SEATTLE, Washington — There are two primary reasons for why people choose to invest capital: the first is to make money, the second is to create change. Root Capital is a marketplace financier focused on creating change through investment. The organization seeks to promote social, economic, and environmental sustainability over the long term in farming communities in Latin America and Africa. This is known as rural social impact investing.
Founded in 1999, Root Capital began as a part of the nonprofit Ecologic Development Fund (EDF). Root Capital’s model is built upon providing financing for small businesses that buy from producers in Latin America and Africa. These businesses then sell those products to buyers in other parts of the world. Essentially, Root Capital provides funding to grow businesses that link farmers to consumers. Since its clients don’t qualify for loans from a traditional bank but need more capital than a microloan, Root Capital describes its client base as “the missing middle of developing world finance”.
Root Capital’s financing of the ‘missing middle’ is a foundation of the future global marketplace. The organization begins by screening potential clients for social and environmental performance potential. By lending to a client with an established economic goal for their community, Root Capital provides financial security for businesses who then provide income and food security for small farmers. Root Capital next evaluates the progress of borrowers by looking at how their growth has benefited their communities, sometimes by examining parts of their investment portfolio, but also through in-depth case studies.
In an early-2016 interview with Conscious Company Magazine, Root Capital founder Willy Foote discussed two key components of the organization’s strategy and success. The first is the investors who provide capital to invest and knowledge to succeed as a long-term financier, in what Foote calls a financial world of “short termism”. The second component is the organization’s multidisciplinary team of experts, which ensures the right decisions are made to promote sustainability.
Evaluating social impact is paramount to successful rural social impact investing. According to the organization’s vice president Brian Milder, there are three principles to measuring success. The first involves client-centric reviews to improve best practices for clients, rather than only looking at a return on investment. Second, the organization performs ‘additionality’ assessments, which compare the effect Root Capital’s investment had on its clients versus how the client would have performed without the investment. Finally, Root Capital promotes both positive impact as well as sound financial investments.
Merely being able to access credit has a major impact on rural communities. As Fresh Cup Magazine describes it, whereas people in coffee-consuming countries worry about high interest rates on their credit cards, coffee producers would worry about simply qualifying for one. When Root Capital clients get access to credit, they are able to open new locations, expand their processing capacity to work with more farmers, and to pay farmers more for their products. When farmers earn more money they are able to expand their own production capacity, and do things like upgrade their irrigation systems, hire more workers, or attend training to increase the quality of their products.
Perhaps the most important measure of success in rural social impact investing is the reliability of those connected to the marketplace. When farmers have stable production over the long-term, marketplace borrowers – clients of Root Capital – can consistently sell products, greatly enhancing their operating capacity. Stability gives producers the chance to invest in their communities, providing education and stable employment. This becomes a life-cycle for the community in which producers can count on demand and build enduring relationships with buyers. This mutualistic life-cycle is how communities build sustainable economic futures for themselves, and for the world.
– Lucas Woodling