Third Sector | Ethics, exits and mainstream investors
At a recent ClearlySo training session, an external speaker addressed the issue of ethics in business and how this is best reflected in the culture of an organisation. The discussion quickly turned to the case of the US firm Etsy, which is getting a lot of attention. A fast-growing impact enterprise, it was eventually floated on NASDAQ. Thereafter the share price fell which, eventually, precipitated a change in management and direction which challenged its culture and ethos.
I can recall similar murmurings about The Body Shop, after its sale to L’Oréal in 2006. Commentators were critical, and argued that the culture of the firm changed since the acquisition. My own conversations with Co-founders Gordon and Anita Roddick suggested that they felt the cultural change seemed an inevitable result of their earlier decision to float the business and bring in many new investors.
Other successful impact enterprises were sold to larger entities with different results. The acquisition by Unilever of Ben & Jerry’s seems a relatively successful acquisition. I lack the knowledge of the transaction’s financial performance, but there seems to have been less of a culture clash. Maybe this stemmed from Unilever’s existing values or that acquiring Ben & Jerry’s encouraged Unilever in that direction, or both.
Acquisitions do not only involve such impact investment sector heavyweights. In fact, many ClearlySo clients have been acquired, although they are far less well-known. Such names include E-car, Wool & the Gang, Positive Ageing, Intern Avenue, Tyze and Epona Clothing.
Some argue that the clashes don’t emerge after being acquired, but that this all starts when firms take on external capital. At this stage they have essentially begun the inexorable path towards an exit—one in which the founders may feel that they have lost the ability to control the process.
One solution is to consider external capital as inherently problematic and to avoid securing it. This will limit growth (and impact) in many circumstances unless the enterprise is highly profitable and/or does not require capital for growth, and/or does not seek to expand rapidly. However, for many of our clients, these choices are not available, and investment seems the only way to achieve their desired growth and impact trajectory—avoiding investment is simply not a viable option.
However, taking in such capital does require exit strategies, although the time horizon to achieve an impact exit will normally be longer than in traditional private equity investing. As a firm we believe that impact, growth and profitability are positively correlated, but if we seek to increase overall impact, we need larger pools of capital and this means impact firms must get comfortable with exits. Investors are different from grant-givers—they want to get their capital back, normally with an appropriate return.
There are many ways in which to minimise the risks of a culture clash. It takes effort, however, and risk can be mitigated but not eliminated. Obviously, an intermediary like ourselves has an interest in urging enterprises to get good advice as they embark on the path to accepting investment. Also, quite a lot can be learned during the due diligence. Frequently this exercise seems to be one-sided, with investors subjecting investees to painful scrutiny. However, we would urge enterprises to invest the time and energy to learn about prospective investors or potential acquirers—to make the process a two-way investigation. These investing and acquiring organisations have track records and histories, and these are astonishingly easy to access. There are firms they have worked with in the past, and often the true nature of these investors/acquirers can be can be ascertained through a few telephone calls. It is depressing how few take this step—and sadly, the consequences of this can be very serious and disappointing.
This blog was originally published on Third Sector on 14 February 2018.