Today I participated in a conference held at the Treasury Department on access to capital. The session, which was convened by Treasury Secretary Timothy Geithner, and Karen Mills, head of the Small Business Administration, explored what the government can do to make it easier for entrepreneurs to access growth capital.
I participated on a panel that explored the environment for initial public offerings or IPOs. As someone who raised money from alternatives sources, I had a different take than the other panelists. Here is a summary of the statement I gave:
Imagine we were back in the year 2000 and I presented the following IPO opportunity to you.
I'm offering you the chance to invest in a lottery, also known as the beverage industry, where according to Beverage Marketing Corp, more than 20,000 new products were launched since the year 2000, but only 35 of them grew to more than $100 million in sales. That's a success rate of less than 2 in 1000.
Now the typical public beverage company trades at 12-15 times EBITDA, but my company will have no earnings, in fact, my company will have negative earnings for the next ten years, that's forty quarters of losses!
But wait there's more—in addition to losing money for 40 quarters in a row, my company will commit to seeking out organic ingredients, which are more costly, harder to find, and more subject to price fluctuations because of the limited supply.
And just to sweeten the deal, my company will commit to purchasing Fair Trade certified teas, which means we will further shrink our margins so that we can pay a premium to tea pickers in India and China.
And finally, in case I didn't scare you off yet, my company will only sell drinks with 17-30 calories per 8 ounce serving, even though the typical calorie profile of the competition is 80-100 calories.
For obvious reasons, this is an investment opportunity that I wouldn't dare offer in the public markets. But despite its scary fundamentals, Honest Tea proved to be a very rewarding investment. From 1998 to 2007 we raised $21 million in angel and private equity before we sold to Coca-Cola this month for more than $100 million.
Mission-driven enterprises like Honest Tea and Stonyfield Farm yogurt avoid the IPO route to financing because they need investors who aren't focused on quarterly earnings, and understand that long-term decision-making will be in the best interests of the brand as well as the planet. But the public markets don't just have their limits on the fundraising side, it's on the exit as well. Whereas the public markets wouldn't know how to properly value our long-term decision-making, acquisitions by strategic partners, especially those that can help expand distribution, such as Group Danone for Stonyfield or Coca-Cola for Honest Tea, have delivered healthy returns to our investors, and healthy brands to the American public.
Mission-driven (or socially responsible) enterprises are really just companies that embrace long-term thinking, with a broader understanding of who their stakeholders are. If the government wants to support enterprises with a longer-term vision, it should explore providing capital gains tax breaks to investors who buy and hold their investments for at least five years.