Seven Chicago angel investors — mostly former derivatives traders and entrepreneurs — have formed an investment network to create financing opportunities for small businesses and startups in the local, sustainable food distribution system.
Members of SLoFIG, short for Sustainably Local Food Investment Group, intend to loan money to small businesses within about a 250-mile radius of Chicago that participate in growing, processing, delivering, selling or serving local food. Each participant has committed to invest $25,000 a year for three years.
The idea for the investment network was developed by leaders at Fresh Taste and other local food-oriented organizations who saw a funding gap for businesses in this niche. So says Karen Lehman, director of Fresh Taste, a funding collaborative of seven foundations (including the Chicago Community Trust), and the city of Chicago’s Department of Housing and Economic Development. Fresh Taste focuses on improving the local food system around Chicago and access to good food.
Inspiration also came after Ms. Lehman and others met with Woody Tasch, a longtime venture capitalist and famed author of Slow Money, a financial guide to investing in regional food networks. Teri Lowinger, one of the angel investors, is heading up the new investment group.
SLoFIG will make its debut next week when some of its investors show up at the three-day FamilyFarmed Expo at the UIC Forum at the University of Illinois at Chicago March 17-19.
In anticipation of a business plan competition session slated for the financing day at the expo, SLoFIG invited local, qualified businesses to submit applications and promised to help groom two finalists to present a polished business pitch at that event. The investment group has received 17 applications and has been working with the two it selected to prep for the challenge next week, Ms. Lehman says. SLoFIG so far hasn’t invested in any companies, according to Ms. Lowinger.
While a good return on investment is an important criterion for businesses that receive loans from SLoFIG, another critical measure is how these entities contribute to the strengthening web of the regional food distribution system around Chicago, Ms. Lehman says. Investors could potentially see a higher rate of return if they placed bets on companies in more traditional industries, but they chose to participate in the fund because of the high value they place on a durable local food system that reaches a wide swath of the population.
Crain’s caught up with Ms. Lehman this week to learn more.
CRAIN’S: Why is there a need for this kind of investment network? Can’t these businesses get bank loans to grow?
Ms. Lehman: From the very start, the founders of Fresh Taste realized we have to rebuild the infrastructure for local food and we wanted to get the investor community involved. We knew it might have to be a different kind of investor who invests in some of the businesses that banks may shy away from. Banks understand corn and soybean out in the countryside but may be unfamiliar with community-supported agriculture. Banks also may be unwilling to take the risk of investing in some of these companies.
SLoFIG investors are concerned about risk, too, but because they’re looking at the social return reward, they may be willing to take a risk that a bank might not. Also, lots of farm-based businesses require patient capital. And some of these businesses are less concerned with selling their business later. So how does an equity investor make money? You have to be really creative about how you structure the deals.
Who are the investors in this emerging angel network?
These are people who are former derivatives traders, entrepreneurs and consultants who came to this out of a real passion for food. Sometimes it happened because there was a health issue in their family like food allergies or illness, and others came to this because they realize the way you live a good quality life is to have access to good local food. They don’t just want this to be for upper-income individuals. They want to make sure the local food system serves all kinds of folks, their food preferences and needs.
They are willing to forgo some financial gain for the right business because of the role it’s playing in the food system. They’re balancing their interests between social return and financial return.
What kinds of businesses qualify to apply for loans from SLoFIG?
The businesses are generally part of the greater Chicago food shed within a 250-mile radius, including parts of Wisconsin, Michigan, Iowa, Indiana and Illinois. The investors aren’t buying farmland, but they’re interested in farm-based businesses that represent some kind of expansion of the business model on the farm. For example, a goat farm selling its milk to others might start making its own farmstead goat cheese.
Other businesses might include food hubs or food processing plants for meat, produce or dairy. There could be restaurants that source local food or caterers that supply meals to schools, companies that develop new food safety technologies or retailers that develop food product lines sourcing local ingredients. With urban farming there has to be an enterprise that comes off the land.
Do the businesses have to be engaged only in organic food or is there a broader criteria for who can apply for loans?
They’re not saying everything has to be organic, but there are general questions asked about whether a company is doing things to be environmentally sustainable. Also, are workers being treated fairly? Does it seem that this business will potentially help the food system reach people who really need the food? Maybe not now, but it could be a business that helps build a structure that can eventually lower costs. A lot of what we’re trying to do is develop enough infrastructure efficiencies in the system so that ultimately costs get lowered. Right now, much of the local food is pretty expensive. Farmers also have to get a fair price for their product.
Is the fund looking for more angel investors who might want to get in on this new trend?
The initial group is expected to grow and just added a new member to total eight. They’re definitely looking for new members. Investors who join have to agree to invest $25,000 a year for the first three years. They also have to be accredited investors.
You emphasize that SLoFIG is forming at a critical moment in time. What’s so important about now?
The demand for local food is so strong right now. We really need to build the infrastructure that can satisfy it so people don’t get disappointed if they’re looking for local food. We have to continue to grow with that demand. Without the kind of private investment from groups like SLoFIG in some of the key pieces of the infrastructure, it will be more difficult to satisfy that demand.
SLoFIG is one piece of the spectrum. USDA (U.S. Department of Agriculture) and Rural Development (which provides business loans within USDA), community development finance institutions and banks are important, too. Getting everyone lined up to recognize this opportunity and figure out how to invest in it is an important piece of work right now.