MaRS Library Balancing the social/environmental and financial returns in an exit
There are really two components of exit for Social Enterprises (SEs) and Social Purpose Businesses (SPBs)–the financial returns and the social and/or environmental impacts generated by the venture described below.
The Social/Environmental “Exit”
Generating innovative business or service models that can be widely adopted by other SEs or larger government organizations or social/environmental agencies can be a successful social/environmental outcome for funders, who generally are not seeking financial returns from the capital they provide to SEs. This is generally accomplished in three stages:
- Identifying promising practices or ventures. Funders look for new ideas to solve social or environmental problems, especially ideas that can be scaled or widely implemented. Funders are also interested in models that reduce the venture’s dependence on donated funds (foundation grants, government funding, individual donations) to operate and scale the enterprise.
- Testing and validating practices or ventures. In order for social enterprises to have their business models adopted on a wider scale, they must validate their models through high quality research. Funders often support the research efforts of SEs in order to help them achieve the ultimate the “social/environmental exit” described below.
- Embed practices of the venture in policies and programs. Funders, who support the social enterprise community, invest in innovative programs to identify models that might become widely adopted or used to develop effective policies or strategies to address systemic social or environmental issues. The grant makers take their social/environmental“exit” when government agencies or other large-scale social/environmental agencies commit to funding the SE as part of their standard program offering or incorporate the SE’s operation into their organization to deliver social or environmental benefits to a wide population of users.
Challenges of defining a successful exit for social ventures
Traditional businesses seeking exits are looking to maximize the financial return to their shareholders as the sole purpose of an acquisition by a third party or a public offering of their shares. Social ventures must consider not only the financial return for their shareholder, but also how to quantify the positive social and environmental benefits that the social venture is generating and may generate going forward and how to ensure that these non-financial benefits will continue past the exit event. Social/environmental outcome measurement is a difficult task and no standards currently exist for the industry.
For SPBs or SEs that are acquired by a traditional for-profit entity or SPBs that become public, it may be difficult to preserve the social mission of the organization post-acquisition due to the additional costs associated with supporting the social mission and/or the differing social or environmental cultures of the two organizations. In some early social venture exit deals, the founding social entrepreneurs have struggled when working in their acquirer’s larger, more corporate environment or dealing with the significant demands of running a public company.
The acquirer may also struggle with continuing the social mission in a manner that is both consistent with past practices of the social venture’s leadership team and compatible with the financial expectations of the acquirer’s shareholders and its existing social and environmental policies.
The boards and management teams of the social venture and its acquirer should consider the key issues for creating a win-win exit with both financial and social/environmental returns for the key stakeholders of the social venture and an appealing business and social/environmental proposition for the acquirer. Covenants to deliver continued social and/or environmental outcomes, with financial penalties borne by the acquirer if the covenants are not met, are starting to appear in acquisition agreements for social ventures. Like the imposition of other covenants in traditional business arrangements, the addition of social or environmental covenants may reduce the financial price an acquirer is willing to pay for a social venture.
Two Exit Case Studies: Stonyfield Farm and Ben& Jerry’s
The partnership between Stonyfield Farm and Groupe Danone provides a great example of a successful financial and social exit.
Groupe Danone bought a controlling interest in Stonyfield Farms, but made no changes to the management team or the company’s environmental and social missions which included giving 10% of the profits to environmental causes, sourcing milk through local dairy cooperatives, using the very best environmental practices and helping to increase the number of organic family farms in the world.
Groupe Danone has helped Stonyfield manage their rapid growth by sharing its expertise in food research, production operations, logistics and distribution and has benefited from the financial return associated with participation in the organic and natural dairy business, which is growing at a rate rarely seen in the traditional food industry.
“I have spent the last two decades trying to prove that our business was commercially viable and competitive, and at the same time committed to the environment and sustainability,” says Stonyfield CEO Gary Hirshberg “Now, the most satisfying thing is the fact that I can reach people I never would have reached as a nonprofit incarnation.”
(Read more about Stonyfield)
Ben & Jerry’s
The acquisition of Ben& Jerry’s by Unilever was considered an unsuccessful social exit by the social venture capital community.
“When companies do sell, social venture investors take a keen interest in whether the values of the portfolio company will be maintained by its acquirer. VCs point to a few well-known acquisitions as the kinds of deals they like to avoid.
High on the most-hated list is socially conscious ice cream maker Ben& Jerry’s 2001 purchase by Unilever for $326 million, which Good Capital’s Jones calls“the classic bad deal.”
Despite efforts by Unilever to preserve elements of Ben & Jerry’s “crunchy capitalist” mission—such as donating a portion of its profits—culture conflicts marred the integration.
Large-scale layoffs, which were anathema to Ben & Jerry’s founders, and objections by Unilever brass to the ice cream maker’s practice of embracing controversial social causes undermined the merger’s success.”
MaRS Social Entrepreneurship. (2009). Part 1: Social Venture Financing, Spring 2009 [white paper].
Alter, K., Shoemaker, P., Tuan, M.& Emerson, J (2001). When is it Time to Say Goodbye? Exit Strategies and Venture Philanthropy Funds. Retrieved November 10, 2009, from http://www.virtueventures.com/resources/exit-strategies
Glasner, J., (Thomson Financial Limited 1992-2008). Wholesome Investing
Hirshberg, G. (2008). Stirring It Up: How to Make Money and Save the World.New York: Hyperion.
- Elements of a term sheet: Funding, liquidation and corporate governance.
- Issue Brief on Seed-Stage Impact Investing in Canada: Insights from the field.
- Negotiation and Conflict Resolution.
- Revenue models—Online advertising and website advertising and marketing.
- Value proposition and Blank’s customer discovery method—Phase 1: State your hypotheses.