presentation and assignment

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Root Capital:

Measuring the Effects of Impact Investing on Impoverished Rural Communities

Miriam Winget, University of Tennessee Chattanooga

Nai H. Lamb, Ph.D., University of Tennessee Chattanooga

Kathleen K. Wheatley, Ph. D., University of Tennessee Chattanooga

This case was prepared by the authors and is intended to be used as a basis for class discussion. The views

represented here are those of the authors and do not necessarily reflect the views of the Society for Case Research.

The views are based on professional judgment. Copyright © 2017 by the Society for Case Research and the authors.

No part of this work may be reproduced or used in any form or by any means without the written permission of the

Society for Case Research.

Introduction

In 2015, Root Capital was a non-profit company that concentrated on social investment to grow

prosperity by lending credit to the underrepresented rural agricultural industry in developing

counties like Africa and Latin America. Root Capital expended funds to small and growing

farming businesses that had a large effect on their environment and communities; it offered

financial training to its clients so that they could maximize their resources and Root Capital

could minimize its lending risk; and Root Capital strengthened market connections for rural

farming organizations by bringing premium and international markets to the rural communities,

catalyzing interested parties and providing a framework of lending to commercial financiers

(“New Issue Brief,” 2014).

For more than fifteen years, Root Capital had established hundreds of millions in capital funds to

hundreds of companies around the world. Through detailed impact studies, Root Capital

estimated that its lending efforts increased prosperity for hundreds of thousands of households

who depended on an agricultural production livelihood (“New Issue Brief,” 2014). A majority of

Root Capital clients saw an increased income of 20% after one year of receiving a loan and a

third of the borrowers improved their income levels by 50% (“Seeding the Market,” 2015).

History

While traveling through Mexico as a journalist, Willy Foote perceived a significant shortage of

available funds for farming businesses in rural Mexican regions. Foote became acquainted with

a cooperative of vanilla growths in a southern Mexican jungle, who worked very hard to stay

afloat in the farming industry but whose business eventually failed. These local people were

faced with problems from drug traffickers in the area and, even more so, a lack of means to attain

loans for business operations and growth. With a sense of urgency from the significant impact

that these small farming companies had on countless individual farmers for the overall prosperity

of surrounding areas, Willy Foote founded Root Capital (originally named EcoLogic Finance

until 2006) in 1999 to invest in these collectives of farmers who were too small for traditional

bank loans yet too large for microloans (“Founder’s Story,” 2012).

After Root Capital gained clients throughout Latin America, Starbucks invested with Root

Capital in 2000 for a project in Chiapas, Mexico that established credit for coffee farmer

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cooperatives and enhanced product quality, prosperity and industry sustainability (“Starbucks

More than Doubles, 2015”). Then in 2002, Green Mountain Coffee Roasters became the first

corporate investor for Root Capital. Root Capital next made its way across the globe to invest in

rural agriculture in East Africa, and, by 2006, it started financial training for clients to provide

enhanced knowledge for business growth (“Root Capital Timeline,” n.d.). Throughout the later

part of that decade and into the next, Root Capital gained many awards and recognitions for its

business model, entrepreneurship, social impact and much more as well as advanced its own

business processes and continual company growth with increased loans in different and new

regions, developing initiatives, more partnerships and hiring officers in local rural agricultural

areas. In 2015, Root Capital celebrated its fifteenth anniversary with the milestones of lending

over $700 million to more than 500 growing companies and reaching millions of people in

developing areas with opportunities for increased wealth and economic productivity (“Root

Capital Timeline,” n.d.).

Rural Poverty

As of 2004, rural poor made up approximately one-fifth of the world population, largely in Latin

America, the Caribbean, Sub-Saharan Africa, Asia, North Africa and the Near East. Two thirds

of the most poverty stricken people in the world earned their meager living from farming or

working in the agriculture industry. Proposed causes of extreme rural poverty include low

agricultural productivity and a lack of capital, unequal income distribution, gender

discrimination impeding prosperity opportunities for women, ethnic discrimination, and

irrigation deficits. Improving agriculture productivity, raising the status of women, anti-

discrimination government policies and better irrigation for croplands all could help to alleviate

poverty in these rural areas (Dao, 2004).

“Root's business is lending to the owners of small farms in poor countries. An estimated

450m of these smallholdings exist worldwide, typically providing a subsistence-at-best

income for more than 2 billion of the poorest people on the planet. Mainstream finance

has largely ignored them. They face multiple hardships, including land of poor quality, a

lack of infrastructure to get their output to market and the constant threat of being wiped

out by extreme weather. The lack of access to credit for working capital and investment

makes a bad situation worse.” (“Seeding the Market,” 2015, p. 75)

Poverty Issues Addressed

Women in Poverty:

In many impoverished rural areas, women played a key role in agricultural productivity by

heading jobs such as clearing, planting, weeding, harvesting and food storage. An estimated 60

to 80 percentage of agrarian labor came from women in Africa and Asian and 40 percent in Latin

America. These same women often did not have equal opportunities or expectations for

education and advancement (Dao, 2004). Although woman produced over half of the world’s

food supply, they owned less than two percent of the land and gained very little of the available

small business loans (“Empowering Women,” n.d.).

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In 2012, Root Capital started Root Capital’s Women in Agriculture Initiative to help provide

increased opportunities for women in agriculture and to better understand the role that women

play in alleviating poverty. When considering clients, Root Capital paid special attention to

farming specialties where women were strongly represented or ran the company, and it looked at

how well small businesses included women as employees and leaders with a non-gender biased

company culture (“Empowering Women,” n.d.).

Peace Building:

Root Capital concentrated many investments in regions where conflict or disaster had occurred.

Root Capital believed that by growing the agricultural industry, the most prolific industry in

most conflict recovering areas, vulnerable countries are best positioned for peace and recovery

(“Peace and Recovery,” n.d.). The Poverty Reduction Strategy Paper developed to address

conflict recovery problems in Sierra Leone found that, “the incidence of poverty in a particular

area is directly linked to the level of economic activity, principally agriculture. For example,

high poverty in Kailahun District is said to be a result of decreased cocoa and coffee production

as a result of war-related destruction of plantations.” (Castañeda, 2009, p. 243)

A prime example of recovery through agriculture productivity can be found in Rwanda following

the 1994 genocide when many coffee farms in the area were left in ruin. By 1999, to help

recovery, a group of coffee growers in Rwanda formed the Maraba cooperative to help the

farmers compete in the coffee market. Financing was a consistent issue since money earned

from the yield only accumulated during the short harvest season (“Supporting Coffee Growers,”

n.d.). Year after year, the farmers lived off money earned from the harvest for the remainder of

the year after harvest, and when new funds were required for the next year’s harvest preparation,

there were little reserves available. Maraba received loans from Root Capital starting in 2005,

and after that time, the cooperative was able to grow and stay competitive in the local markets.

The co-op’s president said that the members were now earning money, owning cars, purchasing

needed equipment for business growth and able to send their children to school (“Supporting

Coffee Growers,” n.d.).

Food Security:

In developing countries, agricultural productivity was somewhere around one third of its

potential. With best practice farming knowledge and access to technology through financing,

poor rural areas could see an improvement in food shortages and unused resources. The

agriculture industry was extremely complicated and unpredictable and it was difficult to manage

on a large scale. Small farmer development, aided by capital, infrastructure and organization

into larger supporting groups such as cooperatives, was the most effective way to address food

shortages and starvation in the developing world (Freeman, 1982).

Most of the world’s starving population was located in impoverished rural areas. Root Capital

loaned money, trained and gave assistance to the businesses that provided the world’s

nourishment for greater food productivity and increased local nutrition (“Promoting Food

Security,” n.d.). Root Capital provided financing for one such sustenance provider in Tanzania,

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Nyirefami Ltd, that sold the wholesome, yet more expensive to produce, millet flour at a

reasonable rate to the local mothers feeding infants (“Nyirefami,” n.d.).

Environmental Sustainability:

Sustained environment in the agriculture industry allowed utilization of the land to gather needed

resources for populations without harming future resource prospects. As populations in

developing countries grew, more poverty stricken people were dependent on subsistence farming

practices that caused long term damage to the productivity of the land through resource

depletion, deforestation and land degradation (Regmi and Weber, 2000). “Rural poverty often

takes an environmental toll, as survival tactics such as illegal logging and slash-and-burn

agriculture degrade the ecosystems upon which farmers depend” (“Sustaining the Environment,”

n.d.).

With available funds for small agricultural businesses in these susceptible areas, rural farmers

had the luxury to grow a company with concern for the future productivity of the land. Through

funding, environmental measures and training, Root Capital facilitated sustainable environmental

efforts that kept the integrity of the land with profitable yields (“Sustaining the Environment,”

n.d.). A great example, COOMPROCOM, a 51 member Nicaraguan coffee farming cooperative

and client of Root Capital, used its organic certification to attract fair trade and organic markets

that pay prices up to 10% above local market prices. COOMPROCOM used its sustainable

techniques to fight tree loss through epidemics like coffee rust with fungi resistant tree varieties.

With ready credit, COOMPROCOM grew each year and spread its sustainable environmental

practices throughout the area which provided stability for members who would otherwise be

migratory workers (“Unlocking Growth Potential,” n.d.).

The Mission

Root Capital sought to grow rural prosperity by enabling small businesses to thrive and connect

with more farmers, providing these farmers more opportunity and better pay to produce quality

products in high demand. Root Capital used three main approaches to address rural poverty

through agricultural productivity in Latin America, the Caribbean and East and West Africa:

financing, advising and catalyzing. Root Capital offered short-term loans that financed

equipment, products and supplies during the production season and longer termed loans for

investment in larger capital expenses to grow businesses (“Our Approach,” n.d.). Through funds

offered to small agricultural businesses and farmer co-ops, these companies were in a better

position to grow, connect to international markets and pay well when purchasing and demanding

high quality products from rural farmers who had little access to buying markets. Root Capital

advised clients and potential clients on financial management practices to support these small

business owners for growing their organizations wisely; sustainable environmental practices was

also important to Root Capital and clients were trained in green farming methods. Root Capital

strived to catalyze financial markets for rural agriculture through innovation, collaboration and

impact studies (“Our Approach,” n.d.).

Although fair trade had become extremely popular, farmers could not meet the demand that fair-

trade-seeking companies like Starbucks and Green Mountain Coffee require without some sort of

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access to working capital. The demand for products from small sustainable farmers was there,

the problem was aligning the appropriate parties to do business (Boss, 2009). A lack of capital

for small subsistence farmers exasperated inherent issues in the industry like extreme weather,

poor land quality, and little business knowledge (“Seeding the Market,” 2015).

Case in point can be found by looking at Soppexcca, a coffee cooperative in Nicaragua.

Although the region was perfect for growing coffee, the company did not have money to move

its product. Traditional banks did not consider Soppexcca as a viable lending option, and private

money lenders charged extreme rates. Once Root Capital starting lending money to the

cooperative, it grew from a group of several farmers to an entity with over six hundred members

who could make a decent living and continue growing the company (Boss, 2009). Interestingly,

Root Capital reported that less than 3% of its loans went unpaid, and ultimately, Root Capital

hoped to go out of business; that is, the company was striving to build up the rural farming

industry to a level where small agricultural companies in developing countries could gain credit

in traditional financing markets (“Seeding the Market,” 2015), (Boss, 2009).

Finance

The core of Root Capital’s business was providing capital for small rural agricultural companies

that would otherwise have had little to no credit options for starting and growing a company or

retaining growers with means to pay those individual producers immediately. Companies like

Starbucks and Green Mountain Coffee had long been clamoring for fair trade products from

around the world, but small rural agricultural businesses historically could not meet such intense

demand, and large distribution and retaining companies, like Starbucks, were not in the business

of lending to provide remote small growers with capital for demand meeting infrastructure.

Before Root Capital and similar social investment companies, there was a gap to fill; members of

the rural agricultural industry needed access to international markets, funds for growth and a way

to meet large and sophisticated demand (Boss, 2009). These small companies grew with access

to capital and were able to repay the loans given them.

Root Capital provided short-term trade credit and pre-harvest loans for daily business costs and

to allow companies to pay farmers immediately. They offered long-term fixed asset loans of up

to $2 million for equipment and future company investments to businesses that typically did not

have access to commercial lenders. Root Capital used two types of lending funds: The

Sustainable Trade Fund to focus on companies that exported coffee and cocoa products, nuts and

produce and the Frontier Portfolio which identified companies that concentrated on local impact

and produced grains and other goods for domestic markets (“Finance,” n.d.). Loan repayment in

this industry was higher than in traditional credit lending arenas with a reported repayment rate

as high as 99 percent (Boss, 2009).

Root Capital was not the only organization that recognized the necessity of investment for

positive impact on prosperity around the world. Root Capital was a founding member, along

with The Bill and Melinda Gates Foundation, Citigroup, Deutsche Bank, J.P. Morgan, Lundin

for Africa, Prudential, The Rockefeller Foundation, and many more, of the Global Impacting

Investing Network (GIIN) formed in 2009. GIIN’s mission was to bring together interested

parties for impact investing that promoted infrastructure, education, market growth in

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underrepresented areas and more. The idea was to facilitate interest for impact investing that

would far exceed the limitations of philanthropy, grants and aid alone. The missing middle

identifier given to the rural agricultural industry in developing nations was an untapped resource.

When the industry grows and enthusiasm builds for investing, social and environment

improvements will manifest as the missing middle gains access to more and more resources for

growth and progress achieving capital (“New Industry Group,” 2009).

Many of the companies that Root Capital represented were great examples of impact in rural

areas through agricultural investing. Musasa, a Rwanda coffee cooperative, became a Root

Capital client a year after its formation with a $90,000 loan to buy beans from the co-op

members. After that time, Musasa grew its membership six times over with continued financial

support from Root Capital. Proceeds from the coffee allowed growth for the company and the

ability to consistently pay on the Root Capital loans (Atkins, 2013).

Across the world in Nicaragua, the coffee farming co-op, Soppexcca, was another one of these

missing middle victims with no available cash to establish strong trade. The members were

struggling to survive since they were too remote and small for traditional loans. They felt like

they didn’t exist in the real world. The only option for capital was from money lenders, who

were extortionists, until Root Capital provided Soppexcca with loans. Individuals made good

wages, the cooperative grew and the members were able to practice sustainable farming to attract

conscientious companies like Starbucks (Boss, 2009).

Advise

Root Capital did not just aim to provide credit for its clients, it intended to make sure those

clients are educated on business practices that make best use of available cash. Once Root

Capital discovered that many of their clients had never dealt with credit applications or banking

processes, it formed a financial advisory service program for potential and current clients. This

training program helped small businesses succeed in growing the companies and reduced the risk

of loan default. Root Capital’s Financial Advisory Services included seminars; workshops for

improvement and development; financial training for accounting, planning and risk management

and loan application help (“Advise,” n.d.).

Many cooperative members had little formal education; clients, including a lot of women and

young farmers who were just learning the business, needed information. Many of Root Capital’s

clients had never even had bank accounts and had never conducted cost accounting or cash flow

analysis. Root Capital attempted to look at the entire picture for the future success of small rural

companies by preparing these business people for growth and development so they could

eventually become traditional banking customers (Boss, 2009). Before loans were issued, the

Financial Advisory Services diagnosed a client’s particular need in the areas of administration,

accounting, financial, commercial, production, member services and impact. This helped

formalize a customized plan geared toward each company’s specific needs. Through these

programs, business owners gained a better understanding of how best to invest money in the

business, conduct cost-profit analysis and apply current financial management techniques

(“Unlocking Growth and Impact,” n.d.).

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Catalyze

In 2009, a panel of experts, including Root Capital, participated in a round table concerning

environmental, social and philanthropic investing in Latin America. The panel agreed investors

had become even more risk averse since Lehman Brothers went down in 2008 and recessions

had decreased wealth resulting in less available capital for the developing nations. With no less

need for impact investing, industry leaders like Root Capital were looking for solutions to

improve the economy in poverty stricken rural areas (“Philanthropy in Latin America,” 2009).

The idea was to spread the word that sustainable finance is profitable and bring together

governments, development organizations and the private and public sectors to fund importers

and exporters in less developed nations. There was a need to switch the thinking from strictly

“risk and return” to “risk, return and social impact” so that social responsibility might project

confidence in the banking world that often earns a bad reputation for greed. Industries also

needed a way to connect so that small businesses were visible to the financial world at large.

Profit in business and philanthropy did not have to be separate and the goals were not mutually

exclusive (“Philanthropy in Latin America,” 2009). Financing could achieve multiple purposes

once the companies in need and main stream institutions had access to each other and more

knowledge of the mutual benefits of patient capital.

Root Capital’s goal was to put itself out of business by bringing so much attention to overlooked

companies that these businesses would have multiple outlets for growth through available credit.

Root Capital was extremely active in the rural impact investing environment and worked with

various companies to escalate its and other’s impact for increasing prosperity in the developing

world. Root Capital constantly worked on research and development for the best methods to add

value to the rural agriculture industry and shared this knowledge with all interested parties

(“Catalyze,” n.d.). In addition to work with GIIN, Root Capital was active in numerous

philanthropy organizations such as Aspen Network of Development Entrepreneurs, Lutheran

World Relief and many more; won numerous awards for social entrepreneurship such as

ACCION Extolled for Social Entrepreneurship, OPIC Impact Award for Renewable Resources –

Agriculture, Social Capitalist Award, Skoll Award for Social Entrepreneurship and many more;

and worked with charitable and for profit companies such as Starbucks, Green Mountain Coffee

Company, The Rockefeller Foundation, the Obama Administration, the United Nations Industrial

Development Organization (“Awards,” n.d.).

Root Capital established its financing business model to decrease risk and set an industry

standard for impact financing and high repayment rates. Root Capital reported a loan repayment

rate for its customers of 99% and Root Capital had a 100% repayment rate for loans from its

investors. Root Capital assessed the appropriate amount of loans for its customers according to a

company’s projected future sales determined through purchase agreements between small

agricultural companies and buyers that Root Capital brought together (Milder, 2008). The buyer

purchase agreement was the estimated guarantee of future repayment. The product buyer made

payment directly to Root Capital for principal and interest on the loans at the same time of

paying the agriculture business for the delivered products. Root Capital funded these loans from

equity that the borrowing organization produced from operations and up to five-year-loan debt

from various investing organizations and companies that Root Capital catalyzed together. Root

Capital also performed vigorous due diligence and surveillance on risks that could interfere with

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transactions, like weather or transportation issues (Milder, 2008). This work of testing the

market and exacting methods for successful loan repayment, paved the way for financial

organizations to understand profitable models when loaning to companies typically overlooked.

Measuring Impact

The impact that available credit had on developing areas was extremely important. The problem

was that it was not always easy to determine the real impact. True impact may not be

quantifiable and may not even be easily observable. Impact reporting and investments standards,

by themselves, were not enough to really see what was happening and what would not happen

without an investment made. Impact assessment will never be precise because the possibilities

are too far reaching and varied, but estimation can be made to better understand the effects. Root

Capital looked to refine its thinking of what impact is and organize it accordingly, categorize

impact into useful sections for defining failure or success and better identify the required rate of

return for future investing. By using constantly improving metrics for general evaluation and

detailed studies, Root Capital could best pinpoint the true social and environmental impact

(McCreless and Trestad, 2012). The Citi Foundation and the Skoll Foundation supported Root

Capital in its initiative to conduct general and detailed studies for assessing the impact of its

work. Root Capital developed and shared its extensive evaluation system so that it could guide

capital to the arenas that make the biggest difference and reduce the risk of loans. The company

believed that the information showed the extent of social and environmental impact and that

impact is good for business and profit (“New Issue Brief,” 2014).

One of Root Capital’s main focuses was assessing the impact it had on its clients, and, in turn,

what impact those clients had on individuals and families working in the agriculture industry, the

environment and rural poverty. It did this in two ways: portfolio-wide evaluations on all its

clients and detailed case studies on selected customers (“Understanding our Impact,” n.d.). Root

Capital used what it called GPS, an analogy from Global Positioning Systems’ physical object

triangulation locating, which was a multi-metric measuring system used to pinpoint the real

results that Root Capital and its clients facilitate for rural poverty and environment improvement

(“Roadmap for Impact,” n.d.). Root Capital measured impact by looking at its clients’

assessments of itself, whether previous clients requested additional loans for further expansion

and the number of new clients requesting loans. This process evolved into scorecards that

identify the environmental standards used by clients, the environmental issues that clients face,

client credit evaluations, client incomes and observable social impact on client reached farmers

who would not otherwise have had access to competitive pricing for their products (“Roadmap

for Impact,” n.d.).

Social and Environmental Scorecards

Root Capital emphasized social and environmental impact and used what it called Social and

Environmental Due Diligence Scorecards to assess if potential clients met the performance

criteria. Root Capital developed its due diligence processes over the years to improve on the

reliance on mere business self-reporting and observance of opaque farming operations (“Issue

Brief 1,” n.d.). After using its system for social and environmental due diligence for years, Root

Capital realized that, in the long run, these evaluations brought as much financial benefit as it

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costs to conduct them (“Issue Brief 1,” n.d.). This is because its due diligence process helped

Root Capital to mitigate risk, find new business opportunities, discover where a company can

grow, strengthen the relationship between the company and its suppliers and determine areas

where clients need improvement. Root Capital would not issue a potentially profitable loan if it

determined that the business did not benefit smallholder farms or the community or if company

practices could have real damage on the environment (“Impact Case to the Business Case,” n.d.).

Root Capital made its due diligence procedures available to anyone wishing to use them so that

lenders could better decide where credit will best impact society, so that financial institutions

could mitigate risk and feel confident when lending to small farming businesses, to show the

long term benefits that good business practices have on the future income of a company and to

give large food and beverage companies confidence in the fair trade businesses that they buy

from (“Issue Brief 1,” n.d.).

The evaluation process began when loan officers from Root Capital visited with potential clients

and existing clients, requesting new loans, to perform due diligence reports. This was a way for

the loan officers to get to know the business managers, observe business practices and review

social and environmental methodologies. They then filled out a credit evaluation form, with the

Social and Environmental Scorecards, from the client’s loan application and observations and

answered questions from the site visits (“Social & Environmental Due Diligence,” 2014). The

score cards looked at the prices and wages that the agriculture company paid farmers in relation

to the prices that the farmers could probably obtain elsewhere. Questions on the score cards

looked at how the potential clients supported farmers with training or guidance on the most

profitable produce which increased the yield for the entire company. The score cards evaluated

how well the company provided stability to producers with well-timed and consistent payments

that help the farmers manage income needs throughout the year (“Social & Environmental Due

Diligence,” 2014). The evaluations looked at the company’s communal impact, how inclusive

the company was of female involvement in the business and if it complied with health and safety

standards. Questions examined the company’s environmental practices to make sure there is no

long-term harm being done. It looked at environmental management systems, land use, the use

of non-hazardous agrochemicals, soil management, water and wastewater use, waste practices

and energy efficiency. The score cards also looked at where financial need was greatest by

assessing a company’s access to credit, the poverty in the area, and vulnerability to conflict or

disaster situations (“Detailed Methodology Guide,” 2014). All this evaluation generated a rating

that told Root Capital if a client was qualified for a loan and what kind and where the company

needed improvement and training. Every client who met Root Capital’s standards received a

loan and were not prioritized according to how high they scored. (“Social & Environmental Due

Diligence,” 2014).

Impact around the Globe

Root Capital delved even deeper into the impact that financing has through its clients with in-

depth studies for specific loan recipients. This helped Root Capital to really see and understand

how the farming communities and environment were affected through agricultural business

growth, what worked toward progress and how to improve further (“Understanding our impact,”

n.d.). These case studies could be viewed alone to understand the interworking of a co-op or

small agricultural business or looked at in groups to see impact on certain regions.

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Central America:

Copiasuro was a fair trade honey association in Guatemala that benefited from Root Capital’s

financial training program. The association came a long way from where it started in 1993,

when it had 22 members and no financial system to speak of. Root Capital came into the

picture in 2007 when Copiasuro joined in a Financial Futures training program. The program

helped the cooperative create long term financial planning and implement modern software

accounting systems to keep track of the money. In a better position to manage finances,

Copiasuro was able to extend more credit to its producers and therefore increase the amount of

honey produced for the entire organization. Within two years of the training program, Copiasuro

doubled its sales. The co-op gained over 175 members and increased exporting to 300 tons of

honey for premium prices to international buyers; the association boasted a 35 percent increase

in income and every member was able to send their children to school. The members followed

their strong vision for the company while maintaining environmental best practices and growing

the business with available financing and business management understanding (“Using Financial

Management Skills,” n.d.).

East Africa:

Pamela Anyoti Peronaci founded Sunshine Agro Products Limited, a social enterprise, in her

hometown of Soroti, Uganda to address the extreme poverty in the area. Sunshine Products

helped citizens to increase their total family income by over a hundred dollars a year, in a gross

national income area of $549 per year, through chili and spice farming; many of Sunshine’s

clients were women who supported large families with little means for work. Root Capital

provided loans to Sunshine Argo Products Limited several times to help the company address

poverty and other community issues. The company grew from 15 to 924 farmers, increased its

product purchases by 660 percent, increased revenue times eleven and was able to extend

microcredit to producers. Through Sunshine’s efforts and continual growth more community

members were able to pay for school, healthcare, household needs, farming supplies and even a

few personal luxuries (“Small Chilies Bring Big Impact,” n.d.).

Mexico:

Tziscao was an organic and fair trade coffee cooperative in Chiapas, Southern Mexico. The co-

op was formed in 2003 to attempt to alleviate the challenges of low prices for coffee, high

production costs and low harvest yields. Tziscao became a Root Capital client in 2012, and Root

Capital conducted an in-depth impact study to determine its effects on Tziscao and its producers.

Root Capital concluded that Tziscao had a moderate, but important, impact on its members and

environmental practices. Although the members struggled with poverty and unfavorable

conditions, the producers reported higher prices paid to them by the cooperative than they had

received elsewhere. The farms also reported incorporating soil conservation techniques aided by

training programs. Through Root Capital loans, the cooperative was able to pay its members a

base amount up front rather than at the end of harvest (“Tziscao,” 2014).

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Root Capital used this study to explore what areas were ripe for development and it determined

that further improvement would likely result if the cooperative was able to extend credit to its

members to promote higher yields and improve member’s living conditions. Tziscao does not

offer credit for its members; credit was ranked by farmers as one of the most important aspects

of a cooperative. Root Capital explored how it could support businesses to offer this important

assistance. The study also found that Tziscao would benefit from a targeted support area and

further training for improving methods and practices to attain higher product yields (“Tziscao,”

2014).

South America:

More than 80 percent of the villagers in the small community of Cochas Chico, Peru made a

living from producing traditional Inca hand crafted works from dried gourds. Raymisa, a Root

Capital client, helped this traditional craftsmanship production extend to an international market

to sell in places like Pier 1 Imports. Loans through Root Capital, not readily available through

traditional means, allowed Raymisa to pay craftsmen immediately while waiting for payment

from international buyers. Raymisa’s export connections allow artisans to earn more, with a

more steady income and has helped the community prosper and send its children to school

(“Creating Sustainable Livelihoods,” n.d.).

West Africa:

Fruiteq was an organic-certified mango seller whose producers were located in Burkina Faso,

Mali and the Ivory Coast. The company’s certification of Global G.A.P. allowed the members

access to the European markets for premium prices. Once financing dried up through Agrofair,

the company could not meet its contracts to new buyers and could not obtain loans from banks.

Root Capital stepped in as a financer in 2010 to provide funds to reestablish needed production

levels to three times more purchases from local farmers and more than tripled sales. Then, in

2011, political conflict blocked many export routes resulting in massive losses for the company.

Despite the hardships, Fruiteq provided its 830 farmers a large income increase through the

international market above what they would receive elsewhere. Fruiteq has elevated the

community through projects such as building a house for the local midwife, giving access to

water through portable water wells, buying a small diesel engine for electricity and purchasing a

local ambulance and a local pharmacy (“Rapid Impact Evaluation: Fruiteq,” 2013).

Through this case study, Root Capital learned that perishable products like fruits and vegetables

were more risky than non-perishable yields like coffee because of increased vulnerability of

spoilage, damage and infestation. Perishable product markets required an even greater standard

of quality, reliability and business transparency to reduce the financial risk of loan default.

Areas prone to conflict and disaster also posed a greater risk for investors, and very conservative

assumptions must be made for payback schedules. Company member loyalty is extremely

important in risky areas; the farmers of Fruiteq, for example, agreed to sell their goods at a lower

price for a period to help the company endure hard times because of the belief the producers had

in the long term benefits of the organization. The Fruiteq case study was a prime example of

how in-depth business examinations could help Root Capital develop profiles for different types

of businesses in different regions to mitigate risk and pave the way for other financiers to extend

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credit while feeling secure in their loans as a business decision (“Rapid Impact Evaluation:

Fruiteq,” 2013).

Products

Rural farming was an important source of products that were extensively used around the world,

and proceeds from growers were used to support their families and communities. Root Capital

worked with clients who sustainably produced cocoa, coffee, fruits and vegetables, and other

crops like shea butter, hand crafts, grains and spices. Small farming businesses generated 90

percent of the world’s supply of cocoa, and 80 percent of coffee worldwide came from small

scale farming. Root Capital noted that there was an unreached high demand of organic and fair-

trade fruits and vegetables although rural farmers often did not have the capital means to get

perishable produce to the premium market (“Products,” n.d.).

Fair-Fruit, a Root Capital client in Guatemala, is a great example of how rural farmers added

value to their communities and environment along with the world’s food production by growing

and distributing snow peas and sugar snap peas. Indigenous farmers produced almost all of the

exports for snow peas and sugar snap peas from Guatemala, the third largest exporter of this

produce in the world. These indigenous producers were plagued by poverty and malnutrition.

Fair-Fruit represented over 1,000 small scale farmers and provided various produce to European

markets desiring fair trade products at 16 percent higher prices than from local markets and

doubled their exports after obtaining the capital for better infrastructure. The fair trade

certification meant access to better markets and indicated that Fair-Fruit growers used

reforestation, watershed management and responsible pesticide use methods along with best

agronomic practices that increased yields. Higher wages through better connections and farming

methods meant that farmers with Fair-Fruit were able to afford education for their children and

the company could provide health screenings and classes to its employees (“Fair Fruit,” n.d.).

Piloting Technology

Root Capital strived to stay in the vanguard for the best business practices and technological

methods for the industry that it financed. Technology could be hard to come by and difficult to

use in rural areas, but if used effectively, small agriculture companies benefited tremendously.

One information system piloted by Root Capital for its own evaluation purposes and for

incorporation in the rural farming business was called mobile-enabled quantitative evaluation

(“Roadmap for Impact,” n.d.). Information applications through mobile devices helped clients to

produce data for Root Capital to assess client impact. These same mobile devices also helped

the clients to manager their own business with a portable method to gather and store information

(“Roadmap for Impact,” n.d.).

Typically, farmers in rural developing countries collected data by hand with paper records and

receipts. Agricultural businesses and co-ops determined the amount and quality of the products

that the farmers offered for sale in the midst of a hectic harvest. Payments to farmers were made,

receipts given and shipping information detailed. All these daily activity records were written

down and kept on paper over extended periods of time until the business managers could get to

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an area that had internet connectivity and take the time to record all the handwritten transactions

to a centralized database (“Roadmap for Impact,” n.d.).

In 2011, Root Capital tested Acopio Movil with its client COOMPROCOM to track and

inventory. This cash and inventory tracking system uses a mobile device to record important

information such as farmer ID numbers, sales, prices paid, and product quality in real time. The

data collection provided the managers with convenient cash flow and inventory feedback during

a harvest day with on hand records. The application could run on any smartphone and connect to

the centralize database whenever the manager was in an area to gain internet connection. This

was one of the least expensive methods for an information system that could work in the remote

areas in which these companies and farmers operated (“Roadmap for Impact,” n.d.).

Root Capital could use this data to track a company’s progress to determine if loans would be

repaid on time or if the clients needed additional assistance. This also helped to look at overall

impact to see what prices farmers were receiving for their goods with the Root Capital client

compared to what they could get through other buyers. Root Capital originally implemented

Acopio Movil simply for its impact studies, but quickly saw how the information system

benefited clients through a data tool usable within the technology accessibility challenges of

rural environments and budget limitations (“Roadmap for Impact,” n.d.).

The COOMPROCOM pilot study with Root Capital helped the 178 growers in the cooperative

reach economies of scale for a better method of bringing together the direct buyers and sellers in

an organized harvest period. The farmers were excited by the possibility that the low cost, user

friendly information technology could bring them enhanced tracking and recording methods for

future harvests and cooperative and management practices (“Student Project,” 2012).

Acopio Movil results were further explored by looking at Root Capital’s 2014 impact case study

for Tziscao, an organic coffee farming cooperative in southern Mexico. In 2011, Root Capital

started loaning funds to Tziscao, amounts equaling $1.2 million by 2014. Before Root Capital,

Tziscao was often short on money for purchasing farmers’ products, and the co-op often was

forced to wait until the end of harvest to pay farmers what was owned them. Many of the

farmers, who needed money immediately upon selling their products, sold coffee to middlemen

for much lower prices. Root Capital’s loans allowed Tziscao to pay farmers in advance to ensure

their business and purchase the products at a higher rate than the farmers would receive

elsewhere (“Tziscao,” 2014). Root Capital summarized that Tziscao’s members earned 13%

above other available prices for their crops which allowed these farmers and families to better

meet basic food and clothing needs. With the amount of income at the poverty level that most of

these people operated their daily lives with, an incremental income increase had a very large

effect on quality of life. Root Capital also concluded a positive environmental impact from

Tziscao’s training and expectation for agronomic practices that conformed to the organic and fair

trade certifications (“Tziscao,” 2014).

To help evaluate the Tziscao project impact, Root Capital used Acopio Movil for feedback on

the prices and practices that the co-op and its members used throughout harvest. More

importantly, Acopio Movil helped the cooperative since the mobile data management system

could be used in areas without internet connections (“Tziscao,” 2014). The management system

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helped Tziscao track and record up to date transactions of product volume, quality and pricing

throughout the season’s yield. It also provided a digital platform for the cooperative to fill out

farmer’s organic and fair trade practices inspection forms for certification audits. Tazisco

recorded all the harvest information on the Acopio Movil application offline during the season

and then synced it to a centralized cloud based database server when there was internet

connection. The co-op reported that this method streamlined efforts, decreased mistakes and

increased accuracy (“Tziscao,” 2014).

Leadership

Willy Foote graduated from Yale University and worked as a financial analysis on Wall Street

before he founded Root Capital in 1999 (“Willy Foote,” n.d.). With an adventurous spirit, he

and his wife traveled around Latin America for two years on a business journalist fellowship. He

got to know some of the local people there and realized from his friendship with a group of

vanilla growers the lack of any capital available to small companies that make a large impact in

their areas. As Willy Foote and his wife were traveling back to the United States to study at the

Harvard Business School, Foote felt a strong sense of urgency to do something about the plight

of the people he got to know in Mexico. Immediately, before his vision faded, and rather than

starting at the prestigious HBS school, he decided to put his energy into growing rural prosperity

through the creation of Root Capital (“Founder’s Story,” n.d.).

Willy Foote has always planned to keep Root Capital as a non-profit company with the goal that

it would eventually become obsolete as Root Capital helped to establish that small rural

agricultural business loans can be financially sound (“Seeding the Market,” 2015). He

envisioned that commercial lenders would ultimately step in to invest in this arena and establish

normal lines of credit to this underserved population. Willy Foote grew the company over the

years with clients and employees around the globe and increased lending through awareness

about the nature of the agriculture industry in developing countries. Willy Foote was the

recipient of numerous awards and acknowledgements including the Skoll Award for Social

Entrepreneurship, an Ashoka Fellow, a Young Global Leader, a Young Presidents’ Organization

member, being listed on the Forbes Impact 30, a Henry Crown Fellow, an Aspen Network for

Development Entrepreneurs committee executive and a member of the Council on Foreign

Relations. Willy Foote also earned a Master of Science from the London School of Economics

(“Willy Foote,” n.d.).

Financial Performance

According to Root Capital’s third quarter report for 2015, “Root Capital reached over 505,000

farm families. These families, represented by the 263 enterprises in our portfolio, earned an

estimated $930 million for their crops through the quarter, a 15 percent increase from the same

time last year. By the end of Q3 2015, our average outstanding balance was $96.4 million, a

year-over-year growth of 10 percent (“Performance Report Q3 2015,” 2015, page 2).”

Listed as issues that affected lending and portfolios included: commodity price volatility from

falling coffee prices by 20 percent in 2015, currency volatility on account of foreign currency

losses in countries where Root Capital operates, the after effects of the coffee leaf rust epidemic

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that devastated coffee crops in Latin America from 2011 until 2014 and erratic weather patterns

expected in the coming growing season. Root Capital needed to weigh risk versus return when

considering loans during times of various risk factor conditions and decide how to best serve

clients with appropriate loans (“Performance Report Q3 2015,” 2015).

In 2015, Root Capital’s Sustainable Trade Fund’s average outstanding balance was slightly down

from the previous year, due to higher credit standards to lessen risk, at $86 million. Their

Frontier Portfolio had an average balance 80 percent higher than the previous year of $10.4

million. Root Capital was very active with financial advisory services with a 27 percent increase

from the previous year of training days that included training 259 organizations. The company

worked toward its goal of facilitating an environment of impact-first agricultural lending through

discussions in South America of responsible lending and sharing best practices information for

cooperative governance and risk evaluation. In quarter three of 2015, Root Capital was very

involved in the Clinton Global Initiative, the Aspen Network of Development Entrepreneurs and

the Global Women’s Network Summit (“Performance Report Q3 2015,” 2015).

Root Capital had a debt-to-equity ratio of 4.21 (see Table 1) with lending capital of $23 million

(see Table 1) and debt of $97 million (see Table 1) in 2015 (“Performance Report Q3 2015,”

2015). Considering contingent net assets not listed on the balance sheet for quarter three of

2015, Root Capital’s net asset balance was $7.6 million (see Table 1) which is almost 3 percent

less than the prior year. The company reduced its budget to $16.2 million to account for lower

than expected revenues in the second quarter of 2015, and operating expenses were expected to

come in just under budget for 2015 (“Performance Report Q3 2015,” 2015). Root Capital’s 2014

audit showed its financial position for the fiscal year 2014 (See Tables 2, 3 and 4) (“Combined

Financial Statements,” 2015).

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Table 1:

Performance Report Q3 2015. (2015). Root Capital. Our Impact: Performance Reports. Retrieved from

http://rootcapital.org/our-impact/performance-reports#qpr.

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Table 2:

Combined Financial Statements, Supplemental Schedules and Report of independent Certified Public Accounts:

December 31, 2014 and 2013. (2015). Root Capital. About Us: Financial Information. Retrieved from

http://rootcapital.org/about-us/financial-information.

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Table 3:

Combined Financial Statements, Supplemental Schedules and Report of independent Certified Public Accounts:

December 31, 2014 and 2013. (2015). Root Capital. About Us: Financial Information. Retrieved from

http://rootcapital.org/about-us/financial-information.

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Table 4:

Combined Financial Statements, Supplemental Schedules and Report of independent Certified Public Accounts:

December 31, 2014 and 2013. (2015). Root Capital. About Us: Financial Information. Retrieved from

http://rootcapital.org/about-us/financial-information.

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Collaborating Companies

Root Capital had no ambition to continue on as anything other than a non-profit. The leaders of

the company believed that they could bring to light the fact that there was money to be made in

financing what they termed as the missing middle, small and growing rural agricultural

businesses in developing nations. Root Capital wanted to continue to bring interested companies

together to finance the “missing middle” until its clients could receive loans via traditional

means. Root Capital worked with non-profit and for profit companies to build up an industry

that made such a large contribution to rural prosperity. Root Capital continued to catalyze

industry leaders, brought awareness of rural poverty, addressed environmental issues that

challenged the farming industry, demonstrated that loans to the “missing middle” are profitable,

had extremely high loan payback rates and gathered investments from organizations wishing to

make a difference for themselves and others around the world.

To name only a few, Good Capital, an investment firm that funded ventures working toward

market-based solutions to address poverty, invested $200,000 in Root Capital in 2010 for its

work with small businesses (“Good Capital Announces,” 2010), and Mitsubishi Corporation

Foundation for the Americas loaned $300,000 to Root Capital for its environmental causes

investments (“Mitsubishi Corporation Foundation,” 2012). Starbucks invested in Root Capital

starting in 2000 to address sustainability in the specialty coffee industry and continued to make

huge investments with companies like Root Capital for its Global Farmer Fund program

(“Starbucks more than doubles,” 2015).

Rural farming was a challenging business with potential harvest interference from a variety of

sources including crop disease, conflict, natural disaster and more. A large threat to coffee trees

was a fungal disease called coffee rust, an epidemic that plagued Central America by destroying

harvests and hundreds of thousands of livelihoods. Green Mountain Coffee Roasters, Inc., the

Multilateral Investment Fund of the InterAmerican Development Bank and Skoll Foundation

supported Root Capital for its resilience initiative to address the destruction caused by coffee rust

by providing producers with the means to create resistance for their trees. The companies were

coming together to help stabilize the farming communities working through the coffee rust

epidemic. Latin America was the largest producer of coffee and Green Mountain Coffee

Roasters, Inc. acknowledged that they depended on the farmers in this areas to produce high

quality coffee products (“Green Mountain Coffee Roasters,” 2013).

After the 2010 earthquake in Haiti, farmers already struggling for capital and production quantity

were pushed into subsistence living to survive. There was no access to capital for new

equipment nor to build a business back up from the ruins. Root Capital stepped in to offer loans

in this disaster area and the Clinton Bush Haiti Fund committed one million to Root Capital for

the efforts in Haiti (“$1 Million Investment,” 2010).

Impact Investing

“Global Impact Investing Network states that ‘impact investments are investments made into

companies, organizations and funds with the intention to generate social and environmental

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impact alongside a financial return’ (Betournay, 2015, page 80)”. Impact investing was

investing with purpose beyond just financial gain; the holistic impact of what financing can do.

Once considered philanthropy, impact investing or socially responsible investing was becoming

an industry unto itself by combining social impact and profitability. It was growing in popularity

and was gradually bringing in capital markets with a lot of money potential to propel it to greater

social gains than ever before. Investors increasingly wanted to leave a legacy of positive change

on top of the desire to earn profit. The global economic crisis brought to light the gap between

the rich and the poor and that governments alone were not solving the problem (Avery, 2012).

Impact investor pioneers like Root Capital, Omidyar Network, and Acumen Fund envisioned

ways to direct capital toward aiding the poor. The idea became more mainstream, and it worked

both for those primarily seeking profit but also wanting to be socially responsible and those who

were more focused on social or environmental impact alone. These companies explored

possibilities and formed standards for measuring risk, profitability and impact so that larger

corporations could follow suit and create new markets that previously failed where populations

were stuck in a cycle of poverty (Novogratz, 2013).

Participation in impact investing as a private project or specific goal fund whose primary purpose

was to achieve some sort of impact further than rate of return had a great outcome for society.

Investors could best target impact with private projects that invested in a particular company or

industry that could bring about a sought after impact. These direct deals required much due

diligence and a close relationship between the investor and the client who both had concurrent

goals. Impact could also be made through funds that were both financially profitable and

achieved a specific impact. The impact then was measured in terms of profitability and social or

environmental gain. Some aimed to achieve impact through public equity where fund managers

could ensure that investments were made in areas and to firms that supported and proliferated

certain impact goals, and where voting shares went toward promoting positive impact strategies.

Fixed income through bonds, like green bonds which attempted to benefit the environment,

provided a way for investors to put money, while earning interest, toward an impact through low

risk means. Regardless of the method for impact investing, impact measurements should be in

place so that investors can see positive changes while investing and guarantee that their money is

accomplishing the desired effect or being redirected in a more efficient manner with the gathered

knowledge. (Betournay, 2015, page 80).

Future Goals

Root Capital’s work will be complete once private investors put Root Capital out of the non-

profit business by stepping in to loan money to growing companies that directly affect the rural

poor around the world. To meet this end, Root Capital continued to show that extending credit

to the rural agriculture industry in developing counties was profitable. About 25 percent of Root

Capital’s loans were lucrative at a reasonable interest rate of 13 percent or less, and Root Capital

showed a loan repayment rate of up to 99 percent. This industry’s potential is estimated at 22

billion for lending to collective small farming companies (“Seeding the Market,” 2015). Root

Capital has exposed this market potential and the best loaning methods for businesses that

increase rural prosperity and sustainable farming through financing, training and catalyzing

industry leaders.

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Root Capital mapped out specific goals for the organization in regards to financing, advising and

catalyzing for 2012 through 2017. The Company intended to triple its loan activities to impact

10 million people worldwide, reach a breakeven point in operations and work with its New

Frontiers portfolio to reach even more underserved markets in domestic value chains. Root

Capital endeavored to expand its advisory services to establish the best growth potential for its

clients with a goal to train 300 small and growing businesses and develop new training programs

through mobile applications and other innovative methods to achieve optimal training

possibilities that best fit the client’s needs. The organization aspired to expand the agriculture

investing marketplace by showing a great model for impactful, profitable and reproducible

lending that traditional creditors can adopt, improving metrics for defining impact, collaborating

with others in the industry to develop great ideas to further the trade and spread out operations to

the regions of impact to hire more and more local employees (‘Scaling our Impact,” n.d.).

As Root Capital looked toward the future, they aimed to answer the following questions: how

does the company know that the loans are making an impact and how can they best evolve the

business model for impact while remaining financially viable. Root Capital planned to focus on

a practical and low cost client centric approach to best evaluate its impact on its clients and the

impact that those clients have on their community and environment (“Roadmap for Impact,”

n.d.). Root Capital stated that, “Our ultimate goal is to demonstrate that lending and financial

training for agricultural businesses can transform livelihoods for small-scale farmers while

sustaining the natural environment upon which they and we depend. As we develop this base of

evidence, we will share our approaches and findings through issue briefs, impact studies, and

articles in external publications. Through this work, we seek to catalyze a financial market to

serve agricultural businesses that connect small-scale farmers to markets across the developing

world and to maximize the social and environmental impact of that market (“Roadmap for

Impact,” n.d., page 29).”

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