To create meaningful social change, it’s important for mission-driven companies to scale the business in a way that maintains and strengthens its social contribution alongside revenues and profits. There is a critical need for investors that support established, growth stage businesses committed to creating lasting social and economic value, yet few private equity impact funds exist.
Patagonia, founded in 1973, was able to protect its social mission by maintaining control of the firm through its successful yet volatile history. A bankruptcy in the 1980s and a rough patch in the 1990s put the company at risk of falling into the hands of outside investors whose values did not align with the mission, but founder Yvon Chouinard managed to keep the company afloat without having to sell equity to a third party. As revenues grew from $20 million in the 1980s to $100 million in 1990s and as much as $750 million in recent years, Patagonia continues its commitment to sustainable sourcing practices, along with bold environmental campaigns, significant charitable giving, and promoting repair and re-use versus consumption.
Not all companies can reach the scale of Patagonia through organic growth, however, and it is increasingly common for established companies to raise additional capital from private equity funds. Impact investors are essential at this stage to ensure a company’s financial and social objectives are understood and supported when making strategic business decisions.
An impactful packaged food company, for example, will often reach a point of scale that requires changes to their sourcing of ingredients, manufacturing processes, and distribution channels. When starting the business, the entrepreneur may have intentionally designed a product that creates positive health outcomes and selected suppliers committed to sustainable operational practices to generate impact. However, when nearing the cusp of profitability that could lead to a high-return sale to a strategic buyer, a private equity investor may advocate for shifting to suppliers that incrementally lower costs but greatly reduce the social impact. An impact investor that is aware of market trends related to sustainability may advocate for a more nuanced review of strategic options, drawing attention to how the firm could grow both the profits and impact in a reinforcing way that could lead to a more advantageous sale.
Similarly, a company providing technology-based educational curriculum may face the decision of where to focus its sales efforts when scaling revenues. While well-funded private schools may allow for shorter sales cycles, a mission-aligned impact investor is likely to see the dual benefit of pursuing public school districts that provide larger revenues and greater social impact. Experienced impact investors may also be able to provide the management team with cross-sector partnership opportunities that improve their likelihood of success in districts facing unique challenges.
The decision to acquire or merge with a competitor is another point at which an impact investor’s perspective and expertise is valuable. While most private equity investors can adequately analyze the cost savings and revenue growth potential of a merger, impact investors also look for ways the social mission may be amplified or jeopardized. For example, a mission-driven healthcare services company targeting underserved populations that is considering merging with a competitor may gain operational efficiencies and the ability to jointly expand into adjacent markets. However, if not analyzed with an impact lens, a management team may miss the potential difference in motivations and end up with sharp disagreement in the newly combined company about the decision to expand into a new markets with high impact potential.
We believe that strategic business decisions can be made to optimize and reinforce both financial and social outcomes, but they require an investor with intention and expertise. Just as entrepreneurs look for a shared commitment, cultural fit and passion when hiring their team, we encourage them to look for this alignment with investors to ensure impact is prioritized as the business grows.
The growth of impact venture capital funds like ours is helping to meet this need at startup phase. However, as successful startups mature and seek capital from additional sources to fund growth and provide liquidity, mission-aligned private equity funds are still scarce. As a public benefit corporation with a mission to grow the marketplace for investments that target financial and social returns, we are developing a new offering to help fill this gap.
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