The food system, and how to fix it or rebuild it, was a hot topic at the recent Social Capital Markets (SOCAP) conference—for good reason. Many of us in the social enterprise sector—investors, entrepreneurs, philanthropists—see the need for an alternative food system that dramatically expands access to fresh food and supports sustainable local food production, and that ultimately helps create more resilient communities. For that to happen, we need to get outside our comfort zones and work together. Collaboration between philanthropists and investors in particular is essential to building an alternative food system.

That’s true both because the challenge is so formidable and because alternative food enterprises by their nature call for a fresh approach to funding. Remaking the food system requires remaking the supply chain, including production, processing, and distribution. Specifically, we need to provide small growers with access to affordable land closer to metropolitan areas; train more people to run farms effectively as businesses; build an infrastructure that enables farmers to sell more food directly and makes it easy for larger institutions to buy regionally produced food; and develop distribution channels that make fresh food a convenient, affordable option for everyone. And while our own expertise is in the United States, similar needs apply worldwide.

It helps that food is a hot investment area in Silicon Valley, especially on the distribution end, where scalable online distribution businesses are attracting substantial capital. But many of the enterprises needed to support an alternative food system simply don’t fit into the traditional venture capital model. They often have high upfront costs and relatively low profit margins—they don’t have hockey-stick growth prospects. They may also have unproven hybrid business models.

Impact investors have significant (if still unrealized) potential in this area but don’t have the capital capacity to do it alone. The enterprises that have real potential to forge links in an alternative supply chain need a combination of funding types to really get moving, from pure gifts to recoverable grants, loan guarantees, convertible notes, low-interest PRI loans, and revenue participation agreements. Philanthropic money could be the most catalytic capital in this field, because it can make the difference in an enterprise developing to the point where it can get conventional investment and debt funding.

At our organization, RSF Social Finance, we call this an integrated capital approach: using coordinated investments, loans, and gifts to address particular social and environmental problems. In the face of huge government subsidies benefiting multinational agribusiness corporations, I believe this is a compelling and much-needed form of market distortion.

Cultural barriers hold back needed investment

Often all that’s needed is a small philanthropic investment. For example, RSF’s Local Initiatives Fund, a pilot project that provides the range of philanthropic capital types described above, has been able to support meaningful growth with investments as low as $50,000.

Given the clear needs, opportunity to make a huge impact, and flexible funding capacities, why aren’t philanthropists doing more in the food sector?

There are a number of barriers, but our culture of philanthropy is the biggest. This kind of investment is not in the category most philanthropists are used to—they may focus solely on the critical work of helping the extremely needy with traditional grants, or they may simply put money for investing in one bucket and money for grants in another. But focusing on systemic change, and employing these different forms of capital, can yield significant benefits related to a foundation’s mission.

One example: Philadelphia-based Common Market provides a distribution link between threatened Delaware Valley farms and urban communities that lack access to fresh foods, largely by serving institutional customers such as schools and hospitals. When the enterprise (a nonprofit that runs like a business) began turning away orders due to lack of storage and packaging capacity, the founders knew they needed a new facility quickly, before the opportunities slipped away, but Common Market was still too small to qualify for the $1.3 million mortgage loan required. The solution was a combination of grants, guarantees, and PRI debt financing; the result was more business for sustainably run regional farms and better food for more people.

Other barriers are mostly related to resistance from foundation boards, staff, and contractors who see only rewards in a conventional approach—and only risks in stepping outside the status quo. Attorneys who are not used to these kinds of financing structures typically discourage foundations and philanthropists from pursuing them (in many cases because they simply don’t have the expertise needed). Finance committees often resist any suggestion that they should invest to further the goals of the organization, rather than solely to increase their financial return. And program officers may be threatened if their grant dockets get smaller because of these alternative uses of funds.

An easy step forward

Loan guarantees are one of the easiest ways for philanthropists to get started in funding an alternative food system. A partial guarantee can open up other funding sources for capital-starved enterprises; guarantors can reduce risk by participating with other organizations; and ideally, guarantors never have to spend the money, so they can recycle funds.  

Here’s an example of how this can work: A $200,000 loan guarantee from the Park Foundation made possible RSF’s recent $950,000 mortgage loan to Regional Access, a wholesale food distributor focused on creating a sustainable regional food system in New York and expanding access to quality food for underserved urban and rural residents. The mortgage loan and a $200,000 line of credit, supported by a $50,000 Local Initiatives Fund guarantee, allowed the company to consolidate debt and expand its reach and operations. That translates to more ecologically responsible and locally grown food for more people (Regional Access currently serves 600-plus stores, restaurants, and institutions) and improved economic viability for local farms for a small, low-risk investment.

If hundreds of food-related social enterprises across the United States could take advantage of this integrated capital approach, we would really move the needle.