Friday, April 20, 2012

Crowdfunding For Local Investment

Okay, as promised, a little bit better news today after yesterday’s roll call of depression. I’ve heard some interesting things about crowdfunding and peer-to-peer lending, and have not had time to research it fully. But my local paper featured a story on it a couple of days ago, and since we’re on the local topic, I thought I’d feature it, especially since I have met or worked with some of the people in the article:
One area that stands to benefit is the type of investing Kaufmann and the others at Fund Milwaukee want to do - financing local businesses that they believe can enhance the community as well as deliver a return.

"The biggest winners out of this will be Main Street companies," said Amy Cortese, author of "Locavesting: The Revolution in Local Investing and How to Profit From It."

"If you're a high-tech start-up doing an iPhone app or the next social network, you have no dearth of investors willing to put up money for you," Cortese said. "But it's much harder for your bread-and-butter type of small businesses - the ones that may not be in the most glamorous or sexy businesses but nonetheless have very good prospects, are part of the fabric of their communities."

Fund Milwaukee has backed what it believes is one such business so far - ice cream-maker Purple Door. Eight of the group's 18 members lent money to Purple Door to help it buy equipment and open a retail store in a Fifth Ward building Kaufmann developed.

Other businesses, including a brewer and a food processor, have approached Fund Milwaukee about investing, Kaufmann said.

Whether the group branches into crowdfunding isn't certain, but Kaufmann for one is enthusiastic about its potential to support community-oriented investment.

"People are very generous in Milwaukee and really want to see Milwaukee be a better place," she said.

And crowdfunding, she said, offers a sort of do-it-yourself avenue of finance that aligns well with many people's ideals.

"It's a reaction in some ways to those who are disappointed with Wall Street and what financial markets are doing," Kaufmann said. "We see the damage, but we don't understand how we can make a difference, and this is kind of creating the path to taking your finances back into your own hands and using the power of your own money to have the impact you want to see directly in your community."
A new way of investing opens to businesses (JSOnline)

Some of the concerns raised in the article I find a bit laughable, like the concern about people getting ripped off. What do they think Wall Street’s been doing over the past decade or so? Does anyone really think Wall Street has “regulations” to “protect small investors?" Please. Crowdfunding allows you to invest in your community, sponsor productive local ventures instead of predatory corporations, and actually meet the beneficiaries of your funds. It allows like-minded people to create what is needed in their own community by pooling resources. And you can even make a profit. Of course you can lose money, investing is always a gamble. There is no “safe” investment. Of course, we know that’s not true, whatever the one percent invest will be returned, even if the public has to be taxed to do it.

One semantic note, I recently heard Andrew Leonard on the Diet Soap podcast. DS can be a bit hit-or-miss, but this was an excellent interview. He pointed out that buying a stock is actually lending money, not investing it, and that our financial system serves to mystify this. Investing money is things like starting a business, expanding plant and equipment, hiring workers, research and development, etc. When we buy a stock we are essentially lending money to a business that is theoretically investing it on our behalf, we are not actually investing ourselves.

Of course, we all know that this is not what’s happening. The returns to stockholders are coming less and less from investments, and more from dismantling society to provide the requisite short-term gains to the investor class. For example, mass layoffs and outsourcing increase company profits, stock values go up, but has anything been invested? Has anything been invested when existing companies are bought out and workers (termed redundancies) are put on the unemployment line?  In such cases it’s just a wealth siphon from the working classes to the investor classes – a wealth pump as it were. As publicly-owned companies move into towns and shut down entrepreneurial locally-owned businesses, stocks allow wealth to be pumped out of that community and into the pockets of shareholders, who can be anywhere in the world. Somehow, we’re all convinced that we benefit from this arrangement thanks to 401K “investor” propaganda, but the facts say that most financial wealth is in the hands if a vanishingly small minority  (The top 5 percent of households own 2/3 of stocks, of which the top 1 percent own a third). Instead of funding beneficial investments, the stock market is turning the economy into a giant zero-sum game. You can think of taxes as a form of investment too – in schools, roads, bridges, research and development, etc. Instead, they are going increasingly to fund military aggression, gravy-trains for the wealthy, pork-barrel spending (hypocritically denounced by its biggest beneficiaries) and tax breaks for the investor class, who use it to “invest” in stocks (see above). Meanwhile, the commons is dismantled piece-by-piece. That's hardly investment. It’s not wealth creation – it’s wealth extraction.

Stocks have become little more than a chit that enable the owners to be the beneficiaries of all that society collectively produces, and the “stock market” a rigged game for the wealthy to play amongst themselves. So I’m not too worried about Crowdfunding. It allows ordinary people with even a minor surplus of wealth to become “angel” investors. Many are probably less concerned with making a killing than helping their neighbors and community (imagine that!) There are some good local businesses that have a lot of popular support and are always short on cash. A good local example is Sweet Water Organics. Since people already donate time and money to them, wouldn’t it be nice if they had at least a possibility, however remote, of a return, even if it takes a while. This could also be used for things like urban farms, microbreweries, restaurants, makerspaces, etc. (The building mentioned in the article, close to where I work, is an urban dairy/creamery). I’ve had some ideas about turning old urban industrial buildings into co-housing projects. Things like this would be a big help.

For more, see: Crowdfunding Goes Prime Time — What Next? (Shareable). An interview with Jenny Kassan of the Sustainable Economies Law Center and Cutting Edge Capital about how the crowdfunding law came about, and what it means for the future.

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