An Impact Fund Investor’s Musings: Lessons Learned from a Decade of Investing in Rural Communities

By Janice St. Onge, President, Flexible Capital Fund, L3C

Since 2011, I’ve been running the Flexible Capital Fund, L3C (the Flex Fund), a for-profit, impact investment fund and Community Development Financial Institution (CDFI). The Flex Fund provides flexible, patient risk capital (yes, there is such a thing) in the form of revenue based financing, debt and equity, to growing companies in Vermont and New England’s food system, forestry and climate change solutions sectors. Companies in these sectors align with our mission of “creating healthy food systems, preserving working lands, building resilient communities, addressing climate change through regenerative solutions and fostering equitable workplaces.” Since 2011, the Flex Fund has made 45 investments totaling $7.2 million in 24 different companies operating in the sustainable food systems, forest products and climate solutions sectors.

Structured for Impact

We knew from day 1 that form must follow function- if we wanted to create impact, our funding needed to be impactful itself. There are three fundamental aspects of the Flexible Capital Fund that enabled us to center our mission. First, the Flex Fund is a women-led and run fund. Why do I lead with this? Well, considering 95.1% of venture capital partners in the U.S. are male, it’s perhaps not surprising that women entrepreneurs receive less than 3% of VC funding. We must diversify fund managers to diversify companies and the economy. It’s not easy trying to change the status quo. Mind you, the Flex Fund is a not a venture capital fund, but we often get lumped into the category.

Second, we are proud to be a certified CDFI. CDFIs are lenders and investors with a mission to provide fair, responsible financing to rural, urban, indigenous, and other communities that mainstream finance doesn’t traditionally reach. Where others see risk, we see opportunity. Through this designation, we have a responsibility to invest at least 60% of our fund into under-invested communities. With CDFI funding, we can also pair our investment with technical assistance for our entrepreneurs to support their success.

Finally, we are the only CDFI – and the only fund – in New England with a focus on revenue-based financing (RBF) as an alternative to equity investment. RBF stands out as an innovative and mutually beneficial approach for companies, investors, employees, and the communities where they operate. This unique financing model creates a collaborative ecosystem that fosters growth, sustainability, and prosperity. RBF loans don’t have an interest rate, and that repayment is based on a percentage of revenue over time and our returns are really a function of the time value of money. Our capital is less expensive than equity, and more expensive than bank debt – which has primary claim to a company’s assets if they can’t pay the loan back from cash flow. But with RBF loans, we don’t always require personal guarantees or collateral, payments are flexible and based on percentage of revenue vs. a fixed principal and interest payment, and we don’t ask for dilution of ownership or decision making. This makes RBF financing a great alternative to equity for growing rural businesses that will never be high enough growth or margins for angel investors or venture capitalists, which is essentially the majority of companies in rural New England.

Let’s Retire Drivers of Wealth Inequality, Discrimination, and Isolation

The Flex Fund has had an incredible 10 years partnering with our portfolio companies who are making New England more vibrant, resilient and equitable. And- despite our use of innovative and non-extractive financing options for growing mission-focused businesses- the fundamentals of our financial system remain the same. There are some things about the system that are just broken, like the need to grow for growth sakes; investors’ focus on short term versus long term results; and the fact that the system doesn’t take into account the costs of our human impact on the planet. It’s time to retire some of the things that perpetuate wealth inequality, discrimination, and isolation and look at how we can move toward a system where we can meet the needs of all people within the means of the living planet.

One Impact Investor’s Recipe for Funding a Better Future

So, as I reflect on the last decade of investing, here’s my attempt to summarize (in no order) what I have learned and that which will inform how the Flex Fund’s does its part to retire the drivers of wealth inequality, discrimination, and isolation over our next 12 years of investing:

1. Invest in People, Not Companies. It’s the entrepreneurs and their teams that are doing the hard work. When funds or economic development entities profess that “we created X number of jobs,” let’s be honest – they didn’t create the jobs, the entrepreneurs did. And sometimes job creation isn’t a good measure of success. Sometimes entrepreneurs may need to make tough decisions to lay people off in order to keep the doors open.
2. Be More Than a Checkbook. Relationships matter. Get to know an entrepreneur and their team before you write the check. Don’t invest in individuals who do not align with your values and principles.
3. Financial Returns Aren’t Everything. There is no such thing as Planet B. It’s critical to also consider social and environmental returns in an investment if we want a future for our children and the next generations.
4. Sustainable Growth Over Endless Expansion. Challenge the idea that unending economic growth is a necessity. Instead, aim for economies that promote thriving and well-being for all, rather than just pursuing growth for its own sake. Help change the goals. Kate Raworth’s Doughnut Economics is a must read on this subject.
5. Promote Diversity in Investing and Entrepreneurship. It’s simple – diverse investors and entrepreneurs lead to better financial, social, and environmental returns. Data shows that gender-inclusive / diverse teams are 21% more likely to see outperformance in profitability relative to peers, and new companies with a female founder performed 63% better than those with all-male teams over an observed 10-year period.
6. Small Investments, Big Impact. Recognize the potential for profound systemic change through small, collaborative investments that collectively contribute to larger transformations.
7. Investing Is Local, Don’t Go It Alone. Collaboration among investment partners and across geographic lines is critical. And collaboration is different than competition. Build bridges, not walls.
8. Local Initiatives Can Have National Impact. Just because an impact fund is regional, doesn’t mean it can’t have national impact. Invest in entrepreneurs located in rural communities, as these ventures can grow, create quality jobs, and address significant issues when provided with the right resources and assistance. Several of our portfolio companies have scaled and now have national influence.
9. Surround Yourself with Mission-Aligned Experts. As an investor, get the right people in the right seats on the bus. Launching, funding, and managing a fund is no small task, no matter what size. Surround yourself with good people who are smarter than you and are 100% in alignment with the mission.
10. Learn from Failure and Treat Others with Dignity. No matter how savvy an entrepreneur is, the truth is failure is part of this work. Investors need to talk about failure and learn from it. When businesses face challenges or need to wind down, treat entrepreneurs with dignity and respect. We’re good in Vermont at helping startups find resources and capital. We’re not as good at helping an entrepreneur wind down the business and help their employees find other work, minimize losses to their investors and lenders, and find a way to move on personally.
11. Prioritize Mental Health and Empathy. Entrepreneurs are not superhuman. Mental health is as important as physical health. Bring empathy, understanding, and humanity to your work as an investor. Entrepreneurship is a deeply personal journey, and for entrepreneurs it’s difficult to separate your identity from the business you’re trying to create. According to a study at UC Berkeley, 72% of entrepreneurs in this sample self-reported mental health concerns. Entrepreneurs were significantly more likely to report a lifetime history of depression (30%), ADHD (29%), substance use conditions (12%), and bipolar diagnosis (11%).
12. The Importance of Patient Equity Capital. Patient risk capital really is important – how an investment is structured for a business matters as much as how it’s priced. The Flex Fund is fortunate to have investors who supported us from the beginning with patient equity, which allowed us to be flexible in our own investments. And the CDFI Fund is a critical source of capital for CDFIs whose mandate is to serve low-income and rural communities in the U.S.
13. An Integrated Capital Approach. We need all kinds of capital across the continuum. Taking an integrated capital approach – using financial, human, social capital to get the job done – ensures our companies have the right match of financing as they grow, at whatever pace makes sense.
14. Unity and Interconnectedness. “They’re from away,” needs to change to, “We’re all in this together.” The global pandemic proved that in spades. Don’t burn bridges and prioritize mutual care and support.
15. Regional Interdependence. Food, energy, and forests aren’t geographically confined to one state or political boundary. Visit another New England state and see how we are bound together and reliant on each other. Think potatoes and seafood in Maine; maple syrup, dairy and microbrews in Vermont; apple cider donuts and pumpkins in New Hampshire.
16. Challenge Failing Systems Collectively. You can’t have systems change without saying goodbye to a system that isn’t working. We all (philanthropy, investors, lenders, policy makers, government, individuals, private sector) need to take risk with our capital and activate our voices. Don’t let others stand alone in the work.
17. Wealth Transfer and Values-Based Investing. There is a storm coming. Know what your money is doing. “$50 trillion will change hands from Boomers to Millennials in North America alone by 2050. It will remake the world. We must know what our money does to people and places, then take actions to align our dollars with our values.” – Joel Solomon, Author.
18. Maintain Hope in Patient Capital. Believe in the potential of patient risk capital to shape a better future. Over the next decade, I believe flexible and patient risk capital – invested in entrepreneurs whose companies are feeding and housing our families and moving us towards a more sustainable future – will make all the difference for a better future.

I recently read an article written by colleagues of mine at the Just Economy Institute entitled Seven Lessons from Successful Financial Activists and found hope in this message – “Making progress on systemic change requires making time and space to keep working on your vision. Allow it in, even if it feels too big. Take stock of it. Reimagine it. Do something substantial to feed it.”

It feels big right now, but I’m going to keep feeding it. And, then I’ll take a nap.

To learn more about our work and how to get involved, visit https://flexiblecapitalfund.com/fund2/.

About Janice St. Onge

Janice St. Onge is President of the Flexible Capital Fund, L3C (“Flex Fund”). Named among the 25 Transformative Funds of 2021, the Flex Fund is an impact investment fund and Community Development Financial Institution (CDFI) providing flexible risk capital (including revenue-based financing, equity and debt) to Vermont’s food system, forest products and climate solutions businesses. As President of the Flex Fund, Janice manages all facets of the Fund’s operations, including raising capital, deal flow, due diligence, and portfolio / financial management. Janice brings economic and business development as well as financial expertise to the organization, having served in the technology, financial services, higher education and state government sectors during her 25+ year career.