Improving the productivity and livelihoods of the more than 2.5 billion farmers around the world should be one of the biggest impact investment opportunities around. Yet, small-scale agriculture businesses, with their seasonal revenues and volatile prices, have generally been seen as too risky and troublesome for equity impact investors.
Maya Mountain Cacao launched in Belize in 2010 with an investment from Alex Whitmore, owner of Taza Chocolate in Boston, who was looking to source high-quality cacao from Belize’s Toledo district. At the time, most of the area’s top cacao farmers sold their harvests to a single dominant buyer: the Toledo Cacao Growers’ Association, which supplied exclusively to Cadbury. Whitmore saw the potential for competition.
Whitmore teamed up with Emily Stone, an energetic social and environmental activist. Stone saw the impact potential of creating another cacao buyer in a region with 70 percent poverty.
Maya Mountain pays farmers a premium rate for eco-friendly cacao. It works with farmers to teach organic, sustainable growing and harvesting techniques and, through a partnership with Kiva, offers micro-loans to help them finance equipment and training. Because Maya Mountain buys whole cacao fruit from farmers and processes it in its own facilities, its farmers can focus all of their time and labor resources on producing more and better cacao to sell, improving their earning potential.
MMC sells to more than 15 buyers through whom its product has made its way to almost half of all bean-to-bar chocolate makers in the U.S. Over the next 12 months, it expects its presence in this market to increase to 75 percent.
Dandelion Chocolate in San Francisco touted the Maya Mountain beans in their new bar as having “a wonderful round and fruity flavor” with “a great sour cherry start with a deep chocolatey finish.” Furthermore, Stone says, “Our stable market access to premium chocolate makers allows farmers to invest in growing their farms and lifting their families out of poverty.”
Maya Mountain Cacao uses a financial instrument called the “demand dividend” arrangement that it says aligns investments with the seasonality of agriculture to raise capital for expansion into northern Belize and Guatemala. For those who aren't fluent in term sheets long-term equity strategies, the demand dividend arrangement essentially is a way to improve the repayment cycle (payment amounts are related to the ability to pay) so that social entrepreneurs have money to use and investors can generate reasonable returns.
Last year, Stone was looking for financing to expand the reach of sustainable, fair-wage, ultra-premium cacao-sourcing venture beyond Belize. Until then, the company was self-financed by the founders, with an additional $75,000 investment from Taza in 2012 and pre-harvest financing from an agricultural trading company. Stone heard about the demand dividend financing structure, developed by John Kohler a former venture capitalist now with Santa Clara University, and the two agreed MMC could be a suitable test case. The demand dividend, also called a Variable Payment Obligation, is effectively a loan that allows young companies to make payments based on their free cash flow.
Jim Villanueva, executive director of the Eleos Foundation, a small foundation based in Santa Barbara, Calif., was interested in financing options that would give young social ventures the best shot at achieving their missions. Eleos’s $200,000 investment in Maya Mountain in July 2013 became the first example of the demand dividend at work.
For Eleos and other impact investors, the demand dividend starts to answer the question of how to recover capital without the need for an acquisition or a public offering. “For a number of impact investors [safe] equity investments aren’t easy to come by. To that end, the demand dividend offers equity-like benefits and protective provisions for investors, but allows companies to finance their own growth,” Kohler explained.
Under the terms of the deal, Maya Mountain will begin repayments after a two-year grace period. The payments, every six months, will be based on 50 percent of the company’s free cash flow, higher if those cash flows exceed targets and lower if they fall below a certain threshold. Over six to seven years, Maya Mountain is expected to repay up to two times the original investment, or $400,000.
Stone and Whitmore and their field team are using the capital to expand its farmer training initiatives. Because of the flexible terms, the whole company won’t be jeopardized if its suppliers have a bad season. And unlike a loan, the demand dividend structure allows Maya Mountain to capture the benefits of its new investments before they have to begin repayments.
“It accommodates the gap between the planting and production cycles,” says Stone.
Higher prices and farmer training helped farmers increase average annual cacao yield by 14 percent, translating to a 20 percent increase in income.
Maya Mountain’s cacao production and sales grew from five metric tons in 2011 to 19 metric tons in 2012 and 35 metric tons in 2013.
One of a series of impact profiles produced in conjunction with the Case Foundation’s new publication, “A Short Guide to Impact Investing.”