3 ms·

Let's say you invest $500/yr at $50 a pop in local businesses, as part of a club. This seems like an amount of money you might be okay essentially gambling with

Let's say you invest $500/yr at $50 a pop in local businesses, as part of a club. This seems like an amount of money you might be okay essentially gambling with. Let's imagine that fund spans a moderate size metro (2mil people) and 0.1% of people are willing to join once it gets "big". 2000 people by $500 is $1mil a year. If you figure seed money is $20-100k for a small business, you're creating 10-50 small businesses a year in your local area. (Possibly more once you're good at it and can leverage SBA and venture resources to help match your capital.) That's not a ton, and would definitely work better if you could nudge participation up to 1% or raise the average funding amount (or get another funding stream, or tax breaks, etc), but I think generating that local entrepreneurial churn can only be a good thing. I'd pay $50/mo to see several new businesses a year get started around town, just for the added cultural value small businesses bring.

scott00 9y ago
This is an interesting concept. I think the implementation would be very tricky though. The most important implementation detail is whether the investments are chosen by the investors, or by a manager or management committee of some kind. I think you would have problems doing this with investors doing the decision making; I would imagine you'd need to spend at least 10 hours per company invested to make a remotely informed decision; people aren't going to want to spend hours making a decision about a $50 investment. If you get the time commitment much lower, it will probably be a huge magnet for fraud. With a manager-based decision making process, I don't think the JOBS act affects the legality much. You'd probably need to house the decision-making in a registered investment company, which will probably cost you at least $50k/year in compliance costs. Getting even 1 remotely qualified manager would probably cost you $200k/year. I don't know that people are going to be as excited about the idea when they hear the expense ratio is 25%/year. To make it work, it seems to me you would need a national-level parent organization to amortize compliance and legal costs, and (qualified) volunteer decision makers.
- SomeStupidPoint 9y ago
  If you look closely, my numbers don't quite add up -- $50/mo is $600/yr not $500/yr. I was guesstimating about $200k/yr in operating expenses (and that's with a lot of volunteered expertise, as you note). But structured as a social-purpose non-profit, with everyone paying in being a member who elects a management board, who allocates the money as they see fit (perhaps with some constraints chosen by members), I think this actually bypasses a large amount of compliance work -- if you never return the money, and are strictly a non-profit investing in local businesses which rolls returns in to future investments -- because the members aren't actually making investments: they're paying for a non-profit's operational funds to support local business ventures. Structuring this way also makes for a better case to get donated expertise, eg from local lawyers and investors, and probably makes your tax situation a lot better. You probably need some rules about earning lifetime membership after a certain pay-in, and definitely some about conflicts of interest (eg, funding member's ventures) but those are more technical details. It's not a good financial investment vehicle, in that even in the best case you'd almost certainly have negative returns and in the worst, you'd have no returns at all -- but if your goal is changing the function of the market to support local enterprises and you're willing to pay in to make that happen, I think it'd function excellently. (Of course, you only really need to seed one or two Starbucks to have the whole portfolio right-side up again, even after decades of total losses. So at a generational level, it might work as a financial instrument as well.) Worth noting, even as a non-profit, there are ways to "return" the money besides the value of the businesses started if you do find yourself with extra funds -- investments in local parks, schools, art programs, etc. It'd never come back in currency returns, but I expect "investors" would see tangible value in their lives, quite possibly exceeding the monetary value they put in. tl;dr: It's easier if you structure as a one-way investment in your community, and collect dividends from the output of a vibrant community.
  - scott00 9y ago
    Ah, I didn't realize you were talking non-profit. That's actually a relatively established model: http://cdvca.org/ http://cdvca.org/
    - SomeStupidPoint 9y ago
sharemywin 9y ago
not sure if this helps but I think if you "work more than 500 hours a year" at the business your considered an active investor. Kind like a partner at a law firm.

scott00 9y ago

This is an interesting concept. I think the implementation would be very tricky though. The most important implementation detail is whether the investments are chosen by the investors, or by a manager or management committee of some kind. I think you would have problems doing this with investors doing the decision making; I would imagine you'd need to spend at least 10 hours per company invested to make a remotely informed decision; people aren't going to want to spend hours making a decision about a $50 investment. If you get the time commitment much lower, it will probably be a huge magnet for fraud. With a manager-based decision making process, I don't think the JOBS act affects the legality much. You'd probably need to house the decision-making in a registered investment company, which will probably cost you at least $50k/year in compliance costs. Getting even 1 remotely qualified manager would probably cost you $200k/year. I don't know that people are going to be as excited about the idea when they hear the expense ratio is 25%/year. To make it work, it seems to me you would need a national-level parent organization to amortize compliance and legal costs, and (qualified) volunteer decision makers.

SomeStupidPoint 9y ago
If you look closely, my numbers don't quite add up -- $50/mo is $600/yr not $500/yr. I was guesstimating about $200k/yr in operating expenses (and that's with a lot of volunteered expertise, as you note). But structured as a social-purpose non-profit, with everyone paying in being a member who elects a management board, who allocates the money as they see fit (perhaps with some constraints chosen by members), I think this actually bypasses a large amount of compliance work -- if you never return the money, and are strictly a non-profit investing in local businesses which rolls returns in to future investments -- because the members aren't actually making investments: they're paying for a non-profit's operational funds to support local business ventures. Structuring this way also makes for a better case to get donated expertise, eg from local lawyers and investors, and probably makes your tax situation a lot better. You probably need some rules about earning lifetime membership after a certain pay-in, and definitely some about conflicts of interest (eg, funding member's ventures) but those are more technical details. It's not a good financial investment vehicle, in that even in the best case you'd almost certainly have negative returns and in the worst, you'd have no returns at all -- but if your goal is changing the function of the market to support local enterprises and you're willing to pay in to make that happen, I think it'd function excellently. (Of course, you only really need to seed one or two Starbucks to have the whole portfolio right-side up again, even after decades of total losses. So at a generational level, it might work as a financial instrument as well.) Worth noting, even as a non-profit, there are ways to "return" the money besides the value of the businesses started if you do find yourself with extra funds -- investments in local parks, schools, art programs, etc. It'd never come back in currency returns, but I expect "investors" would see tangible value in their lives, quite possibly exceeding the monetary value they put in. tl;dr: It's easier if you structure as a one-way investment in your community, and collect dividends from the output of a vibrant community.
- scott00 9y ago
  Ah, I didn't realize you were talking non-profit. That's actually a relatively established model: http://cdvca.org/ http://cdvca.org/
  - SomeStupidPoint 9y ago

sharemywin 9y ago

not sure if this helps but I think if you "work more than 500 hours a year" at the business your considered an active investor. Kind like a partner at a law firm.