All Xero Gravity episodes
Hosted by Elizabeth Ü and Gene Marks
“If you're a business that has a strong public constituency network, a lot of fans, I would seriously think about how to convert them into investors, because once you convert them into investors, you’re also converting them into your fan base,
marketers and loyal customers.”
It’s one of the juicy nuggets Michael Shuman, renowned economist, educator, author and community economic developer, shares with Elizabeth and Gene about raising
money from your community.
You’ll also hear about his other small businesses essentials for funding, including the laws and benefits around growing capital, and choosing the right path to acquiring it, be that through crowdfunding, a community cooperative, a direct public offering or small business loan.
So if your community is where your heart is and where you want your business to grow, don’t miss Xero Gravity #37! Invest locally, listen anywhere.
Small Business Resources:
Hosts: Gene Marks [GM] & Elizabeth Ü [EÜ]
Guests: Michael Shuman [MS]
XG Opening You’ve just tuned into Xero Gravity: a podcast for small business leaders and entrepreneurs across America. Now to your hosts, Gene Marks and Elizabeth Ü.
EÜ: Welcome to Xero Gravity. I'm Elizabeth Ü and my co-host Gene Marks is here as well. As many of you probably already know, it can be challenging to access capital as a small business owner and there's so many reasons for that.
GM: Elizabeth, I mean, the rules have definitely changed over the years. The capital is definitely out there, but raising money going to the traditional bank is not something that a lot of my clients are doing as often as they used to because the requirements for borrowing money from a bank has become really, really difficult for a lot of business owners.
EÜ: No, it's true. I would guess that especially amongst all of the people who really want to move their money off Wall Street and onto Main Street, there's a lot more capital than we might realize is available. It's just in the hands of your neighbors and not in your local bank.
I don't know if you knew this about me Gene, but one of the reasons I have dedicated the last 12 years of my career to helping people raise capital is because I had a colleague, Brahma Mudi, who, when I was a Presidio MBA student, was really struggling to raise capital. He had an amazing idea for a business — it's still an amazing idea. He wanted to start a grocery store that would bring fresh vegetables and other healthy food into what many people might call a food desert. I know that's not always a good word, but these are people that only had access to liquor stores and corner stores. He wanted to bring fresh food into that neighborhood, and even though he had all of the right experience, he really struggled to raise capital.
I have watched him over the last 12 years continue to struggle — all while this very neighborhood where he's trying to put the grocery store is becoming more and more expensive — to actually purchase land for the grocery store. It's just been a terrible experience. My heart just went out to him, and that is why I've been so committed to helping crack this nut of getting capital into these small businesses that are so important to the communities they serve.
Fortunately, there are many great solutions for raising capital, particularly from your community. We have a wonderful guest joining us on the show today and he happens to be a mentor of mine. His name is Michael Shuman. Michael Shuman is an economist, educator, and an author — so many credentials to his name — but one of the things that I've always admired about Michael and his work is that he is very, very committed to helping small businesses raise money from their communities. Turning that inside out, he's also been really helpful in outlining the various opportunities that people have to invest in their community businesses.
GM: The guy is a respected educator. He knows so much about crowd funding and raising money for a community. More interestingly, Elizabeth, the guy ran a chicken business for a while and we're going to find out about that. Stay tuned, We'll be talking with Michael right after this.
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EÜ: Welcome back to Xero Gravity. I'm so excited to introduce Michael Shuman. We've had several podcast episodes in the past about the importance of mentorship and finding the proper advisors, and Michael Shuman has absolutely been that for me. I'm really happy to have him on the show. Michael, I wanted to start off by asking you about your first job. What was your first job?
MS: It depends how we define a job. I would say the first real job I had after serving at Jack In The Box as a hamburger flipper in high school, was that as a film coordinator for the city of Palo Alto, which I did for about a year and a half and organized film festivals, and film events, and film classes. At that point, my dream was to become a filmmaker. If I sometimes seem a little bit over the top in my power points, that's the reason.
EÜ: I love that. Yeah, you definitely have a film producer kind of background. Did your first experience at Jack In The Box have any influence on how you feel about box stores now in your career?
MS: That's very funny. I don't think I've ever been asked that before. Yes. I think number one, it made me understand why it was important to get a degree and do other kinds of work, but it really also made me very sympathetic with what large numbers of Americans are going through at bottom wage jobs. At that point, I give away a little bit on my age that my starting wage was about $0.85 an hour, and it may have risen to about $1.05 by the time I was done in two years.
GM: Michael, you're an educator now. Did you have any interest in becoming a filmmaker at some point? Why didn't you stick with that career?
MS: I did that for about two years in college, and then I had a class where I read E. F. Schumacher's Small Is Beautiful. I was compelled by that, and I was also very compelled by the fact that during 1975—76, California was voting on a proposition to shut down nuclear power in the state. I became very convinced that this big ugly nuclear proliferation, a prime source of energy, was something that was worth trying to get rid of. So I quit school for a year and a half, and worked on this initiative.
Initially I was a volunteer, and then I took a job at Friends of the Earth, and continued on that pathway more or less ever since. That was really quite a turning point for me, and frankly, I still miss the filmmaking, and I love the movies, and thinking about movies and my writing. But at the end of the day I decided that saving the world with whatever means were available was the important thing.
GM: Your specialty is community economic development. What do you mean by community?
MS: Community to me, is the place that you call home. It's a place that you feel familiar and comfortable with. For some people that will be a block and for others that might be 50 miles. Often the word I use is not so much community but local.
The whole idea about local is to take transactions, which otherwise might be impersonal and rather hostile, and transforming them into something that is personal and sensitive and humane. I see the virtues of local economy, as making consumers more connected with their companies where they're buying goods and services. It's making the companies more connected with their workers. it's making them more connected with their investors. And those connections are partially about accountability, but they're also about a kind of give and take communication process, so that we all do better with one another.
EÜ: Michael, where do you feel like a local?
MS: I live in a suburb of Washington, D.C., Silver Spring. I've lived here for seven years. This neighborhood definitely feels local to me, and in the last two years, I've become a runner. One of the great things about running is it gives you a whole different way of seeing your neighborhood. If I’d go for a walk, I'd maybe see a couple of blocks, but if you drive, you whiz past everything, so you don't really see it.
As a runner, you're sort of moving along at a couple miles an hour. I run slow. I've just seen so much of this neighborhood. Where I live, Montgomery County, is ostensibly the wealthiest county in Maryland and a very wealthy county in the United States. But the specific neighborhood I'm in has a high density of Latino and Section 8 housing, so we're very diverse racially and class wise. It's really a wonderful spot.
GM: Michael, let's talk about working with business owners in your community. What type of involvement do you have with businesses in your community? What type of things do you do for them? How do you help business owners in your community?
MS: My general life is giving talks to try to shift investor behavior, consumer behavior, and public policy behavior. There are business groups in my community, local first groups, which are basically networks of local businesses. There are policy organizations within Montgomery County in planning and in economic development. Normally, I charge for my time, because I don't work for anyone else.
In these cases, with these local entities, I will just give my time for them and do whatever I can to try to support their work. To be more specific, in Montgomery County, our economic developers have done many of the same, really stupid things that have been done around the country, like paying big bucks to bring in outside companies, and to bribe Costco to set up big shopping centers. I try to work both overtly and behind the scenes to make sure these mistakes don't keep happening.
EÜ: One of the things I know that you've done that I've really appreciated as far as helping small businesses everywhere, is really being one of the leaders in the conversation about community investing. Is this something that locally-owned businesses around the country can take advantage of? Some of the policies that you've been bringing up and some of the legislation that has turned into national law: I'm wondering if you can explain a little bit about how community investing is democratizing both investing and fundraising around the country?
MS: The big picture is that I think the United States, like many countries, has set up a system that legally governs investment that I would call investment apartheid. What I mean by that is we've created two classes of citizens. One class called the accredited investor, which is basically high wealth, high-income individuals — depending on how you count it, probably a couple of percentage points of the population. They are allowed to invest in anything, anytime, no questions asked.
The rest of us fall into this category called unaccredited investors, and we are considered to be dangerously uneducated. We succumb to all kinds of deals that aren't in our interest, and therefore, we cannot put a penny into a local business unless that business has produced these legal documents called disclosure documents. These disclosure documents are often 100 or 200 pages long and in very tiny print that tell you in various ways how you can lose everything you put into the company.
EÜ: Why you shouldn't invest in the company.
MS: They're all boiler plated. No person ever reads it. But the result of this is that local businesses constitute far more than half the economy, they are highly profitable, highly competitive, and I would argue: their competitiveness is likely to increase in the coming years. Despite all of that, far less than half of our banking capital goes into these businesses, and almost none of our long-term capital — that is, what's in stocks, bonds, mutual funds, pension funds, and insurance funds — almost none of that $30 trillion, goes into these local businesses.
Now, you can call this many things, but I would call it a capital market failure. It's a failure that reflects how effective these securities laws have been in keeping the 98 to 99% of us who are unaccredited, from putting money into more than half the economy. What a lot of securities reform is all about in the last few years is how to make it easier for smaller businesses to accept investment from unaccredited investors.
Really, the first thing that happened along these lines was that in 2012, Congress passed, and President Obama signed what was called the Jobs Act, the Jump Start our Businesses Act. The Jobs Act basically said we're going to make it relatively cheap and easy for a businesses to put a stock issue; or a lending issue; or some kind of security on its website; and get up to $1 million, and we'll allow every American to put in as much as $2,000 per company, per year, into these businesses.
One question mark is that the typical cost before the Jobs Act of a company to do a state offering was somewhere in the range of $25-50,000. That's what you'd have to pay, typically, a lawyer. If you shopped around, maybe you could get it a little bit lower, and if you did some of the work yourself, you could get a little lower, but that was roughly the range we're dealing with.
The question is, from a business standpoint, can you now through the Jobs Act do an offering for less than $25,000? The answer is we don't know, there are two reasons we don't know. First of all, we don't know the various community portals. Portals are these internet sites where companies will go and list the securities, where people can then buy those securities. We don't know what those sites are going to charge companies for listing on their sites. If it is just a couple thousand dollars, then it could be way cheaper than the formal legal pathways.
EÜ: I do want to ask you about some of those formal legal pathways, or even what exists now, because there's so many different ways that small businesses can raise money from their community right now.
MS: Yeah. If we're looking for a comparable thing — by comparable I mean what was a pathway in which unaccredited investors could put money into local businesses?
EÜ: Meaning, everyday people.
MS: Everyday people, right, and a large number. If a company wanted to do that, they would often do what's called a direct public offering. A direct public offering means that the company offered the shares directly to the public to buy from them. That contrasts with say, an initial public offering that might be done by a big company by $1 billion, with Goldman Sachs underwriting it. Those shares are then put out through a vast network of broker dealers.
The way that a direct public offering works is that a company will issue typically under $1 million of security, so very small company, very small offering, selling these shares directly to the public. That has been done. An example of that was the first issue of Ben & Jerry's in Vermont 20 years ago. You had to be a resident of Vermont to buy the shares, but it was a way that the company was able to capitalize itself. That method is the method that I was saying could easily cost $25, 50, 100,000, traditionally.
GM: Are there less expensive methods, Michael? Say, a lot of my clients, They ask me, How can I go out and raise money on a crowdsourcing site? Where would I go?" Is this a good option for small business owners in 2016 to get some capital and what should they be thinking about?
MS: I think that it certainly is in the interest of many companies to get risk capital rather than just enter another loan. I think a lot of small businesses that I know are tired of being in debt, and they would prefer giving up some small equity shares in their company in order to bring this other capital in.
Is crowdfunding the way to do it? Maybe. What we've talked about with the Jobs Act and these state alternatives, which frankly I would say that the state alternatives probably are going to be a lot cheaper and a lot easier than the federal Jobs Act. You will have a couple of different options to choose from, and probably it will cost you — this is a guess — somewhere between $10,000 and $20,000 in order to get $1 million from your network.
Some of the questions about whether the old system works better than the new system sort of depend on when do you need to write the check? In the new system, most of that money you probably would pay at the end of the process, after your shares have been sold, and then the portal (the website) takes a fee, and then okay, you don't mind letting go of that money. Under the old system, with a direct public offering, you would have to write that check in the beginning, $25 to 50,000 to the lawyers, and that might be really hard to do. That's one of the reasons why I think that it is a real step forward to have these crowd funding options available.
EÜ: For a small business, what's the biggest take home for them as far as what's available now and what's coming soon, and how they can sort through all the available options to find something that might be a best fit for them?
MS: I would say, if you're a business that has a strong public constituency network, a lot of fans, I would seriously think about how to convert them into investors. Because once you convert them into investors, you also are converting them into your fan base, marketers and loyal customers.
MS: It's kind of a win, win, win, once you bring them in through this other way. On the other hand, if you don't have that fan base, and you're really at the very beginning stages, this may not be such a smart idea. Frankly, when I talk to audiences about whether or not they should do local investing, one of the things that I counsel them to do is to minimize their involvement with start-up companies. Really, they should be focused on established local companies that they trust. A great restaurant that's setting up a second restaurant, a great store that's setting up another branch or expanding its building. Then you know the management, you know the goods and the service, and you have faith in it. People, I think, need to start being mindful about the difference between a start-up and an established businesses as they make these investment decisions by themselves.
GM: if you've got one key recommendation to make to a small business owner that's trying to raise some capital, what would you give that person as we head into the rest of 2016?
MS: My advice would be, for small amounts of money, if you need $25,000, $50,000 to get up and running, keep to the usual means, which is usually taking out a second loan on your house or your credit cards or your friends and family. Keep it small and simple. Once you get to the next level, I think that's where you can and should start looking at these crowd-funding options. You will find some really interesting ways of raising between, say, $100,000 and $1 million that were not available even three or four years ago.
EÜ: I know you've seen a lot of businesses go through that transition, to those that are looking for just a few thousand to tens of thousands of dollars, to folks that need a lot more of that. Is there one thing — that if you think back over your career and the things that you have told people as far as where to get their next capital, and how you've seen the entire capital marketplace changing — is there anything that you wish you had known sooner? Something you would have been advising to all of your clients or all the other folks that you've been in contact with you, either through your books or your speaking?
MS: Yes. I think that one of the things that I wish I had known about sooner and really understood is the role of cooperatives. Cooperative law is a kind of giant additional place where entrepreneurs might be able to find capital easier, faster, in a more democratic way, without needing to go through all of the torment of these new legal changes. 15 years ago, I tried starting a chicken company, and part of the design was to raise $1 million through direct public offering. It was a good exercise to go through.
GM: Wait, Michael, You tried to start a chicken company, did you just say?
MS: Yes. Bay Friendly Chicken.
GM: Tell us about that story.
MS: Yeah. On the Eastern shore of Maryland, we’ve got Tyson, Perdue, Mountaire, and every single element of these businesses is a textbook case of what business should not be doing. I worked with the Chesapeake Bay Foundation to try to create an alternative kind of chicken company. High standards, high labor standards, better relationship with growers, making them owners, new kinds of processing techniques, new kinds of distribution techniques. On paper, it looked great, but when we needed to raise our $1 million to get the thing up and running, the NASDAQ just collapsed and investors were really uninterested. For me, the upshot was, we should have created a cooperative. If we had created a cooperative, we could have done this. I think I was a little bit blind to that opportunity.
GM: Is a cooperative an option for small business owners like that?
MS: What we could have done is create a producer cooperative that linked together chicken farmers, and they could then jointly own through the producer cooperative the processing facility. And then we could have created alongside of it a consumer cooperative so that that consumer cooperative could own the distribution means to get the processed chicken to the stores and to their homes.
EÜ: Looking back in all of this, do you feel like you should have started a film making cooperative or stuck it out with the chickens, or are you glad you made the transition to speaking in economic development?
MS: No. I think I wound up in the right place.
We're all made in our lives by a series of inadvertent successes and very advertent failures. I feel like that those failures were very important in sending me in the right direction. The failure of the chicken company left me with this sense of “damn it, I'm going to figure out how to crack the securities code and make it easier.”
GM: Well, thank you. This was great having you on. It's a lot of great information on raising money and working with the community to crowdfund money.
EÜ: Yeah, and I really appreciate too, your keeping a finger on the pulse of all things that are happening, so that the rest of us that don't want to do this as a full time job, still have a sense of what's going on, as murky as those details may be.
MS: I'm glad my law school education was useful for something.
EÜ: Awesome. Thanks so much, Michael.
GM: Thanks Michael, take care. See you.
MS: Bye bye.
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GM: If you have any questions you’d like answered on the show…
EÜ: ...tweet us at Xero using the hashtag #XeroGravity. Or, text us your
questions, to 415-813-9878. We’ll answer them on next week’s show!
EÜ: Gene, can you see why I'm such a huge fan of Michael?
GM: Yeah, this guy is an experienced guy. What I like the most about Michael is that he has a real depth perspective about how community funding works, where to go to raise money, and really the way the law is, because Elizabeth, the law is really changing a lot. It's becoming more open for small business owners to raise money, but there's still a lot of questions about it. It's great to get his perspective on what those questions are and some thoughts on what small business owners should be doing to raise money from their community.
EÜ: Yeah, and I wish we had more time to get deeper into what he was saying about how co-ops are really offering a whole new opportunity. I think my favorite comment that he made of the entire interview is that he said — I hope I'm not botching his quote here, but, "We're all made of opportunities and inadvertent failures." I thought this is such a great metaphor, not only for how we craft ourselves as human beings, but also the fundraising process itself. It seems like there's always these opportunities and we have to go through some failures to eventually succeed.
GM: Yeah, in my case it's more like advertent failures, that's pretty much me, but I get what you're trying to say. He's absolutely right.
EÜ: So moving onto what's been making news and continuing on with this theme of raising money for your community, Gene, I recently saw an article in The Point Reyes Light, which is a very small publication, although a very well regarded in my small community of West Marin in the San Francisco Bay area. There is a team at an inverness oyster hot spot. It's called the Salt Water Oyster Depot and they get accolades for their food. People travel from miles around and they're hoping that local funding will help buy them a new oven. This article, it's really great. I mean, I've only been there a couple of times because it's a rather trendy restaurant, but apparently the oven, not only was it causing some limiting factors in what they were able to serve, but the staff was actually burning their forearms trying to get pizzas out of it.
This is not the first time that Salt Water has done some sort of campaign to raise money from the community. They recently did an upgrade, but to purchase this new oven they're actually using a company called Equity Eats. As much as I follow this field, especially as it relates to food companies, I had never heard of Equity Eats. But they're helping people raise money from their community by essentially offering them credit, food credit.
GM: It's a really good idea.
EÜ: It's really great. If people invest, I think they have to invest $1,000 or more, they instantly get a credit, not only for the $1,000 that they invested, but depending on how well the company does, they also get a premium on top. For Salt Water, it's $150 credit as long as the restaurant meets its annual revenue target. I love this idea because not only are they getting their customers to support them in making service and food better for them, but they're also sharing in the success of the restaurant.
GM: Keep your eyes open because we're going to be seeing a lot more of this in the future. It is becoming a lot easier to raise money from your community; it's becoming a lot easier to crowdfund money as well online. I think a lot of small business owners rather, than going to the traditional banks and going through all the paperwork and personal guarantees or whatever, I think this is going to be a growing trend that they can raise some money. By the way, banks don't mind. They like it when small business owners can raise money, grow on their own. They'll get to a certain level where the banks are like, "Okay, these guys are less of a risk for us, so we're going to give them money."
EÜ: I think what's also really cool about this article, too, is it shows that a lot of these crowdfunding campaigns or any kind of campaign where you're raising money from your community, serve as excellent marketing fodder. This local paper picked it up because they're doing something innovative. Something that you can also consider as a small business raising money is the marketing value of some of these community fundraising options. Well, that's it for this week.
Ep. 38 tease Be sure to tune in next Wednesday where we'll talk to two awesome social media marketing experts. They not only have an awesome small business story to share with you all, there’s also some hot tips to help you run your social media campaigns like a pro. We'll see you then.