When Davis Smith first got the entrepreneurship bug, he wanted to start a company that would change the world. Now, 10 years out of college, he's finally getting his chance through a benefit corporation called Cotopaxi.

Cottonwood Heights, Utah-based Cotopaxi--named after a volcano in Ecuador that Davis frequented as a child growing up in South America--is an outdoor gear and apparel retailer that donates 10 percent of all profits to charitable causes in the developing world. So, for example, if you buy a Kilimanjaro backpack, you will be providing three weeks of tutoring to a child at an orphanage in Tanzania. Buy a water bottle, and you're helping a nonprofit called Charity Water dig a well near a school, enabling young girls to attend school and bring home potable water instead of spending their days going to remote wells.

Smith selects the different charities that Cotopaxi supports through the personal relationships he has forged with nonprofits, as well as by targeting areas and companies that have a history of making an impact in education and healthcare.

"I wanted to do something that I was more passionate about," Smith says. "I felt like it was time to do something more meaningful that wasn't just about making money, but was going to have a positive impact on the world."

Smith got his inspiration when he read about a man named Steve Gibson who moved to the Philippines to turn locals into entrepreneurs. Gibson would give them room and board and teach them how to run a business. Today, 80 percent of his graduates are still running their business.

Years ago, Smith bumped into Gibson at a conference and pitched an idea to bring Gibson's program to South America. Gibson's response, however, was that Smith needed to first become an entrepreneur himself before he could change the world.

Smith took his advice, starting pooltables.com, which became the largest retailer of pool tables in the U.S. Once he got that up and running, he sold it and started a new company in Brazil called Baby.com.br. Finally at the end of 2013, Smith finally got his "Gibson moment" when he moved to Salt Lake City to start Cotopaxi.

B before C

When Smith was incorporating Cotopaxi, his attorneys warned him against starting out as a benefit corporation (B Corp) and advised him to add the social justice cause later on. They told him that nobody would want to invest money in a company that was just planning on giving that money away. All of the companies that come to mind when you think of a benefit corporation--Toms, Warby Parker, etc.--all started as a traditional C corporation and converted to a B corporation later on.

Not only that, but some states don't even have the incorporation forms in place yet, and you'd be required to work around the system.

According to Jerome Katz, the Coleman Professor in Entrepreneurship at Saint Louis University's John Cook School of Business, the biggest challenge with incorporating as a benefit corporation is in developing credit with banks and financial institutions. Since benefit corporations have only been around since 2010, the process is still somewhat hazy.

"Bankers assume for regular businesses that the firm will be trying to maximize their profits. In a benefit corporation, the social benefit can possibly dilute the level of preference for paying creditors versus the beneficiary of the company's focus. It adds an element of uncertainty,'" Katz explains. "Until the financial performance of B Corps become more numerous and better known, the fear of loss will weigh against their access to credit."

The same fear applies to angel investors and VCs. Nonetheless Smith was adamant that he needed to start as a B Corp regardless of how investors or banks would respond. "I really felt strongly that if we were going to do the social mission, that it had to be core to the brand," Smith says. "I knew that setting up as a benefit corporation I would be committing publicly and to my team and to my investors that this was something that mattered to me. I didn't feel like that was something I wanted to throw on in the end."

And apparently his attorneys were wrong, because Cotopaxi secured $3 million in a seed round of funding. Smith claims that not one VC he met with gave any pushback about the B Corp issue.

Building a brand

Once the funding was in place and Smith had built up a team of six employees, all that Cotopaxi needed was some customers. With his previous ventures, Smith was merely selling products from other brands. And in those cases, all he had to do was be competitive in pricing and customers would flock. Consumers don't tend to care about a pool table's brand--they're just looking for a good price.

With outerwear, however, consumers more often are looking for the North Face coat or the Columbia fleece. That translated into a much more challenging task for Cotopaxi. To build a brand in the space, Smith needed to think creatively and attract a loyal audience.

He decided to use a bit of guerilla marketing. On the day of its launch in April 2014, Cotopaxi held a competition called Questival in Utah that asked teams to compete for prizes by completing challenges like hiking or volunteering at a local soup kitchen. Smith and his team went around to college campuses with their llamas (Cotopaxi's logo is a llama--"they're rugged and they're the chillest animals you can imagine," Smith says) and got a thousand people to sign up to compete in the first Questival.

The smartest move, however, was to require each team to post pictures of its members wearing Cotopaxi backpacks in order to complete each challenge. This resulted in 30,000 social media posts during the first 24 hours Cotopaxi was up and running.

Cotopaxi ran a second Questival in San Francisco two weeks ago, and Smith plans on running 30 of them next year.

Beyond the creative marketing, Cotopaxi also offers competitive pricing for its gear and apparel. Because it sells directly to consumers, Smith says, Cotopaxi can sell products at prices that are 15 percent lower than some other outerwear brands.

And though Cotopaxi has been around for less than a year, it seems to be catching on. The company is reporting double-digit revenue growth three months running. Only about 1 percent of merchandise is returned--a very low rate for e-retailers--and about 20 percent of customers say they are likely to come back to buy additional products. Additionally, Cotopaxi has a Net Promoter Score (NPS), which gauges a company's customer relationships and loyalty, of greater than 85. (NPS scores range from -100 to 100, and anything above a 50 is exceptional. Costco, for instance, ranked highest in the department/specialty stores category with a score of 82.)

All of that is tied directly to social actions. Every item purchased forwards a specific cause. Cotopaxi prides itself on its transparency, revealing exactly how your purchase is helping make the world a better place.

"We don't just say we're giving away something," Smith said. "It's not about handouts; it's about empowering people to get out of poverty."

Published on: Nov 20, 2014