Exiting Responsibly – thoughts on the UKBAA forum
On the 29th January, I was at the UK Business Angels Association (UKBAA) Winter Investment Forum, networking with and hearing from some of the biggest names in UK angel investing. It was a fantastic day, with an extraordinarily rich mix of people – from experienced angels telling war stories to perspectives from entrepreneurs on both sides of the table, and VCs co-investing with angels.
I was particularly struck by a speech from Andrew Sentence, Senior Economic Advisor at PwC and just returned from Davos. His message was not a new one, but no less powerful for that – the world is running out of energy, materials and natural resources, and those investors who are not thinking about efficiency in these areas are going to find increased risk, and potentially increased cost in the long run, affecting their exits. Stephanie Hyde, a PwC Executive Board member, reiterated this from the consumer and employee perspective. PwC’s review of businesses throughout the country came back with this: customers and employees are demanding to know more about the social and environmental impact of the companies with whom they are doing business. I translate that to: competitive advantage. Advantage in hiring. Decreased employee turnover. Advantage in the marketplace.
I certainly heard the message loud and clear, but as I looked around I wondered if everyone heard the same. I know many of the people in that room are doing remarkable work, and many are helping entrepreneurs to create jobs, solve problems in education, healthcare, and more. Some of them do philanthropy outside of their angel investing – but in this room, they were wearing very specific hats. These were the pure investor hats, with a constant refrain – success is tied to financial return. How and when can I exit?
Exit was the theme of the day. UKBAA Chair, Sir Nigel Rudd’s speech emphasised the point that “the day you buy is the day you sell” – if you’re not thinking about exit on day one, you’re missing a trick. Others brought out their maths – you must aim for a 10x return, to ensure that you are covering your “losses” and making the financial returns for which you are aiming.
One speaker took a slightly different tack, pointing out in his approach that it is not just shareholder value that matters, but also about entrepreneurial wealth creation. Angels are in the lucky position to help the management team create wealth, to support them on their journey – he argued that angels should not just be thinking about what is in the deal for the outside investors, but what is in it for the entrepreneurs as well. That is a step in the right direction – and certainly it is a way to ensure alignment, and to develop a base of entrepreneurs who can them become angels themselves.
I would take this one step further. We should not be talking only about shareholder value, but also about stakeholder value. Stakeholders are shareholders, and they are entrepreneurs, but they are also employees. They are members of the supply chain, members of the wider community. As Sir Nigel Rudd said, we need to think about value and exit on day one – but to me, this means thinking about how we can manage and accelerate value for all stakeholders.
We are not talking about negating or minimising shareholder value, but about maximising stakeholder value throughout, and especially at exit. Through all the talks given at the event, the focus was on the exit in a relatively narrow set of choices. Nobody mentioned the potential value of quasi-equity, or transitioning to worker-owned enterprises, or creating or selling into a holding company to maintain the social value of an organisation – or even managing an exit that maintains the social mission while still getting a great price. Yes, people talked about ensuring a business delivered five more years of (monetary) value for the acquirers, but there was no mention of how an exit can support a company to keep doing social good. How can the financial outcome be the only one that matters?
This is not to say that some others in the room were not thinking about doing social good at all. I know they were, because I spoke to so many of them before and afterwards. Jenny Tooth, CEO of the UKBAA, is constantly introducing me to individuals who are open to looking at investments with positive social impact. The point here is that these hats can be worn together; in our space, where Clearly Social Angels sits, and where I have sat for a dozen years, investors look at deals and say: I want this business to do the maximum amount of good while making a reasonable – or excellent – return on invested capital.
Just last week, it was announced that one of the companies I invested in in the US – Solmetric Corporation, which has solid environmental impact potential – generated a positive exit for investors. They have maintained the integrity of their company, and are now scaling their environmental impact – while making money for their investors. Now I can recycle the money that I invested, along with the capital I made, into another deal, into supporting another entrepreneur. I’m also just exiting, positively, a debt investment I made into an eco-resort many years ago. My capital helped to catalyse other capital, which enabled the project to get off the ground. Now it is not needed anymore, and I’m out, able to do another deal.
Of course we need to understand how we, as impact investors, will exit an investment. And thinking about that from day one can help, as I heard last week, to focus the energy of the team. But from day one, I will be looking for a positive impact exit – one that maximises positive returns for all stakeholders, both social and financial. And there may be times when I decide to consciously forgo some financial upside in exchange for higher impact, and some times when I don’t have to do that at all, because the opportunities for financial returns are on par with a pure financial deal. But I get to make that nuanced choice; that’s part of being an angel, not having to answer to LPs in a fund, or institutional expectations. I do so appreciate my angel colleagues in the UKBAA – I am also looking forward to a continued dialogue about our broader opportunities to make money and make a difference.