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December 27, 2010

Angel Investors Keep Cash Close to Home

by Tom Banse

Loose networks match money with strapped local producers

One way some Americans avoided steep losses in the stock market in recent years was by making unusual alternative investments in small farms and food businesses. These so-called angel investors are organizing loose networks to match their money with cash-hungry local producers.

Farmers Crystie and Keith Kisler proudly pour samples of their hard cider and fruit liquors in the tasting room of the new cidery on their small organic farm. Just four years ago, the Kislers weren't sure they could keep their farm whole, let alone launch a new venture.

"We didn't have the income, or the assets or the confidence perhaps even to approach a bank at that time," says Crystie, who didn't even bother trying to borrow money from the bank.

Investing locally

At that same time, Steve Moore - who'd retired after making money in the software business - was looking for investment alternatives. "I started thinking about where else can I get some kind of reasonable rate of return where return can actually be defined more fully than just how much money did I make."

The two parties were introduced by a mutual acquaintance. They sat down at the farmhouse's kitchen table and negotiated the terms of a $205,000 private loan. Moore charged no interest, but instead received a minority share of the new cidery business.

For the Kislers, the notion of an angel investor seemed miraculous but Moore sees it differently.

"This isn't charity. I'm not giving them money. It's not about a tax deduction," he says. "I am actually getting return in full of what I originally put forward, plus a participation in the cidery, plus consumables as dividends."

And the Kislers are happy to write a check to people whose names they know who have actually been to the farm.

LION's club

Moore is one of the founding members of a group in western Washington state dubbed the Local Investing Opportunities Network or LION. He says the well-to-do members have various reasons for joining.

"They wanted out of Wall Street. They wanted to diversify. They just wanted to help strengthen the community fabric."

The members of LION screen investment requests together, but it's up to each individual to decide whether or not to put up their money. Retired pediatrician Kees Kolff also invested in the Kisler's Finnriver Farm. In addition, he's loaned money to and taken an equity stake in a local artisan cheese maker, the Port Townsend Creamery. He gets some unusual dividends.

"Those of us who have invested get seven percent return per year in cheese," Kolff says. "We get a cheese card. I can show you my cheese card, right here."

There are risks to consider. Most of the loans are unsecured, meaning there's no collateral. The equity investments are long term and liquid, meaning investors can't pull their money out quickly. There is also no regulatory oversight because these are all private transactions.

That presents more risk than a traditional bank would take on. But Mark Bowman, a senior loan officer with the commercial lender Enterprise Cascadia, says private loans and seed money can provide a lifeline to new businesses.

"Having local investors like the LION group is very complementary to the lending that we do," he says. "It even fills gaps of higher risk lending that we can't."

According to Moore, LION fields lots of calls from across the country on how to copy their local investment model. He sees it as a sign that more people want to give literal meaning to the old phrase, put your money where your mouth is.