bonds”. $100 gift cards that can be used in the first 6 months for half face value, maturing over time to full value. Issue batches with different maturity dates to help you plan for redemption.
I can’t imagine that many people in the community, knowing what Bee has accomplished with Beezy’s, wouldn’t shell out a few hundred bucks now, if they had it to spare, in order to get something going on Michigan Avenue under her direction. Essentially, it would be an interest free loan, with the promise of great food on the other end. (And it’s actually better than that, as Bee would still be making profit on the food sold.) It would be a bet on the future of Ypsilanti. There would, of course, be risk involved, as most restaurants fail, but if that risk were shared by hundreds of us, it wouldn’t likely send any of us into bankruptcy, even if the worst were to happen.
And, the cool thing is, something like this could work for any restaurant or retail endeavor, assuming the person or persons associated with said endeavor had a certain level of trust within the community. As we all know, those people are hard to come by, but they do exist. And, through a mechanism like this, these entrepreneurs could afford to do renovations, purchase merchandise, etc. It’s not even out of the realm of possibility that we, the community, could recruit successful entrepreneurs to our area with such a program. For instance, what if we, as a community, decided that we had a need for a practical downtown clothing store like Sam’s in Ann Arbor, or if we wanted to attract Neehee’s to expand into Ypsi from Canton? I’m sure there are other examples of well-run, regional businesses that we felt could help breathe new life into our downtown.
And, speaking of possible models for local investment, here’s a clip from a Fast Company article that was shared by a reader named J.
…In your reporting, did you find evidence that communities that invested locally were more resilient during the recession?
Yes, absolutely. One of the best examples is Hardwick, Vermont, where community investing has been unfolding for a decade. It started when the area’s new generation of farmers and entrepreneurs began getting together to help each other work through business issues. Many of them, such as Tom Stearns of High Mowing Seeds and Pete Johnson of Pete’s Greens, were experiencing rapid growth and would run into cash flow problems, so they began lending money to each other to get through lean times. Around 2005, Stearns raised $1.1 million from a group of (accredited) local investors, all within 50 miles. Other community investments followed. Claire’s Restaurant, which showcases food grown or raised by the area’s farmers, sold prepaid “food coupons” to 50 residents for $1,000 apiece, which entitled them to $25 off a meal once a month for four years. It’s sort of modern day barn raising. All of this mutual support and reinforcement has attracted more entrepreneurs to Hardwick, like the Vermont Food Venture Center, a shared use facility for food producers and startups, which has relocated to Hardwick from Burlington to be part of the action. In the last three years, while most of the country was struggling with unemployment, Hardwick created 100 food and agriculture-related jobs, increasing local jobs by 25 percent.
What was one of the most interesting models for locavesting you discovered?
Do It Yourself IPOs–DPOs, as they’re called–are really interesting. It’s just like an IPO but without the Wall Street middleman. What does Wall Street do for its 7% fee? They market the shares to their client base. But if you’re a company that has a very strong following, enthusiastic customers, a known presence in your community, you don’t need that Rolodex. DPOs are perfectly legal under SEC laws and they can be done for very little money.
Are they listed anywhere?
That’s the nut of the problem. They can be traded. The company can set up a bulletin board and trade them, or they can trade on an OTC market which is not ideal. The problem is liquidity, and that can scare off potential investors. That’s the idea of a local stock exchange, where people could go public and trade their shares. A lot of people are surprised to learn that 100 years ago we had many local stock exchanges across the country and those exchanges helped fuel their local industries. Today our markets are global and efficient but not serving the types of companies they used to. Local exchanges would be very regionally focused. You’re not going to have the speculators and robotraders, I don’t think people will be shorting the local hardware store…
Maybe it seems unlikely now, but I can imagine some kind of Ypsi-Arbor exchange along these lines in another ten to twenty years, or at least some kind of formalized way for individuals with the financial means to do so to come together to back local entrepreneurs.
And, as we mentioned a few days ago, this kind of individual, distributed economic development could even extend beyond the realm of food service and retail. We could, if we wanted, band together to buy foreclosed properties and then lease them to individuals involved in urban agriculture initiatives… The possibilities are endless, assuming, of course, we have local men and women interested in investing in their community’s future.
25 Comments
Excellent ideas. Back in the hippie days I lived in C-U. We utilized a voluntary community tax (1%). That contribution provided the seed money for the establishment of numerous businesses and co-operatives (I was involved in starting a printing coop that continued in business for over a decade). Grocery stores, eateries, clothing manufacturers, car repair, gas station, record store, deli, etc) all got their initial seed money from this voluntary tax. The Nixon IRS ultimately shut us down and forced us to turn this into a “united way” type organization which funded alternative social services (ie. rape crises center, drug counseling, migrant worker assistance, etc.)
Count me in for a bond/shares of some sort. We don’t live locally anymore, so I would not get a chance to use pre-paid cards and I’d personally feel very hesitant going into the real estate market in it’s current shape…
That being said, we want to support Bee and make this happen!
Maybe we should start by taking an inventory on the kinds of goods and services we typically leave the city for. That, I suspect, would lead to a list of the kinds of businesses we’d like to have here.
I’m trying not to get too up in Bee’s (literal) business, but I am really liking this conversation, and the thought of applying local investment models to all sorts of businesses.
One thing I’d offer, though, is a different way to look at “return” — Mark, you and I had a bit of side conversation on the topic, in which you were wondering what percent return people would need to expect in order to buy into this.
While I think being able to forecast a certain positive internal rate of return becomes important as people invest larger amounts, I think a strong case can be made for investments that pay only incidental financial returns, and have the main benefit elsewhere: I don’t own a share in the ypsi food co-op because the 2% user discount makes the food co-op a cheaper way to buy food than Kroger — I own a share in the food co-op because I like living in a community with a food co-op. (And people in Green Bay own shares in the community-owned Packers because they like having a football team.)
Similarly, I think I could easily invest $1,000 or so in a co-operative community development without worrying about whether the financial returns are “better” than keeping that money in my bank account (0.5%), paying it towards my mortgage (4%), or putting it in my IRA. The return I’d be looking for would instead be in my investment making my community a better place to live: I’d be looking for the use value of my investment, rather than the exchange value.
And, nothing against Bee, but I think I’d rather make this investment in a higher-level fund that could buy/improve/lease buildings, serve as a revolving loan fund for businesses, etc. than as an investment in one single business, something potentially broader/more impactful than a single business, as well as limiting the risk relative to having all one’s eggs in any one small business.
I think this is a great idea.
However, I would also like to see the community enable the return of Movies 4 Sale.
I like what Murph says here.
Mark, you might interview the food coop’s GM, as they’ve just completed a member-loan campaign, and how they figure investment returns is interesting. Apparently the campaign was wonderfully supported, successful, big turnout and all that.
Which brings me to something I’m not sure Murph was steering towards, but, nevertheless: let’s indeed all join together to start our own Cooperative Community Fund. All members contributing money would by definition become voting members, and, after reviewing basic paperwork/applications from prospective Fundees, members could take a quick vote on how money would be disbursed. The key in all this, however (especially considering the long term), is that the Fund be organized as a cooperative, which by nature builds in a mechanism by which to avoid the common pratfalls of misanalysis, bad markets, greed, cronyism, and so forth.
In the meantime, I’m also good for a startup loan to Bee, and I wouldn’t need a return beyond one lovely meal.
I can see people investing in Bee’s new venture, as people like, respect, and trust her. I think you’d have a harder time of it, however, convincing people to invest in a property-buying cooperative venture. I think, first, you’d need to have someone who had demonstrated success, that people could rally around. Otherwise, it runs the risk of looking like Water Street part II.
Not a property-buying venture, but some kind of community fund with the expressed aim of being a startup funder for progressive and/or culturally interesting business ventures.
How much working capital does Bee need? The building is $189k, but I would think she could get a loan for a portion of it, and she would probably need to do renovation work. I think you need to know how much money this would require to come up with an appropriate solution for Bee running a restaurant in the Wolverine.
And for our future (Deja Vu), there are apparently also such things as Community-Owned Cooperative Cinemas.
http://www.acadiacinema.coop/
Two friends sent me the link to your article today, excited to share it, as I have been talking about this in earnest for the last 4 months. I’m just coming off of the Slow Money conference in San Francisco a couple of weeks ago — it’s amazing what people are doing all over the country towards this aim of redirecting their dollars into the local community for the sole purpose of building resiliency and fostering the growth of entrepreneurs who are directly impacting the quality of life and business for us all.
We’re in the midst of launching an in house study this winter of the various ways we can help connect local investors to local opportunities, many of which have been brought up here. There are a myriad of complexities with each of these ideas, the SEC being responsible for a large part of them (I’m probably breaking several laws in just writing this post). We’re trying to figure out the best strategies that we as independent (and ‘radically’ alternative) financial advisors in the community should employ to help our clients diversify their interests into their local community versus relying on the heavily manipulated international markets.
I’m keenly interested in where this conversation goes. There are several conversations like this happening all over Washtenaw County. Please keep me abreast of developments if you would.
angelabarbash@gmail.com
734-260-3095
Another example is the Riverwest Investment Cooperative in Milwaukee’s Riverwest neighborhood. http://riverwestinvest.com/
There the focus was on purchasing, rehabbing and then managing rental property. They’ve been around since 2003, and had some troubled times during the housing crisis, as you’d expect. But they’re still intact. According to the 2010 annual report, they have purchased, rehabbed and sold one property. And currently hold and lease two properties, including one 8-unit rental.
There are a few investment levels as well (from their website):
Membership
A RIC membership can be purchased for $1000 by any Wisconsin resident. Only one membership is allowed per individual. Members are entitled to several rights, in particular, they are eligible to serve on the Board of Directors. Also, Members have one vote each to elect directors at the annual meeting as well as one vote toward investment/property decisions when requested by the Board of Directors. Members earn a distribution of year-end net proceeds.
Preferred Shares Investor
A preferred share in RIC can be purchased at $100 increments by any Wisconsin resident. Ten shares may be converted into one membership at the request of the investor. Preferred Shares Investors earn dividends at 3% APR.
Friend
This is an important category of involvement with RIC because “Friends” are a cadre of area residents who care about what we do, have an interest in the neighborhood and want to stay informed about our events, meetings, decisions and volunteer opportunities. To become a “Friend” please contact the Secretary to be added to the contact/email list.
Maybe I’m dreaming a little too big, but I like the idea of community owned wind power.
http://en.wikipedia.org/wiki/WindShare
I’m concerned about the numbers in the case of Ypsi. If it’s true that this group in Milwaukee has only been able to address three properties since 2003, I’m doubtful that we’ll be able to make much impact with funds raised from our much smaller population. Realistically speaking, how many people would contribute $1,000 to such a purpose? 50? 100?
This discussion interests me as well. My business is the kind that could really benefit from equipment upgrades & improvements to stay competitive with big box places & rich Rec centers. I’d love to be involved in this community discussion.
Julia
Owner/Durector Ypsi Studio
yes! wow! sweet!!
first, this isn’t about *me* and I am honored to be attached to a conversation of this nature- and so I think what we have in store for wolv fundraising if things come together will be different than what we’ve got going on here… [just sayin’] And I will let Mark, all y’all know what I need when the time comes and we’ll figure that all out.
second- something I’ve been trying to get off the ground since year one, is small retail operations/pop ups that would want to work within beezy’s in the 3rd room, which is some way is feeding into the larger idea of community funded entrepreneurship… So I have existing, underutilized space, a relatively captive audience and built in traffic and would charge some paltry percentage of actual sales to the retailer as “rent”…
then ideally, these things would incubate; and perhaps there’d be enough interest to lease a separate storefront and might feed also into cooperative retail. [that might be community funded, and vetted by the “board” and folks would have business plans & documented visions and all that- maybe akin to a scholarship w/spark like central support?]
It’s one thing to say “shop local”, and it helps, oh it does! But man! Think of the possibilities if we invest locally- and you are and can every time you buy a gift card, every groupon offer you ignore, every contribution to community groups…
I just started reading a book entitled ‘sacred economics’ and though not very far into it yet, [it’s a little new-agey to start] it’s inspiring to be reminded that money isn’t inherently good or bad, but that we can honor things with it. *honor* and provide and spread the money around so we can help everyone get what they need to thrive, create & innovate on a small scale…
and in that spirit, I go about my business!
I’m not sure Murph was steering towards, but, nevertheless: let’s indeed all join together to start our own Cooperative Community Fund.
Charlie, you picked up what I was laying down pretty darned well. But let me lay down a bit more on why, yes, I definitely see property acquisition/ownership as a (good) potential activity for such a co-op, for a couple of reasons:
* In Bee’s case, maybe she specifically does want to own the building as part of her business model. But maybe she (or another business) does not, and would instead prefer to just worry about their business, and leave the property maintenance side of things to a friendly, community-owned, cooperatively-run landlord. I understand this is how the Ypsi Food Co-op operates, actually — the Co-op does not own the flour mill building, but the building is owned separately, albeit by a consortium of co-op members. Seems to work out — it means the Co-op has a supportive, long-term relationship with their landlord, but also doesn’t have to worry about things like leasing out the apartments upstairs as a piece of the Co-op’s business.
* In Bee’s case, maybe she does want 100 shareholders in her business — but I can see other businesses saying, um, not so much. (Or maybe Bee doesn’t.) In those cases, being a friendly, non-profit-motivated landlord is a way that a community investment co-op could still be supportive of the business.
* Owning the property may be a more stable investment than owning a share of the business. New/small businesses have high failure rates — hopefully the involvement of an institution like this would bring that down, but in some cases the better bet might be to separate ownership of the building or other assets from ownership of the business, to limit exposure.
* Property ownership opens the possibilities beyond just that one business that everybody lines up for, including residential properties. (Note that I was a long-time student co-oper in Ann Arbor, and did a stint on the ICC Board, during which I advocated expansion of the co-op system into Ypsi/EMU, so I am specifically including co-op residential property in my vision here.)
* One of the big issues in downtown and West Cross has been the dearth of move-in ready properties. A lot of the vacant properties that we like to gripe about have either been not actually available (as SPARK found out when they attempted to lease the Smith Furniture Building), or else are in such bad shape that a business owner won’t take them on. (I recall Henrietta Fahrenheit’s owner listing the intensive renovation required before opening her store to be one of the factors that inhibited her success.) There really aren’t many options available to any given business owner. I think this is less of an issue now that the Maurers have undergone their renovation rampage down Michigan Avenue, and after we’ve sacrificed a few Henriettas in the name of creating leaseable space, but a lot of prospective business owners over the years have looked at the options and then looked elsewhere. Having an investment co-op that was willing to undertake a renovation on spec (or on behalf of an existing biz that wanted a space to grow into) could help address this, though would also be more risky than taking on a property with a biz tenant in hand.
* I’m not sure where Mr. X’s skepticism is coming from — I really see an investment co-op willing to undertake property ownership, rather than Bee’s Next Big Thing, as having a lot more options and potential. There are only so many people who already have a business in town and are interested in opening a second one and can capture enough passion to get community investment (“so many” being approximately 2, Bee and the Greffs) while a property-oriented plan gives much more flexibility to take on the “unproven” prospective business owners and give them a leg up on success without having to buy into their business directly: this is how we invest in the next 10 Bees’ first businesses, rather than our one and only Bee’s second biz.
(You may be able to tell I’ve been thinking about such things for a decade or so. Like I said, long-time student co-oper.)
Funny Bee, I’m reading through “Impact Investing” and Sacred Economics is next.
Andrew Leonard has a good article on Salon today about just this topic, A declaration of independence — from Wall Street:
Great idea, and one I’d invest in, although maybe at the $100 level instead of the $1,000 – I like Murph’s Savings Bond idea because it gives you that flexibility.
A recent local example that might be worth looking into is SELMA Cafe/Tilian Farm in Ann Arbor. From the sound of it, they generally followed equity model (complete with an “IPO” at the Grange) – where community members could invest in farm infrastructure (land, hoop houses, tractors).
From what I heard, their model was basically a longish-term, low-interest loan. Say, offering a yield of 2% per year with a requirement to keep your money there for at least 5 years. That’s as good a rate as you’ll get from a CD these days, and a much lower rate than a business can get a bank loan for. It may be better suited to business expansions than start-ups, but it could be one product that a “Cooperative Community Fund” might offer.
Keep me posted!!
I always try to think about these things in terms of risk/reward. My thought would be to cooperatively owning a property and leasing it to someone who will run a business. Using the Wolverine as an example (and a much lower price tag, say 125K), say there are 150 ‘investors’ at $1000 each to buy the building outright, pay taxes,closing costs, have some reserves etc. If leased at whatever price, return on investment is immediate. If it sits vacant, I cannot see an outlay (yearly dues) of more than $100 a year per investor (x150 = $15000) for taxes, insurance, etc., etc. No different than a condo complex if you think about it. The devil is in the details obviously, but to me the risk is small. I look at it low risk with big potential upside.
Yes, great ideas.
And, related: local community-issued scrip:
http://www.huffingtonpost.com/2009/04/06/communities-print-own-cur_n_183497.html
…. such as Detroit Cheers:
http://en.wikipedia.org/wiki/Detroit_Community_Scrip
Also Colors Restaurant in Detroit and New York is working on an employee ownership idea. They are working out the kinks still.
Thanks for the tip, Paul. I’ll look into it.
One Trackback
[…] of you who were active in the conversation with Bee Roll some time ago, when we were kicking around the various models we might use to fund a new restaurant on Michigan Avenue.)[note: If you find this interview interesting, you might also want to check out my coverage of the […]