Wondering what it would take to turn that type of situation around, Foote planned to attend Harvard Business School when he returned to the U.S. But he changed his mind on the drive home. "I had this growing fear that if I didn't act on my ideas," he says, "I'd lose my sense of urgency."
Re-Wiring The Supply Chain
Root Capital's model is simple, but radical. The nonprofit doesn't work with either large industrial plantations or individual smallholder farmers. Its clients are what it calls the "missing middle"--i.e. small and growing businesses, or SGBs, that are too big for micro-loans and too small and risky (and remote) for commercial banks. These small businesses, many of them farmer cooperatives and associations consisting of a few hundred to a few thousand members, require between $50,000 and $2 million.
In order to fulfill orders from buyers in the U.S. and Europe, these small businesses need working capital to buy coffee beans and other crops from the farmers. If they don't have cash, the farmers are often forced to sell to middlemen at lower prices.
No working capital, no beans. No beans, no business.
Root Capital's novelty was to accept an SGB's forward sales contract with a buyer like Starbucks as collateral. It's a financing technique that had not been applied before in this sector. In effect, it has served as a strategic lever for creating a virtuous circle
By paying the growers immediately, the SGBs have helped them avoid the cut-rate middlemen. This has taken the farmers out of crisis mode, which has allowed them to plan. And this, in turn, has allowed the SGBs to grow their businesses with buyers in the US and Europe who are assured a reliable supply.
When the buyers receive their coffee (or other crop), they pay Root Capital. The nonprofit deducts the interest it charges (between 9.5% and 12%) and remits the balance to the SGB.
"We think we have a very compelling risk mitigation strategy," Foote told the New York Times. "As long as product ships we get paid back. So we get very good at asking, 'Why wouldn't product ship?'"
Many of the SGBs have applied the Fair Trade premiums they earn to creating social services like health care or education, or building infrastructure in the community like water treatment facilities.
Supply Chain Finance
In an effort to continue pushing the frontier, Root Capital has begun experimenting with how to apply its model to advance food security and nutrition in Africa, where 35% of the population is malnourished. According to Brian Milder, Root Capital's vice president of strategy, knowledge and innovation, the idea is to offer similar short-term working capital loans to businesses in domestic value chains such as maize, rice and finger millet.
"We're working all along the value chain," he says. "We're looking at inputs, seeds, and fertilizer. We're financing primary production and [basic] processing like converting finger millet into nutritious flour for baking. And we're very interested in finding [food] handling models because 30% of grain production is lost between the farm and on its way to being processed due to improper drying and storage."
Secosen, a Dakar, Senegal-based company in the rice business, is one example of Root Capital's efforts to boost the food supply. Although there's plenty of land in northern and southern Senegal and it's already irrigated, farmers have not been willing to take the risk of purchasing inputs like seed because the market for rice has been so unreliable.