New Systems for Small Business Capital Campaigns
As discussions move forward on how to reduce government mandated social distancing and business shutdowns, communities must develop and implement economic recovery plans that take into account the ongoing economic impact of the COVID Pandemic, the changes in markets and consumer behavior and ongoing threat of future pandemics. Communities must engage in this activity with disruption of workers, networks and available capital.
From my perspective, each community must engage in the planning and conduct of their own capital campaigns on their own behalf and for their individual members. Shortfalls in tax revenues will force a cutback in government services which can amplify challenges to businesses in re-starting operations and growing revenue.
Money will be needed for government operations, for community programs and for businesses. Care must be taken by one group in a community not to cannibalize funding needed by other groups.
A first step in conducting a post-Pandemic community capital campaign will be to take an inventory of available capital. Typically, two or more sources of capital need to be combined into a capital stack to fund any activity or project. No single source of capital, including government disaster funding, will get the job done.
A capital stack refers to two more types of funding and/or two or more sources of funding to complete a transaction.
Most people are familiar with the capital stack used in the purchase of a car or house where the owner puts up cash which is combined with a loan or mortgage from a lender. The amount of cash as a percentage of the purchase price (equity to debt ratio) will vary. The lender must meet its risk threshold before it will make loan. The lender will want to cover all its costs if it must take possession and sell the car or house in the event of a default.
A capital stack used by a community to effect economic recovery must take several forms to cover the wide range of transactions needed by the community as a whole and individually by government agencies, community organizations and businesses.
A capital stack for a community may include:
To be most effective, a community needs a person or organization that is experienced with all these types of capital that can coordinate access and facilitate teaming. This service may be provided through an existing organization or through creation of a temporary position that has sometimes been called a ‘czar’.
As a practical matter, few communities have organizations or people who have the needed range of experience who can act rapidly without getting bogged down in slow decision-making processes and/or local politics and/or unresolved personal conflicts.
Developers with experience in mixed-use, complex developments may best fit this job position.
The Council for Development Finance Agencies - https://www.cdfa.net/ - is the best organization that I have found that spans the most types of capital needed by the most types of communities.
Recommended reading: Community Revival in the Wake of Disaster: Lessons in Local Entrepreneurship by Storr, Haeffele-Balch and Grube. Amazon link
The community may need an independent individual or organization to act as a moderator in addition to a coordinator. This may result in establishment of a new entity working in a public private partnership with local governments. My preference is for the entity to be a for-profit entity that can act as an economic first responder with the agility and diplomacy that this situation calls for because speed is necessary.
Attracting capital by a small business now will be the principal topic of the next free Small Business Pandemic Survival & Recovery Webinar presented by Karl Dakin and produced by the Capital Innovation & Technology Institute that will be held at 9 am MDST (Denver) on Thursday, April 23 at Knowledge Avatars in a Virbela virtual office platform. You may register now at https://knowledgeavatars.com/.
Capital Innovation & Technology Institute LLC
The Capital Innovation & Technology Institute now offers for sale the Small Business Pandemic Survival & Recovery Kit with information on development of a capital strategy and accessing funding from government disaster relief programs. https://knowledgeavatars.com/
This article was first published on LinkedIn on April 20, 2020 at https://www.linkedin.com/pulse/capital-stacks-community-economic-recovery-karl-dakin/