How to Take on Investors and Keep Your Values

By David Brodwin

For mission-driven businesses, growth is both a blessing and a curse. It’s a blessing because growth can magnify both the social and financial return. But it’s a curse because growth usually creates a need for more capital, and bringing in new capital, if not done right, can put the mission at risk.

Investors willing to risk large amounts of capital to help a business expand expect a high return on their investment, and often don’t care much about the social mission. Once they own a major share of stock, the temptation is strong to cut back on the social mission in order to boost the financial bottom line. That’s why we see very few triple-bottom-line businesses grow to become large, publicly traded corporations. Fortunately, there are now a growing number of options that management teams can use to protect the company’s mission while taking in more capital.

Finding Mission-Aligned Investors

There are strategies that companies can use to find investors who are committed to the mission and avoid investors who seek only a financial return. Crowdfunding is one such strategy that has made significant progress and will likely continue to grow, providing a way to attract investors who share the company’s mission. New rules are enabling the crowdfunding industry to move past the Kickstarter style of donation- or reward-based fundraising to take in investments that provide a financial return. Recent US Securities and Exchange Commission rules now allow companies to raise up to $50 million in some cases.

The organization I co-founded, the American Sustainable Business Council, was instrumental in helping key policymakers craft legislation to safely unleash the power of crowdfunding at the national level. We are now working in California to build support for legislation that enables crowdfunding rules for agricultural and renewable energy enterprises in particular.

Another way to find investors who share the mission is to turn employees into owners.

Giving workers ownership of a company through stock or a cooperative ownership structure can preserve the mission of a business and enable it to successfully pursue its environmental and social interests.

Companies like New Belgium Brewing and Dansko have found that employee ownership has strengthened their companies’ bottom lines while protecting their missions. “We want to be our stakeholders’ favorite shoe company by adhering to high business standards and practices,” said Dansko CEO Mandy Cabot. “Being 100-percent ESOP [Employee Stock Ownership Plan structure] ensures that our original goal remains intact without sacrificing our key values or diminishing business growth.”

The co-op structure provides another way to expand ownership. Today’s co-ops range from purchasing collectives to giant multinationals. In the US, more than 29,000 co-ops provide more than two million jobs. Michael Peck, a longtime booster of co-ops and a co-founder of 1worker1vote.org, points out that beyond the value of protecting a company’s mission, “any formula that includes broad-based worker ownership and participation has proven more successful during economic downturns.”

New Innovations in Exit Strategies

It’s great if you can get all the capital you need from investors who share a deep commitment to the social mission, but new exit strategies enable mission-driven companies to work with investors who care primarily about the financial return. These alternative approaches don’t require financial investors to be committed to the mission, and also keep them at arm’s length so they can’t compromise that mission.

The core idea here is to pay investors an attractive, risk-adjusted rate of return in the form of cash payments from the business instead of an IPO or corporate sale. The nominal rate of return is less than an IPO would provide, but the risk is lower because the payments start sooner and the rate of return is guaranteed. There’s typically a cap on the percentage of revenue that can be taken out of the operation to pay investors, but the payout continues over time until the promised return has been paid.

One example is a business that pays the investor a small percentage royalty of net sales every quarter. This payment would be 3 to 6 percent of revenue, and would continue until the investor is paid back, including an agreed-to profit. This approach provides a solid, risk- adjusted return for investors without enabling them to undercut the social mission of the company.

Using Entity Structure to Protect the Mission

Alongside the strategies just described, companies are increasingly relying on the legal structure of certified Benefit Corporations (B Corps) to protect the company’s mission when seeking capital or going public. For example, Etsy, an online marketplace largely for artisanal and craft manufacturers, went public last April but kept its status as a certified B Corp, which provided a defense against investor pressure to sacrifice its social mission in pursuit of greater financial returns.

Likewise, Seventh Generation tapped private equity to grow from less than $10 million in sales in 2000 to over $150 million in 2010. According to former CEO Jeffrey Hollender, “In no way did those investors ever interfere with the company’s product quality or ingredients, our 10-percent-of-profits giving program, or our environmental activism.” But, he also said, “When they invested, they did sign on to company values, and of course we were also one of the first B Corps certified by B Lab.”

In the end, no matter what investment strategy a mission-oriented entrepreneur chooses, she should choose her investors carefully — “more carefully than your employees,” said Hollender. By seeking the right investors, designing the right exit strategies, and taking advantage of Benefit Corporation legal status, a social entrepreneur can protect the mission as the company grows — and even as it moves to scale.

 

David BrodwinDavid Brodwin is vice president and co-founder of the American Sustainable Business Council (ASBC). ASBC advocates for policy change and informs business owners and the public about the need and opportunities for building a vibrant, sustainable economy. Through its national member network, it represents more than 200,000 businesses and more than 325,000 entrepreneurs, executives, managers, and investors from a wide range of industries. Learn more at www.asbcouncil.org.

 

This article appeared in Issue 5 | Jan/Feb 2016

To read more inspiring articles from Issue 5, including our cover story featuring Daniel Lubetzky, Founder and CEO of KINDSnacks, purchase a copy of Issue 5 online!

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