Microlending has been used to fight poverty in developing countries for years. Several hundred dollars can help a small family business become profitable and bustling entrepreneurs have escaped poverty through these programs. In 2006, the Nobel Peace Prize was awarded to Mohammad Yunus, a pioneer in the field. He has been widely quoted as saying that his grandchildren will have learn about poverty in museums because microlending has the potential to eliminate poverty on the streets.
This idea is now being applied in the private equity field. A former venture capitalist, Woody Tasch, founded Slow Money to bring a similar vision to the U.S. Slow Money is a nonprofit network of angel investors, venture capitalists, foundations, and family offices that has funded 200 early-stage companies with about $130 million since 1992
Slow Money’s focus is to rebuild sustainable systems to grow and distribute food. About 2,000 members have contributed amounts ranging from $25 to $85,000 to the Slow Money Alliance, which then loans the money to companies in the local economies of poor, emerging communities. Loans have been for as little as $40,000 to a California producer of pasture-raised chickens and to the Santa Fe Alliance, which helps link farmers in New Mexico with local restaurants. The loan portfolio also includes a loan of more than $300,000 to four small food enterprises in Washington State.
One recent deal helped fund the Fresh & Wyld Farmhouse Inn in Colorado. The business faced a balloon payment of more than $500,000 on a mortgage, and traditional financing would have required interest-only monthly payments of more than $4,000. The payments would have crippled the small business. Slow Money arranged for 40 local investors, all of whom were new to the private equity business, to invest at least $2,500 each.
State securities laws prevented advertising the securities, so the business announced the venture capital offering to potential angel investors on their email list. The offering by Fresh & Wyld Farmhouse Inn was oversubscribed and the small business now has a cash reserve. The investors get repaid in six years and earn interest of 6% in goods in services or a 3% cash return on their investment. Some with a $2,500 investment will choose to enjoy a gourmet dinner at the Inn as their annual return on investment.
Microlending is moving from developing economies to fund private equity deals in small businesses in the world’s largest economy. Capital is provided as loans to small businesses, and borrowers pay below market interest rates even though they carry greater than average risk. Local communities can help businesses grow through this simple venture capital idea.