This presentation discusses the challenge of exits for impact investors. How might investors structure investments and exits to perpetuate the mission of the enterprise? Presented by Ross Baird and Paul Hudnut at Unreasonable Institute Impact Investing Bootcamp on July 10, 2013
2. Session Line Up
11:00 Intro: Perpetuating Impact
11:05 Types of Direct Investments
11:15 Types of Exits
11:25 Win-Win Structures
11:40 Exercise
11:55 Q&A
12:00 Adjourn
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3. Intro: What’s Impact Investing?
“Impact Investing”
Impact: expectation that purpose of the enterprise
is to have a significant, positive, long term effect
on a social or environmental challenge AND
Investing: expectation that funds will:
be used to build a sustainable, profitable enterprise
and
… then be returned to funder at some point (along
with interest or gain)
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4. Intro: The Quandary
To be impact investors, we need to focus on
defining, designing, scaling and perpetuating
impact
Yet, by being investors (wanting return of
capital), we can (unintentionally?) undercut or
undo the impact we sought in the first place.
How might we structure and exit impact
investments to perpetuate impact?
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5. Intro: Economic Systems
Extractive
Extract resources;
Focus on financial capital
Regenerative
Creates conditions for life
Focus on social and natural capital, too
To achieve sustained impact, let’s not apply
an EXTRACTIVE financial model to a
REGENERATIVE business model.
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6. Intro: Aligned Investing
Steps toward a mutual goal: long term impact
drives the vision and growth of the company
Ownership sets mutual goals
Don’t be afraid to set ownership criteria- “club
rules”
Structure investments
Impact Goals
Return Goals
Structure exits
Start designing the organization from day one;
beware of the “long shadow” of funding decisions
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7. Types of Funding: Non-dilutive
Grants
From foundations and governments
Seek non-financial returns (no impact on operating cash
flow)
Non-dilutive to ownership (but may have control
mechanisms)
Debt
Advanced in expectation of repayment of principal and
interest at a date in the future; impacts operating cash
flow
Non-dilutive to ownership
Recourse and non-recourse; secured and unsecured.
Guaranty often required for start ups
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8. Types of Funding (Dilutive)
Convertible Debt
Loan with option to convert to equity (in lieu of security)
Captures upside for lender
Postpones valuation negotiation for early stage companies
Interest accrues (cash flow); control negotiable
Equity (stock)
Advanced with expectation in proportionately sharing the
value created by the business.
Requires a valuation of the company (negotiated) and exit
strategy
Ownership of shares; dilutive
No impact on operating cash flows
Classes: Common and Preferred shares
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9. Types of Exits: What you’ll traditionally see
For Funders:
IPO
Acquisition
Buyout (Management or Private Equity)
Debt/Repaid Loan
For Founders:
Brought along with the investors (typically without
the same preferences)
Rarely allowed to cash out a small percentage
when follow-on funds are raised
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10. Types of Exits: Mission-preserving?
Debt
Pro: exit is clear; Con: tough for early-stage ventures
Revenue-share
Pro: liquidity sooner, tied to performance; con: largely
untested
Dividend-paying equity
Pro: Tied to free cash flow, success; con: tracking, numbers,
taxes
ESOP/LBO
Pro: Mission-preserving; con: need to plan far in advance
Redemption R
11. Types of Exit: From Startup to
Exit
Inviragen was founded 2005 to develop novel vaccines for
diseases in developing world.
Government Grants
National Institutes of Health ~$30 million from 2006-12
Convertible Debt
$150,000 in 2006 ($10k max chunks)
Additional in 2012
Equity
Series A- $15 million in 2009
Exit in 2013 by sale to Takeda Pharmaceuticals
$35 M in Cash + up to $215 M in Milestones
Potential for 8x return over 9-12 years
..and saving millions of lives with dengue, HFMD vaccines
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12. Types of Exit: How can exit/impact go
wrong?
Ben and Jerry’s
Acquisition by Unilever; ensuing changes to supply
chain
AND/BUT: Unilever is now the largest Fair Trade
purchaser in the world
AND/BUT: Ben and Jerry’s recently became a B-
Corporation
SKS Microfinance
Largest microfinance bank in the world; IPO in 2010
Led to a flood of private capital into microfinance
markets; financial return for initial investors
AND/BUT mixed reports on actual impact; suicides of
borrowers (unclear direct relation to company
practices) led to politically motivated regulation; share
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13. Types of Exit: How can exit/impact go right?
“Baked-in” impact
Example: Cell Bazaar, mobile-phone based
“Craigslist” in Bangladesh, targeted at BoP
populations
Acquired 15 million customers in four years,
acquired by Telenor
Owners of the company preserve the mission
New Belgium Brewery: 100% employee owned
via leveraged buy-out completed in 2012
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14. Learnings: What Should You
Consider?
Investments (money in)
Look for baked in impact- inherent in product or service
Is serving the target impact beneficiary a MUST HAVE for
company growth, or a NICE TO HAVE?
Ownership club- bound by shared responsibility for
mission
Work backwards from perpetuation (“how might we…”)
Potential “carrots and sticks”:
Special redemption rights for mission perpetuating exits
Formula price for sale to ESOP/Cooperative/Foundation
Debt with contingent warrants (exercisable if exit is NOT
mission aligned)
Exit (money out)
Explore and understand options early (long shadows)
Reducing options may reduce return, but increase R
16. Your Turn: Kickboard Case
One company
Four different stage owners
Founder (Freddie)
FFF- Convertible Debt (Maggie Mission)
First “outside” investor: Samantha Seed
Investment Fund: Iggie Impact
Now, two acquisition offers on the table.
Mainstream Educational Media Enterprises, Inc. (privately held;
well known provider of products and services to schools; 50
years old)
Regenerative Education Partners (cooperative owned by
teacher’s pension funds; 8 year history operating charter schools
in 10 states)
In the next 15 minutes, determine which you would prefer, and P
17. Read outs and Questions
What did each investor decide to do? Why?
Freddy Founder
Maggie Mission
Samantha Seed
Iggie Impact
Questions?
THE END (next steps as rolling credits)
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18. Next step idea: The Pixar Story
Once upon a time _____
Every day ____
One day ____
Because of that _____
Because of that ______
Until finally _____
Write this for the enterprises you are
speaking with—and yourself!
19. Further Reading: Toward
Regenerative Investing and
Ownership
Living Purpose
“creating conditions for life”
Rooted Membership
“ownership in living hands”/ no absentee owners
Mission-controlled Governance
“humans at the helm”/ not dependent on any 1 person
Stakeholder Finance
“capital as friend”; control mechanisms (ESOP,
foundation)
Ethical Networks
“reinforcing shared values”
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M. Kelly, Owning Our Future 2012
Notas del editor
Paul
You need to focus on both: neither is sufficient alone to be an impact investor. In this session, we are not going to be talking about the front end of investing (deal flow, diligence)We are going to touch on middle (deal structure) and back end (exit). Cruxes: Defining/designing impact into bizmodel Deal between Founders and Funders Returning investment (“Exit”) Scaling and perpetuating the purpose