Stanford Social Innovation Review

Selling Vs. Selling Out

The real question is not whether social investing will become real, or whether it will become a more important asset class. Social investment is growing, and its growth is in line with societal trends that are both on the rise in their acceptance and in line with the realities of limited environmental resources and economic transformation.

Based on the trends I’m seeing, I’m declaring the question settled. Yes, social venture capital is both a valid emerging asset class and in the forefront in its ability to deliver scalable social impact at low cost and provide an actual financial return that helps support the mission and the enterprise.

So the only question remaining is how are you going to manage exits? Nobody wants to end up like Ben and Jerry’s, where soon after a multinational acquired it, key facets of its social mission were cut from the company. What kind of social mission was lost? The ethical rule that Chunky Monkey would never have bovine growth hormone was kept under the Unilever regime; it was a value that consumers bought every time they bought a pint and was on the label.

What was gone? Hidden charitable subsidization of a social mission through non-profit partner ice cream shops. At those shops, 40 percent of the workforce was composed of at-risk youth who learned from social workers and job supervisors how to have a bank account and to complete a high school equivalency exam.

Exit is what matters now. The question is no longer can you build the second generation of socially responsible business, enterprises that bake their social mission into their business operations. The question is not even can those businesses make enough money to pay off investors. The question is, can the social mission survive the exit of the founders and the sale to new owners? Can it do so while still rewarding the people and the investors who took the risk to build a big business that delivers scalable social impact along with profit?

Judy Wick of White Dog Café has recently sold her iconic Pittsburgh restaurant but retained the rights to the brand and the ability to swoop back in to take over if she feels the mission is being compromised.

While there’s a lot to like in that approach, we at Good Capital have come up with something with our portfolio company Better World Books (BWB) that has a lot to commend it. We have created a new social impact model which carves out a 5 percent ownership stake for the company’s key literacy partners and grants stock options based upon the non profits’ ability to hit their stated literacy targets and increase the volume and quality of books collected in book drives that provide BWB with its inventory. Here’s a slide presentation on the details
What does this mean? Literacy groups like Room to Read, Books for Africa, and the National Council on Family Literacy, whose mission is to teach people to read, are earning stock options in a venture-backed startup. Those options will, if we do well together, be worth more money when, in a few years, BWB is at, say, $100 million in annual revenues.  (BWB will be at $30 million this June if things stay on their current track, up from $18 million when we invested last April.)

All the stockholders have to be satisfied if BWB sells. That means Books for Africa’s interests will have to represented at the table when the company negotiates with a buyer, if that should happen, say, five years from now. Unlike Ben and Jerry’s, where the private philanthropy of the owners was stripped away after the sale to the multinational, we will have set a price on a non profit’s meeting its literacy goals. That price will be equated with shares in BWB that have a financial value.

The mission can’t really go away in this company after a sale. If BWB ever does sell to a larger company, the mission has been baked in, and the social return will be directly convertible to a financial investment. We have aligned the interests of the social mission and the financial mission in a way that has rarely been done before, perhaps never in the context of a private, for-profit company.

How this will exactly play out will be determined by a mix of market conditions, BWB’s ability to execute as a fast growing business, and the ecosystem of goodwill, partners, and advisors it continues to accumulate around itself. But in this deal at least, selling should not result in selling out. The non-profits and the social mission are going to be counted in a way they’ve never been counted before.

Kevin Jones is a cofounding principal of Good Capital, an investment firm that accelerates the flow of capital to enterprises that use market forces to create large-scale social change. Jones is a successful serial entrepreneur, angel investor, and cofounder of Social Capital Markets, the groundbreaking conference on social venture investing.

Posted by Kelsey Walker

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When More Mission Equals More Money

I’ve got an investment thesis for the kind of business that I think will work best under current economic, climactic and social conditions. I’m seeing a new opportunity for a spectrum of businesses that will produce more revenue at higher margins by being more tied to their social and environmental mission. More mission focus, more margin more sustainably.

Here are the foundational assumptions behind my current thesis. As I’m using the word, it means more than a hypothesis, but not proven enough to be called a theory.

Assumptions:

1. We all have less money than we did and that’s likely to remain true for a while.
2. Not all of us can have more things, or new things all the time. The cost of doing business in the old (old as in pre-September 2008) consumer economy based on planned obsolescence has become too high as environmental and social costs nudge their way onto the balance sheet.

We are not going to recreate an economy based on collective financial and cultural deception that pretends we can grow beyond the carrying costs of the planet. Deep and structural changes are underway in our economy and our culture.

It’s not that we have become suddenly wiser. It’s that we suddenly have less money because we have been collectively complicit in an economic system that has lied to us about the true costs of our actions. The culprit is not Madoff or the men from AIG. They sold us the growth story we wanted to buy. It was a collective, participatory deception; markets are co-created realities. We are now reaping the fruit of the lies we all wanted to be true. But I am far from pessimistic. A dose of reality in time is a lot better than riding a false myth down the tubes.

The good news is that I think the economic system we will build next will be one in which environmental and social costs will no longer be externalities; costs that get pushed off the balance sheet. The cost of doing business to the planet and at least the human costs of climate change will now be factored in. For someone whose main motivation is to see the market become a tool to fight poverty and injustice, that is good news. It means that poverty is now closer to getting onto the balance sheet.

At the micro level, that means that where I work as a professional investor I am looking for businesses that make more money in times when customers have less money to spend, when buying patterns are factoring in the truth that we won’t all be able to have more things and have new things all of the time.

That means I am interested in businesses that make more margin when people effectively share scarce resources: non profit and for profit businesses like Zipcar and City Car Share, where people rent a car or truck for just the hours they need them. Other models include coworking, where entrepreneurs share space and resources.  Examples include coworking sites like Ned  in Portland and non profit shared garden projects like Alemany Farm.

At the heart of these new models that involve cooperative use of finite resources is a sharing dynamic; to maximize their efficiency, there needs to be an incentive to get over old ideas of single person, single business or nuclear family ownership of things like cars, offices or gardens. The best way to enable efficient sharing, I believe, is to encourage allegiance to a cause or a movement. That’s why I like the global network of coworking sites linked to The Hub (the-hub.net). It’s coworking for social entrepreneurs, or, as they call them in order to avoid getting stuck in the definition wars, social innovators.

If you do it right, the way they do in the Hub’s network, the more you are true to the mission, the more aware and in tune the operators and hosts are in creating the proper social dynamic that facilitates match making and sharing; the closer social entrepreneurs want to be to each other within the work space; and the more they talk to each other about what they are working on and who the person next to them should meet who could help them.

If you manage that hosting magic right, if you listen to the community well, that equals a higher density of usage of the space, which maximizes the revenue per square foot. So the more true you are to the mission, the higher the margin, all based on the sharing of resources that we now realize are scarcer. And by sharing space, buying it in cell-phone-like plans of 20 to 100 hours per month, the entrepreneur cuts her costs while lowering her businesses carbon footprint by up to two thirds.

There are more than a dozen affiliates in The Hub’s network, from London to Johannesburg to Cairo to Sao Palo to Amsterdam. We’re launching the first US member of The Hub’s network in San Francisco. And I’m working with a team from the green MBA program at the Dominican University to find other businesses where effective sharing equals more revenue at higher margin.

So here are the two pillars of the model, as I see it emerging: You build your business based on sharing scarce resources in a time when your customers have less money, and you dedicate your business to serve a movement where sharing comes easily.

Then you build your revenue model to reduce financial and environmental costs for your customers (individual and collectively) while increasing your margins as a provider. The more you focus on your mission, the truer you are to your community’s mission, and the higher your margins. That’s the model that makes sense to me these days.

Kevin Jones is a cofounding principal of Good Capital, an investment firm that accelerates the flow of capital to enterprises that use market forces to create large-scale social change. Jones is a successful serial entrepreneur, angel investor, and cofounder of Social Capital Markets, the groundbreaking conference on social venture investing.

Posted by Kelsey Walker

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