Why we’re not creating the Patagonias of tomorrow (part three)

Note: this is the final episode of a three-part series. Part 1 is here, and part 2 is here.

In the first part of this saga, we saw that despite holding Patagonia in high regard, the fast-growing impact investment pool would not fund such a company if it were starting up today. Then, we saw that the way the system currently operates is structurally incompatible with the creation of Patagonia-like companies. But we want more companies like Patagonia—so how do we fix this?


What it would take to fund the next Patagonia

First off, it’s important to acknowledge that the world has changed a lot since Patagonia started in 1973. We’ve gone from a time where the concept of a computer was science-fiction — to our current day, where always-on commerce is disintermediating your data to give you real-time recommendations and scalably target other individuals who resemble you.

Feel free to circle back and leverage this laser-focused database in future.

Business has always been competitive, but both the financial landscape, and more importantly the speed to get a product to market and grow a company have increased exponentially.

As a result, even if you have a slow growth mindset, you do have to move much faster than in the past — because it’s that much quicker for your competition to catch up.

The mission-driven entrepreneur’s goal

As the steward of the company’s mission and vision, across customers, employees, shareholders, community and environment, the entrepreneur needs to partner with backers who 100% share their vision.

They need to operate with a shared understanding of purpose, governance, vision, timeline, and values. Finding that fit is no easy task.

In an ideal world

In an ideal world that entrepreneur is already independently wealthy, and invests their own money into the venture, thus keeping complete ownership and therefore complete alignment between shareholders and their own vision. Of course, that’s not an ideal world, because — among other reasons — many people with bright ideas are not privately wealthy.

(There are also scenarios where it is fitting and practical for the company to be employee-owned, which can be very effective at keeping the mission strong. However, this type of organization is only practical for a subset of businesses so I will leave this concept at that for now.)

Failing that, here is a collection of ideas floating around that I think deserve some attention.

New modes of financing

There is a false truism out there that there are “standard” term sheets for investment. Venture capitalists have successfully convinced lawyers and other participants in the investment process to push a model of financing that drives outcomes where shareholder gains are the only objective of the company, and specifically through an “exit”.

By holding pure equity (ownership) in the company, the only way this type of investor can achieve a return is either when the company is sold to a buyer or listed on the public markets (IPO).

Yet the idea that this type of investment needs to be the norm is — pardon my latin — bullshitto.

A statue of Cicero, who might very well have used that word.

There have been countless instances of creative term sheets that create healthy incentives for companies to prosper and create positive impact — and critically, don’t make a company sprint towards the exit. There is a movement quietly growing to spread these ideas, and make more entrepreneurs aware that there is even a choice. Luni Libes has promoted a revenue-based equity model, and a collaborative effort between entrepreneur John Berger, Boma and ADAP have come up with a very thoughtful similar concept called Performance Aligned Preferred Stock. Both attempt to align impact investor and entrepreneur incentives and allow businesses to operate in a healthier way.

Neither are a panacea — each business is different and needs to think uniquely about how to align its investors’ incentives with its own. But these alternative solutions deserve much more airtime and adoption. If one major institutional investor were to announce they were adopting a similar investment model, I have no doubt a wave of change would ripple through that community. This in turn would create a massive system change as a whole generation of impact-oriented companies would be set up to prosper, and potentially grow into future Patagonias.

More early stage impact investment

A closely related issue is the microscopic volume of institutional impact investment directed towards early stage social businesses (less than $1–2 million in revenue). Startups in this phase looking for funding do not have access to debt capital either. The main players filling the gap are venture capitalists, and “angel investors” — the majority of which view the world through a venture capital lens, in my experience — especially as the media has sensationalized that type of investing. That means a well-intentioned social entrepreneur with a business model that needs capital to take off is very likely to go down the venture route, and if “successful” create the next AND1.

We need more leaders in the impact investment space to fill this void, to set new norms for financing these early stage enterprises, and to create an alternative to venture capital for those profitable businesses that could become immensely impactful.

In particular, we need more infrastructure and networks for early stage impact investment:

  • More networks like Investors’ Circle — Social Venture Network. They serve a critical function in bringing together those independent investors with purpose-driven entrepreneurs. It’s a fairly small organization and remarkably they are the only game in town right now. There is a huge opportunity for many more of these networks. If you know of similar groups, please let us know in the comment section below!
  • There is a big opportunity for university endowments to play a role in this space, especially if the schools have strong social entrepreneurship programs or MBA degrees with a sustainability or social impact angle. Right now, I still see a one-track focus on tech venture capital from these players.
  • More lenders like Accion (a nonprofit) willing to lend something to very new socially-minded companies.

Less McKinsey bias

We need more investors who have the freedom to think holistically, from first principles, and take their heads out of a spreadsheet and rigid criteria that make for short-sighted siloed decisions. This is, admittedly, a really difficult problem to solve, because as a fund investing someone else’s money, you need to be able to report in quantifiable ways to your funders. That said, I believe it is possible to reconcile these two ideas. Closed Loop is a set of funds that combines a quantitative approach to impact assessment with a broader view on societal and cultural change — and clearly has given itself the freedom to think holistically. Personally, as an investor, I would much rather trust a fund manager thinking along these lines than a spreadsheet-driven manager with no broader view of the systemic impact and change driven by their dollars.

Change the culture

Finally, we need to collectively change the culture around fundraising and investment. Fundraising is not an end, it is a means. It isn’t sexy and it shouldn’t be. Writers, thought leaders, journalists, investors need to start celebrating the successful outcomes of purpose-driven businesses, not the fundraising milestones. Our culture glorifies the successful pitch to investors, with theatrical shows like Shark Tank and catchy headlines about the latest billion dollar round of funding — when we should be celebrating the businesses who built successful businesses and created impact. Ironically, the best of these tend to be those that made it with less money raised, not more. Patagonia, anyone?

I’m thrilled you’re still with me.

In today’s gilded age, in a period of great societal and economic transformation, we need consumer-facing companies with strong values that will drive this transition era towards an outcome that is regenerative.

I’ve been meaning to write about this complex, behind-the-scenes, and arguably boring topic for months. There are many, major, complex issues we care about in the B Corp movement, whether it’s diversity and inclusion, environmental remediation, or empowering workers. Fixing the incentives, culture, and system around financing would have a massive impact across all of them. That’s what makes this a not-boring topic. Overhauling our economic system sounds overly ambitious and unrealistic. But what we’re talking about here are small changes that a small number of people have the capacity to make. They amount to a quiet, radical re-alignment of our economy. That is healthily ambitious and definitely not unrealistic.

There is so much energy out there: I am inspired by many of the people I have had the opportunity to meet in the field of social and environmental impact. So many people are devising new solutions, and many others have the appetite and money to make them a reality.

We have a whole new generation of entrepreneurs who are both idealistic and business-savvy. The opportunity has never been greater to make a decisive change in how the engine of business operates in the country and globally, and to give birth to many little Patagonias.

Your turn: What’s your take? What do you think are the big changes needed to drive more investment to create triple bottom line companies? Are there any other organizations worth highlighting in this movement? Comment below!


About the author
Harry Doull is the founder and co-CEO of Keap Candles, a Brooklyn-based B Corp candle company blending master perfumer scents with a zero waste approach. Harry is also the Chairman of SolarAid’s USA chapter. SolarAid is an international charity, founded in 2006 to combat poverty and climate change, currently providing access to solar lights in Uganda, Malawi and Zambia to help catalyze solar markets and eradicate the kerosene lamp.