18. Investing in the Underinvested

Today’s letter is about investing in the underinvested. Here’s the letter:

I'd like to invest in some underinvested entrepreneurs. How can I do this? 

Love this question! So 3 things came to mind when I saw this question:

Are you familiar with equity crowdfunding? Sometimes you’ll also hear this referred to as regulation crowdfunding. Let’s get some time travel sound effects and go back to 2012...Barack Obama was the POTUS and he ushered in the Jobs Act. Jobs stood for Jumpstart Our Businesses. It passed with bipartisan support and the whole theme of it was making funding more accessible to small businesses. Whereas previously, only “accredited” investors could participate in venture capital investing, this act made it so that everyday investors could also participate. At the time, there was a lot of criticism that the cap for what a company could crowdfund was $1M in equity, but the Securities and Exchange Commission has recently upped that cap to $5M.

I think that was probably the moment that Arlan Hamilton knew what she would do next.

Arlan Hamilton is the founder and managing partner of Backstage Capital. She has stepped loudly onto the scene and is a black, gay, woman who is committed to funding startups by people of color, women, and the LGBTQIA+ community.

In Feb of 2021, she announced that she is opening a new fund that anyone can invest in to allow more regular people access to VC-style investing as part of their portfolios. Specifically, she is allowing everyday investors to invest in the umbrella company of Backstage Capital. And my understanding is that you can invest as little as $100. What a time to be alive! I will be following developments on this.

https://www.theverge.com/2021/2/1/22213270/arlan-hamilton-backstage-capital-vc-venture-capitalist-interview-decoder

I also want to highlight another way to invest in underinvested entrepreneurs and that is by lending out small amounts of money through the practice of microlending. Muhammad Yunus won a nobel prize for his work in creating a successful microlending system with the Grameen Bank. He says he got the idea when he was talking to some women in a village in Bangladesh and realized the challenges they faced in trying to access even tiny amounts of capital to start or grow their small businesses. And I do mean tiny amounts of money. A few dollars per woman. And they all paid him back and made profits on the money he’d lent them. So anyway, fast forward some years and he grew Grameen Bank to provide billions of dollars in microloans to millions of borrowers, mostly women, in Bangladesh. Muhammad Yunus’ advocacy for this type of economic development inspired lots of others to start similar organizations, like kiva.

Kiva is based in SF and it originated when Jessica Jackley invited her then husband Matt Flannery to listen to Muhammad Yunus speak at Stanford Business School. They were so moved by his speech that they founded Kiva 2 years later. Kiva has grown a lot since then. I was reading their 2019 annual report and saw that they were facilitating $150M in loans in 67 countries. Most of their loans go to women in rural areas in developing countries, although they don’t limit loans to women and they do also loan to borrowers in the US. Some borrowers get the loans directly from Kiva, in which case they don’t pay interest. Other times, and I get the sense that this may be the majority of loans, Kiva works with local partners to be able to disburse these loans. So the borrower usually pays interest to the local partner. And the local partner uses that interest to pay a fee to Kiva. Kiva uses those fees to run their organization and they also get lots of funding and grants to provide the overhead costs. The repayment rates are high- about 97% and you can loan as little as $25. All of your loan amount will go to the borrower. And you don’t need to have the full amount that a borrower has requested. There’s a crowdfunding element to it, so for example, I saw a post by a Palestinian woman in the West Bank who is raising money to upgrade her sewing machine and fabrics to sew to support her family. So far, about 48 people have lent money towards this effort. There are thousands of borrowers who have posted their projects and you can choose to lend your money to the ones that speak to you. There are similar organizations if kiva doesn’t feel like a good fit for you, but check it out to get used to the concept at least. And by the way, they do also loan to borrowers in the US as well.

Speaking of the US, here’s my third suggestion. Have you thought about banking with a CDFI? That is a community development financial institution. In other words, a bank or credit union that focus on serving people in low income areas that have traditionally been locked out of the financial system because, say it with me, systematic oppression. One secret about being poor in America is that it is really, really expensive. For example, payday lenders sometimes charge around 400% interest rates. I’ll say that again- 400%. Rather than going to a payday lender, a person could go to one of these CDFIs and get a rate of say 18%. Or, you might have someone that is trying to buy a house or start a small business who will actually get access to money through one of these CDFIs. So my suggestion is to consider banking with a CDFI. You can put all or some of your money into one of these CDFIs which means your capital will then be accessible to a community that has been locked out of traditional banks. There are CDFIs all over America, here's a link so you can find a CDFI bank or credit union in your state. 

https://www.cdfifund.gov/programs-training/certification/cdfi/Pages/default.aspx

So those are my 3 suggestions for you today, you want to invest in the underinvested, think about:

1. Equity crowdfunding for example through Backstage Capital, Arlan Hamilton’s VC.
2. Microlending, for example through an organization like Kiva
3. Keep some of your money in a CDFI bank or credit union so people who have historically been locked out of our country’s financial system can have access to capital to buy homes, and take out loans and start businesses.

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