When we started thinking about an AFI-like venture in mid-2014 we wanted it to be a different - and hopefully better - experience for both companies raising money and for individual investors looking to place capital. After over a year in actual practice, we've doubled down on some of those tactics, and discovered a few new ones...
Click the "Read More" link just a little lower and to the right for the verbose version of each of those bullets, and a couple more...
AFI isn't a bank, or a hedge fund, or a private equity fund, or a community development finance organization, or a venture capital firm, or a crowdfunding site. Structurally, we more resemble an “angel network”, where individual investors assist each other in due diligence then make independent decisions on whether - and how much - to invest. We're a matchmaker, a facilitator, a consultancy that educates entrepreneurs on the fundraising process and the pros and cons of various types of capital and educates investors on transitioning at least some of their portfolios from Wall Street to private investment in good, clean, fair, local companies. In that sense we're like a Slow Money group, with maybe a little more process infrastructure. And we do this full time.
While AFI is a for-profit company, that’s for simplicity and flexibility. We reject the idea that the purpose of business is solely to “increase shareholder value” while other stakeholders, the environment included, be damned. Philosophically, we're, for the most part, aligned with the principles of both the Slow Food and the Slow Money movements. Our intent is to improve the world first, and eventually to be financially self-supporting. Luckily it doesn’t cost much (in dollars that is, time is another matter…) to run this type of organization, and the partners are happy to fund it during start-up phase.
We are only interested in firms with sustainability and triple-bottom-line thinking baked into their DNA; and only in the food business (which is actually pretty broad, encompassing producers like farmers and ranchers to processors to consumer packaged goods companies to distributors, retailers, and restaurants, and even includes waste & recycling and potentially even water); and only in firms in the Central Texas region. And, we're focused just on companies that are up-and-running, with products and customers and revenues and teams, but who could benefit by investment. We'll leave the concept-stage deals to someone else.
"Bootstrap Plus" Company Strategy: Fast Growth, Quick Exit Not Required
We were amazed in 2015 the number of entrepreneurs that came to us wanting to raise $500k or $1M or $1.5M of "equity", or maybe with a "convertible note". When asked why equity, many responded with something like "because all the other kids are doing it." We tried to talk most of them out of it.
First, there's the simple fact of Convertible Notes and SEE/Series A equity: for the investors to get their money back, the company has to "exit". Exits are usually a company sale, rarely an IPO. Right from the beginning, investors in equity deals are typically above all concerned with the company doing things that puts the company on the path to a profitable sale. These things may, but may not, be aligned with a triple-bottom-line company's raison de etre, the entrepreneurs' values (or economics, but that's another matter), or societal needs. And certainly, if the strategy is to grow as fast as possible, losing money and burning cash all along the way, that requires the Executive Team to be in perpetual fund-raising mode.
Next, it is generally accepted in the VC world that one must invest in concordance with the Power Law (see "12 Things I Learned from Marc Andreessen"). The Power Law has many implications, but one of the most significant is the acceptance - or even the intent - of VC firms to expect that almost all the returns in their fund will come from one or two "unicorns", who will make so much money they'll cover for all the losses on all the rest of the companies in the portfolio. That translates to a) trying to sniff out which firms might be able to "scale" (i.e. grow exponentially with little incremental variable cost) and b) pushing, via the control and governance provisions built into the fund raising agreements, presence on the company's Board, and informally, the firm to adopt high-risk, high-potential-return, "home run" strategies, knowing full well that not just many, but most firms will fail, joining the ranks of the "walking wounded".
We just don't see this as a good approach for most impact companies, or for many food companies. There are plenty of great firms that a) may rapidly grow volume but, due to structural things like having to actually plant the seeds that grow the veggies, or having to actually put the salsa in the bottle, can never "scale" and b) there are plenty of opportunities to build solid, respectable, profitable businesses that aren't home runs but rather sensible collections of singles and doubles, with an occasional triple thrown in for excitement.
There's another way. We call it “Bootstrap Plus”. It is pretty simple: Set a customer or operational or impact milestone, raise just enough cash to both achieve that milestone, run sensible business operations taking reasonable risks, and become profitable and cash-positive, enabling the entrepreneur to be free to either repeat or take profits off the table or consciously decide on an equity raise.
Now, all that said, there are situations where equity in an impact food business is exactly the right move, particularly if a sizable market opportunity must be addressed quickly. And, the space has seen many high profile M&A deals, providing nice wealth building to the entrepreneurs and substantial upside to the investors. A company that has dialed in the perfect amount of debt may not have room for more debt, but market opportunities require more capital. We're not against equity flat out, just against its position as the de facto vehicle of choice.
Optimized Capital Stack
Every company is different, at a different stage, in need of different resources, advice and capital. We try to understand the fundamental nature of the business, the goals of the entrepreneur, and the appetite of potential investors when educating companies on their options. For many food businesses - particularly those without plans for rapid “hockey stick” growth or quick exit - convertible notes and equity are just not appropriate, while loans and royalty agreements are.
Many investment organizations offer just one or two investment vehicles to both their investors and their company clients: Foundations and the government do grants; Banks, equipment financing companies, and CDFI's do loans; specialty finance firms do royalty-based financing; Angels & VC do Convertible Notes and SEED/Series A.
We have assisted companies get grant funding (with it’s 0% cost of capital); have worked through combinations of bank lines of credit, equipment financing, and investor-supplied claims on cash flow. We know mortgage-backed financing, and have done royalty deals, collateralized loans, and even simple signature loans. We aren’t like the guy with the hammer, seeing all the world as a nail, rather we try to help each company craft the lowest cost capital stack that supports their goals - and provides our investors with market returns.
Market Returns from Impact Investments
Many of our investors are attempting to transition their investment portfolios to be more heavily weighted with impact investments in both the public and private markets. We do not believe that investors should be asked to take a haircut to invest in socially responsible ventures. If anything, social impact firms should provide better returns than nasty polluters, poison peddlers, empty calorie purveyors of brand and plastic packaging, and greed-heads intent only on greater and greater wealth for the few. We have much work to do here.
Small Deal Size
It is dogma in the investing and lending business that it is as much work to prepare a small deal as it is a large one, so one “can’t” do small deals because there is no money to be made. We embrace small deals. We love the micro-entrepreneur, needing just a few thousand dollars to build capacity to meet existing demand.
No Investor Participation Fees
Unlike most Angel groups, including national chains like Investors' Circle, we don't charge investors fees to belong to the group. Partially this is practical... we need to build our investor base! And partly it is philosophical... we ought to be able to figure out how to support our activities without taking up-front investor fees. We also don't have minimum investment requirements. We do require all investors to be accredited at the time of deal close.
All (Qualified) Companies Welcome
Many investors in small or early stage businesses seem to take a “contest” approach: either they actually run a contest, with one or a couple “winners” and many losers, or they use a winnowing approach. We try to help each company that meets our overall qualification criteria either through our process or with referrals to members of our Expert Network or others who can help. Admittedly, we have much work to become better at this goal.
We don’t run investment cycles, with set deadlines. Companies may enter our process whenever they like, and proceed at their own pace.
Pay What You Like
So far, we haven’t charged anyone anything for any of our services. In 2016 we may transition to four types of AFI revenue: Pay What You Like Consulting, Origination Fees on Debt Financing, Management Fees and/or Carry on larger deals for which we've created a Special Purpose Vehicle (SPV) to aggregate investors, and Sponsorships. Pay What You Like Consulting means that after the work of getting a firm ready for an equity transaction, but before that transaction closes, we will ask firms to evaluate how much value they have received from our assistance, and to pay us some fraction of that, including zero. We do not charge or expect “success fees” based on the closing of securities transactions.
We believe there are many paths up the mountain. We explicitly refuse to see ourselves in competition with - and we explicitly aim to collaborate with - other members of the food, finance, and social good ecosystems. We hope to carve a niche complementary to existing angel groups, venture capital funds, crowdfunding sites, incubators, accelerators, economic development offices, universities and small business development centers, NGO’s, CDFI’s, foundations, and activist individuals. Let’s all experiment, share what works, resist the urge to criticize, and pull together for the common aim of building a stronger local sustainable food system, greater access to nutrition for the hungry, resources and assistance to entrepreneurs, and efficient, transparent flows of capital and return.
News from AFI; Links to stories on business-for-good, private-company investing, fundraising, & sustainable food.