Business models, funding and the regulatory environment. This panel is focused on business models. We have a set of questions we're going to go through. As we give the responses if we can

1e. Do you currently engage in any partnerships or collaborative ventures?

A. yes
B. no

It appears that most of the group is no stranger to partnerships.

2e. If yes, what is the nature of the partnership or collaborative venture:

A. Share staff and/or infrastructure on an ongoing basis
B. One-time sharing of staff and/or infrastructure
C. Joint fundraising
D. Joint marketing or customer outreach
E. other

Joint marketing and other are the dominant responses. What are the other? Some people are doing more then one. We participate in a funded collaborative with banks and foundations. We work with CDFI partners in local areas so we split transactions with them if they are too big.

3e. What stage are you at in with the partnership/collaborative ventures?

A. Designing it
B. Planning/negotiating with partners
C. Up and running
D. Tried it but not doing it any more

Most are up and running. Urban Progress CDC and we have started joint venturing with for-profits.

4e. From your participation thus far, how would you rate their success?

A. Very successful
B. Moderately successful
C. Some success but a struggle
D. Not successful
E. Too early to tell

Fairly even distribution across the first three.

Let's move into the panel presentation. The way the slides are cued we'll start with Christine Neal from Unified Western Grocers. Unified is an 80 year old organization. They serve many organizations that are challenged competing with larger organizations. It opens up access to insurance, technology and capital in addition to other things.

Thanks to all of you for having me.

About Unified
We distribute groceries in CA, AZ and WA. The grocery industry has three national chains. These three chains do their own buying and distribution. Below the national chains are the regional chains and then below that you have the independent grocer. That is our customer. Our mission is to help these independent grocers succeed against these larger competitors. How can they provide the services and technology to compete?

We function as a virtual chain to give them the products and services to compete. We were founded in 1925. Their were 8 merchants that came together to buy a carload of soap. They could buy it cheaper together then they could individuallly. The concept of buying power is the same today. What is different today is we also do the warehousing , the distribution and the technology.

Cooperative
We are structured as a cooperative. Our customers and our shareholders are the same people. The only place we get our equity capital is from our customers.

Our earnings are paid out in dividends. Our mission is to provide our services at a low cost to our members. We recently came up with this phrase: Success at retail, sustainability at wholesale. We have to have enough capital in Unified to be around another 75 years.

Members
We have some customers that are independents with one store and we have some that have 50 stores. In Southern California we serve the hispanic population. We have no operating requirements. Ace Hardware is an example of a cooperative but they have operational requirements.

Branding
We also have some private label products. We have some banding together for advertising. Our brand in CA is Springfield. Our private label brand in WA is Western Family.

Products
We warehouse about 60,000 products. We have about 4 million square feet of warehouse space.

We buy by the truckload, we sell by the case, and then our customers sell by the individual item. We do what makes them efficient. We provide a lot of technology these days - like scanners and payment systems.

Services
Some of the services we provide are: advertising (they don't pay for it but we facilitate it). Merchandising support. We tell them when its time to order. We do real estate services - some times landlords are not comfortable having an independent grocer on the lease. If the need arises we will gaurantee the lease or we will lease the property and then sub-lease to our members.

We do dairy - our members came to us and said we needed to do something so we built a dairy. We have an insurance company and we have a lending company. We have capital set aside by our members to grow the channel. Its used for people that are buying stores or needing new equipment. I would consider this a CDFI. We know these customers and we want to encourage the channel to grow.

Success
Our success is tied to and measured by our retailers.

HPN is a very high performing not-for-profit. Many of the organizations they serve are at an inflection point.

The Network
I'm going to start the old fashioned way. I came in here thinking we are really good at product innovation and then I saw where product innovation fits on the chart and that is way down there.

We have a series of companies we've created. We have 87 members around the US in affordable housing. They are in the top tier of non-profits and that is part of our strategy. These larger groups didn't fit the old business model. Our members started city wide, state wide or region wide. They were looked upon by the system pretty favorably. These organizations were viewed as not following the right model - they were seen as businesses and not as non-profits. These organizations didn't have peers. This network started in 1991. The members are voted on by the board. We are selective. We go through a process to figure out whether an organization is a good fit. The board has 16 members on it. Our members are very productive.

We've been working hard to create a sector of higher performing social enterprises. One of the things that came out on the production side our members developed 20,000 new homes. That is about 20% of the whole system of affordable homes. That was when we were at 67 organizations. We are performing at about 10 times the volume of the average non-profit.

We came together as a peer group to learn and share and we saw opportunities to join together so we've created new enterprises. We are trying to help our members succeed and grow. They are expanding rapidly. They need capital. Our businesses are owned by our members. We do have to raise private capital and we have a voting system since we are structured as a limited liability corporation.

There are some real shortcomings in the non-profit model and how it can grow.

We are no where near where our members would like to be when it comes to scale. We have five organizations in Texas.

The Companies
The first company we created was the CDFI to give working capital to successful non-profits to use high risk capital (equity like capital) to do early stage work. We ended up with a $30million fund. We created a fund that got us quite cheap capital. We are in between 90 and100% financing. We creating a venture capital company. We recently created a securities company to do bond financing. We are looking to capture their volume to go to the capital markets. Our goal is to do $100m in funding a year. The top 90% will be AAA rated and we will hold the bottom 10%. We are looking at Charter School loans and single family mortgages.

We build new companies when we have enough demand to participate. Members put up the capital for these new companies but we won't get into an area that doesn't have interest by the members.

The new venture we just created is the Gulf Coast Housing Partnership.

Housing Partnership Insurance
This was a pretty transformative model for us. We started to assemble a group of organizations to move this forward. The company is owned by the members so they own stock based on the volume of business they did. Last year there was a profit of $1.5m. That will be retained for now but will ultimately create an annuity for these companies. Our performance is much better then the market. This gave us the idea we could go to other ventures. They needed to own the organization and drive the products and services. The insurance business lead to the security company.

Securities
We created the securities company to pool and securitize tax exempt bonds. It's an LLC owned by the members and investors. It's an operating partnership overseen by the Network.

Gulf Coast Housing Partnership
The Gulf Coast situation created an opportunity and we wanted to show what non-profits could do operating at scale. We now have $20m raised. We have some local banks and the McArthur Foundation involved. We needed a company that could be large enough. Its structured a lot like a CDFI and it operates like a CDC. We now have a pipeline of 750 units that are in development. The dynamic in the gulf is very depressing.

Some of the organizations that support us.

Lessons learned you mentioned this morning rang true to me. The business model we started with is not the business model we have now. We really look to be profitable. We started as a trade association. We then went through a change to have a board of directors. The insurance company turned it all on its head. We are a business alliance of high performance organizations, owned by them, ran by them. This structure allows us to have such a pulse to design products and to compare what we can do together to what they can do separately. There are other structures that can't be as responsive.

We've gone through several different business models. We need to do a lot more work on this model so that our members can earn money to reinvest in what they are doing. This is not about capacity building. We are focused on the industry to create new platforms and new ways for organizations to operate together.

ACCION members operate independently. Their business model lets them partner with banks.

Thank you for inviting me here.

Overview
To get started, I'm going to give you an introduction. We are an organization that strives to be an engine for entrepreneurship. We make loans to entrepreneurs and service those loans. We are a micro-lender and loan from $200 to $50,000. We still think of ourselves as being in start up mode even though we have been around since 1994.

New Mexico only has only 100 incorporated communities. We are a local independent licensee of ACCION. We have our own board of directors and our own products. We have one main office in Albuquerque.

Innovation
In 1999 we had gotten our legs on the ground and we realized we needed to move beyond Albuquerque to the whole state. I hesitate to say this but NM is a large state (5th largest in the US) with a small population (1.8million people). We wanted to find a way to spread our reach beyond Albuquerque. We didn't feel like opening a bunch of satellite offices but we needed to grow in a way that achieved benefits.

We locked ourselves away in Taos for a strategic planning session and the idea we came up with was to ask the big guys to do our work for us. We would ask the big banks to serve as ACCION field offices. We had them trained in ACCION methods and products and promoting ACCION. Once we determined that they would close the loan on behalf of our organization. We had been convinced that it was our staff that was the big differentiator for us but we let go of that and we were willing to make loans to entrepreneurs that we hadn't met before. When we approached the banks we struck out on three of the five we presented to. This is working now after five years.

We are now experimenting with a field office to explore going into depth in one area to see how that goes.

Benefits
We believe we are contributing to greater mission fulfillment. We are understanding the benefits for the banks being involved. Its more then CRA. They are doing this free of charge and they are going beyond the call of duty. We haven't tested this in a large urban environment but we know it works in small communities. This works in small communities and the good will has been a strong motivating force. ACCION bears the risk but that banker is sitting down in that community closing that loan. Customer loyalty is not anecdotal. Really importantly it is providing opportunities for our customers and it allows us to be nimble and turn things around quickly.

Reaching Scale
We started with two banks and a handful of loan closings. We now have 41 bank offices in 31 communities offering ACCION loans. Last year half of the 479 loans were outside of Albuquerque. Our portfolio has grown to $8.5m. Our self-sufficiency scores improved as well.

Lessons
It was important to get buy-in from top officials at the banks but we also had to understand the impact on their front-line staff. Understanding the bank incentives and making it easier for the partner was very important in making this happen.

Looking Ahead
We need industry wide change. We hope we can get outside of just one-off innovations. We need disruptive thinking in the CDFI industry. We need some points of disruption in our models.

Larry is going to talk about his organization's work.

We're actually a credit union service organization. It was formed to improve the well being of the community. We found there was a market that wasn't being served.

CUSO
Altogether they have about 500,000 members and $2.2b in assets.

We deliver bi-lingual support for financial literacy and homeownership workshops.

We identified the non-profit organizations that - about 30 to 40 organizations - they all have a roll within our model. Some service loans. Some originate loans. We partner with different organizations and we've developed home ownership workshops.

At this point we assess every participant for any high cost of preditory product. We try to take the preditory loan to the credit union and prepare them for home ownership.

Lending is based on demographics and focus group findings. Our average household income is $29,500. The cost of housing is out of reach for these families. We've developed different ways of product delivery. We need to be prepared for long term commitment for this endeavor.

About 10% of the people that go to our workshops are already ready for home ownership. We counsel them and set them up with a mortgage program. The others go through a mortgage readiness program. We have organizations that help with down payments. Once the buyers are qualified we put them to the right loan - some of which we've developed.

The credit union provides a line of credit. We limit the documentation that is required. The CUSO regulates the program loans. We sell some loans to Fanny Mae through one of our partners. We collect the payments on the program loans even if they have been sold to Fanny Mae. We also deal with any delinquency. Once we call them once or twice they are not late any more.

We can support them with other services as well.

The credit unions provide the CUSO with management services.

Programs
We also have financial literacy workshop. We've got a program funded by HUD.

We try to get participants to use EITC refunds towards a purchase of a home. Its a very important thing in our area. We've developed about 8 home programs and they are all different with different partners.

SLIDE - partners

SLIDE - results
3600 families have been counseled. Over 400 families have been placed in homes. We've opened 9339 new accounts with families that have never had an account before. The credit unions that are our partners have developed some small loan products that compete with preditory loans. They have found that their losses are under 2%. They pay so much less interest. We've developed a lot of other relationsihps with these borrowers.

We've provided 350 home ownership workshops.

We enroll about 75 people per month to this program.

We have time for a few questions.

Q - Just wondering about how you helped some of the non-profits overcome their fear of owning a for-profit enterprise?

A lot of our members have some experience running for-profit companies. Just how much income can come in requires some research. We did a lot of research for the insurance business. For the securities we created a structure for them to borrow money and they need to pay these off before we pay dividends.

We need a new structure to bring in private investment but not being a for-profit company has some challenges. It might be an LLC or an S Corporation. In general they are concerned about the income they get back.

Q - How are the loans performing that have been closed by the banks? Are the banks providing the capital as well?

In some cases we never meet the borrower. We have not noticed any differences in portfolio quality. In our worse case scenario we were prepared for bottoming out. Intuitively it seems like you should have better borrower payback if you sit down with the borrower. In terms of the capital - we've had wonderful support from the banking community. There are 4 or 5 banks that provided 0% money. A few of the partners put money into the portfolio in addition to the operational support.

Every bank has a personality and a culture. We don't have one template partnership model. We customize to what they are comfortable with.

Q - I was curious how you measure self-sufficiency?

We measure self-sufficiency by taking our earned income (non-fund raised dollars) and divide by overall operating expenses less the mirror of in-kind contributions.

Q - I was wondering when you said it's not about capacity building?

Capacity building means a lot of different things. Our model is ot build on their success and on their strength. Its not about taking start ups and building basic systems but about taking mature organizations and finding where collaboration makes sense and adds value for them. We do peer exchange but we don't do training. We are really focused on organizations at a different level of development. These organizations have their own names and brands and they are well regarded in their communities. We struggle with the next stage thinking about how you do that (go to the next stage) when it comes to brand? One of the biggest challenges is infrastruture, management systems, back office technology, etc.

It would be great if we could generate income so we can invest in ourselves. We need to have the flexibility of tools to know where to invest.

Q - For the credit unions, have you been working with the tax payer ID mortgages?

This hasn't been an issue for us at all. If someone is undocumented in the family but others in the family are documented then its not a problem.