High Mowing Seeds, an organic seed company, grew out of what is known today as “slow money,” or patient capital.
The founder, Tom Stearns, started his business with a line of credit that was guaranteed by his parents. (Many entrepreneurs don’t even have that opportunity.) That allowed the business to get off the ground, but at some point it needed more capital to grow. They did not want to go the traditional venture capital route where they would eventually lose control of the company and potentially the jobs so needed in their community. 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. HMS found this group of committed impact investors through local advisors; many of the investors had started their impact investing journey with a simple note with a local CDFI.
The deal was a 10-year convertible note, a loan that could be converted into equity at the end of 5 years. The note accrued interest at 6 percent, 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. If all investors converted, they would own 30 percent 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 principal for the next five years.
In practical terms, structuring the deal as a convertible note 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 (and that of their advisor), the patience also paid off. They got to know the company and its management more thoroughly than if the specter of money were a constant, lurking background presence.
High Mowing Seeds was a good test for what could be done during both good and bad economic times. If this investment could flourish during a five-year period when financial and corporate institutions all around them were failing, that certainly shows this kind of investment can be appropriate for any time. While it still makes sense to primarily invest in publicly traded stocks and bonds and community investments, these investments plant our fields with many more investment varieties.