Seed Capital

In October 2007, I was in Albuquerque for the annual Socially Responsible Investing (SRI) in the Rockies conference, which each year brings together hundreds of SRI professionals to network and hear about each other’s work. Ironically, on one of those afternoons, I got a call from my office back in Vermont telling me that Tom Stearns of High Mowing Seeds in Wolcott, Vermont had made a “cold” call to me wishing to talk to me about investing in his company. It was a call — to me “hot,” not cold — that I had been waiting for. It was also one that profoundly changed the kind of investments that Clean Yield makes to have a significant impact on the health of our local economy. I immediately called back and told Tom to hold a spot for us in his investor lineup. He was taken aback; without any pitch from him, here was a financial institution wanting — not just willing to consider – an investment in his company.

I didn’t know Tom, but I knew of him. He and his co-owner, Meredith Davis, lived in our community and had started a small organic seed company. He was part of a group of young farmers, cheese makers, and other “valued-added” food producers who, with a group of older organic farmers and producers from the back-to-the-land generation of the late 1960s and ’70s, were turning our part of Vermont into a sustainable agricultural hub.

High Mowing Seeds (HMS) began as an adolescent’s obsession with growing seeds. It turned into a serious hobby and eventually blossomed into a vocation and full-time business. The startup was funded, as many are, by a bank line of credit guaranteed by Tom’s parents. In 2001, the company had sales of $18,000. When Tom got in touch with us in 2007, sales had grown to $700,000, not enough to satisfy his creditors, but enough to foretell the possibility of paying them off.

By 2007, Tom and Meredith realized that they needed about $800,000 in cash to set the stage for 10 years of orderly growth. The money was needed for inventory, working capital, and to pay off a few high-interest debts the company had incurred. They didn’t, however, have much to offer in exchange for the $800,000. They did have equity (encumbered by debt), but offering equity was problematic. Unlike venture capital deals where the “exit strategy” is to sell the company and pay off the investors with piles of money, Tom and Meredith wanted to retain control and ensure that the company remained in the Wolcott community. Without selling out, they wouldn’t have the cash to pay off the investors with venture-capital-like returns. What they needed were investors who were willing to lend or invest their money without expecting much of a financial return but who did expect a high social return. These folks are now widely known as Slow Money investors, but at that time not only was there no name for them, Tom, Meredith and their lawyer had no idea whether such a breed of investor even existed. We did. They were our clients who long wanted to use their investment capital to make more of a social impact, particularly locally, than just investing in a portfolio of socially screened stocks and bonds. Thus my call to Tom, telling him to hold a place for us in his investment pool. He had come to the right compost pile.

The deal HMS came up with was to issue a 10-year convertible note, a loan that could be converted into equity at some point. The note accrued interest at 6%, which for the time (pre-crash) was well below bank rates. Because the interest accrued, and wouldn’t be paid out until the conversion date, five years after the note’s issuance, HMS was not burdened by immediate payouts that could slow down growth. The conversion date was set as December 31, 2012. If all investors converted they would own 30% of the stock, not enough to control the company’s destiny, but enough to have a voice. If investors didn’t convert, they would be paid out their original investment, the accrued interest, and interest on the principle for the next five years. NeitherHMSnor the investor pool knew at the outset whether converting to equity at the conversion date would be good or bad. Initial feelings were that if everything went well the investors would not convert, but rather use their capital for other Slow Money-type projects. This was Tom and Meredith’s view as well — as long as they had the cash, they would rather pay out their investors and retain their ownership positions.

Tom, Meredith, and their lawyer, Eli Moulton, were thrilled by the positive reception to the offer. One of the first investors to sign on was a family foundation known for its work in sustainable agriculture in Vermont. Four investors who were friends and family of Tom and Meredith also were early investors. After doing our due diligence on HMS, Clean Yield came up with seven clients, five individuals and two family foundations who were eager to invest. Fittingly, a thirteenth investor came aboard at one of the first Slow Money events held in the country. Arguably, HMS was the first fully realized Slow Money investment vehicle, and it did not go unnoticed. In fact, there was so much interest in the HMS investment that it was oversubscribed. HMS was able to bring four more investors aboard at the same terms to finance more inventory and a climate-controlled room to house the seeds, a project slated for a few years down the road.

In hindsight, it was nearly a perfect Slow Money deal and an appropriate metaphor for starting and growing new types of companies piloted by the combination of social entrepreneurs with good ideas and investors willing to make patient, long-term financial sacrifices to secure high social returns. The project received a lot of media attention. From the very first, one of the most differentiating aspects of the project was the makeup of the investor pool and financial partners. It included a diverse mix of individuals, family foundations, family and friends, and the Vermont Community Loan Fund, a community development financial institution that makes below-market-rate loans. More important, their common characteristic was that they weren’t in it for the money, but for the social returns. They weren’t dreaming about the bounty at the end of the harvest, but stretching the harvest into perpetuity.

In practical terms, structuring the deal as a convertible note, where interest payments would not start for five years, had benefits for both the entrepreneurs and the investors. Management was able to grow the company at the pace they wanted without constantly thinking that they needed enough cash flow to make interest payments; they could concentrate on getting the company to a profitable status (which they did after the second year); by not spending their time raising cash project by project, they could avoid the distraction of looking for larger companies that might want to acquire them; and they had time to really get to know their investors in case they did become stockholders. In essence, it gave HMS time and space to become a more fully developed company.

From the investors’ perspective, the patience also paid off. We got to know the company and its management more thoroughly than if the specter of money were a constant, lurking background presence. It also gave us access to the company. Halfway into the investment period, Clean Yield’s social research and advocacy director performed a social audit of HMS. Since HMS’ investors priorities were social return, we wanted to know how far along HMS was in its development of a positive employee culture and work environment. From the first line of the audit report: “HMS is remarkably ‘social’ in all four areas we examined: governance, employees, community, and environment.”

The conversion date arrived this past December 31, and it was a time to celebrate. The investors had received periodic reports that the company was performing well, so it would have come as a shock if the conversion date weren’t one to celebrate. Tom started out his letter to the investors with “Well, this is a moment that we have all been waiting for. A real measure of our success over these last five years is the joy I feel in writing these checks to all of you.” Knowing that financial return was not our most pressing issue, Tom followed up with a description of the social returns over the five years (captured in the table below). It is inspiring.

Tom and Meredith and the community’s garden have flourished. As for our part, Clean Yield and its investors didn’t just revel in HMS’s success, we used HMS as a test for what could be done during both good and bad economic times. If the investment could flourish during a five-year period when financial and corporate institutions all around us were failing, then it was appropriate for any time. We still primarily invest in publicly traded stocks and bonds and community investments, but we are also planting our fields with many more investment varieties. Our clients have growing positions in Slow Money-like ventures, including a goat dairy and breeding farm, a tasting and retail center for local organic products, a solar company, a natural meat company, a sustainable agriculture fund, a forest products conservation fund, an organic dairy co-op, a fair trade coffee co-op, and most recently, a pickling business for organic vegetables. The financial return is nearly always modest, between 3% and 6%, but the social return is priceless.

Number of organic seed varieties2007: 279

2012: 650

Estimated seeds sold per year2012: 1.5 billion, or 14,000 acres’ worth
Donations to schools, community gardens and educational groups2007 – present:200,000 packets
Pounds of food donated to Salvation Farms and the Vermont Food Bank2007 – present: 75,000
Full-time employees2007: 25

2012: 34

Average hourly rate (excluding owners)2007: $11.12

2012: $14.98 ($2.50 above Vermont Livable Wage Rates)

Total spending on teambuilding, community food trades, and staff meals$50,000
Total spending on breeding new and unique varieties to serve organic growers$65,000
Dollars into the local economy$6.2 million spent in Vermont (47% of all spending)

$2.3 million spent in Wolcott and Hardwick (including payroll)

Profit sharing distributions to staff2010: $1000 towards staff perks – ping pong table, dishwasher, and massage day

2011: $23,511

2012: $35,000

Benefits· Continued to offer dental insurance, an HRA (Health reimbursement account) for employees and their families to all year-round part-time and full-time employees

· Added a FSA (Flexible spending account) for all year-round employees

· Added 5 paid days personal/sick time for seasonal employees

· Added a health care benefit for seasonal employees – $166/month for full-time and $83/month for part-time

Environmental Improvements· Moved to 100% recyclable and compostable packaging and packing material, and 70-100% recycled material in most of our mailers and shipping boxes

· Moved to using 100% post-consumer-waste recycled paper for printing customer invoices

· Moved to FSC-certified paper for our catalog

· Expanded our warehouse compost program and now divert 7,000 LBS per year of compostable materials from landfills, which is processed into high-quality compost by Highfields Institute

· Completed a lighting retrofit throughout our entire warehouse to more energy-efficient units

· Designed our new building to maximize natural light and designed the lighting system so that it is possible to turn on only the fixtures that are needed


* Please note: Investments like the HMS investment are available to all clients who are qualified. To qualify, most investors must meet the “Accredited Investor” criteria established by the Securities and Exchange Commission: