Show your supply chain? No sweat.

Photo courtesy of The Sweatshop Project 

The recent collapse of a garment factory in Bangladesh, which killed or injured thousands of low-wage workers, shined a harsh light on how and where much of our clothing is made. And working conditions aren't the only problem:  fashion often comes at a high cost to our health and the environment, with finishes, fabrics and dyes that involve a laundry list of toxic chemicals. In fact, consumer goods of all kinds—whether clothing or cosmetics or processed food—are the retail equivalents of the global financial system, characterized by long, complex and opaque supply chains that are hard for companies, much less consumers, to keep track of. That is, until some tragedy, scandal or recall brings the details to the surface (horse meat, anyone?).  

In the wake of the Bangladesh incident, companies from Nordstrom to Walmart have indicated they would take steps to make their supply chains more transparent. We've heard that before. But corporations have been slow to back up their promises. In the meantime, a new generation of socially-minded companies is showing the way.  

In North Carolina, T.S. Designs makes organic cotton t-shirts "from dirt to shirt" in the state. The organic cotton is grown, spun, knit, finished, sewn and printed all within 700 miles—compared to the 16,000 miles that a typical globally-sourced t-shirt travels. The t-shirts are also printed with water-based ink and no harsh chemicals. When T.S. Designs president Eric Henry set out on this mission, there was no organic cotton being grown in the Carolinas. But with the help of a $30,000 loan from Slow Money NC, Henry was able to persuade (and pay up front) a handful of cotton farmers to make the switch to organic. In late 2011, the state's first organic cotton crop was harvested and ginned. Henry also helped found Cotton of the Carolinas, a collaboration of farmers and manufacturers dedicated to growing, making, and selling its t-shirts in the Carolinas. Each t-shirt from the Coalition comes with a tag that lets you track the entire supply chain, from farm to finish.  

I was recently introduced to another supply chain pioneer, S.W. Basics, a small but ambitious Brooklyn startup that makes a line of wonderfully simple skin care products, each with just five or fewer ingredients. No scary, unpronounceable names, chemical fragrances or fillers made in a lab. Just pure, ethically-sourced ingredients like shea butter, avocado oil, rosewater, coconut butter, and sea salt. S.W.'s founder, Adina Grigore, says all of the ingredients are either certified organic, Fair Trade, or sourced from small, family farms. And she wants you to know! Grigore and her team have launched a Kickstarter campaign to help the company film and document its suppliers, from the family that sustainably harvests its witch hazel in the Ozarks to the small Iowa firm that makes its lip balms and the women's cooperative in Ghana that suppliers its shea butter. 

The idea, says Grigore, is to celebrate S.W.'s suppliers and help them perhaps attract more business so that they can thrive. But it's also about creating new standards for doing business and encouraging people to be curious about how their products are made.

"For me, it's about being truthful to what we're doing, and not in a way that's token, like putting our ingredients on the front label, but in a way that is completely transparent," she says. In other words, "Proof, not just words." 

Grigore believes that if supply chains were more transparent, people might make different purchasing decisions. After all, would you knowingly buy cosmetics that have lead or endocrine disruptors in them? Or a t-shirt made in a sweat shop? No wonder the big conglomerates are so slow in responding to pressure.

As consumers, we have power. In addition to buying local and ethical, we can demand information from the retailers and manufacturers whose products we choose to buy. Or not buy, as the case may be. 

Happy Anniversary, JOBS Act!

In case you missed it, today marks the one-year anniversary of the JOBS Act. For those assembled in the Rose Garden for that momentous signing and for millions of entrepreneurs who would benefit from the law, hopes were high. A year later, we're still waiting for key provisions of the Act, notably crowdfunding and (Title III) and the lifting of the general solicitation ban (Title II).

There's been plenty written about that in the days leading up to the one-year anniversary (see links below) and several events today to commemorate the one-year mark (I participated in one in NYC yesterday). But I am reminded of the words of Bill Gates, who sagely observed that when it comes to disruptive technologies, we tend to overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.  The revolution, apparently, will wait. 

Happy anniversary JOBS!

http://www.forbes.com/sites/ryancaldbeck/2013/03/16/happy-first-birthday-jobs-act/
 
http://www.washingtonpost.com/business/on-small-business/for-brokerdealers-crowdfunding-presents-new-opportunity/2013/03/28/bb835942-8075-11e2-8074-b26a871b165a_story.html

http://www.inc.com/candace-klein/the-regulations-that-ate-crowdfunding.html

http://www.forbes.com/sites/devinthorpe/2013/04/03/anniversary-of-jobs-act-finds-investment-crowdfunders-champing-at-the-bit/

http://www.crowdsourcing.org/editorial/conference-to-bring-crowdfunding-leaders-to-silicon-valley/24856

Crowdfunders to SEC: Bring it On

I was in the Rose Garden that exhilarating, giddy day last April, when President Obama signed the JOBS Act into law. And I can tell you with relative certainty that everyone present, including the President, thought that it would be implemented by now. Instead, as we approach the one-year anniversary, key pieces of the JOBS Act —namely Title II and III, which eliminate the restrictions on advertising private securities and allow for investment-based crowdfunding, respectively— are still just a rosy dream. That's because the SEC, the agency charged with writing the rules that will govern these new provisions, has been moving at the speed of molasses.

Here's a not-very-well-guarded secret: the proposed rules for crowdfunding have been written by the SEC staff and finished for some time. What's holding it up? Well, apparently the commissioners have been sitting on the rules for reasons spanning wariness of leaving themselves open to criticism from opponents of crowdfunding, to turmoil at the agency: former SEC chairwoman Mary Schapiro resigned late last year. Elisse Walter — one of four remaining commissioners, was named interim chairwoman. Then President Obama nominated Mary Jo White to head the agency, although she has yet to take over the role. In the meantime, it's a power vacuum. For crowdfunding advocates and startups, it's like waiting for Godot.

And that's a shame, because the delay is holding back regulatory progress that could deliver much needed relief to small businesses seeking capital and begin to bring the transformational power of the Internet and social networks to a broken financial system.

It's against this backdrop that some of the leaders of the nascent crowdfunding industry decided to take a stand. This morning, the Crowdfunding Professional Association staged a press conference at the National Press Club in Washington, before heading off to meet with various officials in the Office of Science & Technology Research, Treasury and, yes, SEC. Their aim, it seems, was to dispel some of the misperceptions about crowdfunding and put pressure on the SEC to act.

One of those misperceptions is that crowdfunding is about get-rich-quick schemes. Instead, speaker after speaker talked of helping Main Street businesses. Woody Neiss of Crowdfund Capital Advisors summed it up when he said that crowdfunding is not about "finding the next Facebook" — Silicon Valley does a robust job of that already. It's about finding and funding "the next 1 or 10 or 100,000 Main Street startups" that will create jobs and help build strong and prosperous communities. "It's social media meets community finance," he said.

Readers of this blog and my book will know that this is long what I have been preaching. To me, crowdfunding makes the most sense when there are social bonds and relationships that connect investors and entrepreneurs. As Warren Buffet has long advised: it makes sense to invest in what you know!

Crowdfunding is also an opportunity to take a broken financial system and make it better. To wit: Sarah Hanks, a former securities and corporate lawyer who is now the CEO of CrowdCheck, is offering a private market solution that addresses regulators' fraud and risk concerns. Her disclosure and due diligence system walks investors through the investment process, presenting them relevant information in plain understandable English. Compare that with the typical phone book-sized prospectus filled with legalese that no one in their right mind reads. "We've thrown that out the window," says Hanks. "The best disclosure is the kind that someone is actually reads and understands."

Crowdfunding is in its infancy and will continue to evolve to address market needs. As Chance Barnett, founder of Crowdfunder.com pointed out, Crowdfunding 1.0 was about transactions, often undertaken on impulse. But with the JOBS Act, we're on the cusp of Crowdfunding 2.0, which will be based on building long term relationships and community ecosystems.

In a world of speculation and short term trading, that is something to celebrate. That is, if the SEC ever makes a move.

The Real Risk With Crowdfunding

When the JOBS Act was signed into law last April, entrepreneurs were elated, even giddy, at the prospects. They and other supporters saw it as a democratizing force that could unlock new sources of capital for job-creating entrepreneurs, boost the economy and give Wall Street-wary investors a profitable alternative. It was one of those disruptive innovations that comes along once a generation and radically transforms the competitive landscape. It was so potentially revolutionary that pundits and financial pros alike predicted it would put many venture capitalists and banks out of business—in other words, exactly the sort of game-changing opportunity that makes entrepreneurs dream big.  

Well, ten months later, the enthusiasm has cooled. Not for the potential of crowdfunding, but for the realistic chances that it will be enacted anytime soon and in a form that honors the original intent of legislators to ease the bottlenecks that prevent so many entrepreneurs and small business owners from obtaining the capital they need to grow, hire and thrive. The SEC, which was charged with writing the rules that will govern the nascent crowdfunding industry by year-end, has missed that deadline (not surprisingly–the agency is concerned about the potential for fraud and has a lot on its plate already). Most people now believe true investment crowdfunding will not get underway until 2014. At the same time, it appears likely that the rules will require the new crowdfunding portals to be regulated much like conventional broker-dealers—in other words, more Merrill Lynch than eBay, as one observer put it. For better or for worse, crowdfunding may turn out to be a game not for idealistic entrepreneurs but for well-capitalized investment pros. 

As I wrote in my recent feature for the New York Times, despite the uncertainty, the outlines of a new industry are beginning to take shape, and with it a glimpse of what a crowdfunding future might look like: promising young companies able to get funding from people who  believe in them, regardless of those investors' net worth; new jobs being created by the availability of growth capital; and more broadly shared prosperity and economic opportunity. Sure, there is a risk of fraud and loss with crowdfunding. But then, that takes place every day on Wall Street. As Thom Ruhe, vice president for entrepreneurship at the Kauffman Foundation, told me, with the economy stuck in limbo, the bigger risk to the economy is to do nothing at all. 

Kickstarting the Indie Food Scene

I've been a bad blogger, I know. I will not even tally up how many weeks have passed since my last post! So thank you for hanging in there. I intend to revive this blog - and indeed build it into something much bigger - in the coming months. In the meantime, let me ease back in by sharing a story I recently wrote for Edible Manhattan about Kickstarter and its role in funding a new crop of indie food entrepreneurs:

THE EDIBLE ECONOMY: RAISING DOUGH
First published in the November-December 2012 edition of Edible Manhattan

When Dan Maniaci and Piergiorgio Maselli were Boston College students with an appetite for more than knowledge, burgers were a shared obsession. Sliders, Big Macs, Shackburgers, animal-style In-N-Outs—they devoured them all (Maniaci earned the nickname “Tapeworms” after scarfing 11 cheeseburgers in one sitting).

Still, for all the great burgers they could order while out, the two undergrads lamented the pathetic state of patties made at home: overcooked and drowned in ketchup. So they began making their own burger sauce in an effort to resuscitate the home burger experience.

From their tiny dorm kitchen, the pair experimented with recipes and tried them out at tailgate parties until they hit on their Top Secret Burger Sauce— Maselli likens it to “a zesty mayonnaise with some spice.” After graduating in 2010, they moved to New York (“burger nirvana,” says Maniaci) with big plans to launch Gotham Sauce Co.

But, like many would-be food entrepreneurs with little credit history and no collateral, they found the up-front costs—renting a commercial kitchen space, contracting with a manufacturer, securing the right permits—were out of reach. “We didn’t even bother going to a bank,” says Maselli.

In years past, their story would have ended there. Instead, this September, Maniaci and Maselli turned to Kickstarter, a three-year-old company on the Lower East Side whose Web site lets ambitious but underfunded entrepreneurs appeal directly to friends, fans and future customers who believe in their idea. They put together a video pitch explaining their quest “to give the homemade burger a better life” through their secret sauce. And they promised perks to anyone who made a donation—from “a warm and fuzzy feeling” for a $1 contribution, to a bottle of Top Secret Burger Sauce for a $10 pledge, all the way up to a gourmet tailgate party cooked by the two 24-year-old entrepreneurs for a $2,500 pledge.

On September 15, just four days into a monthlong funding campaign, they hit their $5,000 goal—modest seed money that would allow them to start commercial production and shop the product around. But contributions continued to pour in, from friends, family, classmates and random burger lovers. With more than a week to go, 950 people had chipped in a whopping $18,500.

Maselli, a New York native now in law school at St. John’s, called the tremendous response “a vindication” of the venture. He and Maniaci are finalizing arrangements with a co-packer and plan to ship their first products in December. Armed with bottles, they can also begin calling on specialty stores and supermarkets, he adds.

Welcome to the Kickstarter economy.

Read more here or go to http://www.ediblemanhattan.com/featured-article/raising-dough/ 

In Defense of Crowdfunding

Crowdfunding legislation is tantalizingly close to becoming reality—the Senate is expected to pass a version of a bipartisan House bill within days. But a rash of negative publicity threatens to derail this important update to antiquated securities laws that hamper small business capital raising.


The problems stem from the Jump-Start Our Business Start-Ups act—JOBS, for short—a House package that rolled together a number of largely uncontroversial bills aimed at spurring small business capital raising, and added some new ones. JOBS has provoked a fierce outcry from consumer protection groups, regulators and pundits, who evoke alarming images of coke-snorting boiler room operators, Nigerian scammers and pump-and-dump research analysts. It seems this bill will make "Muppets" of all of us.


Let's all take a deep breathe and consider this.


The elements of JOBS sparking the most backlash are provisions that loosen regulations on public and pre-IPO companies, including exempting publicly traded "emerging growth companies" from certain reporting requirements, and letting issuers and financial firms peddle securities to accredited (aka wealthy) investors. Fair criticism. I don't see anyone taking issue with other elements of the bill, like raising the ceiling for Reg A offerings and increasing the number of shareholders (from 500 to 1,000) a private company can have before it is considered public.


The other key element of the package is a crowdfunding bill that had previously passed the House with near unanimous support. Crowdfunding has its share of detractors, for sure. But much of the recent criticism seems to be unfairly tarring crowdfunding and other good elements of JOBS with the same broad brush. In the Times, Floyd Norris declared crowdfunding "a major victory for Wall Street." 


That couldn't be farther from the truth.


Crowdfunding, as most people by now know, is a fundraising model where lots of small sums are aggregated from lots of people. Think Kickstarter.com, Kiva.org, and President Obama's initial presidential campaign. Crowdfunding legislation would move that model into the investment sphere, so  entrepreneurs could tap into their social networks to raise capital, and allow those investors to share in the profits. It's Kickstarter with a financial return. 


Under existing rules—rules that were crafted in the 1930s, in the age of ticker tape and telegraphs—that is illegal. Private companies may only raise money from accredited investors. If they want to reach out to their customers, their friends and family, their neighbors or social networks—a perfectly natural impulse—they must hire lawyers and accountants to guide them through a registration process and produce a bulky prospectus that hardly anyone reads. This process can easily cost $1 million or more—making it a non-starter for small firms that only need $10,000 or $100,000 or even a million.


These small firms are shut off from a huge pool of potential capital, at a time when bank lending and seed funding is down dramatically. And ordinary Americans are unable to invest in companies that they know and love and support.


Having spent the past two years talking to small businesses and investors, I can tell you that people want to invest this way. They would like to put their money in companies that they know, that are part of their community, or doing things they believe in. Just look at the success of Kickstarter, which has raised tens of millions of dollars in contributions for creative ventures. The site logged $1.6 million in pledges in a single day this week.


Before it shut down last month under pressure from regulators, ProFounder.com—a crowdfunding platform cofounded by a founder of Kiva—helped dozens of small businesses raise money from friends and family. This kind of capital is supportive, nurturing capital. It's the antithesis of vulture capital or "ripping the eyeballs out" of Muppets.   


In fact, crowdfunding presents a badly needed alternative to Wall Street-style investing. Just as Kickstarter allows independent artists to bypass the traditional gatekeepers like record studios and publishers to get their works produced, crowdfunding can help entrepreneurs with good ideas or promising growth potential get funding that is not forthcoming from banks or VCs. Millions of Americans have moved their money out of big banks to credit unions and community banks; many may want to do the same with some of their investment dollars.  


Yes, there is risk. Investors could lose money or be victims of fraud—just as they can in the stock market. Most of the proposed crowdfunding bills limit the amount that individuals can invest in a crowdfunded venture—the highest allowable amount among the bills is (the lesser of) $10,000 or 10% of their annual income—so the amount any one investor could lose would be limited. (In comparison, there is no limit to what they can lose in the stock market or at the casino, for that matter). The amount a company can raise is also limited, to $1 million (or $2 million with additional disclosure).


It is the risk of fraud that has most critics' knickers in a knot. Without a doubt, hucksters will ooze out of the ether. But there are commonsense measures included in the crowdfunding bills that can address the risk. For example, the Senate bills require companies to go through a crowdfunding intermediary to raise funds. The intermediaries (the equivalent of a Kickstarter or eBay) must register with the SEC. And they must hold funds in escrow until the money is released to the company raising it. In addition, state regulators can prosecute any offenders if someone manages to pull off a fraud.


The crowdfunding intermediaries will also perform a basic level of vetting of the companies they list on  their sites, such as background checks of principals and the like. And let's not underestimate the power of  hundreds or thousands of people dissecting a business plan and crowd-vetting an idea or a company. The Internet brings a new level of transparency to investing, in ways that the framers of the 1930s securities laws could never have imagined. In fact, crowdfunding has the potential to be more transparent than many other investments we can routinely make. Do you know what's in your emerging market mutual fund, or what the hidden fees are, for example? Do you really know what is going on inside that blue-chip bank whose stock you own? (Here's a hint)


Crowdfunding has been taking place for nearly two years in the UK without a hitch, funding hundreds of local businesses. Luke Lang, a cofounder of Crowdcube.com, which has raised more than £2.5 million in equity capital for more than a dozen companies since it launched a little over a year ago, fully expects some companies to fail; that comes with the territory. But so far there has not been a whiff of fraud. Likewise, on Funding Circle.com, British investors have lent more than £23 million to about 600 local businesses in the less than two years, with nary a Nigerian scammer or boiler room creep. 


The bottom line is, the financial system is broken. Small businesses—which create the majority of jobs, contribute half of private GDP and provide the biggest economic boost for their communities—are going begging for capital. Investor protections are predicated on the public markets, yet those markets are closed to 80% of the companies that need them, according to a report by Grant Thornton (pdf here). Small firms are simply priced out. The median IPO size has risen from $10 million 20 years ago to roughly $140 million today. 


We need alternatives. Done sensibly, with the right precautions built in, crowdfunding could unleash a new wave of innovation and job growth. The potential rewards vastly outweigh the risks. I hope Congress and the pundits will separate this issue from some of the more problematic proposals in the JOBS package. 

Starbucks Revisited

Remember Starbucks' Create Jobs for USA program?


The java giant launched the program last fall in an innovative effort to help stimulate the economy by getting money into the hands of micro-entrepreneurs and small businesses that could create jobs—if only they had access to funding. The program is sort of a "counter-to-community" model: Starbucks customers are encouraged to donate a few bucks after buying their Caramel Macchiatos. The aggregated funds are then funneled to community development loans funds, which make loans to entrepreneurs in low-to-moderate income areas that conventional lenders deem too risky. These loan funds have an impressive record of success and job creation. (See my previous post on this)


The program is off to a promising start. Since November 1, customers have donated more than $2 million. Assuming an average donation of $5, that's about 400,000 customers. Add in the $5 million that Starbucks kicked in, and we're looking at $7 million being injected into underserved communities. The money is leveraged by the community loan funds for maximum impact: every $5 from the Create Jobs for USA program translates into $35 worth of loans.


Those are the numbers, but here's what it looks like in action.


In Elkins Park, a tree-lined Philadelphia suburb, Starbucks customers are helping to fund a new food cooperative called CreekSide Co-op. The Reinvestment Fund, a Philly-based community loan fund that is one of the 63 such organizations to receive funds from Create Jobs for USA, is making a $2.2 million bridge loan to the coop. That will allow it to complete construction, after which it will qualify for a USDA loan guarantee program. In addition, CreekSide Co-op has raised $280,000 from its members, who earn up to 6% on their money, in an ongoing member loan campaign.


The CreekSide Co-op is expected to create 47 fulltime positions and 28 construction jobs. And locals hope it will help revive the area's flagging retail district, which has suffered since a popular, locally-owned grocery store sold out several years ago and foot traffic trailed off.  Jon McGoran, a Creekside Co-op board member and Elkins Park resident, notes the experience of Mount Airy, another Philadelphia neighborhood. When the Weavers Way food coop opened a few decades ago in a quiet spot there, other businesses soon followed, including a bookstore, a yoga studio, a creperie and an architectural salvage shop, creating a vibrant retail center and what is today one of the area's most coveted neighborhoods. McGoran, who works at Weavers Way, said Mt. Airy coop is also lending money and expertise to CreekSide.


In Buffalo, New York, a community health center is another recipient of a Starbucks-supported community loan. After several hospitals and primary care facilities in the area were shuttered, patients visits at the Community Health Center of Buffalo swelled. The center was able to expand to 50,000 square feet thanks to a $450,000 loan from Primary Care Development Corp., a New York-based community development financial institution (CDFI). The expansion enables the center to provide primary and preventative medical care, dental and behavioral health services more than 12,000 low-income residents, and has created jobs across a spectrum of skill levels, ranging from entry-level clerical to licensed professionals, in an area that badly needs them.


These are just a couple of examples of how the spare change donations of ordinary citizens can have a real impact on neighborhoods in need. Better yet, many community development loan funds allow individuals to invest directly in their own communities, in return for CD-like returns in the low-to-mid digits. To find a loan fund in your own area, check out the Opportunity Finance Network's CDFI locator.