Finance your Independence

Finance your Independence

By now, every mission-driven entrepreneur knows the cardinal rule for growing a business while maintaining its values: External investors are a mixed blessing.

The field is littered with examples of companies that started out with high ideals, but eventually found themselves compromised by the investor requirement to maximize returns. But while the type of financing to avoid maybe clear, the type of financing to embrace is somewhat more elusive. The question remains: How do you raise capital without losing control of your business?

Bootstrap, bootstrap, bootstrap

Contrary to the illusion created during the dot.com era, most businesses finance their start-up requirements through some form of “bootstrapping” – that is, using cleverness and cash conservation strategies to get to the point where sales begin to cover expenses and support modest growth. This gives them the freedom to make their own business decisions (and mistakes) without having to worry about the financial requirements of outside investors. Bootstrapping has the further advantage of fostering the kinds of business discipline – frugality, hard work, focus, accountability – required to successfully create something out of nothing.

Use debt rather than equity

When people decry the shortage of capital available for mission-driven firms, they are generally talking about the lack of equity capital – a critical resource in the start-up stage, but only one source of capital for later expansion. Once a business becomes “bankable,” mission-driven firms face few if any special obstacles. On the other hand, the worthiness of their goals doesn’t entitle them to any special treatment either! When it comes to bankers, business is business.

Choose your investors carefully…

All investors are not created equal. In an ideal world, the mission-driven company would be financed by investors who share the founder’s values, time horizon, risk profile, and expectations around an appropriate financial return. There are such people – and their value far exceeds their weight in gold! Aligning the expectations of outside investors with both the ideals and the realities of the values-based business is one of the greatest sources of stress for mission-driven entrepreneurs. 

…and meet them on their own terms

Unfortunately, this is not an ideal world and there are not nearly enough values-based investors to meet the need for values-based capital. Thus, most of the successful mission-driven entrepreneurs I interviewed had learned how to present their business propositions in terms that were attractive to conventional investors. They learned to respect the financial motivations and liquidity requirements of  those investors and to position their offerings in terms of that thinking.

Build mission into your value proposition

Tom McMakin, former Chief Operating Officer of Great Harvest Bread Company and currently a principal in Thrive Capital Partners, a mission-friendly private equity firm, is a great proponent of building corporate values into the brand. That way, there is no temptation to sacrifice long-term values for the sake of short-term financial rewards: the values are an important part of the company’s overall commitment to its customers.

Invent new instruments

Necessity is the mother of invention. So it is not surprising that the need for additional capital is beginning to give rise to some unusual new financing vehicles. These include debt-equity hybrids, the use of Series B non-voting shares, co-ops that pay dividends to outside investors, ESOP buyouts, a values-based holding company, and others. None of these is truly new, but each is an important adaptation of market-based financial tools to the unique circumstances of mission-driven firms. 

Exit with Care

The critical question for mission-driven entrepreneurs is this: “How do you insure that the mission-based, non-financial values of your business survive beyond your own involvement and the involvement of your idealistic early investors?” This is what Business Ethics editor Marjorie Kelly has labeled the “legacy problem.”

The key to achieving a more satisfactory outcome is to address the issue from the outset – or at least from the very first time the firm takes in Other People’s Money. All of the recommendations presented here are designed to do just that – to insure that the values of the firm will outlive the involvement of the founder.  Choosing the right buyer, structuring the right deal, and managing the end-game as carefully as you have managed the growth of the business make a big difference, too. But if you wait to address the “legacy problem” at legacy time, you’ve waited too long.

Jill Bamburg is the MBA Program Director at the Bainbridge Graduate Institute the author of Getting to Scale: Growing Your Business without Selling Out, forthcoming from Berrett-Koehler.