Business Plan Domonique Juleon Emily Kanter Dorothy Mitchell Colby Ochsner Anna Richter Sash Sunday
Acknowledgements Thank you to the following people that supported us along the way and made this business plan possible: Bert Loosmore, Michael Shuman, Amy Pearl, Jenny Kassan, Shaula Massena, Travis Williams, Keith Antonsen, Caleb Dean and Parker Oschner. Also thanks to OlyKraut in Olympia, WA for supplying us with sufficent spicy garlic chi to get the creative juices flowing. ~ The Dirt Road Capital Team
Table of Contents I. The Team...............................................................pg. 4 II. The Model..............................................................pg. 6 III. The Data.............................................................pg. 11 IV. External Environment.........................................pg. 14 V. Implementation Roadmap...................................pg. 19 VI. Risk Analysis.......................................................pg. 20 Appendix A (The Dashboard) Appendix B (The Financials) Appendix C (The Milestones)
I. The Team
The team at Dirt Road Capital is planting the seeds for a new system of place-based financing and investing in the Pacific Northwest food system. We see access to affordable capital as a critical leverage point in allowing food producers to thrive. Our role is to facilitate opportunities for food business owners to find financing by providing a mechanism for members of the community to invest directly in their businesses. Unlike more traditional methods of investing, Dirt Road Capital’s offerings are rooted in the community, forged through personal connections, and driven by a shared desire to grow a healthy food system. Our team includes active farmers, food processors, and food systems builders. From seed to retail, we have first-hand experience of what it takes to make it as a small business owner turning food into a livelihood. In our day-to-day operations, we will draw upon core competencies in community engagement, marketing, financial analysis, program evaluation, and organizational leadership that we bring from previous careers. Moreover, with decades of combined experience working in the food community in the Pacific Northwest, we have connections to the people and organizations that will help us identify the entrepreneurs and investors we need to make our business a success. Our knowledge of the non-profit, government, academic and for-profit spheres will help us engage a variety of stakeholders who have a part to play in creating a strong regional food system. Our advisors and mentors are prominent movers and shakers in the local investing and food systems communities. Michael Shuman, nationally known local investing activist with Cutting Edge Capital and Mission
4
Markets and author of Local Dollars, Local Sense: How to Move Your Money from Wall Street to Main Street and Achieve Real Prosperity is supporting our efforts around local investment mechanisms. Jenny Kassan, CEO of Cutting Edge Capital, is a resource for all things legal and provides a wealth of information about the market landscape. Other mentors include Amy Pearl of Springboard Innovation and ChangeXChange Northwest, a local investing and trading platform; Shaula Massena - impact investing expert and member of Investor’s Circle; and Bert Loosmore - BGI faculty member, entrepreneur, and Slow Money Northwest management committee member. With their guidance, we have access to expert perspectives on multiple facets of our value proposition. Our approach to our work is grounded in the systems thinking perspective we have learned through our MBA coursework in Sustainable Systems at the Bainbridge Graduate Institute. The heart of our businesses is our commitment to reforging a food system based on strong community connections. By providing community members with tools to invest in their food-producing neighbors, we aim to transform how entrepreneurs raise capital while shifting mental models of what it means to make an investment. Dirt Road Capital helps people to truly “put their money where their mouth is.” Grounded in our knowledge of the Northwest food system and with an abiding passion for seeing food producers live their right livelihoods, Dirt Road Capital is ready to blaze a trail between food and finance.
Team Members Anna Richter, Chief Managing Lead Dedicated to helping the good causes of the world and to creating resilient food systems, Anna’s curiosity and drive have led her to Dirt Road Capital, where she contributes to the strategy and community of regional farms and investors. She has experience getting her hands dirty at a small farm start-up, Old Portland Farm. Anna’s leadership experience was honed through her work as the Director of the Nonprofit Technology Network, where she educated nonprofits in how to use technology to further their missions and causes. Prior to her work in the nonprofit technology community, Anna lived and worked for three years as a Peace Corps Volunteer in Honduras. She used her engineering skills to design gravity-fed water systems and honed her tech-for-good skills as the director of a local nonprofit, Guaruma, which focuses on environmental education through computer and photography training. Anna graduated from Michigan State University with a BS in Applied Engineering Science. She also serves on the board of Focus the Nation, a nonprofit working to create the next generation of energy leaders. Sash Sunday, Financing and Accounting Lead Sash Sunday studied food and sustainable agriculture at The Evergreen State College. She is a founding owner of OlyKraut LLC, a raw sauerkraut company in the South Puget Sound whose mission is to grow the regional food system through farm-processor
partnerships and establish raw, fermented foods as a staple in the American diet. Sash is the vice-chair of the Thurston Food System Council and a member of small food and ag financing organization in the Pacific Northwest. She has led workshops and spoken on topics ranging from sauerkraut making, to regional food distribution channels, to finance management in women-owned businesses. The challenges of the small food business owner are close to her heart and building strong, regional food systems is her bailiwick. Emily Kanter, Business Development and Marketing Lead Emily has a background in sustainable food systems strategy, non-profit management, community engagement, marketing and website design. She was formerly the Assistant Director at Urban Gleaners, a non-profit food recovery organization in Portland, OR from 2011-2013. Emily moved to Portland in 2010 from Boston, MA, where she was Program Director at the Sustainable Business Network of Greater Massachusetts. She also worked as the Outreach Coordinator for the Boston Local Food Festival, an event that attracted over 40,000 people in its first year. Prior to working for SBN, Emily lived abroad in the bustling metropolises of Buenos Aires, Argentina and Taipei, Taiwan, teaching English immersion classes to both
children and adults. In both countries she studied local food cultures and witnessed firsthand the detrimental effects of western globalization on native diets. Emily has a deep understanding of the local and organic food industry - her family has owned and operated a natural foods grocery and health care business for over 38 years. Emily is passionate about creating strong local food systems that benefit the entire community. Dorothy Mitchell, Operations and Management Lead Dorothy brings to Dirt Road capital a combination of community connections and professional experience relevant to the work of creating investment opportunities tieing community members to local food producers. Through her former work with an agricultural gleaning program in Whatcom County, WA, she has formed many relationships with farmers in Northwest Washington and the organizations that support them. Her time as a program coordinator at the Oregon Food Bank honed her program evaluation skills and facilitated additional connections to important players in the Northwest food system. She also brings experience analyzing revenue-generating projects and creating dashboards for the City of Portland’s Transportation Bureau. Dorothy’s passion for connecting people in the food system and helping food producers operate more successful businesses drives her work with Dirt Road Capital. With her analytical nature and eye for detail, Dorothy helps DRC’s food producer clients make the most of current SEC securities exemptions while staying on top of emerging opportunities in the
dynamic alternative financing arena. Domonique Juleon, Sales and Customer Service Lead Domonique is passionate about empowering individuals through food. When people are connected to their food, they become connected to their own personal health, their community, and their environment. Domonique received her undergraduate degree in Economics from the University of Washington and for the last 12 years has worked with a variety of organizations in bookkeeping, finance, marketing, and general administration. Domonique has also worked with urban farmers and communities to find ways to bring food back into the cities. She brings both broad business experience and a passion for food and community to the DRC Team. Colby Ochsner, Sales and Information Technology Lead As a lifelong farmer and rancher in rural Wyoming, Colby knows what it takes to manage a farm and understands small rural communities. He has new venture experience as a founder of Amped Strategies, a market research firm. Colby has also worked as a construction project estimator and knows firsthand how to create project takeoffs and analyze cost drivers. This experience complements his deep passion for building local food systems and for rural community development.
5
II. The Model Vision and Purpose
Our Business Model
We believe that the presence of a local sustainable food system in every community is a key element in creating positive social, economic and environmental conditions for all people, and that local investing is a key mechanism in strengthening and growing these food systems. Dirt Road Capital aims to support local food investors as they determine the best places to invest their wealth, and to support local food businesses as they seek affordable capital.
Mission Our mission is to grow sustainable and healthy regional food systems by connecting producers and processors to affordable community capital.
Our Values 1. We support sustainable, locally-based food systems that nourish the whole community. 2. We believe in access to affordable, locally-grown food for all people, and fair wages for all farmers and food workers. 3. We take a systems-based approach to solving complex challenges. 4. We believe that place-based investing is an essential tool in creating strong local living economies. 5. We are practical dreamers. We use finance as a tool to fix some of the deepest problems within the food system. 6. We embrace fun, laughter and celebration as essential elements in a successful business relationship. Our team works and plays together. Our
6
Value Proposition Dirt Road Capital combines expertise in sustainable, local food systems with strong business acumen to provide investors and food businesses with a viable alternative to traditional investing. Our comprehensive, tailored financing consulting and Direct Public Offering design services help food businesses obtain much-needed capital to grow their operations. Our simple, easy-to-use investment mechanisms and due diligence reports allow conscious investors to feel confident putting patient, purpose-driven capital directly into their local food system and realize positive returns.
We will also begin the multi-stage process of building our website for our various stakeholder bases. Beyond the website, non-personnel expenses will be mainly limited to travel and phone costs.
Target Markets
Business Recruitment Stage :
Our business engages two type of clients: community investors and local food entrepreneurs. Accredited or unaccredited, our investor clientele consists of people who care about their communities, believe in a strong food system, and want their investments to reflect their values. The left column shows the channels through which we will seek out these investors. On the food business side, we will work with entrepreneurs who are already engaged in considering the next step for their businesses. Some of these businesses may turn to us because they have had difficulty getting the financing they need through more traditional mechanisms. The right-hand column describes the channels we will use to reach out to entrepreneurs. Our greatest focus will be on in-person presentations to individuals already pursuing business planning through classes, incubators, or other mechanisms.
Marketing Plan Our marketing plan will be carried out in multiple steps in order to support each phase of the business plan.
Launch Period: During Phase 1 of the Business plan, marketing efforts will consist of a staff person calling and meeting in person with Local Investing Opportunities Network (LION) and Slow Money members currently pursuing financing projects. The original LION group is based in Port Townsend, WA; there are at least 4 other LIONs in Washington and one in Portland, OR, as well as Slow Money chapters in Washington State and the Willamette Valley region in Oregon. The goal at this point in time is to establish our reputation by finding existing projects that could benefit from further due diligence reporting. Marketing will focus on outreach about DRC services; specifically, determining if our due diligence services might be of use to current active investors considering local projects.
Once we have produced and sold at least 3 due diligence reports to investors, we will have more credibility to begin engaging with food businesses that we believe would be strong candidates for an assessment of financing options, possibly leading to a next step of helping the business launch a Direct Public Offering. DRC has decided to specialize in creating DPOs because, although there are many types of financing that businesses could pursue, we believe that we can build a strong reputation by focusing on one specific option. Given the relative novelty of DPOs, we can create a niche for ourselves by offering this service. DPOs are flexible (they can be used to create equity or debt), and local investing experts believe that they will play a key role in rejuvenating place-based investing; for these reasons we see them as a tool worth pursuing. In Phase 2, we will begin working with businesses to go through the paperwork and legal arrangements needed to launch the offering. Our goal is to have 20 DPOs ready to go before unveiling our online platform for investors in the next stage (see below). Our marketing efforts will continue to focus on in-person relationship building. We will send a staff member to ag-related conferences and events in the Pacific Northwest to participate and/or speak, as well as to farming and food business training and incubation programs as a guest speaker. These training programs include WSU’s Cultivating Success program,
7
Slow Money Northwest’s business incubator program, Viva Farms’ farmer incubator program, and BGI-associated business incubators such as Fledge and Kick. This staff member might also conduct basic outreach to vendors at farmers markets. Communication with Slow Money members, LIONs, and other stakeholder organizations such as the Northwest Ag Business Council will also continue, including attending relevant meetings and conferences.
awareness of our new local investment opportunities. Our website will gain new content, most importantly the web tool that allows for investments to take place. Social media outreach, especially for potential investors, will become an important part of our marketing toolkit. In addition, we will set a budget for search engine optimization (SEO) so that searches related to local investing in the Northwest point people in our direction.
Our web presence will become more robust at this stage in order to provide a clear, consistent message to the business owners with whom we are starting to build relationships. The site will describe our services and provide information to help businesses determine whether they would be a good fit for what we have to offer. This will also be the stage at which we begin to pitch stories to the news media to raise awareness of our efforts.
In-person outreach will continue to be crucial, including attendance at relevant conferences and outreach to “locavores” at farmers markets. We will expand our awareness-raising to include announcements on popular food and farming listservs, while continuing to pitch stories to the news media. We will begin to advertise in relevant location-based periodicals, such as the Edible magazines, Sunset, and Grow Northwest. We will also work with retailers and restaurants that currently purchase products from the food businesses seeking financing, with the goal of finding creative ways for these partners to advertise the investment opportunities to their customers.
Expenses will grow to include the cost of attending relevant conferences and their related travel, as well as the ongoing web development expenses.
Investor Recruitment Stage: This stage of marketing aligns with the third phase of our business plan, in which we launch an online tool for unaccredited and accredited investors alike to invest in local food-based businesses. The outreach to potential business clients described above will continue during this stage. In addition, we will ramp up marketing efforts to engage the general public and spread
8
Online tools such as Food Hub could serve as a “rolodex” of existing food businesses for us to contact with information about our services. Expenses will ramp up again during this phase. Website development costs will continue, and we may engage an intern to take on some social media and other marketing duties. Conference and travel expenses will also continue. New expenses will include the development and printing of marketing materials, the cost of paying for advertising in the print media, and SEO expenses.
Key Resources and Activities
Summary of Dashboard Indicators
Without buy-in from both sides, our model cannot work.
Dirt Road Capital’s dashboard is crucial to achieving our purpose of growing a sustainable and healthy regional food system by connecting producers and processors to affordable community capital.
The dashboard is not meant to be exhaustive of all the metrics DRC should and will monitor, but rather to provide a snapshot that management and community stakeholders can view to assess progress toward achieving DRC’s purpose.
The DRC Purpose Dashboard is divided into internal indicators and external indicators. The internal indicators are meant to help management quickly see if we are meeting our financial, social, and environmental goals in the quarterly operations of the business. The external indicators are divided into two categories, one for producers/processors and one for investors. By monitoring indicators that reflect both perspectives, we can assess the impact of our services on the financial and environmental health of the food system and its stakeholders, as well as tracking the degree to which community connections are being forged.
For more information please see Appendix A.
9
Dashboard Indicators Matrix
Producers and Processors (PP)
Investors
DRC Office Procedures & Culture
Financial
10
Environmental
Social
Goal: Financially sustainable business model
Goal: "Do no environmental harm" in our office footprint
Goal: Happy, innovative, and productive owners and employees
Metrics: Net Income, Net Profit Margin, Working Capital
Metrics: GHG from operations Metrics: Overall Happiness rating, participation in office sponsored events
Goal: Twenty percent of total investment in community projects, no default on securities, measured community returns
Goal: Regional investment dollars that promote and protect regional food systems.
Goal: Investors that feel connected to their local and regional communities
Metrics: Percentage of direct community investment in relation to overall investments, ROI to investors as an average of all investments
Metrics: Dollar amount invested in community‐based businesses per year, total value of community investment.
Metrics: Number of investors that attend community events, investors self‐ reported level of community connection.
Goal: Provide access to Goal: Increase the amount of Goal: Increase the connection community‐based financial capital sustainability‐related between farmers/processors and sustain community businesses farming/producer practices. and their communities. Protect environmental assets. Metrics: Number of projects successfully funded as a percentage of projects in sales pipeline, food businesses' net income before and after capital fundraising.
Metrics: Percentage in total Metrics: Number of farm acres preserved as working revenues that were invested land, number of sustainability‐ back into community by related improvements made processors, community by producers and processors. attendance at producer/processor, DRC, or related events, number of local jobs created in regional communities
III. The Data
Revenue Sources and Sales are tiered based on the following asset brackets for the farmers/procesProjections
to the application consultation and assessment to understand their investment options.
Dirt Road Capital will achieve self-sustaining operations in its second year because of our diverse revenue streams, along with the relatively low overhead required of a financial services business. Dirt Road Capital’s major revenue sources include the following:
Investment Services Revenue: Starting in Year 2, DRC will set the stage for our highest revenue generator: facilitating investments from community members to food producers through our website.
sors:
Food Producer Registration Revenue: Farms and food processors will pay to have their business assessed financially, socially, and environmentally. The food business first completes an application so that we can determine if they are a good fit for our services and pays a $50 application fee. A consultation session is included in the application fee to ensure the business is ready for DRC services. Then business owners can take the next step of employing DRC to carry out the due diligence and produce a report, for which we also charge a fee. As a final step, businesses can pay to have the report listed on the DRC website. These fees
Assets between $0 and $50,000 Assets between $50,001 and $100,000 Assets between $100,001 and $200,000 Assets greater than $200,000
Due Diligence Reporting Revenue: After DRC completes an assessment and produces a due diligence report, investors have the ability to purchase one of three report packages: 1 report, 5 reports, or yearly unlimited reports. The price structure varies based on three classes of investor: individual, institutional, and financial advisor. Financing Coaching Revenue: DRC is able work with food producers throughout the process to help them understand what their financing options are and how the due diligence and/or a DPO could help them recruit investors. These optional coaching sessions are for businesses that may require additional support in addition
DPO Services: In Year 2, DRC will work with food producers who would like to create a Direct Public Offering. We levy an assets-based fee for the service of setting up the DPO. Investment Transaction Fees: Once the DPOs are available online, investors will be able to review the accompanying due diligence reports and invest directly into farms. DRC will charge a transaction fee based on the investment amount. Investor Consultation: DRC will also charge for optional consulting with investors seeking to understand the risks and rewards of investing in their local food system.
11
Major Operating Expenses and Capital Spending As a financial services business, Dirt Road Capital’s major expenses are salaries and systems development. Salaries We believe in properly recognizing and compensating the efforts of our team. In year 1, salaries make up 44% of sales, which rises to 65% in year 5. In addition to the six founders, we bring on one employee in Year 1, growing slowly to 15 employees in Year 5 to match our expected increase in workload and revenues. In Year 4 , it will be essential to bring a lawyer
12
on staff in order to structure the DPO agreements. Systems DRC will develop an interactive online interface with information for prospective clients, a database of due diligence reports, and a system for investors to easily and securely purchase shares of food and farm businesses. A simple website will be created when we launch, which will grow as we add services. The full robust web interface
and database will be built in Q3 of Year 2 and launch in Q1 of Year 3. Capital Expenditures DRC purchases 7 computers for our office in Year 2 as an initial capital expenditure. Those are depreciated over three years at which point the computers will no longer be considered capital expenditures; future technology purchases will be considered expenses.
Funding Requirements and Profitability Projections DRC plans to fund start-up costs through a revenue-based financing plan. DRC will seek an investor who shares our core values and brings enough financing and investing expertise to be an active contributor to the DRC team. To assist with initial operations, DRC requires a $168,000 investment, which will give the investor 8.5% equity in the company. When quarterly revenues exceed $60,000, DRC will begin buying back equity at 8% of annual revenues until a $220,000 payback has been met. Based on our projections, the
result in positive net income, with the exception of financing coaching. We are willing to absorb a loss for this service, because we see it as a critical educational step to ensure that food and farm business are aware of the benefits and associated risks of DPOs and other financing options. For more information on our financials and to view our pro forma, please see Appendix B.
internal rate of return is 17% and full buyback will occur in Year 5. We predict slow and steady growth, with net profit becoming positive beginning in Year 2. All revenue streams
13
IV. External Environment The Economy:
Impetus for alternative financing methods While the Great Recession and subsequent slow recovery dealt a blow to business owners and households across the country, the economic viability of many smaller food producers in the Pacific Northwest has been uncertain for some time. Earlier studies by our team found that the average net income for small and medium sized farms in 2007 was only $7,000, with 50% of the operators of these businesses working an off-farm job to make ends meet. Dirt Road Capital will serve both farmers and food processors in the Pacific Northwest community. Our initial research, however, was directed primarily towards farmers in Washington State. There are approximately 2,200 farms operating on less than 100 acres in Washington State. Farm operators at that scale will be among our primary clients, along with smaller food processing businesses. Access to capital can be a significant barrier to profitability for a food business. There are few traditional options for small businesses seeking capital. Bank loans can be difficult to obtain because of complicated application processes and a low risk tolerance on the part of lenders. Investors generally expect high growth and a quick return, which for most food businesses, especially farms, is not usually feasible. Meanwhile, complicated securities regulations designed to protect investors end up creating barriers that prevent most people from putting their money directly into local businesses. As smaller, regionally-based businesses form and begin to scale, they will be seeking financing options and encountering roadblocks along the way.
14
A recent survey of regional fruit/vegetable farmers in Washington (Thurston, Lewis, and Mason Counties) found that about 42% would be likely to use loans to expand their current operations, and around 85% would choose to reinvest their annual income in order to grow. When presented with a list of areas in which they hoped to expand their sales, including farmers market, CSAs, and selling to retailers, approximately a third of respondents saw each potential growth area as a desirable opportunity. [1] Demand for local food is high, and food producers and processors could stand to gain from this trend if they are able to grow their operations or find a niche where they stand out. From the aforementioned survey, we observed some resistance to debt financing as a means of growth. Similarly, in a survey conducted the the DRC team, only 28% of farmer respondents expressed any interest in learning more about equity-style investments. We believe that lack of understanding of new community based financing methods is preventing local growers from accessing capital and taking full advantage of the market by growing or improving their operations. Through education and outreach, Dirt Road Capital can help small businesses improve their own accounting processes, increase their awareness of financing options, and bring values-driven investors into the picture. In an industry driven by relationships and community connections, we believe that farmers and food processors might find it palatable to move beyond their comfort zone with equity and debt financing if their investors and lenders are not strangers, but rather community members and customers.
Market Analysis and Key Trends:
Fresh ideas for financing and investing The 2008 financial collapse was, ironically, a key positive turning point for community investing. As investors began to truly understand the volatility of the public markets, many also began to question their investments into large multinational corporations and extractive industries. Movements like Slow Money and LION investing came into existence at this moment in time, when a shift occurred in the way investors view both the financial and also the social, environmental and/or community return on their investments. Since the launch of Kickstarter in 2009[2], crowdfunding has become many entrepreneurs’ go-to mechanism for affordable capital—and “investors” are coming out in droves to donate to the launch of businesses they care about. Over its four-year history, Kickstarter participants have channeled $531 million to businesses and projects they love. According to one report, crowdfunding platforms have raised over $5.1 billion dollars in 2013, with North Americans generating 59% of the funds. A cumulative total of 42.8% of total investments have been placed into the Social Causes, Business & Entrepreneurship and Energy & Environment categories of crowdfunded projects[3]. DRC’s value proposition is not based on crowdfunding in the way the terms applies to models like Kickstarter and Indiegogo, because our investors are putting in capital that they expect to recoup, with a return. That said, the trend towards people supporting companies they care about without expecting a high financial return, while also encouraging their peers to do so, is a
powerful wave that DRC will be riding. tionships. As the graphic below indiUnlike the donation-based model A similar trend has been occurring with cates, projects under the “crowdfundof Kickstarter and Indiegogo, other investments in the food and agricul- ing” umbrella that involve equity tend emerging companies such as Solar ture sector. Slow Money, a non-profit to attract the largest investments. Mosaic offer an actual financial return organization focused on supporting on investment—as high as a 6.38% an- local and sustainable food business- Currently, many of the options for nual return over es, has catalyzed place-based investments have been a 5-year loan investors to “DIY” deals. In her book Locavestperiod[4]. As of “act as if food, ing, journalist Amy Cortese describes this writing, Sofarms and fer- the successful funding efforts of an lar Mosaic suptility mattered” organic New York State dairy farm, porters have inand put money Milk Thistle, through small, individvested over $2.1 into businesses ual loans from both accredited and million to fund in their commu- unaccredited investors. Milk Thistle solar installanity that uphold originally looked for funders by puttions on low-inthe Slow Mon- ting out a handmade sign at their come housing ey principles[7]. farmers’ market booth—only to learn and other comOver the past that they were violating Securities munity solar four years, $25 and Exchange Commission laws. Corprojects[3]. Anmillion has been tese writes of the farmer, “Hesse has other peer-toinvested in 210 succeeded, in large part, by tapping peer investment small food en- into a powerful movement that is company, Pros- Credit: Crowdfunding Behavior Over Time (via terprises across centered on promoting locally proper, promotes http://blog.gogetfunding.com/crowdfunding-statis- the country[8]. duced goods and supporting healthy a “seasoned re- tics-and-trends-infographic/) More than 650 sustainable communities. But he has turn of 9.09%” people attended also bumped up against its limits. It for lenders. To date, Prosper’s 1.6 the most recent Slow Money National is easier for an individual to invest in million lenders have provided over Gathering in Boulder, CO. Among the a company halfway around the world $400 million in personal loans to bor- participants were farmers, ranchers, than in a small enterprise down the rowers[5]. Clearly, the tide is turning food entrepreneurs— and hundreds street… in the meantime, millions of for community investing—more and of investors. A recent online survey businesses like Milk Thistle are going more, companies are finding innova- conducted by our team revealed begging for capital, unable to expand tive ways to employ SEC exemptions that over 54% of and investors are taking matters into 44 respondents their own hands and funding the busi- would be interestnesses they care about. The JOBS ed in investing in (Jumpstart Our Business Startups) Act, a local food busisigned into law in 2012 by President ness. With access Obama, will hopefully help to change to solid financial the landscape for unaccredited invest- and sustainabiliing. The JOBS Act has crowdfunding ty metrics, these provisions that, when finalized, will al- investors (both low small businesses to bypass the big accredited and unstock exchanges and sell securities to accredited) would unaccredited investors online. There be more comfort- Crowdfunding Behavior Over Time (via http://blog.gogetfunding.com/ will be restrictions about who they can able putting their crowdfunding-statistics-and-trends-infographic/) be sold through and how they can be money directly advertised, and due diligence will be into their local food system via equity or hire, and holding back an important required part of the picture - making investments. Dirt Road Capital’s due pillar of a full throttled economic rebusinesses like Dirt Road Capital es- diligence reports can help farmers and covery.”[9} Luckily, Milk Thistle found sential to the movement. investors create strong financial rela- a willing and inexpensive attorney to
15
help them through the challenging securities process and legalese. Not every business interested in creating a direct public offering has this resource at their disposal—hence the need for businesses like Dirt Road Capital.
Competitor Analysis: Other players in alternative financing and investing At present, agriculturally-based businesses in the Pacific Northwest have a few options if they wish to undertake a project that requires significant capital. One resource is Northwest Farm Credit Services, a cooperatively owned lending association that provides equipment and real estate loans, lines of credit, and a various financial services to the agricultural/fisheries/forestry related business sector.
Business owners can also approach their own credit union or bank, but may find a loan at a reasonable rate hard to come by. They can apply for grants, some of which are quite large, although designated for fairly specific projects. For example, the USDA offers the Value-Added Producer grant which provides $100,000-300,000 for the infrastructure development and marketing of a value-added product for a farm operation. These grants, however, involve an extremely rigorous application process and are highly competitive. Fortunately, many alternative funding mechanisms are developing or resurfacing in response to a growing need for capital for small businesses. Fan-based funding in the form of donations, pre-sales, and memberships has begun to take off. Community Supported Agriculture shares (CSAs) are a great example of how farmers have successfully engaged their loyal customers to obtain early-season rev-
The Competitor Landscape
16
enues in order to stabilize their financial operations over the course of the season. Seeking private investment is an option that has been common in many other industries. Only in recent years have community-minded investors begun to explore ways of lending to or obtaining equity in food businesses in their area. The Local Investment Opportunities Network (LION) is an example of a group of people that has risen to this challenge. They bring investors together who are interested in putting their money into their community and then introduce them to local businesses seeking funding. Currently, the first chapter, based in Port Townsend, WA has loaned about $3 million to small local businesses, about 1/3 of which are food businesses. These deals are forged only once a relationship has been developed between the prospective investor and the business owner. They have primarily consisted of debt financing, with
terms that were defined by the lender and the recipient and were generally more favorable than the rates offered by the bank. Slow Money members have been engaging in private deals of a similar nature, targeted specifically to food businesses. Direct Public Offerings, as discussed earlier, are an emerging form of financing that is catching on among food businesses. The DPO process is regulated by the federal Securities and Exchange Commission (SEC). Different methods of creating a DPO are possible depending on which SEC exemption (to an official IPO filing) makes the most sense for a particular business to pursue. For these types of structures, the SEC cedes a fair amount of control to the states, which means that one’s options might differ depending on the strictness of a particular state’s regulations. Given the lack of public awareness and understanding of DPOs, and the level of time and expertise needed to ensure that the offering is legally sound, some enterprising financing experts have begun hanging out their shingle to facilitate these deals. Cutting Edge Capital in California is already working to structure DPOs and other forms of financing so that businesses around the country can obtain community capital, including some food businesses (see Competitive Advantages below for more). In the Portland, OR area, ChangeXChange Northwest is working to educate people about DPOs and local financing, one Northwest community at a time, and plans to launch a regional stock exchange in the next few years so that shares of local businesses can be purchased and traded. Mission Markets, whose founders also have ties to Cutting Edge Capital, is a platform that will take advantage of the new crowdfunding regulations in the JOBS Act by serving as a “portal” for trades
to occur. Their SEC-approved trading infrastructure is likely what will allow ChangeXChange NW to operate as a trading site. These organizations offer different services and work at different scales, but are important players in a broader movement focused on redirecting the money of a given community from traditional, Wall Street investments to local business development. As these various finance alternatives gain a foothold, there is a growing need for public education around how to engage with them. Small businesses need information on utilizing them and investors and community members need to understand how they work and why and if they are worthwhile. To that end, we see the organizations described above as potential partners rather than competitors. Each has a slightly different niche and role to play in growing awareness and interest in investing based on shared values and the desire to strengthen one’s community. As you will see below, DRC’s value proposition combines some of the elements of these other organizations into a unique offering, focused on a specific community. We will likely rely on examples from the groundbreaking work of Cutting Edge Capital when we outline our services to food producers, and down the road we hope to trade shares of the DPOs we create on ChangeXChange’s platform. We firmly believe that the efforts of all of these groups is “making a bigger pie” and that collaboration, not competition, will result in the paradigm shift in investing and financing that we hope to make a reality.
Competitive Advantages Community Dirt Road Capital stands out because we are rooted in our community. Unlike traditional investment firms and popular donation-based crowdfunding sites, our business is centered around the idea of place-based investing. Our due diligence services and website with investment opportunities are designed to allow Pacific Northwest residents to fund businesses in their communities. We aim to link eaters with producers, creating investment connections between community members and the people growing and making the food that they already purchase and love. Our team’s knowledge of farmers and food producers in Washington State will make us a trusted resource in this arena. At the regional scale, it will be possible for our team to develop personal relationships with the entrepreneurs looking for financing, and we would work to facilitate opportunities for investors to meet the business owners in person. For would-be investors hungry to take their commitment to eating local and buying local to the next level, we are a natural choice.
Innovation A primary component of our competitive advantage is our unique value proposition. Companies like Oakland-based Cutting Edge Capital are carving a new niche by helping community business find new means of financing. Our model takes that concept a step further by offering that financing assistance within a specific industry in a specific place, and by offering the resulting investment opportunities to unaccredited investors on our own platform. Our due diligence for local food systems investments in
17
the Pacific Northwest is also a value proposition we have not seen elsewhere. Our arena is a fairly small and untested niche market. The ideas behind our business have not yet gained common acceptance, and for another company to attempt to replicate our model in the same location seems unlikely. Should our model prove to be profitable, other entrepreneurs would probably think twice before attempting to compete with the one established player in this relatively small market. In addition, our model anticipates new opportunities that might arise as SEC regulations are finalized and potential partners build their own platforms. Title III of the JOBS Act will make it legal for businesses to sell securities online to unaccredited investors, with a number of restrictions around investment amounts and how the opportunities are promoted and handled. While many crowdfunding-type companies might burst onto the scene once the rules of the game are clarified, we believe that our investing and financing services will stand out due to our geographical and thematic focus. Furthermore, we might profit from a demand for due diligence assessments, depending on the strictness of the regulations governing the level of disclosure needed for the new online offerings. Many of these emerging start-ups will try to continue in the Kickstarter and IndieGogo mold by listing cross-coun-
18
try investment opportunities, but our value proposition caters to people who are craving a way to make a tangible difference with their investments by putting them to work in their community’s food system.
Relationships The personalized nature of our service will be a primary distinguishing factor. In the early stages, we will be serving investors who already have potential investments in mind; therefore, our services will be completely targeted around conducting the due diligence that those investors need to feel confident in their investments. Down the road, when we offer investment opportunities to unaccredited investors throughout the Pacific Northwest, exceptional customer service will be a
hallmark of our activities. We aim to be available to any potential investor for a phone conversation - a level of service that most unaccredited investors would be hard pressed to find unless they employed a financial advisor. Given the novelty of our model, it is important that we give investors the opportunity to have their questions answered. Furthermore, we want to bring investors and entrepreneurs together as much as possible, so facilitating visits to farms and work spaces, or setting up other opportunities for all parties to meet face-to-face will be an important element in our approach. In working with food producers, establishing strong relationships is crucial. We will approach our initial assessment meetings with the farmers from the mindset of working with them to determine what type of financing makes the most sense, rather than pushing them towards a financing mechanism that generates revenue for us. We know that the effort of going through a DPO is only worth it for committed entrepreneurs whose businesses can stand up to the risk aversion of potential investors. Therefore, we want to get to know all of our potential clients very well and ensure
that we take on only those with a high potential for success. Simply put - we care about food producers. We love working with them and helping them overcome barriers to profitability. We will do whatever we can to point them in the direction of the opportunity that makes the most sense for their stage of business growth, and unlike many financiers, we will not be thinking only about our bottom line. Trust In the early stages, our reputation will rest on the strength of our due diligence assessments. Our team’s knowledge not only of financial metrics and sustainability measures but also of the competitive landscape will position us to conduct thorough assessments upon which investors can rely. Partnerships with existing business incubators and educators who are working with food producers will
allow us to narrow in on entrepreneurs who are thinking critically about their business’s operations and what it will take to get to where they want to be. Our reports will provide an honest and balanced assessment of the risks and opportunities inherent in each business. Our due diligence will be on par with that offered by an investment firm in a prospectus for any of their securities, however, there will also be environmental and social metrics that would not typically be provided. The level of due diligence will be far more thorough than any background information provided as part of a typical Kickstarter-style crowdfunding campaign. It would eventually damage our reputation to give investors false expectations; therefore, we will make it clear to any business that participates in the investment process that our job is not to sell them to investors but rather to
facilitate financing opportunities by educating community members about local investment opportunities. Transparency around risk and our commitment to facilitating face-to-face meetings between producers and potential investors should make it so that each business can find the right investor fit. Cited: [1] L. Patzek, Personal Communication, May 30, 2013. [2] http://en.wikipedia.org/wiki/Crowd_funding#History [3] http://en.wikipedia.org/wiki/Mosaic_Inc. [4] https://joinmosaic.com/ [5] http://www.prosper.com/about/ [6] http://blog.gogetfunding.com/crowdfunding-statistics-and-trends-infographic/ [7} http://slowmoney.org/ [8] Locavesting Amy Cortese 2011
19
V. Implementation Roadmap Based on our research and revenue projections, Dirt Road Capital has a plan in place for our business to grow in three phases. Each phase involves projects and milestones that must build upon one another in order to facilitate the next phase’s activities. Our revenue projections and profitability depend upon meeting the outlined goals. In Phase 1, the first year, DRC will start by developing a basic website. This website will showcase what DRC is and how our services work. During this same time, the owners of DRC will reach out to their existing food networks, leveraging connections to find initial clients among food investors who are part of the LION and the Slow Money movements. The website will be completed by month two, and serve us in garnering our first applications for due diligence reports in month three. In month six Dirt Road Capital will begin to pay their operating owners a salary. We will have clients registered for post-assessment financing coaching by month six, and
20
begin earning revenue from due diligence reporting by month seven. In month eight DRC will strategically begin recruiting farms and businesses for their Direct Public Offering arm of services, and begin training to earn a Broker/Dealer license. In Phase 2, the second year, DRC will begin the first quarter by opening up a brick and mortar location in a leased facility. Opening a location will give the business higher visibility in the community. In the second phase, DRC will fully launch our services to design DPOs for interested food producers. By the third quarter of this phase, DRC will have a broker/dealer license. At this time we will kick off development of a more advanced website that will allow investors to invest directly from our website into the Direct Public Offering of their choice. Phase 2 also includes several marketing outreach related events. In Phase 3, the third year, Dirt Road Capital will launch the full website that allows for investors to purchase secu-
rities from our food-producing clients. As this website is completed, DRC plans to have twenty direct public offering opportunities ready to populate it. DRC will also begin to earn revenues from investor transaction fees in the first quarter of year three. By the third quarter, DRC would like to have a long-term marketing plan developed for Phase 4. In Phase 4, our fourth and fifth years of operations, Dirt Road Capital will have a steady stream of DPOs available on the website. Meanwhile, DRC plans to integrate into local stock exchanges (such as ChangeXChange Northwest, currently in development by Springboard Innovation in Portland) and provide a catalyst for local investment and economic growth. For more information, please see the attachment Appendix C.
VI. Risk Analysis Factors to Consider
Associated Risk
Countermeasure
Existence of a market of potential Our model assumes that there are local investors in the Pacific Northwest people in Washington and Oregon who wish to invest money locally, but are not currently doing so. If this assumption proves untrue, we will not have local funders for the entrepreneurs seeking financing.
The existence of local investing clubs and Slow Money chapters in WA and OR suggests that this potential investor market exists, as does the presence of many “buy local” and “eat local” campaigns in Pacific Northwest communities. Meanwhile, crowdfunding campaigns are wildly successful nationwide. Our model taps into these three trends, allowing community members to support local food-based enterprises with whom they have an affinity. Should we find insufficient interest in the Pacific Northwest, we could alter our model to help businesses seek unaccredited investor funding from other parts of the country, using SEC exemptions beyond our primary tool, the Intrastate offering exemption.
Scope of market for due diligence reporting
If customers prove unwilling to pay for due diligence reporting, we would simply continue to offer the same investment opportunities on our website without charging investors to view the due diligence reports. Since we would have to provide an informational prospectus anyway, we will continue to carry out the due diligence. To make up for lost revenue, we could adjust the fee structure of the investment tool.
Our value proposition assumes that lack of available information about the risk associated with local investment is a barrier for unaccredited and accredited investors to putting money into local food businesses. If this assumption does not bear out, we might not have a market for a major element of our value proposition.
Residency of investors for Intrastate Exemption DPO projects
If even one out-of-state resident invests in a DPO launched through the Intrastate Offering Exemption, it would nullify the whole project.
Obtain addresses and contact information for every investor. Once obtained, check the addresses against White Pages listings.
Number of potential food businesses seeking financing
Insufficient clients seeking financing will limit our potential earnings and restrict the available investment options for our investors.
We will conduct targeted outreach to organizations and institutions already working with food businesses in order to connect with entrepreneurs looking to expand their operations or take on a new project. Once we have a few successful client stories to share, our reputation will likely spread by word of mouth in the relatively small food/ farming community in the Pacific Northwest.
21
Factors to Consider Novelty of value proposition
Associated Risk
Countermeasure
Most people have very little understanding of the “standard” investment system, let alone an unproven local investing model. Lack of understanding might lead to reluctance to try it.
Our first step is to preach to the choir by creating successful outcomes for people already passionate about the local investing movement and looking to make deals with food producers in their community, such as members of the Slow Money movement. By generating good press, we can then reach out to other groups of people who already value buying and eating locally. Our offering could be marketed in many ways depending on the target audience, including as an antithesis to Wall Street greed.
Success of businesses receiving financ- If the businesses receiving financing ing don’t do well, it will mean a low ROI for the investors and they might pull out or not invest again.
22
We will conduct extremely thorough due diligence, and provide clear warnings upfront about the risk. We will work with as many businesses as possible that have gone through some sort of formal business planning training. In addition, by facilitating face-to-face meetings and visits between investors and business owners, we hope to provide investors with a better understanding of the risk they are undertaking as well as a more personal frame of reference for what their money is going towards. Our targeted investors are people who already believe in building up the local economy and the local food system, and might be more willing to accept a lower ROI if they find the community and environmental returns attractive. Finally, we believe that investors will become loyal customers of the business if they are not already, thus contributing to the business’s success.
Factors to Consider
Associated Risk
Countermeasure
Ability of food producer to pay fees for the due diligence reporting
Many producers might not have the funds available to pay us to produce the due diligence reporting that potential investors would see
Before due diligence reporting, an assessment visit will be conducted with prospective financing recipients. Based on this meeting, we will work with the food businesses to determine the appropriate type of financing, which might not require production of a due diligence report. If the farmer is unable to pay for that service, they might not be at a stage where they would attract the kind of investment that would necessitate the due diligence reporting. In Phase 1, we anticipate that the investors might be willing to cover the due diligence costs on behalf of their prospective investees, since they have already expressed interest in that business’s success.
Willingness of food businesses to accept equity-style investments
If farmers and food processors are unwilling to sell shares of their business, it could limit our ability to launch and market DPOs.
DPOs based on lending are also a possible offering we could create for businesses unwilling to accept equity financing. Similarly, we could create revenue-based financing deals that would create some certainty for both parties around the amount to be paid to the investor and the financial stability of the business at the time of the payments. Finally, by educating farmers and food producers about what equity means, we hope to make the idea less foreign and more palatable.
Unpredictable nature of farming
A bad weather year or crop year could mean no dividends or rewards for investors in farm businesses.
All of our information will be extremely honest about risks and expectations related to farm investments. Creating personal connections between investors and farmers so that investors understand how each business works should enable potential investors to make educated choices. Finally, we will work with a variety of types of food producers (different types of farming and food processing) to provide a diverse range of options for investors to choose from.
23
Factors to Consider
Associated Risk
Countermeasure
Expense of filing and paperwork for DPOs
For offerings like DPOs, lawyers fees very steep, possibly out of range for food businesses or for DRC.
Paying a lawyer an hourly rate will be a considerable expense. However, after our lawyer has experience creating DPOs, the process will become much smoother and less expensive for subsequent offerings. Our lawyer may even be able to create a “fill-in-theblanks” style form for DPO offerings to make the process easier and faster.
Ability to obtain information we need for due diligence reports
Some businesses might not have answers for us around some of the metrics we need to produce the reports.
First, we will focus on working with businesses involved in incubator/ training programs, who already have some idea of basic accounting and finance. We will also develop a checklist for interested businesses and a website with tools to get them started in thinking about the metrics we are requesting. We intend to work closely with the businesses to get the metrics we need, and will likely be able to obtain some of the needed information with limited input from the business owners.
Economic Stability
If another recession occurs, people’s ability to make investments could decrease even more.
Our model allows for even very small investments. Furthermore, our primary customer segment consists of people whose commitment to supporting their community leads them to make financial decisions for the greater good. Finally, we can bill our investment offerings as a panacea to the type of speculation and fiscal irresponsibility that brought about the recession in the first place.
24