The 4 Questions Impact Investors and Social Entrepreneurs Need to Answer Before Sealing the Deal
Renewal Funds Strives to Invest—and Exit—With Impact and Return
Renewal Funds, which evolved out of Renewal Partners in 2008, is a venture capital firm investing in early growth stage companies in Canada and the United States. Renewal Funds currently has two funds (Renewal2 and Renewal3) and a total of $98 million under management, with investments in more than 20 companies with six realizations and only one write-off thus far.
“Overall, we invest in companies that we see as fundamentally changing the way that industry works,” says Paul Richardson, Renewal Funds co-founder and managing partner. “We’re not a typical venture fund in that we’re happy to support companies that have long-term, steady growth periods, rather than short-term skyrocket investment periods.”
Renewal Funds is game-changing in part because of its investment thesis and portfolio company management strategies, and perhaps most of all because of the quality of the partnerships that Renewal Funds secures for its portfolio companies upon exit. Last year alone, Renewal Funds helped secure four high-impact acquisitions for four of its portfolio companies.
“Everybody thinks about mission investments, and everybody’s talking about impact, but thinking through how you exit, making sure that you do it in a way that respects the people who built the company and its purpose is critical,” Richardson says. “Three out of the four portfolio companies that we sold in 2017 were B Corps at the time that they exited, and the other one would have definitely qualified, had they applied. A sale transaction for that type of company requires consideration of a broader set of stakeholders.”
Below are excerpts from interviews with Richardson on how Renewal Funds invests—and exits—with impact and return. For more information, read the full articles about the four-question framework and Alter Eco exit.
Let’s start at the beginning. How does Renewal find the right investors for your fund?
Richardson: It’s been a good time to try and find partners because more people are becoming interested in aligning their money with their values. We start all of our conversations with our investors around the fact that we are a mission-focused venture fund, and the mission side of what we do is as important as the financial side. We don’t talk about short-term IRRs; we talk about goals over the life of the fund.
I think this helps to align people to the idea that we’re going to be patient with their capital, and they should be patient with us to see how things transpire. We look at all of our investors as equally important, and so whether you’ve invested $250,000 or $2.5 million, you have exactly the same terms with us. And by having such a large network of investors, we have this incredible source of intellectual capital and experience that we can bring to bear to help our companies, if necessary.
What does it mean to think about mission-aligned exits, and how does that show up in your fund management and relationship with your portfolio companies?
Richardson: One of our goals in all of our investments is to support the company, not only during the time that we’re partnered with them, but also to look at the company as a living and breathing thing that should go on and become bigger and better after our involvement. If we work with a company where mission shows up throughout everything they do — their product is a mission-oriented product and the people are a mission-oriented group — there is a high chance that the group interested in supporting that company after Renewal will be mission-aligned. But, it’s not necessarily a foregone conclusion.
We are not a private-equity company that owns and controls a company that we invest in; we are generally a minority investor. We can’t fully control how the exit goes, but in most companies we work with, we develop a level of understanding and involvement that aligns us with the employees and co-investors and allows us to help make sure that we do have a mission exit.
So when we look at selling a company, we ask four main questions:
- Will the employees, the people who have truly built the company, be treated fairly?
- Will the product or service that we have been trying to support with our dollars be further supported by the buyer?
- Does this buyer have the capacity to take the company to a new height beyond the level that an early-stage investor like Renewal can?
- And how likely is it that the community and mission of the company will continue to be supported?
How does that play out in the real world? Can you describe one of your exits from last year?
Richardson: We made our first investment in organic, fair-trade foods company Alter Eco back in 2010, and the company has grown its revenues approximately 10 times over the time that we’ve been invested. I was chair of that company for the last three or four years, and we’ve had a board seat throughout. Alter Eco is a B Corp and represents exactly what a B Corp should be — started by people who were smart, mission-first people who care about building a product that matters.
Along with our co-investors in the 2010 series A round and the company management, we decided it was the right time to find a buyer who could inject new capital and take it to the next level. All of us felt aligned in the idea that there was a next step that the company could take, and a larger source of capital would be helpful.
We started the process by making it clear to the investment bankers that that mission was going to be a key element, and that any bid that was just financial would be very difficult to consider. We as a company and board went out to look for people who were aligned that way. We found a buyer, NextWorld, who has created an Evergreen fund. Alter Eco’s B Corp status was a positive feature, as we found the buyers wanted Alter Eco to remain a B Corp through the process.
NextWorld Evergreen is a large fund with a lot of capacity to build the brand. They are committed to Alter Eco’s organic and fair-trade values, and to keeping all employees who wished to remain with the company through the transition. The company is staying in the premises that it was occupying, and is expanding its offerings within the organic and fair trade space.
If you were to summarize how to invest and exit with impact, how would you sum it up?
Richardson: You have to be clear from the beginning what is important to you, because everyone has different ideas about mission. We have a very particular idea about mission at Renewal, and we’re clear in our minds what that means. Mission-alignment has to exist in every aspect of a company for us to be involved in the company.
Second, you have to be able to wait and do a deal at the right time. You can’t expect to be able to find a mission-aligned exit instantly when you’re in trouble. So the time to think about your exit — and start discussions with your partners about who the right people might be to exit with — must come earlier rather than later. And you have to take the time to learn about the people you may deal with.
The final thing is that you should not be afraid to ask for what’s important to you on the exit. In a number of these exits that we’ve discussed today, the sellers were able to ask for assurances from people that you wouldn’t think you would be able to get in writing, and we did. You should not be afraid to ask for what is right and ask for it fairly early on, because it really helps flush out who’s just talk and who’s real, in terms of their further commitment to mission.
Renewal Funds is part of the community of Certified B Corporations. Read more stories of people using business as a force for good in B the Change, or sign up to receive the B the Change Weekly newsletter for more stories like the one above, delivered straight to your inbox.
