On Tuesday, my husband's company, NetSpend, finally had its IPO. After more than ten years of anticipation, the day came and went surprisingly unceremoniously, culminating not with champagne and a feast but with a frightfully suburban dinner of spaghetti and meatballs including sauce from a can. The juxtaposition of our past expectations of monumentality with the actual ordinary tone of the day spurred me to wonder: Why are exits important? And what, if any, relevance do they have for social entrepreneurs?
In the social entrepreneurship world—one that encompasses both for-profit and non-profit organizations—conversations about the need for exits are persistent. If we have more and bigger exits, the thinking goes, these events will attract additional capital into this space. The relationship between big, sexy exits and a sudden flood of capital are undeniable, and undoubtedly reflect one of the reasons why exits are important: They generate tangible, liquid wealth.
But the sad fact remains that actual exits for social entrepreneurs are extremely rare.
Right now most social entrepreneurs are funded by "patient" investors who agree to wait sometimes up to fifteen years for the promise of a great return. Needless to say, those timeframes are unworkable for most traditional capital. More and more frequent exits would prove the possibility of liquidity in these social enterprises and increase the appeal to traditional investors.
For the for-profit social entrepreneurs who are right now making their pitches to potential angel investors or venture capitalists, having even just one or two high-profile exits to refer to would help deflate some of the sarcastic and dismissive remarks about the true viability of a business that puts its social mission on par with financial return.
This leads up to the second reason why exits are so important: They signal to the market that an organization has reached a certain level of financial sustainability and scale. Exits are, by definition, big, and for a company founder to achieve an exit—whether by acquisition, a mezzanine round, or an IPO—that means it has achieved significant milestones in terms of revenue, profit, and market validation.
Much of the enthusiasm for social entrepreneurship as a new model for social impact is its emphasis around sustainability – both financial and environmental – and scale. At this point, without a handful of big success stories to cite, it is difficult to persuasively argue that the model will live up to its promise of truly harnessing the market to, as the saying goes, do well and do good. Similarly, that kind of signaling might also provoke more traditional entrepreneurs who are on the fence about whether to pursue a regular business or a business with a social mission.
In the non-profit social entrepreneurship space the word exit appears like a misnomer. How can you have an exit for an organization with no owners? Although brave, pioneering social entrepreneurs, like the founders of Compartamos and SKS Microfinance, have turned this question upside down by actually converting non-profit organizations into for-profit companies with multi-million-dollar IPOs, in the mainstream non-profit world the concepts of exit and exit strategy are virtually absent. I believe this is a shame.
Non-profit social entrepreneurs would benefit from exits just as much as their for-profit peers. I believe more non-profit exits would actually attract additional capital to the non-profit space as it does in the for-profit space. Donors are persistently frustrated by fragmentation and duplication in the non-profit market, and I believe exits – whether by acquisition, merger, or even just closing down shop – would bring some welcome consolidation and efficiency that would provoke additional philanthropic investment.
Exits are also important for organizational realignment and revitalization. In the for-profit world, exits are often accompanied by changes in leadership team and business strategy. Unless businesses build exits into their lifecycles, non-profits rarely have catalytic events to spur these types of transitions. Furthermore, succession planning and transition beyond the founding social entrepreneur are often neglected because there are no unambiguous end points in sight. What if non-profit social entrepreneurs could aim toward an exit that came with a $50,000 bonus to do with what they wished?
The irony with exits is that for the entrepreneurs who live through them, they are seldom the pinnacle moment they once imagined. These events are usually of much more significance to the people in the ecosystem around them – investors, partners, parents, and members of the media – whose emotions are less driven by the original passion and purpose of the enterprise than by their own role in its growth. But to the outside world, exits are powerful signals of success and opportunity. To the extent that we want to attract ambitious dreamers to social entrepreneurship, we need more exits.