I recently had a new client sign on to work with me to raise capital. Her dream is to develop a retail shop targeted at creative people. She wants to set one up and eventually franchise it all over the country. This is her passion because when she was going through tough times, she found that exploring her creative side saved her from the abyss.
She was invited to enter a pitch competition. Her passion showed and the judges were captivated. She won the competition!
Many months later she and I talked and I heard what happened next. The “prize” for winning this competition was that she got to pitch a whole bunch of the top venture capitalists in Silicon Valley.
Why would anyone recommend that someone who wants to start a retail shop pitch to VCs when this is so obviously not the kind of business that VCs are looking to invest in?
Maybe they thought it would somehow help her get some ideas for improving her business.
Well, that is not what happened. What happened was (1) the VCs told her to change her business model to try to make it more like the type of business a VC would invest in and (2) she felt like she was crazy because none of them really got what she was trying to do.
She changed her business model into something that she wasn’t excited about. She got demoralized and depressed. Great prize, right?
Lesson learned: Do not waste time pitching to investors that are not a good fit for you! It is worse than a waste of time. It can take you completely off track, make you feel alone, and plunge you into despair.
The tale begins in 1978 when two partners, Ben Cohen and Jerry Greenfield, founded a gourmet ice creamery in a renovated gas station in South Burlington, Vermont. Ben and Jerry ran their business so it was fair to its employees, kind to the environment, and kind to the cows who provided the raw product they used to create their ice cream. They called their pursuit of both profits and people the “double dip.” Their slogans such as “Peace, Love, and Ice Cream!” made them poster children for “hippie” corporations — in other words social enterprises, companies that make a positive impact on the world while also making money.
Initially, Ben and Jerry offered stock in their company to Vermont residents only using a Direct Public offering. The idea was to “spread the wealth” to their immediate community. Following a national stock offering in 1985, Ben & Jerry’s Ice Cream established a foundation and committed 7.5% of its annual pretax profits to fund it. Cohen and Greenfield also devised a simple three-pronged mission statement in which they pledged to manufacture the world’s best ice cream, to run a financially successful company, and “to make the world a better place.”
Ben & Jerry’s Ice Cream continued to build its business on the bedrock of its social values. The company sourced its ingredients from regional organic dairy farms. It only used milk that did not contain artificial growth hormones. It even went to court for the right to label its ice cream hormone-free. Then it developed chemical-free containers, and made fair-trade and organic ingredients priorities in their manufacturing process. It also took steps to reduce its trash output, creating a more sustainable overall carbon footprint for its operations. It opened scoop shops in inner city neighborhoods for the purpose of creating jobs for low-income community residents.
In other words, the mission the company’s founders was having a major positive impact.
But in 2000, Unilever, an Anglo-Dutch consumer goods conglomerate, offered to buy Ben & Jerry’s Ice Cream at 25% over the company’s estimated value. Cohen and Greenfield did not want to sell. They voiced concerns that Unilever would neglect if not abandon outright all the socially responsible aspects they had worked so hard to incorporate into their operations. However, as a publicly held corporation, Ben & Jerry’s Ice Cream was worried that they would be sued by their shareholders if they did not maximize shareholder value.
You probably know how this story ends. Ben & Jerry’s Ice Cream was eventually sold to Unilever for $326 million. Cohen and Greenfield each took multi-million paychecks as part of the deal. However, in a statement released to the press, the founders agreed that they would have preferred that their company remain independent.
Cohen and Greenfield’s fears were soon realized when Unilever began shuttering Ben & Jerry’s Ice Cream factories and laying off employees in order to create operational “synergies.” Unilever also reportedly took steps to decouple the corporation from its employees’ ideals. And customers worldwide have denounced the current quality of company’s product as far inferior to what Cohen and Greenfield had produced during their heyday.
Obviously this summarization glosses over many important details in the tale of Ben & Jerry’s Ice Cream. And of course this case has bred numerous dissenting opinions.
Frankly, to my mind, that isn’t the point. The point is this:
Aspiring social entrepreneurs need to plan early to prevent the forced sale of their companies!
For now, the best advice I can you is this: you shouldn’t go it alone.
It has never been more important for social entrepreneurs to have good coach, advocate, attorney, and strategist in their corner. I am all those things in one, and I would love to play that role for you!
Over the past 20 years, I’ve helped social enterprises structure and raise financing in total alignment with their long term goals and values. If you run a socially-responsible business or are thinking of starting one today!
Financial Success and Core Values
One of my favorite examples of an organization that has been able to raise millions of dollars of capital while staying in control and true to its values is Equal Exchange.
Despite posting enviable growth, this company has successfully retained its mission to create mutually beneficial relationships between farmers and consumers and support worker democracy and fair trade throughout the world.
Try some of Equal Exchange’s teas, coffees, chocolates, and fruit. You’ll be hard pressed to find goods of this quality anywhere else, and you’ll feel awesome that what you’re consuming is good for you and good for the world.
So what’s their secret?
How has Equal Exchange been able to grow and thrive for over 25 years while maintaining its mission and values?
Equal Exchange stipulates from the outset that investors have no voting rights. Investors are sufficiently confident in the worker-owners of the company to steward its resources. And investors have never been disappointed – they have received generous dividends every year, resulting in a return that exceeds a comparable investment in the S&P 500.
Notably, Equal Exchange’s structure prevents any investor or owner from profiting from the sale of the company.
Equal Exchange’s structure and investor agreements ensure that only values-aligned investors will be interested. The controls placed shareholder participation have never proven a hurdle to gaining investment. Demand exceeds supply every time. Equal Exchange offers its preferred stock.
Equal Exchange is not successful in spite of its commitment to its mission but because of it. A majority of investors and consumers want to do business with values-driven companies and Equal Exchange meets that demand.
There is plenty of room for more companies to do the same!
A social enterprise is a business (for-profit or nonprofit) that, in addition to striving to be profitable, takes actions that in some way make the world a better place. Such actions could include paying a living wage, using environmentally friendly practices, supporting improvements in the business’s community, and so on.
I often refer to such businesses as socially responsible, heart-centered, or mission-driven enterprises. In fact, if you read my blog posts or get to know me to any degree, you’ll often hear me use the terms interchangeably.
While it may seem like a delicate balance to pursue profit while also contributing to a better world, plenty of organizations have been successful in pursuing this business model. And so can you! In fact, evidence exists to support the notion that socially responsible businesses can actually be more profitable than businesses focused solely on profit.
Structurally, as I mentioned, social enterprises can be organized as for-profit or non-profit companies. Depending on the country or locality in which they are established and the preferences of their founders, they may choose to organize themselves as co-operatives, traditional corporations, limited liability companies, benefit corporations, community interest companies, or charitable organizations, to name just a few possibilities. Some create “hybrids,” combinations of two or more entities that work together to achieve the business’ goals.
These days, because of growing public outrage over socially irresponsible companies, many businesses say they are socially responsible. But are they really?
The truth is, many companies add socially responsible activities to their operations because they perceive that, by doing so, they will make their overall conduct more palatable to consumers. In other words, social responsibility does not drive the mission of these organizations. Such activities are added as icing on a cake to make it sweeter to the consumer. From a terminology standpoint, such companies are not social enterprises but merely organizations that operate various “corporate social responsibility” programs.
True social enterprises place mission at the center of everything they do. Many codify their missions into their charter documents. When they raise money from investors, they ensure, through properly drafted agreements, that the investors will not interfere with the long-term pursuit of the company’s mission.
There are infinite ways in which social enterprises can be structured and investor agreements drafted. And there are many wonderful examples of companies that have designed very creative structures to ensure long-term fidelity to mission, even after bringing on investors. Here are a few great examples:
Let’s summarize what you learned in Part One of this series.
First: any business founder who brings in professional investors like venture capitalists, could be setting themselves up to be fired from their own business.
Second: there are ways to structure your relationship with investors that ensure you cannot be fired.
I have worked with many clients over the years to design their offering to investors so that they could stay in control of their own companies. Some “experts” will tell you that if you sell equity, you are automatically going to be giving up control. This is not true! Equity can be structured in an infinite number of ways. There is nothing inherent in an equity investment that requires you to give up control of your company.
One of my favorite examples of a successful business that has raised millions of dollars from investors but has given up ZERO control is Equal Exchange.
Equal Exchange offers investors preferred stock with no voting rights. Thus even though investors own a majority of the stock, the management (elected by the workers) stay in control.
Other companies, like CORE Foods, choose not to offer equity to investors and raise money in the form of debt.
Knowing what to offer to investors is one of the most important keys to a successful capital raise. And by success, I mean not just raising the amount you want to raise, but also being able to continue to run your business the way you see fit even after you raise money. Take the time to understand all of the options and choose the one that fits best with your vision and goals. That way, you can make sure that you don’t sow the seeds of your own firing by bringing on investors.