What is the Best Structure for Social Ventures?

September 4th, 2009

The SOCAP09 conference on social entrepreneurship has swamped my Twitter feed for most of this week and I had a chance to stop in Wednesday evening to check it out.  The conference is for people starting companies looking to do well by doing good.

Todd Johnson, a preeminent lawyer in this area, posed a question via Twitter last week about the best type of entity structure for social ventures.  It’s a good question and there are some very interesting developments in the staid realm of corporate law that can help these types of companies along.  At the same time, there is tremendous diversity in the types of businesses being created, so if I had to give a one-line answer it would be “whatever structure makes partner organizations yawn the most”.

That’s probably not tremendously helpful, so here is my quick survey of social venture entity structures.  I’ve posted on this topic before and will continue to revisit as the landscape changes.  If readers know of other entity structures, and especially if you have seen certain structures work well in specific environments, please leave a note in the comments.

Nonprofit.  With apologies to non-profits and their lawyers everywhere for collapsing an entire sector into a pithy sentence, what most differentiates a nonprofit from a for-profit company is that the nonprofit has no owners in the financial-return sense.  Benefits are potential tax deductions for donors to the business and pure focus on the mission without having to consider shareholder returns.  A major drawback is that if the mission changes and participants wish to take profits out of the business it can be difficult or impossible to do so.  I have worked with nonprofits only in passing, so I won’t go any further except to note that non-profits run the gamut from entirely donation-dependent organizations such as the General Assistance Advocacy Project I worked with in law school to significant revenue-generating businesses like Kiva.org.

L3C. This is a new flavor of for-profit entity intended to help charitable foundations make grants more easily.  I don’t do anything remotely like this kind of work, so I can’t speak much to it except to say that the L3C was designed to allow foundations to meet their Program Related Investment guidelines under federal tax law more easily.  The first L3C was adopted in Vermont in February 2008 and as of today (Sept 4, 2009) there are at least 6 states with similar statutes in effect or pending, so I will assume they fill a need and leave it to more knowledgeable people to advise further.

Plain Old Company.  In many cases this is a great option and all a social entrepreneur needs. A “regular” corporation or LLC is simple, well-understood and easy to form.  One drawback is that while the owner/managers can dedicate the business to social goals, there is nothing to prevent the mission from being overridden.  Many social venture experts look to Ben & Jerry’s acquisition by Unilever as an example of this shortcoming- the B&J Board had an offer that was financially rewarding, but there were apprehensions that Unilever would not retain B&J’s commitment to support communities around its stores.  In the end, the Board decided it did not have discretion to put social-welfare goals over shareholder returns and accepted the Unilever buyout.  Many of B&J’s social programs ended shortly thereafter.

B Corporation.  The good folks at B Labs are setting standards to address this problem, along with many others.  A B corporation is a “regular” corporation (or LLC or other entity) that has made a commitment its charter documents to consider factors other than shareholder returns in determining corporate actions, esp. environmental, community, social and employee welfare.  The benefit of this is that the Board can, if necessary, choose paths that may lead to a lower shareholder return if circumstances require.  The problem is that only 32 US states allow this type of language in corporate charters, so businesses in California and elsewhere need to incorporate in B-corp friendly states to get the full benefit.

Social Venture Company.  You may be able to see where this is going.  There are groups in California, Minnesota (I think) and possibly other states working on legislation to create a new type of entity that permits the broad-constituency language promoted by B corp and others.  Like England’s Community Interest Company, these entities would be separate from “plain old” corporations or LLCs by their commitment to work toward positive outcomes for shareholders and non-financial stakeholders.  We don’t know much about these proposed entities yet and many of the draft ideas are subject to change so there isn’t much to say about them currently.

Going back to the start of this post, I strongly believe that the best entity structure for a given project is the one that investors, donors and business partners can gloss over without thinking about much.  We don’t quite have a standardized approach that allows this yet.  With luck in a few more years we will.

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Frank Herbert, Douglas Adams and the Economy

November 12th, 2008

Two of my favorite books as a teenager were Dune and the Hitchhiker’s Guide to the Galaxy.  These quotes from those books have been bouncing around my brain lately:

Dune – Fear is the Mindkiller (the complete Litany Against Fear is here)

Image courtesy jamesbelieves.blogspot.com

Hitchhiker’s Guide – Don’t Panic

Image courtesy http://en.wikipedia.org/wiki/Image:Towelday-Innsbruck.jpg
Image courtesy of Wikipedia

I have been repeating these phrases to myself a lot recently.  Unstable economies are scary times, but energy spent being anxious and stressed is just wasted energy.  Some days I can’t get on top of the stress and end up completely exhausted, but unless I managed to do something productive in spite of my stress I am no better off.

In that vein, here is an article about strategies for getting past the anxiety and focusing on things you can control.

In the Hunt – Recession Advice for Entrepreneurs – Stay Calm – NYTimes.com

Acknowledge the anxiety, then focus past it on steps you can take to make yourself feel like you are moving toward your goals every day.  Good advice.

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Startup Business Strategy For The Simple-Minded

June 20th, 2008

Dharmesh Shah is an entrepreneur in Boston who writes a thoughtful blog on the challenges of launching a new business.  This post rings true with me.

Startup Business Strategy For The Simple-Minded

The not-AP-approved short version is this:

Decide what to build, launch an imperfect version, sell unsuspecting customers, keep improving, sell more unsuspecting customers.  Lather, rinse, repeat.  SUCCESS!

I have had many clients over the years who spent a huge amount of energy working *around* the core aspects of the business rather than on them.  The ones that managed to keep everything to a minimum other than the core goals of the company have been the most successful, without exception.

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What Needs to Go in My Business Plan?

March 21st, 2008

I have read many business plans from clients and friends over the years, and helped write more than a few. I have strong opinions about what works and what doesn’t and I have been mulling a post on the subject for a while.

As I started writing though, I found that lots of other bright people have also written extensively on this topic. More to the point, many of these people are VCs in the business of funding companies. Here, then, is a whole lotta link-love on the subject of business plans, with my own editorial comments.

*Purpose. Guy Kawasaki says that writing the plan is a really valuable exercise to “to solidify the objectives (what), strategies (how), and tactics (when, where, who)“. He also says (two lines prior) that it is a “mechanical step in due diligence”. Translation- no one is going to read the whole thing, so figure out how to make the important points stand out without being ostentatious about it. Use descriptive headings.

*Length. Around 10 pages is all you need. Guy says 11 and even allows an extra 9 for good measure. The best ones I have seen have all been concise. If you have trouble reducing the essence of your business to that amount of space you are too close to it. Get a friend who knows nothing about the idea to review it and tell her/him to cut out everything the tiniest bit extraneous.

*Executive Summary. The Woodside Fund allows 3-5 pages for this. Brad Burnham says 1-2. Guy says 1 and I agree with him. Remember that your audience may look at 10 of these every day. Hitting the major points so a reader can take them all in a single scan is a big help.

*Management Team. This is the hardest for most people, because new businesses are usually in new areas for the founders so their prior experience isn’t necessarily relevant. This is also the least-discussed area of the business plan by all of the VC blogs I researched for this post. Ask the VC cites the ability to build the product and ability to sell it as key attributes in founders. I’m willing to bet there are more exceptions to this rule than any other, though. I can name a half-dozen clients whose founders had vision and managerial/organizational skills, but no technical or sales experience per se. What is the secret then? I’d say it is to instill confidence in the audience that you can do what you say you will do. I hate to be so vague, but I really believe if you can convey that everything else will follow.

*The Business. Dick Costolo nails it- for web companies at least: “You do need to intimately understand where you sit in the proverbial value chain and what your position there means for your company, but you don’t need to know precisely how you will extract value.” You’ll be lucky to garner a $250M valuation while “starting to focus on making money” like Meebo, but a good idea can go a lot farther on the web than in many other places without a clear revenue stream.

This is really three sections in one: the problem (why people have been clamoring for your product without knowing it), the solution (why your product will satisfy the unrequited, unvoiced longing) and the business model (where you fit in the value chain, if not how to monetize). Give adequate attention to each part.

*Financials. Everyone wants to see them and everyone knows they are always dead wrong, so what to do? Ask the VC says that the user adoption piece of the projections is the most interesting, but it is the part most likely to be wrong and over which you have the least control. The answer is that the ideas that matter more than the actual numbers on the page. The financial projections convert the concepts in the business model through into cash terms. Don’t get hung up on whether growth will hit in month 19 or 27 because you will have very little control over that. Instead show that you understand your place in the value chain.

Other key points: one page of projections for a new business, shown monthly for 2-3 years, then quarterly through year 5. And don’t provide best/average/worst case projections. Work out a growth plan and be able to justify it.

*Flexibility and Adaptability. Or as Josh Kopelman says “your business plan is wrong”. You know everything is subject to change, as do your readers. State your plan confidently, but don’t get tied to it.

I realize I could continue almost endlessly on this topic. That’s enough for now, though. More later.

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