Verde Ventures’ Adriana Madrigal is one of the fund’s senior staff. She helps guide applicants through the loan process, and track loan recipients’ progress on repayment and conservation-related targets. Julie Shaw talked with her about Verde Ventures.
Q: What is the basic process of Verde Ventures loan applicants? How long does it usually take for a loan application to make it through final approval, if it gets that far?
Madrigal: Our process has two steps. The first one is the biodiversity and socio-economic committee review. In this step we need to understand the conservation and socio-economic benefits of each of the projects that apply for funding. So we need to understand the location, the impact and contributions to the places where the projects operate. The projects that we support need to be located within Conservation International (CI) priority areas.
In agribusinesses, for example, we need to know where they produce and source from in the case of coffee or cocoa. So the first criterion is the location. And we have to look at the specific benefits to conservation and environmental protection.
We also assess the community benefits, in terms of jobs generated, income, health, education and things of that sort. So once we understand the ramifications of our investment, we present the project for a biodiversity and socio-economic review, which is conducted by a group of CI scientists.
Once it is approved by this review committee, we continue the business and financial due diligence that is more typical analysis of financial institutions. For instance, we analyze the management, the financial information, the product, the competitiveness, how strong the proposal is, the potential for growth, repayment capacity, and associated risks.
Depending on the quality of the information that we receive from the clients, that process can take an average of six months, but often less. However, in some cases the process can take longer. It depends on the quality of information that we receive from the clients.
Q: So in some cases you may have to go back to them and help them put together more information for you?
Madrigal: Yes. We help the applicants generate the information we need. In most cases, there is no business plan, so we help them produce the information and shape it into the form we need to present to our investment committee. The final product is the investment memo. It’s of very high quality, and we share that with the entrepreneur and in some instances they have used the final document to solicit other investors for funding. I like to see that transfer of skills and knowledge to entrepreneurs.
Also, when entrepreneurs approach us with a request for financing, not all of them are currently implementing all the conservation practices that we would like to see in all projects. In order to receive Verde Ventures funding, the project must agree to make the improvements. Then, we engage with a local partner, and they go do an assessment of the production area, and they work on an improvement plan over a three- or five-year period. So we set milestones for each year in areas such as water management or soil management or agricultural practices or reforestation.
In the case of coffee, we do revolving lines of credit. So for each year, the renewal of the funding is subject to compliance or fulfillment of the targets for conservation improvements. We can also provide economic incentives in exchange for conservation. For example, we can offer a reduction of interest rates or increase the amount of funding, or both.
Our business is not to maximize financial returns; our business is conservation first and foremost. We are very upfront with our clients in just making sure they understand what our main interest is, and that is to achieve conservation at the field level.
Q: Have you noticed any trends in the type or number of applications you receive related to the state of the global economy or other developments?
Madrigal: What I’ve seen is that now more than ever access to credit is difficult in countries where we work, which is quite a statement given that it was very difficult to obtain credit before. So the collateral and repayment terms are more stringent, and some of our clients are expressing that it’s more difficult for them to access credit. They want to make sure they continue to have access to credit, and they want to know whether we are thinking of being stricter than we have been in the past. But I think that we have very strict guidelines already, that we don’t envision changing our procedures.
Q: What are some of the challenges involved in investing in small and medium-sized businesses?
Madrigal: Most of the enterprises that Verde Ventures works with are small farmers and family-owned businesses. They need a lot of assistance in business development services, such as financial literacy. Many of them do not know how to negotiate or deal with lenders or investors. They don’t know what type of information we need to assess a possible investment. Verde Ventures provides a lot of assistance and works closely with entrepreneurs.
Ability to manage growth is also a limitation. They’re used to being small. The company may have a lot of potential but they just don’t know how to take it one step farther. So they need the training to be able to be successful.
We deal with several different categories of clients. Some of them are very, very structured and they have their systems in place and the management has a lot of experience and access to market and they are very sophisticated. That’s on the higher end of our spectrum, but that would be maybe less than 10 percent of our portfolio. In the bulk of what we do, we are dealing with small rural producers that are organized in producers’ organizations or cooperatives. That brings additional challenges. They’re producers, they’re very good at producing coffee, but they don’t necessarily know how to run a business.
Q: How do you monitor the progress of the businesses to which you award loans?
Madrigal: At the end of the day, I think that it’s through our personal relationships with the principals of each of the projects we work with. We have a strong relationship with them. In addition to the support from our partners in the field, we can just pick up the phone. We are in touch with them on a very regular basis, understanding what’s going on at the field level. We take pride in the good quality of those relationships.
When everything’s going according to schedule, when the repayments are coming on time, there’s not much follow up that we have to do, but thanks to the relationships that we develop during the good times, we are most of the time the first ones to find out when things are not going well. Our entrepreneurs deal with a lot of challenges.
We can share with you lots of stories from the field about the things these people have to go through. My admiration and my respect go out to them, because I think what they do is amazing.