Innovators in Rural Community Economic Development
Every so often I find myself thinking about the Wealth Works framework in new or expanded ways. I would like to share these thoughts with the Wealth Works community on the chance that they can add value to your work and to our shared understanding and ability to articulate the framework. I would welcome your feedback. I also invite you to share your own thinking.
Today’s topic is building relationships with investors. (Thanks to Jim King and Robert de Jongh for helping me think about this). Like some of you, I was recently at the Rural Investment Conference sponsored by the White House Rural Council. One of my takeaways from the conference was the importance of engaging potential investors in the proof of concept or pilot stage of developing a WealthWorks value chain, rather than waiting until you need the investment to scale up to full implementation.
Why talk with investors before you are ready to ask for money? What kind of conversation would you have, anyway?
Remember when we first focused on building relationships with demand and we had to learn to ask what the buyer needed rather than trying to sell what we thought we had? Well, there is a similar learning approach to investors that can help you not only build relationships with investors but structure your value chain to create the foundation for future investment.
The conversation with investors is all about risk. The degree of risk determines not only whether or not the investor is willing to participate, but also the terms of the participation; the greater the perceived risk, the higher the desired reward. What matters here is not your idea of risk, but theirs. What is it about your business model and operations that looks risky from the perspective of the investor? How would the investor quantify or qualify that risk? What is the information an investor would need to increase their confidence in your ability to manage risk?
Once you understand risk from the perspective of the investor, you can ask them (or others) to help you think about what you need to “prove” during the proof of concept phase to characterize the types of risk and the degree of risk and your capacity to manage it to their satisfaction. If you go through the proof of concept phase making sure that your “proof points” answer the questions investors are most likely to raise, you will be well positioned for scaling up.
Thanks to the work Marjorie Kelly did, we have a better idea of the many types of investors that may have self-interest in investing in WealthWorks value chains. Different types of investors will answer the questions about risk differently. For example, some investors will be concerned about things like food security or environmental impacts associated with your WealthWorks value chain. Others will be concerned about the reliability of transportation, impact on reputation, or the level of capitalization. The better you understand which components of the value chain investors are likely to have concerns about, the more likely you are to be able to collect the information during proof of concept that will help you communicate a realistic assessment of the risks that matter to them and prove that you have (or could have) the systems in place to manage those risks.
Once the risks are identified, you can begin to work intentionally on ways to mitigate those risks. In some cases, the very structure of a WealthWorks value chain may help mitigate important risks like overdependence on a single supplier or a single buyer. Other risks, like lack of a trained labor force, may be mitigated by giving attention to building individual capital and/or using social capital to attract individual capital. (One of the most interesting stories I heard at the Rural Investment Conference was the story of a biofuels entrepreneur who built a commercial scale facility in a small town in New Mexico. She was concerned about finding the labor she needed, but once the word about her facility got out, families contacted relatives that had moved away and enough of them came back to provide the labor that was needed. She was pleasantly surprised with how easy it was to fill the range of positions she had available.)
As this work continues, we have an opportunity to learn more about the language of risk and the many strategies available to limit risk (including, but certainly not limited to credit enhancements to manage financial risk) that can also help us build multiple forms of wealth that stick. The time to start is during proof of concept.
WealthWorks is a 21st-century approach to local and regional economic development that belongs in every community and economic development toolkit. For information about Yellow Wood's engagement with WealthWorks, see our WealthWorks and Wealth Creation pages and related resources.
