Saturday, March 07, 2009

Startups not bailouts

My presentation to the Wisconsin Assembly's Committee on Rural Economic Development was really fun. Nervous, but fun.

I knew as the last of 4 speakers I'd be limited in time, so I had to focus on the three key action steps I most need as an economic developer working in rural communities.

For me it's a no-brainer. Good universal broadband, virtual incubators, and micro lending.

For this post I'd like to focus on micro lending. Specifically how a fast, inexpensive, off-the-shelf hybrid lending program might be put together quickly in local communities.

Thomas Friedman had a good piece in the New York Times last month about the use of capital in this awful economy. He focuses on the high tech economy, which is an obvious necessary component, but I believe this approach would benefit all levels of enterprise investment, perhaps especially micro lending. In an economy this bad, there are millions of people who might benefit from their own startup enterprise, sustainably run and seeded with micro investments, wisely overseen.

Here is Mr. Friedman: "Our country is still bursting with innovators looking for capital. So, let’s make sure all the losers clamoring for help don’t drown out the potential winners who could lift us out of this. Some of our best companies, such as Intel, were started in recessions, when necessity makes innovators even more inventive and risk-takers even more daring.

Yes, we have to shore up the banking system, which underpins everything; and finding a fair way to prevent hardworking people, who played by the rules, from losing their homes to foreclosure is both right and essential for stability.

But beyond that, let’s think, talk and plan in more aspirational ways. We’re down, but we’re not out…. Our motto should be, 'Start-ups, not bailouts: nurture the next Google, don’t nurse the old G.M.’s.'”

We are down, but we are not out. Exactly. That's a succinct call to action. Communities and economies will be rebuilt through new and better enterprises. A few will be Googles. The vast majority will be small businesses.

There are surely micro loan funds run by governments in North America that work, I just don't know any. I think that governments really want to do this, but it just requires too many activities that governments constitutionally can't do. They just can't get involved to the degree that's needed by the entrepreneur.

That's where you come in. Here's my hybrid idea.

A group of citizens want to improve their community. These communities can be neighborhoods, cities, counties, and regions. The community could also be virtual with members worldwide and everything in between.

Let's say the interested citizens want their community to go increasingly greener. Those citizens should vote with their money and establish their own green micro lending fund.

Banks are equipped to segregate the funds and create the loan coupon books specific to each loan, providing the institutional backbone with the tracking and recording components needed. They can create this for a modest fee if they can avoid the costs normally associated with loan origination (finding appropriate borrowers) and with loan collections, which can consume time and resources. Some loans will fail, many times because there is no insight and oversight afforded the borrower by the bank or government backer.

This is where you come in again.

As local citizens who want their community to go green, your group could be out in the community finding the entrepreneurs who are creating the kind of tomorrows you want.

Do not look for home runs here. That's a death strategy. Play small ball. Light a thousand candles stuff.

It's your money, shared with your friends and peers in your community, so it's unlikely you're going to publicly game the system to benefit cousin Bubba. There is a built in feedback loop that would keep our green citizens motivated to help find and create good, sustainable green entrepreneurs.

And your work continues…

You help present the case for your entrepreneur to your fellow green citizens or their green investment review committee. If approved, you have to help with mentorship and advice for that green entrepreneur while they grow their enterprise. If you can plug them into local resources like my office, all the better.

Self interest. Feedback loop 2.

The green entrepreneur succeeds. Your green fund gets their money back. Feedback loop 3.

Governments can't do this kind of personal mentorship. Banks can't easily locate and prepare efficiently organized, highly targeted new enterprises, let alone manage the supervision and collection issues associated with most small scale startups.

But you can't manage the loan coupon books the way the IRS requires either. Banks can. Easily and accurately. It's not good VS bad. It's who does what best.

I would strongly recommend people initially treat these targeted micro loan funds as though they were stock buying clubs without the stocks. If you want to formalize into a corporation or legal entity of some kind that's perfectly legitimate, but I'd like to focus on a looser model in this post. This latter route will absolutely require a lot more law and regulation than most situations need, but as the fund grows and as a more diverse group contributes, everyone will likely want a contractual way in and out of a more formalized and legally defined fund.

So, this could be your community green group. People chipping in risk money to make the vision of their green tomorrow happen. I'd suggest people put that money in as seed money and treat it as an investment in their communities, not as a way to make personal money.

This would be treated as a loan only. Requiring an ownership share would require that the receiving entrepreneur lawyer up to a degree that isn't productive at this stage.

Talk among yourselves about what the fund should have in place in advance for things like goals, returns (to cover bank fees), and potential rules to play in this sand box. Build out future conflict up front.

If it's like a simple stock buying club, the members voluntarily join for a common purpose, make their contribution to the pot, then add their expertise for trying to grow that pot. If their circumstances change or the goals of the group fractal, then contributors can take out their share of the non-invested pot at that moment and go play elsewhere.

Put the money into a segregated fund at the bank or credit union. For a modest fee, the financial institution will handle the official requirements and back-office mechanics, for which they are unbelievably well prepared to do. Your group and you do the messy, fun, non-bank entrepreneur stuff.

Here is where my day job comes into this. What's my dream tool for effective, nimble economic development?

I would have independent micro loan fund(s) available for specific purposes that were controlled by interested citizens, not governments.

If I knew the interests of those groups in advance, I can find, train and point appropriate entrepreneurs to them.

Beyond me, the entrepreneurs would get pre-loan vetting by interested, motivated individuals, fiscally legal processes, managed by committed people with some mentorship capabilities in place, and the most valuable of all resources, a network into the communities they hope to serve.

Like-minded people who want to change their communities in ways they and their friends want, should vote with their money. There is no more direct way I know to change and positively influence the future.

So, what would a targeted investor group like this look? Whatever you want it to look like.

I'd suggest for a neighborhood, it might be a group of people building up a fund of a few hundred dollars could help some local startup(s) improve their community. See what works and what doesn't.

If I think about this at a county level where I work, you'd have to pilot it to see what was manageable, but I'd think starting with $10,000 would be a reasonable start. You'd start with loans from $500 to say $2,000 to test it out, following the feedback loops described above. If it works and you can garner the contributions, move the fund to $50,000 and any good economic developer can get you dozens of startups tailored to the needs of that fund.

Nobody should expect home runs. This is small ball stuff. Day-in, day-out. One foot in front of the other. Repeat. This is how communities get built by choice not accident.

I scribbled down a quote from a guy on the radio I can't locate via online searching that went something like, 'our future is our choice, not our fate'.

We have a choice in this miserable economic environment to build the futures we want. Leave these decisions to others, and we will live in futures others choose for us.

Small, locally based, independent, member-run micro loan funds would be an unbelievably powerful tool for communities and the economic developers who serve them.

If you keep your expectations realistic and you keep the structure of the loan fund appropriately non-regulated, small groups of like-minded citizens can change the future of their communities.

Not by talking about it, but by making it happen with their money.

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