Published on June 4, 2008

Local agricultural entrepreneurs have found new sources for that traditional organic business fertilizer — money. A combination of grants, family foundations, and angel investors have financed recent farm-based startups, and just over the horizon is an investment fund that could funnel as much as $20-million to $30-million into agriculture-related businesses over the next several years.

The new funding structures are designed to help businesses prosper without forcing them eventually to sell out to larger companies, as notoriously happened to Ben and Jerry’s.

Tom Stearns, the head of High Mowing Seeds, an organic seed company based in Hardwick, was invited to a January meeting of investors and entrepreneurs at Robert Redford’s Sundance Film Festival in Utah.

An investment group called Investors Circle got wind of High Mowing and invited Mr. Stearns to the gathering.

“They’re incubating this concept called slow money,” he said. The idea is loosely based on the Italian slow food movement, which pits local cuisine against the fast food forces of McDonald’s and other international food companies.

Mr. Stearns termed it “a collective effort to rebuild our healthy food system in this state.” The outcome, he said, was a decision to create a slow money fund to finance local, sustainable agricultural enterprises. Mr. Stearns was invited to sit on the fund’s board.

He said the fund plans to field test its ideas with pilot projects in Vermont and northern California. It will begin by conducting feasibility studies “to understand the landscape of business in each region.”

Once the study is complete, a meeting of entrepreneurs, investors, and other interested parties will be planned. Mr. Stearns said the slow money fund hopes to begin investing by 2009.

He said the fund could eventually be in the hundreds of millions of dollars, not all of which would be invested in Vermont. Mr. Stearns predicted that as much as $100-million might make its way to the state over five years, with $20-million to $30-million in the first year.

Woody Tasch, chairman and CEO of Investors’ Circle, was more restrained in his predictions. “I like those numbers,” he said Tuesday in a telephone interview, before cautioning that the fund has yet to raise any money.

While suggesting that his organization hopes to achieve “a significant feat of financial entrepreneurship,” Mr. Tasch said he would “stop short at showing up in Vermont with $30-million.”

Right now internal discussions call for a fund of between $50 and $100-million, Mr. Tasch said.

Nevertheless, Mr. Tasch was not willing to contradict Mr. Stearns’ vision. Mr. Stearns was present at the organizational meeting at Sundance, and what he took from those discussions was a valid interpretation, Mr. Tasch said.

Mr. Tasch said the question on the table, after extensive discussions about slow money, was, “Are we really going to do this?” The answer, he said, “was a strong, rousing yes.”

His background in development and investing has led him to the slow money idea, Mr. Tasch said. He said slow money favors diversity, in the form of biodiversity, ecodiversity and cultural diversity, over globalization, which, he said, always means monoculture.

Mr. Tasch said he took a year’s sabbatical to think about the slow money concept, which he expounded in a book — A Bee’s-Eye View — An Inquiry Into the Nature of Slow Money, which will soon be published by Chelsea Green Press.

He said the plans for the slow money fund will be fleshed out after a series of slow money institutes to be held around the country. In addition to Vermont and northern California, the fund is very interested in supporting projects in Kentucky, New Orleans and the upper Midwest.

Mr. Tasch said he favors investing over philanthropy to help sustainable agriculture and soil conservation, because there isn’t enough philanthropic money to do the job. He favors new, flexible forms of investing, though, to insure that businesses can remain small and control can continue to be maintained locally.

“I want to provide the most flexible form of capital ever invented,” Mr. Tasch declared, although he admitted his statement sounds somewhat “bombastic.”

Mr. Stearns suggested that a model project for the slow money fund might include a slaughterhouse for local farmers. Rather than merely invest $2-million in such an operation, the fund might want to combine it with a processing facility to produce sausages and other meat products, and a packaging and shipping facility. A marketing division might also be part of the project. In addition, Mr. Stearns said, the fund might also contribute to the Northeast Organic Farming Association (NOFA) so it can provide information and support programs to help farmers produce better meat.

The key, Mr. Stearns said, is the establishment of food systems, rather than stand-alone businesses.

Rian Fried of Clean Yield Asset Management in Greensboro has followed trends in social investing for more than two decades. While such investors used to concentrate on finding traditional corporations that operate in accord with their values, the field is expanding.

Now individual investors and family foundations are looking to promote projects that, in their view, directly provide social benefits, he said in an telephone interview. Such investments, like all venture capital investing, can present greater risks for the investor and require a great deal of detailed information about the project and high level of sophistication on the part of the investor, he said.

A capital fund focused on social investments can allow its participants to distribute some of the inherent risk over a range of projects and, by combining resources, provide a deeper level of research into the details of those projects than an individual is likely to be able to manage, Mr. Fried said.

Mr. Stearns, though, isn’t waiting for the slow money fund. His company recently raised $800,000 for the business with a convertible debt offering. He said investors will be guaranteed a 6 percent rate of return over five years. At the end of that time investors can trade the debt for shares in High Mowing or convert it to a loan with interest and principal repaid at 6 percent interest over the following five years.

In nearby Greensboro, the $3.2-million cheese caves at Jasper Hill Farm were built with $400,000 from a revolving loan fund established by U.S. Department of Agriculture (USDA). The USDA gave an additional $149,000 to Agrimark and the Cabot Creamery Cooperative to help them work with Jasper Hill to develop aging facilities for the company’s cloth-bound cheddar.

Mateo Kehler, who started Jasper Hill with his brother Andy, said Monday that his business had acquired a foundation as a partner. The Castanea Foundation, Inc., of Montpelier has invested in the Cheese Cellars, he said. The Castanea web site says the foundation’s mission is to “conserve and protect agriculturally productive and environmentally significant lands and water resources throughout Vermont and select areas of New York.”

Such foundation investment is often termed “program related” investing, meaning that the investment is designed to advance a foundation goal, rather than merely earn money. According to Rick Hausman, Clean Yield’s director of research, such investments have been somewhat complicated in the past because of Internal Revenue Service (IRS) regulations.

Foundations have no problem donating to nonprofit organizations, because they are prescreened by the IRS. Investments are problematic because foundations, especially family foundations, must be able to show that none of their money is going to benefit anyone associated with the foundation, Mr. Hausman said.

For instance a foundation could get into trouble if it invested in a company owned by the nephew of a foundation trustee.

Nevertheless, program related investment can be a very useful tool, allowing a foundation to promote a social good by investing in a business. That is because a foundation, which can make donations as well as investments, is able to take a higher degree of risk than another investor, such as a pension fund.

If the foundation loses money, it has essentially donated it to the underlying cause. If it makes money, it has more to invest.

The difficulty of assuring the IRS that the investment is legitimate has been addressed by a law recently passed by the Vermont Legislature.

With it, Vermont becomes the first state in the country to authorize the creation of low-profit limited liability companies, more commonly known as L3Cs. To get this designation a corporation must have a social purpose as its main focus. The company is allowed to make a profit, but prohibited from making profit a main focus. Like nonprofit corporations, the L3C is barred from engaging in politics.

Mr. Hausman says the IRS will respect the state’s L3C designation and not require an investing foundation to get a letter of approval before investing money in such a program.

According to Mr. Hausman, an L3C could be the mechanism used to assign different levels of risk to different investors in a project.

Mr. Stearns and Mr. Kehler expressed interest in the concept but, so far, the category is very new, and no one has any real experience in how it will eventually work.

In the meanwhile, Mr. Stearns and Andrew Meyer of Vermont Soy and Vermont Natural Coatings are planning a new venture, an eco-industrial park slated for construction in Hardwick. They plan to design green technology into the park, and to provide space for new agriculture-related businesses to start and grow. Mr. Stearns and Mr. Meyer envision a place where businesses share support facilities like office space and a shipping area, to lower the cost of doing business.

Mr. Kehler, Mr. Stearns and Mr. Meyer each made clear their belief that a business must produce a social return as well as a financial one. Producing the first, though, depends on the second, all agree.

While the men see a potential for increased competition, they want to encourage others to work toward creating a sustainable farm economy in northern Vermont, and they are helping to pioneer funding sources to make that growth possible.