How Investors Should Think About B-Corps
The start-up world tends to categorize B-Corps (aka benefit corporations, aka multi-bottom-line business) as businesses that sacrifice profit for non-financial benefit,but everyone focused on building great companies should understood that many B-Corps have a competitive advantage to outperform on earnings *because* of their purpose.
I’ve been closely following the B-Corp movement for the last couple of years and studied them in-depth in the last couple of months. I’m finding many in the start-up community - investors, entrepreneurs,employees - can’t make sense of B-Corps within their existing professional planning or investment philosophies. When done right, however, benefit corporations can outperform their peers due to superior customer and employee retention, a company product that is marketing, and a long-term mission and vision that is exciting and inspiring. There’s a lot about B-Corps I won’t be discussing here, but I’m very hopeful this post can lead to a greater discussion and understanding how the value of B-Corps can be surprisingly aligned with the goals of traditional Capitalists, and I’ll just consider their social benefit output as a wonderful, world-improving icing on the cake.
A benefit corporation is a for-profit corporate structure - currently recognized by 14 US states - that commits the company to a societal or environmental service as part of it’s profit making goal. They are required to produce an annual benefit report (I’m sure you’ve seen a Warby Parker report) as part of a greater transparency commitment, but there is no required 3rd party certification or ongoing auditing, though many voluntarily have them done. There is a growing standard akin to GAAP for accounting that B-Corps are expected to work within, and can be questioned if they are not.
B-Corps, therefore, are like any other for-profit except they’ve made a foundational commitment to providing a greater output than just shareholder profit. Plenty of companies had foundational benefit commitments prior to the formaization of B-Corps, such as Patagonia (which now a B-Corp), Clif Bar, Ben & Jerry’s (even after the Unilever acquisition), so the only difference between B and C Corps I can tell is that B-Corp’s have a strong legal position to fend off challenges by new management, directors or investors to sacrifice benefit for increased profitibility, but they have all the other rights, requirements and liabilities for any US C-Corp.
Here’s a list of what I’ve found in my research and conversations are the biggest obstacles the start-up community has about B-Corps and the reasons why investors avoid them, followed by explanations about why it’s absolutely worth making the effort to make changes to avoid the obstacles
Obstacle 1) Founders can be satisfied with subpar profit-line becuase of the non-financial benefit their business is creating. In my perspective the creation of societal or environmental benefit is amazing, but if a for-profit is not going to do a great job making money that is a very risky business venture. Building a business is very hard, and risking not optimizing profit, put that business at great risk when challenges arrive. Thus I believe any founding group that isn’t interested in running a for-profit for maximum financial success is a very risky venture and it would be much better and safe if that organization structured itself as a non-profit, not pay taxes, and not take investments. I would advise any investor to guide such a start-up accordingly.
Obstacle 2) Founders tend to categorically refuse to consider selling the business or going public. Let me start by saying that any company that can achieve greatness without needing traditional investors and or a parent company to get there absolutely should do it without them. It’s always been a goal of mine and I applaud those very rare businesses that can get huge withouth outside support. But, outside of those exceptions, B-Corp founders should be rational and consider the terms they can ask of investors. Most institutional investors have a commitment to return their LPs money in 10 years, so they can’t invest in a business with no clear exit opportunity in that time frame. I believe B-Corps should be open to selling or going public if all their benefit commitments remain in-tact. Ben & Jerry’s was bought by Unilever, but they still provide great societal and environmental benefit. Etsy will very likely go public in the next year and investors will have to accept their growth is due to their commitment to helping people everywhere learn how to make, sell and grow their small businesses.
Obstacle 3) There still isn’t a dividend model that can repay traditional investors in the time frame of their funds. Dividends are the obvious back-up method as to how a profitable company that does not want to sell or go public can return capital to investors. But it’s very tricky within current 10 year expected return time frames. Worse, including dividend terms in original investment docs may become to big a burden on a company slogging thru it’s middle years, yet negotiating dividend terms after a company is throwing off cash requires a consensus to be made amongst unaligned partners. Still I highly recommend if investors want to back a young B-Corp that consider selling or ipo a deal-breaker to try and consider dividend terms in the original agreement, and considering using non-LP dollars for that investment.
Obstacle 4) Investors don’t like when their brain’s greed trigger gets mixed in with their do-good trigger. They’d rather be greedy when they’re being greedy and do good when they want to do good. This is a paraphrase from a very smart, successful investor I spoke with early on. And I agree the sentiment is good to have if the investor is be pitched on the benefit. Only the richest people in the world can invest on benefit. We’ve also seen that crowdfunding for benefit is entirely possible. But where investors shouldn’t be confused is when the benefit a B-Corp provides is what will make them so financially successful such as how TOMS’ mission could help them to break into a very crowded footwear market, or how Warby Parker’s mission could help them get footing against the global near-monopoly of Luxottica.
Therefore, you should think about B-Corps, particularly the best B-Corps, as businesses with a built-in competitive advantage to outperform their competitors and provide a timely investment return to their investors and employees and founders (if they want it.) Don’t think of B-Corp’s as businesses that leaking money from the bottom-line, but as innovative businesses that can invest marketing dollars much more efficiently. Don’t think of B-Corps as do-gooders, but as businesses that can generate superior customer LTV. Think of B-Corps as superiorly-focused mission-driven corporations that won’t get watered down along they way. Think of B-Corps as companies that are forever differentiated from their pure profit competitors.
While very few B-Corps are as good as the ones I mentions - just as most C-Corps aren’t as nearly as good as a business as they should be - if you think about B-Corps in the way I recommend you’ll start seeing them and their potential to meet both your and the world’s needs and how those goals can exist in complete harmony.
And that’s how you should think about B-Corps.
[Photo credit RBruceMontgomery]
