A culture of entrepreneurship is taking root in Detroit. Attend an Open City
event and you will see that there is a growing group of Detroiters excited to transform their ideas and talents into small businesses. Of course, starting a business is no cake walk. Significant planning, product testing, and time investment is required to launch a venture. But even with all of that, one large hurdle remains--access to capital is required to really make a business work.
Capital, particularly from traditional financial institutions like banks, is not always available to startups. That's why a new movement is gaining momentum, one that is looking to find and utilize alternative forms of capital to help small businesses grow.
On Nov. 18, Cliff Bell's was packed with people interested in learning more about these alternatives from a panel of experts involved in the world of "Loca-vesting," or sourcing funding locally from companies and individuals located in the same community as the would-be borrower.
The panel was composed of:
Pavan V. Muzumdar, CFA at Revalue
Jason Paulateer, VP and Market Manager, PNC Bank
Christine Narayanan, CEO, Opportunity Resource Fund
Craig Fahle, host of WDET
's daily local affairs program The Craig Fahle Show
, moderated the panel, and started by asking the question that most people in the audience were thinking: "Loca-what?"
Loca-vesting, as panelists explained, is a term coined by author Amy Cortese for non-traditional, community-sourced capital--meaning that "loca-vested" capital's destination is not far from its source. In other words, it's neighbors investing in neighbors.
While the term itself is a neologism
, there's really nothing new about loca-vesting.
"Local investing is something we used to have a long time ago and it's starting to come back," said Pavin Muzumdar, who explained how government regulations had greatly discourage local investing, but changes in regulations are now allowing for its resurgence. "Right now we have a window of opportunity."
Muzumdar's firm, Revalue, is an investment firm that does exactly that by collecting the money of local investors and investing it in local businesses.
Fahle asked the panelists, "How seriously are banks taking alternatives to traditional investing in this city?"
Jason Paulateer pointed out, "There's a misconception that banks are not investing. It's not true. For startups, however, banks are not the place to go," suggesting that loca-vesting has long been a traditional route for startups, who must first go to friends, families, and (Paulateer noted somewhat facetiously) fools for initial funding.
Of course, there are institutional lenders who do make loans in the startup space. They are known as CDFIs, or community development financial institutions. Banks, while not willing to be the lender of choice to startups, will often give money (as is required of them by the Community Reinvestment Act
) to the loan funds of CDFIs.
"We lend where banks will not," said Christine Narayanan, CEO of the Opportunity Resource Fund, a 26-year-old CDFI which has been loca-vesting that entire time. "We will lend to startup businesses."
Intermediary financial institutions like CDFIs are an important addition to the "friends, family, and fools" who traditionally lend to startups. As Narayanan pointed out, "It's not always a great idea to lend your brother-in-law $20,000, even if he's got a great idea. That's where intermediaries come in."
Intermediaries and other loca-vesting institutions not only make investments in local businesses, they provide counsel and expert advice to their borrowers. "You need intermediaries who are coaches," said Pavan Muzumdar.
This also applies to people funding local businesses by investing in funds like Revalue. "We look at who you are as an investor, and we help our clients understand their investments. You can visit the investment if its in your local community. Most local businesses aren't going to be rocket science ventures. They're going to be businesses you understand."
Jason Paulateer noted that we still have a long way to go to build a strong network of loca-vestors in Metro Detroit. "From a private equity standpoint, in Silicon Valley, there's over 300 private equity firms. There's only 25 in Michigan. We're in the process of building an ecosystem, but we've got a ways to go to get there."
Pointing to the BizGrid
(the subject of the previous Open City event), a graphical representation of the various business resources and the organizations that exist to support Detroit entrepreneurs, Paulateer noted without a doubt, "The ecosystem is forming."
Reflecting on the the zeitgeist of Detroit, Pavan Muzumdar commented, "There's a lot more awareness of entrepreneurship. All capital is just an advance on future money you will make from customers. Focus on the customer and capital will come."
Matthew Lewis is a special projects editor for Model D.