Entrepreneurship | December 18, 2018

The Opportunity Alpha: Year in Review

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Greetings, ImpactAlpha readers!

The Opportunity Alpha

The maximum opportunity, we wrote last summer, is “to flip the switch from scarcity to an abundance of capital for investments in geographies and demographics that have long been capital-starved.”

Certainly there is maximum danger as well in “Opportunity Zones,” the talk of the town in U.S. impact investing after targeted capital-gains tax breaks were slipped into last year’s tax bill. Dozens of “opportunity funds” already are raising billions to invest in the 8,700 designated low-income neighborhoods in all 50 states. The dangers include extractive real-estate plays that fuel gentrification, investment schemes that cut out local businesses and residents, and social impact goals that get trampled in the rush for tax breaks for already wealthy investors. That Opportunity Zones will encourage all kinds shenanigans is completely predictable.

New Revivalists are using these six strategies to revive entrepreneurship and the American Dream

Less predictable will be ways Agents of Impact inside and outside of the neighborhoods seize the, er, opportunity. At the outer edges of probability, the Opportunity Zones opportunity is a chance to demonstrate a new economic model that values broad prosperity, racial equity and social inclusion.

That “opportunity alpha,” of course, goes far beyond tax breaks. Across the U.S., “New Revivalists” are leveraging place, untapped talent and technology to serve local needs, rebuild manufacturing, create jobs, share wealth and restore neighborhoods. In New Orleans, Louisville, Cincinnati and elsewhere, local ecosystem builders have long been nurturing entrepreneurs, tapping talent, stacking capital and prioritizing positive social impact as a business advantage. Across asset classes, a new set of investors are working with companies to craft financing and “stakeholder” structures that work for more entrepreneurs and share economic gains with the community and employees as well.

Opportunity alpha is driven by investments in places where others aren’t looking, bets on leaders and team members others have underestimated, and commitments to solutions to problems others don’t yet understand. The trick to making the zones more than a quick-flip real-estate play, and to generate more than low-wage, temporary jobs, is active community participation and deep engagement that surfaces better ideas, activates talent, reduces risks and makes for better investments. Game on!

Agents of Impact shape Opportunity Zone opportunities

1. Early movers set the tone. ImpactAlpha identified impact fund managers moving early to align investment strategies in Opportunity Zones with community goals. Among the first movers: Access Ventures, LISC, Village Capital, Enterprise Community Partners and TPP Capital Management. Shaping things to come.

  • ImpactAlpha has identified more than 60 opportunity funds aiming to raise roughly $15 billion for commercial and residential estate, affordable housing, clean energy infrastructure and small business and venture investment.

Community development lenders attract new investors to low-income neighborhoods

2. Small business opportunity. To be sure, the easy money is in shovel-ready real estate in the new zones. The real “opportunity alpha” lies in bridging the capital gap for small businesses key to quality jobs and local wealth-creation. The $250 million Rivermont Enterprise Emergent Communities Fund is aiming to invest in businesses on “Main Streets,” starting in North Carolina and Virginia.

3. Stacking community capital. Low-income neighborhoods need debt, equity, grants and even municipal-bonds, to create thriving communities with jobs, housing and services for current residents and growing revenues for local business owners. Flavors of financing.

4. Catalyzing impact. The Kresge and Rockefeller foundations issued a call for opportunity fund managers with inclusive investment theses. Calvert Impact Capital (backed by Kresge) will incubate five such fund managers – Craft3, New Orleans Startup Fund, Gulf Coast Housing Partnership, Renaissance HBCU Opportunity Fund and Fifth Ward Community Redevelopment Corporation.

5. City action. Accelerator for America, led by Los Angeles Mayor Eric Garcetti, is boosting city-level planning for Opportunity Zones. Brookings Institution’s Bruce Katz and Evan Weiss offer 10 ways cities can maximize economic and social potential, including skills-training for local residents and access to capital for female- and minority-owned businesses. New York City is considering loans at 3% (vs. commercial rates of about 8%) for opportunity fund managers.

Opportunity zone advocates call for market transparency and impact accountability

6. Carrots and sticks. Impact and community investors have been pushing for federal rules to encourage investment in small business, as well as for basic data reporting. Rules due in January are likely to include at least basic reporting requirements for social impact and further clarity on qualifying OZ businesses. President Trump created a White House council to coordinate federal Opportunity Zone support, including grant funding, loan guarantees, infrastructure spending and crime prevention initiatives.

New Revivalists leverage the power of place

1. New Revivalists. ImpactAlpha teamed with venture firm Village Capital to produce profiles of more than two-dozen entrepreneurial ecosystem builders. The series continues. Some highlights:

2. Six New Revivalist strategies. Meet and and talk with leaders working to revive entrepreneurship in cities and towns across the U.S. and you’ll find some common threads: Go to overlooked places. Solve real problems. Give entrepreneurs space to grow. Fill the friends and family pre-seed capital gap. Build businesses on revenues, not venture capital. Most importantly, spot hidden and underestimated talent. Join the revival.

New Revivalists are using these six strategies to revive entrepreneurship and the American Dream

3. Place-based models… From Detroit and Chicago to Appalachia and the Navajo Nation, private investors are tapping civic leaders, community foundations and local nonprofits to find investment opportunities in small businesses, schools, health clinics and urban infrastructure. The impact: quality jobs, affordable housing and inclusive growth. Invest in where you know.

4. …can catalyze community-development capital. The PhilaImpact Fund is giving small investors and donor-advised fund investors the opportunity to invest in local economic development through Reinvestment Fund’s promissory notes… Reinvestment Fund, along with the Local Initiatives Support Corp., issued S&P-rated bonds, a new source of capital for community development finance institutions… Neighborly is giving municipal bonds a tech makeoverImpact Community Capital is bringing institutional capital to affordable housing.

Impact investors seek to steer institutional capital toward affordable-housing finance

5. New localism lives. Civic leader and social financier Jeremy Nowak’s ideas live on in The New Localism, a vision for revitalizing civic life and rebalancing local economics. “Power,” write Nowak and co-author Bruce Katz, “belongs to the problem solvers.” Remembering Nowak.

Restructuring finance to restructure the economy

1. Alternative capital structures. The “demand dividend” and other revenue-sharing structures re-emerged in 2018 as an alternative to venture capital-style investment term sheets. The Creative Action Network, an artist-activist community in San Francisco, will repay investors from profits after the firm hits revenue targets. For companies that are too big for revenue-sharing, but too small for VC funding, equity buybacks, or redemptions, might be a better fit. “Investors are not taking money out of the company during the crucial early years of growth, and instead are reinvesting into the business,” says Candide Group’s Aner Ben-Ami.

‘Demand dividend’ emerges as alternative to venture capital financing

2. Stakeholder ownership. The Center for Economic Democracy in Boston is working with the Oakland-based The Worker’s Lab to help small business owners who want to retire to sell the business to their workers instead of another sole proprietor. New Belgium Brewing Co. bucked the concentration of the beer industry with an Employee Stock Ownership Plan that transfers ownership to its employees. At produce distributor Organically Grown Co., an investor-backed “perpetual purpose-driven trust” is governed by investors, workers, growers, customers and community allies, which share in the company’s economic upside.

3. Democratizing investment decisions. By letting entrepreneurs, rather than investors, select which firms would receive an investment, venture firm Village Capital has built a portfolio of more than 100 early-stage ventures more diversified across race, sex, geography and sector than industry averages. Boston’s Ujima Project is putting communities, rather than investors, at the center of investment decision-making. Fund of funds Illumen Capital’s Daryn Dodson is training the fund managers he invests to check gender and racial biases and unlock value throughout their portfolios.

After 100 early-stage deals, Village Capital takes aim at later and larger investments

4. Re-thinking underwriting. Traditional small-business lending has relied on outdated underwriting models that too-often exclude diverse business owners and communities. Community Investment Management provides working capital to innovative lenders using data and technology to better understand small-business borrowers. Living Cities is investing in new methodologies for assessing risk to expand access to credit for people of color.

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December 18, 2018.