I’ve used this site as a platform to educate you on ways to make money, invest money, and save money. Today’s topic, locavesting, is a combination of investing and making some extra cash! I’ve been hearing more and more about this topic over the last year as communities and small business owners alike, try to spur business growth. The best way for me to describe locavesting is this…think P2P lending meets crowdfunding! Crowdfunding sites have been springing up left and right over the past several years. They basically allow you to invest a set portion of money into a project, business, or product. In return, you typically receive some sort of novelty item or specialized service from the company you are helping to partially fund. A brewery that you “donate” $250 to might name one of their beers after you, or offer an “all you can drink” event in return. I remember one of the first smart watches got it’s start on a crowdfunding site and that all of the initial investors were able to get first dibs on one of the watches when they rolled out of production. While those are nice rewards and all, you are putting up cold hard cash and getting novelty items in return. I never understood why anyone outside of family and friends would ever bother investing their money in such a fashion. P2P lending is actually a pretty old concept at this point, think of Lending Club and Prosper. Both large and small investors alike have been diversifying their portfolios for years with investments in person 2 person lending. Consumers that often have trouble getting low interest bank loans will turn to one of these types of sites in order to get a loan that doesn’t break the bank. Companies like Lending Club are all online and don’t have the brick and mortar overheard of the big banks, so they are able to lend out money at a single digit interest rate. The best part, the loans are funded by people like you and I. You loan a few dollars out per loan, often on hundreds of loans at time to mitigate your risk, and get a healthy return that beats out the bank and even the stock market at times.
So I was saying, Locavesting is the combination of P2P lending and crowdfunding. A person that wants to start a business, or perhaps mass produce a new product, will fund their project by offering up small portions of equity from local investors like you and I. The difference between regular ole crowdfunding and locavesting is that we get an actually ownership stake in the company and a healthy financial return for the risk we take on. Locavesting has actually been taking my local area by storm, albeit at a slower than desired pace. Right now this type of investing is very well regulated, which means state and federal government laws still have a lot of work in order to grow it. My home state of Michigan is actually doing a ton of legislative work to spur intrastate investment in local businesses. Rather than continuously offer in-state tax incentives that cost our government money they are able to defer investment dollars to local investors. This is actually a double whammy of benefits to the state because the investment dollars are coming from local citizens that in turn help raise the tax base and build out new business growth.
Most people don’t realize that this type of investment model has been running hot in the UK for years, and quite successfully. Unfortunately, the UK is usually quicker and a bit more efficient at moving the needle when it comes to government regulation. Sure, there is risk with locavesting, but no more so than putting the money into the stock market. In the end it is like anything else, you have to do your homework in order to minimize losses and maximize returns. A small brewery might have the best tasting beer in the world but they nobody will ever know if the owner can’t get the funds to get the business off the ground. I use an example of a brewery because you need to invest in something that you actually believe in. Don’t invest in a shoe company if you walk around barefoot all day, simple as that.
So, enough with the fluff, how do we go about starting to locavest??? Fortunately, there is a site that is ALL about the local investing movement, and surprise, it’s called Locavesting! Just use Google to search out your local investing options, believe me there are plenty. The State of Michigan has enacted laws to support this type of community investment, and even many of the cities around me have started crowd funded investing on their municipal sites. I can put $1,000 into a fledgling restaurant that is going to open a couple miles from my house and know that I own some portion of that business…not a bad feeling at all. Just think of it as being a silent partner! I know of a few people that have invested their money and done quite well utilizing locavesting, and I am just starting to dabble in it myself. The only problem is that you spend a lot more time doing research for investing small chunks of money at a time. When I put $5,000 in an index fund it takes about 5 minutes to enact the transaction. I know that I’m going to generate a 5% return based on historical data and I don’t think twice. However, with locavesting I would probably break up the $5,000 into 5 different $1,000 investments in different companies and products. Hopefully, at least one will pay off and it will generate a lifetime of returns above and beyond a measly 5%. Of course that is the risk you have to take!
The future of relaxed legislation when it comes to locavesting is going to spur huge growth! I bet you didn’t know that companies such as General Motors and Chrysler got their start up funds from the Detroit Stock Exchange over 100 years ago!!! That’s right, while it doesn’t exist anymore for various reasons, there was a local stock exchange that spurred business growth for automotive powerhouses that still exist today and are arguably the lifeblood of my local economy. In fact, my day job is at a large tier 1 OEM supplier, so my livelihood can actually be traced back to the successful movement of locavesting in the early 1900’s.
Let’s keep this simple, doing your homework, invest smart, invest local, and add an important tool to an already diversifed (hopefully) portfolio! Plus, this is the kinda investment you can really have fun with…it’s like running your own personal Shark Tank!!!