Janice St. Onge is the president of the Flexible Capital Fund, a Montpelier-based impact investment company with a mission of aiding small businesses in the sectors of food, farm and forest products, clean energy, and clean technology.
The Flexible Capital Fund is one of several Community Development Financial Institutions, private companies that deliver affordable loans to companies that have trouble finding the capital they need through traditional lenders. Other CDFIs in Vermont include Opportunities Credit Union, the Vermont Community Loan Fund, and Community Capital of Vermont.
The Flexible Capital Fund has invested $4.9 million in 16 companies, helping those businesses leverage another $8 million in capital. St. Onge said most of the investing the Flex Fund does is a type called revenue-based financing or royalty-based financing, which functions as a loan that the company repays based on revenue over time. The Flexible Capital Fund also offers subordinated debt and recently made its first equity investment, and now holds a minority position in Ceres Greens in Barre, Mamasezz in Brattleboro, and Eden Specialty Ciders in Newport.
The 16 companies in the portfolio also include Grow Compost in Waterbury, the energy storage company Northern Reliability, Pulmac Systems Inc. in Williston, and Aqua ViTea, a kombucha maker in Middlebury that provides fountains in stores so that customers can use their own bottles.
St. Onge joined the Vermont Sustainable Jobs Fund in 2007 and then helped create the separate for-profit Flexible Capital Fund and raise the capital to start. She spent some time talking to VTDigger about the lending opportunities available to Vermont entrepreneurs. The interview has been edited for length and clarity.
VTDigger: What was the lending environment like before VSJF started the fund?
Janice St. Onge: When I came on board, I was charged with looking at the market need in the capital continuum. Capital had dried up for a lot of businesses in Vermont, especially for those businesses that are core to the heart of who we are as a state — food system businesses and farms and forest products and clean energy, and clean technology.
VTD: Hadn’t they always had trouble finding funding?
JSO: Yes, but it was exacerbated, especially on the debt side, because of the credit drying up. We saw a gap. If you think back to who was playing in the equity investment side of the capital continuum, you had Fresh Tracks Capital, a venture firm, the Vermont Seed Capital Fund, and the North Country Angel Investors were the primary equity investors in Vermont.
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Nobody else was doing royalty financing. We found that a lot of businesses, especially in food, forestry and clean energy, had a really strong team, a good growth opportunity, maybe not nationally but regionally, and were growing but they couldn’t find capital for that next stage of growth because they didn’t have high enough growth or high enough margins for an equity investor. And they didn’t have the collateral or operating history for traditional lenders. So there was this gap where royalty-based financing provides some advantages.
VTD: How is the experience for the entrepreneur different with RBF?
JSO: With RBF you are betting on every company and you are there as a partner. With bank debt or some of the more traditional lenders, they have collateral, they have a personal guarantee, they have two other sources of repayment beyond cash flow, so they are not necessarily as much of an ongoing partner as a royalty-based funder would be when they have a vested interest in making sure that business is successful.
With an equity investor, because of risk, they invest $100,000 today, and because they don’t know if they’re ever going to have an exit, they want three to five times their money over a period of time if they invest in 10 companies. Only two to three will get them their money back, so they are betting on the two to three big winners out of 10.
We have observer rights, so I know what is happening with our businesses. I can bring my advisory capacity to the table if needed. We’re a real partner with the business. That’s not to say banks and other lenders aren’t, but I would say we’re a high-touch lender.
And with RBF, you are not locked into a fixed monthly payment. Essentially your payments grow as your revenue grows. It can be very flexible, so if you have a bad month, you don’t pay; it’s debt. It means that I don’t have an ownership position in your business, or decision-making authority. I’m not going to sit on your board and tell you what to do; that’s another advantage. And traditionally it’s less expensive than equity.
We have businesses who want to do well, who want to make change, but they are not going to grow at the speed and with the margins that traditional equity investment is looking for.
VTD: Are you a state entity?
JSO: We’re not in any way connected with the state. It’s a separate for-profit impact investment fund that has its own board of managers and its own investment committee. We make decisions separate and distinct from the Vermont Sustainable Jobs Fund. They are our fund manager by contract, so we pay them a management fee to provide operating services. There is no state money involved.
VTD: How does the investment landscape look generally now, 10 years into the economic recovery?
JSO: Whether it’s food, forestry or clean energy, it’s always difficult for companies that are growing. Once they get to $1 million in revenue, taking that next leap to really grow and find that right capital is difficult, especially if you need equity investment. We have folks who are doing equity investment in Vermont, but their focus, and rightfully so, is really first and foremost on getting a return on their investment.
Sometimes it takes more than one kind of capital to support a growing business. Six of our 16 portfolio companies have had direct investment from mission-aligned philanthropic organizations either direct or through participation agreements with the Flexible Capital Fund.
And the landscape of investment is shifting to where people want to see their money do good as opposed to harm. I have seen a lot of dollars moving into the impact investment space. Organizations like the Vermont Community Foundation have stepped up and are doing impact investment in Vermont. Other foundations like High Meadows Fund are also doing impact investing. Slowly, more dollars are trickling in on the impact investment side. Gender equity is also a component of what we look for, and in providing quality livable wage jobs.
VTD: Can Vermonters invest now in companies through the Flexible Capital Fund?
JSO: We raised capital from 2011 to 2014. Our fund life ends in 2023 unless we decide to raise a second fund. Right now we’re looking at the business model to see if that will work for us.
VTD: What’s next?
JSO: This is no surprise: we’re seeing an aging demographic in our entrepreneurs, so a lot of economic development entities and funders are concerned about the succession of those entrepreneurs and making sure those businesses they have started and grown continue to exist after the entrepreneurs retire. This is a big issue for Vermont.
There is a lot of money out there waiting to be placed, and in the next 20 years the transfer of wealth from one generation to the next, to the millennials in particular, is insane; $50 billion will change hands in the next 30 years. That could make or break this world, if you consider whether those dollars are invested for harm or invested for good.
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