Every day, the US municipal bond market raises $1 billion for public works projects—roads, bridges, schools, and the like. Most ordinary citizens know little or nothing about the financing of those projects, and they don’t have a clue about how they might take part in that process. Now a San Francisco-based start-up called Neighborly aims to disrupt the $3.6 trillion market for municipal bonds (“munis”) by making that market more accessible to community-minded individuals.
Buying bonds to support local projects “used to be as much a part of civic life as voting for mayor,” says Jase Wilson, cofounder and CEO of Neighborly. He cites early-20th-century projects like the Golden Gate Bridge—which was funded through $35 million in bond sales—as examples from a bygone era of civic investing. The intervening decades have brought new layers of regulation and market complexity, he explains: “You need a PhD in finance to invest in something that supports your community.”
Another virtue of municipal bonds is that they often pay tax-free interest. Yet bond issuers have structured the market so that only people with deep pockets can enter it. The standard price per bond is now $5,000, and purchases typically come to $25,000 or more. “You almost never see somebody buying a single bond,” Wilson says. Consequently, buyers are more likely to be institutional investors that seek a financial safe haven than individuals who want to support specific local projects.
Wilson and his team aim to bring down the price of entry by launching an online platform that streamlines transactions. Currently, the municipal bond market involves a long string of underwriters and resellers who mark up prices with each transaction. “It’s middlemen, plural,” Wilson says. Each markup, he adds, “drives up the costs to taxpayers and reduces the end investor value.”
Neighborly wants to eliminate the middlemen and reset bond prices to an amount that even young investors can aff ord. As proof of concept, Wilson points to the city of Denver. In August 2014, Denver off ered Colorado residents a chance to buy $500 bonds to fund $12 million in road improvements and other building projects. There were no underwriters and no intermediaries. Instead, citizens could buy the bonds online or over the counter at Denver City Hall. “They sold out in 23 minutes,” Wilson says. “Give people a reason to invest, and they will. There’s something magic [that happens] when the money is in touch with the need.”
In mid-2015, Neighborly was testing its online marketplace with a select group of accredited investors. In one demonstration project, the company off ered “microbonds” priced at $500 to fund school construction projects in San Leandro, Calif. Doing so required Neighborly to purchase previously issued $5,000 bonds and then to break them into smaller bonds to sell on its platform. “We jumped through numerous legal hoops to make these microbonds available,” the company reported in a post on its website. “It was an experiment to show what small-scale retail investing in municipal bond projects could look like.”
The municipal bond market may be ripe for disruption. Since the fi nancial crisis that started in 2008, margins on municipal bonds have become ever thinner, according to Thomas Doe, president of Municipal Market Analytics, a research fi rm based in Concord, Mass. “There’s still a lot of money [in municipal bonds], but the opportunity isn’t as enticing” to some investors as it used to be, Doe says. Meanwhile, the backlog of infrastructure projects that require public funding continues to grow.
Wilson and his team might help fi ll this funding gap “by coming at the business in a new way,” Doe suggests: “They may turn out to be like the Southwest Airlines or JetBlue of the municipal bond industry.” Neighborly doesn’t have to limit its appeal to small-scale investors, though. “It’s a nice idea to say that every twentysomething should have a municipal bond,” Doe says. “But why not use the same platform to go to [wealthy] people and aggregate capital for larger projects? That could do tremendous good for the country.”
Early funders of Neighborly include Formation 8, a venture capital firm based in San Francisco, and the actor Ashton Kutcher. As yet, the company hasn’t settled on a revenue model. One option is to act like a traditional underwriter and charge communities to issue bonds sold on its platform. But Wilson has a different model in mind. “It may be more interesting,” he says, “to think of us as a software company” that charges a licensing fee for use of the platform. If Neighborly’s software could bring increased efficiency to the bond underwriting process, the cost to issue bonds would drop from the current norm of 2 percent. “What if we could bring that [cost down] to 1 percent?” Wilson asks. “That would save states billions [of dollars].”
Read more stories by Suzie Boss.