Q&A With Slow Money Investor, Arno Hesse
By Logan Yonavjak
How did you initially get involved with Slow Money?
During the financial crisis in 2008, I was a bank executive, now in recovery, and was bearing witness to the fact that traditional financial institutions weren’t really funding the basics that are important to me: food, agriculture, and community. I didn’t realize changing the system from the inside had such limits, and knew I wanted to get on the other side.
I met Woody Tasch (Chairman & Founder of Slow Money) at a conference in Sonoma. He gave a talk at a breakout, and I committed to becoming a founding member then and there. Realizing that I’m a life-long eater, it’s been more of a homecoming for me!
I started gathering people in Berkeley and developed the SOIL group, which is more of a community than an organization, but we now host many events, such as Food Funded.
How is it different being an investor that bases decisions on the Principles of Slow Money?
Slow Money is about patient capital, and investing from a relationship perspective. I know most of the owners of the businesses I invest in and end up eating and evangelizing what they produce.
I want to align my nest egg with the world I want to live in. When I got started, I was often asked: “don’t you give up on returns”? The thing is, the world I want to see is part of the return I get — these businesses produce food and heal ecosystems. I echo many of the Slow Money Principles: that we must bring money back down to earth, invest in things that grow in soil and the soil itself, and take a lot of our money out of opaque stock exchanges and into things that matter to people.
On the flip side: everyone who places their investment with Wall Street needs to account for all the externalized costs and risks that are incurred to people and planet. On Wall Street you can move your money easily. However, for our environment, there is no “Planet B”. Also, since most of our investments are in small businesses or early stage enterprises, they cannot be easily sold.
With our long-term perspective, we also don’t desire to rush our investment towards an exit, like selling to a large corporation. IPO’s are not happening in food and ag for the most part. So we have been looking at other models for getting our money back. Rather than traditional loans, we have used revenue sharing quite a bit — sometimes also called royalty financing.
Can you explain revenue-sharing?
These are not investments focused on making a killing, but making a living.
With revenue-sharing, instead of a fixed loan repayment investors get an agreed-upon percentage of the companies’ revenue. When the company is still small, so are the repayment checks. As its revenues grow, the repayments grow. At a certain amount, usually 1.5–2 times of the original investing (depending on risk), the business has fulfilled its obligation.
The food and ag space usually does not have exponential growth since it has built-in natural limits, like molecules and acreage. These can’t be multiplied in the same way that software can.
Revenue sharing is always capped — it doesn’t go on forever. In most cases, we are aiming at a payback over 7–8 years, with no repayments in the first year, and it’s recommended that the entire re-payments never exceed 5% of revenue. Once the company has paid the loan back they are free and clear of liability. For investors, it provides more visibility for how they will get repaid without forcing the enterprise to sell.
Another benefit of revenue sharing is that it’s an incentive for the investor to evangelize the business because repayment is tied to the company’s sales success in the market.
It’s important to distinguish revenue-sharing from profit-sharing. With profit-sharing — more like dividends — investors may get involved in a discussion about costs and use of the profits. Should the enterprise reinvest in the company or pay investors back? Revenue-sharing is easier to administer and create transparency around.
Can you give one or two examples of revenue-sharing in the Slow Money network?
Farmhouse Culture is a fermentation business near Santa Cruz, CA selling superb products like sauerkraut and kimchi. A group of us invested very early. After the first year, checks came in every quarter. Eventually, after 3–4 years they were done with all the payments, faster than expected because sales grew nicely. In some other cases, we realized that companies are growing slower than expected — revenue-payment may go on 10–12 years.
What are the pros and cons of this investment tool rather than traditional equity/debt?
The pros of revenue sharing compared to debt: early-stage companies can pay back when they have revenue and are not beholden to strict repayment timelines.
The pros of revenue sharing compared to equity: an investor may not get the upside if a company pays back the loan early and then does really well. There are other models with revenue-sharing where you can pay back the principal and then leave the interest as equity in the company. Like with all equity arrangements, shareholders then get paid back either through dividends or a company sale. In general, patient investors are more likely to invest if they have some visibility into how the money would get back to them even if it’s some time down the road. Among experienced investors and impact funds, revenue sharing models are considered “structured exits”.
Any Parting Thoughts?
Frankly, we’re all still learning about adequate models for investing Slow Money-style. In some cases, pioneering investments may incur negative nominal dollar returns, which is a better fit for philanthropic funding.
In food and agriculture — it’s not tech — such revenue sharing is turning out to be a better, slower model to align the needs of entrepreneurs and investors for growth, risk, and liquidity. All of this hinges around stronger relationships in our local food systems.
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