For-profit social ventures sure have come a long way.
Look no further than Etsy's spectacular public offering in mid-April. The IPO netted $267 million for the crafts marketplace, which saw its share price double on its first day of trading. So it would seem the open question of whether social-mission driven companies can also earn a buck, might also be closed.
Etsy is registered as a certified B Corp. That means it has a double bottom line, one that pays out to the public shareholders and one that supports its community and the social causes they foster.
These types of companies have traditionally run into difficulty raising funds from investors, who tend to be profit driven. And a social mission has long been viewed as a financial drag on a company--thus imperiling a company's ability to financially benefit its shareholders. That has obvious implications for a company that wants to IPO, as most public companies have a stated duty to create profit for shareholders.
Yet if Etsy's experience can serve as an indicator of what's to come, the future appears brighter for social ventures. Still, it won't always make sense for every company. The certification process, for instance, isn’t trivial, and it could lead to becoming a legal benefit corporation, which has various statutory requirements that affect you, your board, and your investors.
Here's a look at registering as a B Corp, as well as some pros and cons:
More than 1,200 smaller businesses are registered B Corps. Etsy may be the first to go public with the certification. It was, however, preceeded by cosmetics company Natura, which went public in 2004, and which received its certification in December, 2014.
B Corp certification was created by the non-profit B Lab in 2006. The goal was to develop a set of standards, much as Leadership in Energy and Environmental Design (LEED) sets standards for green buildings, for purpose-driven businesses. Such companies have goals of saving the environment and benefitting wider communities beyond the shareholders of the company. The communities, often referred to as company stakeholders, include customers, the locales in which the business operates or produces its products and services, and employees.
Customers Tend to Like It
Registering as B Corp can help you develop your company mission, and it could help you connect with a specific community, and even distinguish your product from competitors.
“The reason we initially did it was simply to tell the workers it is important for us to address these issues,” says Mike Del Ponte, the founder of Soma, a sustainable water filter and carafe company in San Francisco. “But the surprising thing about the process itself was that it helped us think about how to make our company better.”
And customers care about the distinction too, Del Ponte says, as a way to distinguish the company's products from competitors who lack the certification. It's somewhat like the way organic labelling can guide consumer choices, he says.
The Process Can Be Taxing
For its part, Soma has been a certified B Corp since August of 2014. Del Ponte says the certification process, which began with a questionnaire that ran to some 250 questions, took several months of hard work to get through, and necessitated bi-weekly meetings with all of the company’s eight employees to make sure everyone was on board.
Among other questions, the company needed to be able to prove that its materials and manufacturing processes are sustainable. That was easy enough, since Soma’s factory is 40 minutes away and can be audited by company executives. Further, its filter products are made from sustainable coconut shell fiber, and its packaging is all post-consumer waste.
Other questions were a little more challenging, such as did all of the employees know the board members, and did they have insight into the company’s finances?
“As a CEO, that was a light bulb moment,” Del Ponte says, adding the questions prompted him to make changes to become more transparent about such matters. And the company's social mission has played well with investors. Soma has raised $6 million from a combination of accredited investors and Silicon Valley venture capital firms, $2.2 million of which came in a Series A round following its certification.
It Provides Clarity of Purpose
Jeffrey Hollender, the chief executive and co-founder of Seventh Generation, the sustainable cleaning products company, said the certification was critical for his company, one of the first to get the B Corp certification in 2007. (His latest company, Sustain Condoms, founded with his daughter Meika, also has the certification.)
“The most important aspect was the level of certainty the certification could help give to consumers," Hollender says. “In a world where lots of companies were calling themselves socially responsible, there was no way to measure and evaluate who was and who wasn’t.”
You Might Wind Up in Legal Trouble
While Hollender says he would never consider starting a company that did not have the B Corp certification, not everyone is likely to be happy.
“Lawyers at Seventh Generation advised against it,” Hollender says.
In fact, certifying as a B Corp could be the first step toward becoming a benefit corporation, a legal distinction available in 26 states and the District of Columbia that does not require B Corp certification, but which would mean rewriting corporate bylaws to be in line with principles that put stakeholders on an equal footing with shareholders, or perhaps in front of them. And that could have potential legal repurcussions, experts say, particularly for public companies where the general expectation is that the shareholder always comes first. (For its part, Etsy has not decided whether it will become a benefit corporation, a company spokeswoman said.)
To that end, it might be best to get a B Corp certification before you go public, Hollender says.
“That way every investor knows you are one,” Hollender says.