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I was inspired to dive into the idea of Community Capital after attending a half-day workshop called CoCap held in Oakland, CA on Labor Day.  Although the actual workshop left something to be desired, CoCap’s outlook, mission, and agency has led me on a brief tour of how we can better leverage the resources around us to drive sustainable ‘being’ in our urban spaces.   I do not speak to growth or scale, since the very idea of growth in light of scale may in fact be in contradiction to the essence of community capital.

What is Community Capital?

Well, we really haven’t talked about this much so a clear definition is still being fashioned, however the easy definition is that community capital embodies several other types of capital – including human, social, financial, natural, built/manufactured, and political – which all combine to form an ecosystem of sorts for resources to flow, be used, shared, discussed, and ‘be’ in a somewhat localized region (the scale of which is open for interpretation, but I’m thinking a city region however you could consider an entire metropolitan region or a series of counties or districts, or even a state if there are many states).  It’s the resources and energy that make a community thrive and regenerate.  I will not go so far to say that it is what makes things balanced in a community – I think that’s the goal – however community capital is what makes up a community or ecosystem of human life.  This concept is no doubt up for discussion and I think it needs to be, yet to begin, we need someplace and something to work with.

I’ve included these other forms of capital because it was clear from our workshop that many of us were working from very different ideas of what community capital represents.  Using a very narrow lens, community capital can be looked at as the financial resources (i.e. the money) within a neighborhood that are available for communal use – either as an investment club-type group investment or as a community bank investment (both of these communal formations will be discussed later).  We spent our time during the workshop identifying who an investor is; I think my goal here is instead to identify how it is that investors use their resources at the local level.  With this in mind, community capital then expands and encompasses much more than just money, but relationships, institutions, the natural environment (air, water, trees, land, etc.), infrastructure (roads, buildings, utilities, etc.), and governance (laws, social contracts, etc.) of which all this is within the physical jurisdiction of community.

Here, I always appreciate how poetry can offer us much more colorful imagery of what a vision of community capital could be:

“Even after all this time,

The sun never says to the earth,

You owe Me.”

Look what happens

with a love like that,

It lights the Whole Sky.”

I am in debt to Charles Eisenstein who penned Sacred Economics and introduced me (economically speaking) to the gift economy, the woes of usury (interest), and the above Hafiz poem.  Part of what has come from his research and then mixed with the idea of community capital is that markets work, but only to an extent – meaning that to get our capital back into the community and the people who live there, some non-financial market interventions are needed.  Why?  Well, first, globalization and the disconnect between what we purchase, our relationship to it, and its negative effects on all the stakeholders.  Also, markets are imperfect, like life.  Our very own Federal Reserve chairman said this in his testimony to Congress and in his own book “The Age of Turbulence” (taken from Kathryn Schulz “Being Wrong:  Adventures in the Margins of Error”):

“As Waxman pointed out, Greenspan’s economic model was based on the premise that markets could be trusted to regulate themselves – and, as a corollary, that governments should not do so instead. Since Greenspan’s model had essentially been the global model for close to twenty years, the doctrine of market self-regulation had become all but holy writ. As Waxman put it, “trust in the wisdom of the markets was infinite.”

Then the markets imploded – and, with them, the model. As Greenspan told the committee, “the whole intellectual edifice collapsed.” He had, he continued, “found a flaw in the model that I perceived is the critical functioning structure that defines how the world works.” If that wasn’t clear enough, Waxman offered a blunt translation: “you found that your view of the world, your ideology, was not right.”

It is a measure of how completely and publically Greenspan’s model had failed that he was forced to concur. “Precisely,” he replied. “That’s precisely the reason I was shocked, because I had been going for forty years or more with every considerable evidence that it was working exceptionally well.” The demise of his doctrine that the market would always protect investors had left him, he said, “in a state of shocked disbelief.”

What makes Community Capital work?

To start:  Coordination, Networks, and Trust.

With trust it is important to differentiate between different levels of trust that exist in this context.  Some people would see a third party or an institution as more trustworthy than a group of individuals who have formed an investment club in the neighborhood.  And rightly so, what information can you get from the local group?  We find that there are less historical and quantitative measures than what is offered from a local institution, community bank, etc. but more in qualitative measures – which makes sense since often times it is the relationships that matter most when local groups choose to invest in a business.  And now with technology, the situation and system is turned upside down.  We can now access or at least request the historic and quantitative information rather easily from the neighborhood investment club.  However, a long track record and history still remain issues for community investments – Where will this information sit? Is there a centralized index to go to? Will we then aggregate communities to capture this data?

This brings me to another aspect within community capital, namely that of cooperative saving groups.  As someone who has worked overseas in communities where government services and modern society barely reach, the idea of local groups forming to build up a capital base has been a popular idea for a number of years now and possibly a source of guidance as we build out community capital here in the US.  In Uganda in particular, community members form what are known as SACCO’s or Savings and Credit Cooperative Organizations for the chance to get a loan to allocate to their own personal business or other consumptive behavior such as health care or education.  Many (but not all) of these groups, unfortunately, are plagued by mismanagement, corruption, and power struggles.  This is more common than not.  As financial providers, many SACCO’s face a series of problems which taints their reputation such as:

  • opaque governance and lack of simple and transparent rules;
  • no separation of ownership and management; some chairmen consider themselves owners of the institution;
  • lack of member involvement in the affairs of the institution which regularly gives the Board, management, and their friends the ability to take loans without seeing to their repayment duties;
  • unnecessarily complex accounting systems, often only half understood and half followed;
  • infrequent and incomplete audits;
  • members who are generally net borrowers seeking to minimize their interest rate on loans – resulting in inadequate incentives to save and insufficient revenues to run the organization;
  • lending out both share capital and savings, leading to frequent liquidity management problems;
  • poorly enforced lending policies and poor systems to track and manage arrears;
  • large portfolios in arrears, with overdue loan repayments stretching back into the distant past;
  • considerable difficulty realizing collateral – as community-based, community owned and managed organizations, the officers responsible are reluctant to seize and sell the assets from their relatives or neighbors

(see “Microfinance in Uganda” p.38-40 report published by the Austrian Department of Development Cooperation in Dec 2001).

Hopefully this allows us to question how we can use this information to better advise and guide us as we look toward building responsible community capital systems.

What are the tools for building Community Capital? 

Buying Local – well, upon closer look this is not always a good guide to creating or serving community capital.  See Maggie Anderson’s “One Black Year” where she chronicles her every transaction to see how much of the money she spends can go to black owned businesses in the community and how much of that money stays local.  According to her research, of every $100 spent on black owned local businesses, only $5 remains in the community.  Why?  Well, many of the business owners are absentee landlords and owners who live in distant and foreign communities.  The goal here then is to invest and put your money into businesses that have more fully transparent supply chains so that you know what impact your dollar is having as it cycles through the system.  TS Designs in North Carolina is a solid example of how a global commodity like cotton was revived in the US even with labor costs being high in comparison to global labor prices.

Time Banking (CES or LETS) – this is an addition to the original list of tools, as I am just getting involved in one myself.  Basically, this is another form of currency measured by volunteer time given (or received) and yet this time does not have a fixed price associated with it – it simply values an hour of time as a unit of currency, for the most part flattening our current system of valuation.  Here is a sample list of offers and requests by a local DC community time bank – in essence connecting people right here in the community with the very resources they need, another form of community exchange systems or CES.  Fundamentally, the system of time banking adheres to some basic principles namely that 1) we are all valuable (assets), 2) we can reshape what work means and is, 3) we can build reciprocity through our acts, not just our wallets, 4) we need each other (social networks), and 5) we have to understand (respect) that we matter to each other.  *these are specific to one view by Edgar Cahn’s No More Throw Away People

Basic Fundraising – going to your family, friends, and professional contacts is always a good place to begin if not for the outcome that you will pitch your idea a number of times to people who are somewhat sensitive to you and will offer you feedback as you progress up the ‘capital raising chain’.  P. Burke Keegan also wrote in her book a very local form of fundraising for non-profits focused on building community partnerships.  There the bake sale and the capital campaign drive are discussed.

Community Owned Banks – these institutions are different from CDFI’s in that they are depository institutions, capped at $1 billion assets, which are locally owned and operated.  Community Owned Banks focus on the needs of local families and business and at the same time lending decisions are made understanding these needs (so they offer credit/debt).  However, as we have seen in the most recent financial crisis and with the most recent recession that even with the excess cash in the market (bonds purchased by the Fed) that these institutions still operate under similar standards as that of large banks.  They operate under similar lending criteria (collateralizing, cash flow, loan loss rates, returns on investment, debt/equity levels, etc.) which keep them tied to hoarding capital in much the same way large banks are doing now.

Community Development Financial Institutions – a CDFI is a financial institution which provides credit and financial services to underserved (unconventional financial) markets and populations.  This is one of the more successful forms of capital for community development that we’ve seen work in our current financial system boasting loan loss rates under 2% and profits in otherwise undervalued markets.  These institutions work like banks, financing based on alternative models of valuation for minorities, women, and local small businesses (or Impact Investing!).  Again, even with these institutions, we are still seeing capital sit in our financial system since CDFI’s function under similar operating rules and standards as other banks.

SEC’s Investment Clubs – similar to a SACCO, these clubs can be informal, typically consist of members who know each other and have aligned goals of investing together, and which investments are typically for a local business or non-profit that honors the ‘gentlemen’s’ agreement – as opposed to the ‘investment contract’.  These clubs do not have to register with the SEC unless 1) the member’s interests are in actual securities or 2) if the investment club turns into an actual investment company.  A quick rule of thumb is if you are looking to make a profit off others work or if you have any passive members in the group, then you are likely moving towards a security-like transaction or investment contract in which case you would have to register with the SEC.  In addition, to steer clear of looking like an investment company, your club cannot make a public offering of your investments and must not have more than 100 members.

Private Offerings – This is your traditional form of raising capital and typically has its roots in VC firms or other private equity companies.  It’s also the most difficult of all forms of raising capital listed here.  These investors will want to know that your business idea can meet their financial expectations first and that you can be the one to deliver this to them.  Issues of society, environment, community, or governance are typically not measured like financial capital is.

Crowdfunding – I’ll leave this one to Tanya Prive at Forbes to inform you here; but think Kickstarter or Kiva.  These organizations offer a platform for you to reach your networks (and others) to raise capital and each has its own unique spin:  Kiva is for international loans (debt) in developing countries, RockthePost is (equity) specifically for accredited investors, and Kickstarter is about birthing creative projects (equity).  An important distinction between these groups is whether they issue a security (an “I owe you”) or if they just offer you the chance to buy into an idea via a donation.  And, older forms of crowdfunding are emerging in an organized way with DPO’s.

Direct Public Offerings – DPO’s are also known as Investment Crowdfunding and this is a generic term that includes any offer and sale of an investment opportunity to the public where the entity that is raising the funds is offering the investment directly, without a middleman like an investment bank.  See Cutting Edge Capital who facilitates these offerings and has a platform to do so.

Bambi Francisco Roizen offers a good +/- analysis of DPO’s using the People’s Community Market out in Oakland, CA.  As she explains it, the upsides are:

  • the investor pool is broad – 2000 total investors, of which 500 are un-accredited; compare this to a private round with unaccredited investors capped at 35
  • the firm can raise in excess of $1 million – equity-based crowdfunding under the JOBS Act allows a company to raise up to $1M during a 12-month period, however, with a DPO, a company may raise much more; since the limit is on a “per-permit” basis, you only state the minimum amount you propose to raise
  • there is reasonable costs – it is $25,000 per state for the setup including the permit, legal paperwork,  administrative system, shareholder paperwork if performed by Cutting Edge Capital; *the unknown and bigger risk is preparing an annual shareholder document that keeps shareholders abreast of the company’s financials and plans
  • customers become shareholders and evangelists – customers share in the upside (and downside) of building you up and build the relationships with owners that is intimate
  • ability to promote – DPO’s are allowed to be advertised using non-solicited messages and you can buy shares online

And the downsides of DPO’s are:

  • there are tons of shareholders – likely due to the lower average raise and the fact that many shareholders could be unaccredited
  • there is a potential limit to how much raised – the limit is on a “per-permit” basis, approved by the state
  • that they are restricted to certain states – and approvals must be done on a per state basis
  • they are unable to raise money from VCs down the road – due to a capitalization table with hundreds of shareholders; yet Ben&Jerry’s and Annie’s did go public

I’ll add a fifth (and sixth) reason for the downsidehistorical records and a central location for information including an index not just to track information but to distribute it.  And a sixth reason to the upside would be that capital is raised from local investors who put money into a company that then circulates it back into the local community – thereby not just living by the adage of ‘buying local’ but also keeping capital local, i.e. community capital.

In the NYTimes’ blog You’re the BossWhy aren’t Direct Public Offerings more common?”, Rachel Maxwell from Seattle noted this:

I’m working on a startup that is involved with transforming social capital into financial capital and we find ourselves recommending DPOs to many of the local businesses we work with. I think the three primary things holding these businesses back from DPO are:  1) Lack of experienced (with DPOs) local legal assistance, 2) Lack of experience and knowledge of how to market their DPO to lots of investors, and 3) No well-trodden path to liquidity or a secondary market for those investors in the long run.

A history exists, but maybe not a centralized documented one.   And maybe this makes sense since the SEC does not require this so the market for this space has not been tapped into and not enough people make money along the ‘community capital-raising chain’.  The question is whether a first mover will take that risk now that DPO’s are getting some more media coverage along with the impact investment conversations, see here and here.

Collaborative Networks, Partnerships, and Relationships – if you were to go to Silicon Valley or any business school in America, you’d likely learn that partnerships are frowned upon in entrepreneurship.  The guru of entrepreneurship and fundraising for tech, Guy Kawasaki, vehemently despises partnerships for new businesses as you can see here in one of his ‘top 10’ presentations (go to minute 15:30).  His reasoning is very ‘financial capital’ focused and not holistic in scope.  In community capital, this is how we make the connections and draw on our rich relationships to ultimately allow our investors to participate by writing a check (really, facilitating a transfer) or by making a commitment or by asking a penetrating question to enhance the due diligence process.  My recommendation having studied business but also just thinking about it for a second:  don’t listen to Guy on this one.  The point here is that community groups, spaces of interaction, and your relationships are where social capital is built.

I hope this offers a preview to what we still need to discuss and learn as the conversation moves forward.  It would be GREAT to hear your ideas, comments, additions, beliefs, etc. on the subject of Community Capital.

Burning Man - Nevada 2013

8 thoughts on “A Primer on Community Capital

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  3. Create a Community Investment Fund: http://bit.ly/1iw5PLW

    “Here’s the stunning bottom line: Even though roughly half the jobs and the output in the economy comes from local small business, almost all our investment dollars go into big corporations on Wall Street.

    The overall wealth of the country is over $150 trillion. Some of this wealth is held as land, buildings, and machinery, and considered “illiquid” – not very easy to convert into dollars. The most liquid assets held by household and nonprofits are stocks, bonds, mutual funds, pension funds, and life insurance funds, and at the end of 2010 these totaled about $30 trillion.

    Not even 1% of these savings touches local small business.

    Were local businesses uncompetitive and unprofitable, and obsolete for the US economy, this gap would be understandable. But local businesses are highly competitive (their share of jobs in the US is growing), and at least as profitable as larger corporations (sole proprietorships are three times as profitable as C-corporations). Our investment gap actually represents a huge capital market failure. It means that Americans are systematically overinvesting in Wall Street and underinvesting in Main Street. Were this $30 trillion allocated efficiently, at least $15 trillion would shift into locally owned small businesses.”

    *Creating a Community Investment Fund by Michael H. Shuman

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  5. How is the new JOBS Act helping us? http://bit.ly/17eW4Qt

    “Investment Limitation – The aggregate amount sold to any investor by an issuer cannot exceed:

    (i) if both annual income and net worth are less than $100,000, the greater of $2,000 or 5 percent of the annual income or net worth of such investor; and

    (ii) if either annual income or net worth exceeds $100,000, 10 percent of the annual income or net worth of such investor, not to exceed a maximum aggregate amount sold of $100,000”

    *The new crowdfunding law limits our ability to allocate capital as wee see fit by lowering our overall threshold of available capital for enterprise! Have a look at the entire summary yourself at the link above; it appears the system continues to discriminate against unaccredited investors and further protects those owners of capital already in place.

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  6. Another way to create community capital with existing community owned banks is through collaborative partnership. Equal Exchange did so by creating an entirely company-centric CD (certificate of deposit) as Daniel Fireside explains in 2011:

    “Our latest innovation has been a partnership with Wainwright Bank (soon to become Eastern Bank) —a respected and progressive institution in its own right—to create a unique, branded certificate of deposit. With a conventional CD, you have no idea what the bank is doing with your money. With the Equal Exchange CD, Wainwright pools all the funds and makes up to 90% of it available to us as a line of credit at a below market interest rate. The Equal Exchange CD pays the same rate as the bank’s standard CD, yet creates a new socially responsible financial product that supports the operation of a leading Fair Trade, organic business. Wainwright Bank is FDIC insured, so if they were to fold, depositors would be covered up to the legal limit. However, since the bank is using the deposits essentially as collateral for the line of credit, depositors risk losing their money if Equal Exchange were to default on the loan. Yet a growing number of depositors seem eager to take on this additional risk in exchange for the social return.”

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