A little over a year ago Juli Kaufmann finished moving about $75,000 — her entire personal portfolio — into investments in local businesses. It all started four years ago, when Kaufmann, 46, who runs a small real estate development company in Milwaukee that emphasizes sustainable development, decided she'd had enough of Wall Street. Instead, she wanted to support companies in her area and, in so doing, boost the local economy while making a respectable return.
Through her involvement with Fund Milwaukee, a grassroots investment network; and a statewide group called Wisconsin Women's Business Initiative, she's put her money into about a dozen enterprises, including a bicycle shop, an ice-cream store, real estate and a brewery.
Mostly making loans, she's been paid back on schedule or ahead of time in all but one investment, typically charging an interest rate of around 5 percent. "I wanted to have a more tangible connection to my investments, to understand where my money is going," she said. "It seemed like a no-brainer."
While her all-in approach makes her a rarity, Kaufmann is one of a growing number of small investors who are shifting their focus from Wall Street to Main Street. According to Michael Shuman, author of "Local Dollars, Local Sense" and an expert on community economics, only about 1 percent of the $30 trillion that Americans invest in stocks, bonds, mutual funds, pension funds and life insurance funds touch small businesses. Yet he believes real prosperity can be found in the many investment options that sit within local communities.
In fact, according to Ted Zoller, a senior fellow at the Kauffman Foundation and a professor of entrepreneurship at University of North Carolina at Chapel Hill, "metropolitan areas with more local investing activity tend also to have more vibrant economies."
Turned off by what they see as the failures of traditional finance, this new breed of investor is turning to small investment clubs and networks through which they can make loans, equity investments or a little of both in nearby businesses. And they're tapping intrastate crowdfunding platforms that give them access to small companies in their home states, like CraftFund in Wisconsin and Hatch Oregon. What's more, the Securities and Exchange Commission is considering rules that could loosen some advertising restrictions, giving a boost to these sites, which to date are in 25 states.
While no concrete figures exist to confirm how many people are investing in this way, local investing experts say the population is increasing — and it reflects a wide range of individuals. Many are entrepreneurs themselves, and others range from retirees to engineers.
"This is a way for small investors to put their money in Main Street businesses and help them grow," said Amy Cortese, author of "Locavesting," a book about the local investing movement, and editor of a website of the same name, with news and guidance for investors and entrepreneurs.
Generally, these investors aren't focused on bigger crowdfunding platforms. With great fanfare, the SEC recently approved final rules to the 2012 Jumpstart Our Business Startups (JOBS) Act, allowing unaccredited investors to participate in crowdfunding financing sites. But because those platforms are national in scope, they're not as attractive to many locally-oriented investors.
In some cases, this new breed of investor isn't particularly interested in financial returns, either. For them it's all about participating in a new type of investment.
Take Tracy Eliasson, 41, a member of Colorado Food Investments in Boulder. Part of the Slow Money Alliance, the four-year-old club focuses on farms and other local food-related entrepreneurs. Eliasson works full-time as an engineer and part-time running Settembre Cellars, plowing much of her savings into the nine-year-old winery, which she founded with her husband, Blake. Still, when she joined Colorado Food Investments in 2014, she was happy to contribute the required $5,000 to the club, whose members make investing decisions as a group.
Although Eliasson has participated in about seven investments, including three made before she signed on — three- to five-year loans of $5,000 to $15,000 with a 4 percent to 5 percent interest rate — she doesn't anticipate reaping much of a return. "We might even end up losing a little," she said. "But if you define a return as having a positive impact on your neighborhood, we're going to have a positive return."
On the other hand, most people like Kaufmann expect to do good and make money, too. For example, according to James Frazier, co-founder of the Local Investing Opportunities Network (LION) in Port Townsend, Washington, members typically make loans at a 5 percent to 7 percent interest rate.
Kaufmann, though, points to a $5,000 loan at 4.5 percent interest that she gave to an artisanal ice-cream wholesaler and store three years ago after learning through Fund Milwaukee that the business was looking for financing; members make investments as individuals, not as a group.
"I've received excellent returns," she said, noting that she was paid back much earlier than the original term of five years. Plus, many of the businesses include freebies and discounts that, according to Kaufmann, add up to a significant amount of money. As part of a $1,000 five-year 4.5 percent loan she made recently to a local bicycle shop, she received a deep discount on equipment and tune-ups. And she gets free treats every time she visits the ice-cream store. Says Kaufmann, the mother of a nine-year-old boy, "My son and I go there a lot."
Similarly, last year, craft beer enthusiast Kreigh Knerr, 30, learned that start-up MobCraft, a Madison, Wisconsin, crowdsourced brewery, was raising money via a new Wisconsin intrastate crowdfunding platform. Although he usually puts his money into his own business, a six-year-old SAT and ACT prep-tutoring and mobile app company, he decided to invest around $1,000 in the offering early this year. One major attraction: special tastings. Plus, according to Knerr, he takes part in beer trading, through which fellow ale lovers exchange beverages unavailable in their areas, and he's been able to get bottles selling for two to three times as much as he paid for his MobCraft libations.
These investments come with their own risks, of course, since they may not be vetted with the same thoroughness as, say, a traditional private equity deal. The actual evaluation process depends on the type of organization. In some investment groups, for example, companies present a pitch to members. Those who are interested will ask for more financial information and typically visit the business and meet in person with the company owner several times.
Hatch Oregon, on the other hand, will qualify all entrepreneurs before they can list on the site and make sure their prospectus is up to snuff, including explaining all the risks. Then it's up to the individual to do more research. To keep tabs on performance, investors receive monthly information from their investments and often regularly pay them a visit.
But most investors are aware it's a bit of a gamble. For that reason, locavesting experts advise not going overboard. "In most cases, people should put only a portion of their money into local investments," said Cortese, the author of "Locavesting."
"They're an alternative asset class that can help investors diversify their portfolios," she said, "while investing in a meaningful way."
At the same time, especially if the investment involves a business they patronize, they feel the local nature of the deals gives them a layer of protection. For example, retired electrician Diane Jones, 65, has invested about $60,000 in loans and equity financing since joining LION three years ago.
"I could lose everything I put into some of these investments," she said. "But I've lost a lot of money in the stock market, too."
— By Anne Field, special to CNBC.com
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