This presentation discusses the challenge of exits for impact investors. How might investors structure investments and exits to perpetuate the mission of the enterprise? Presented by Ross Baird and Paul Hudnut at Unreasonable Institute Impact Investing Bootcamp on July 10, 2013

1. UNREASONABLE INSTITUTE
JULY 10, 2013
PERPETUATING MISSION
Structuring investments and exits
Ross Baird &
Paul Hudnut

2. Session Line Up
 11:00 Intro: Perpetuating Impact
 11:05 Types of Direct Investments
 11:15 Types of Exits
 11:25 Win-Win Structures
 11:40 Exercise
 11:55 Q&A
 12:00 Adjourn
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3. Intro: What’s Impact Investing?
 “Impact Investing”
 Impact: expectation that purpose of the enterprise
is to have a significant, positive, long term effect
on a social or environmental challenge AND
 Investing: expectation that funds will:
 be used to build a sustainable, profitable enterprise
and
 … then be returned to funder at some point (along
with interest or gain)
P

4. Intro: The Quandary
 To be impact investors, we need to focus on
defining, designing, scaling and perpetuating
impact
 Yet, by being investors (wanting return of
capital), we can (unintentionally?) undercut or
undo the impact we sought in the first place.
How might we structure and exit impact
investments to perpetuate impact?
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5. Intro: Economic Systems
 Extractive
 Extract resources;
 Focus on financial capital
 Regenerative
 Creates conditions for life
 Focus on social and natural capital, too
 To achieve sustained impact, let’s not apply
an EXTRACTIVE financial model to a
REGENERATIVE business model.
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6. Intro: Aligned Investing
 Steps toward a mutual goal: long term impact
drives the vision and growth of the company
 Ownership sets mutual goals
 Don’t be afraid to set ownership criteria- “club
rules”
 Structure investments
 Impact Goals
 Return Goals
 Structure exits
 Start designing the organization from day one;
beware of the “long shadow” of funding decisions
6
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7. Types of Funding: Non-dilutive
 Grants
 From foundations and governments
 Seek non-financial returns (no impact on operating cash
flow)
 Non-dilutive to ownership (but may have control
mechanisms)
 Debt
 Advanced in expectation of repayment of principal and
interest at a date in the future; impacts operating cash
flow
 Non-dilutive to ownership
 Recourse and non-recourse; secured and unsecured.
 Guaranty often required for start ups
R

8. Types of Funding (Dilutive)
 Convertible Debt
 Loan with option to convert to equity (in lieu of security)
 Captures upside for lender
 Postpones valuation negotiation for early stage companies
 Interest accrues (cash flow); control negotiable
 Equity (stock)
 Advanced with expectation in proportionately sharing the
value created by the business.
 Requires a valuation of the company (negotiated) and exit
strategy
 Ownership of shares; dilutive
 No impact on operating cash flows
 Classes: Common and Preferred shares
R

9. Types of Exits: What you’ll traditionally see
For Funders:
 IPO
 Acquisition
 Buyout (Management or Private Equity)
 Debt/Repaid Loan
For Founders:
 Brought along with the investors (typically without
the same preferences)
 Rarely allowed to cash out a small percentage
when follow-on funds are raised
R

10. Types of Exits: Mission-preserving?
 Debt
 Pro: exit is clear; Con: tough for early-stage ventures
 Revenue-share
 Pro: liquidity sooner, tied to performance; con: largely
untested
 Dividend-paying equity
 Pro: Tied to free cash flow, success; con: tracking, numbers,
taxes
 ESOP/LBO
 Pro: Mission-preserving; con: need to plan far in advance
 Redemption R

11. Types of Exit: From Startup to
Exit
 Inviragen was founded 2005 to develop novel vaccines for
diseases in developing world.
 Government Grants
 National Institutes of Health ~$30 million from 2006-12
 Convertible Debt
 $150,000 in 2006 ($10k max chunks)
 Additional in 2012
 Equity
 Series A- $15 million in 2009
 Exit in 2013 by sale to Takeda Pharmaceuticals
 $35 M in Cash + up to $215 M in Milestones
 Potential for 8x return over 9-12 years
 ..and saving millions of lives with dengue, HFMD vaccines
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12. Types of Exit: How can exit/impact go
wrong?
 Ben and Jerry’s
 Acquisition by Unilever; ensuing changes to supply
chain
 AND/BUT: Unilever is now the largest Fair Trade
purchaser in the world
 AND/BUT: Ben and Jerry’s recently became a B-
Corporation
 SKS Microfinance
 Largest microfinance bank in the world; IPO in 2010
 Led to a flood of private capital into microfinance
markets; financial return for initial investors
 AND/BUT mixed reports on actual impact; suicides of
borrowers (unclear direct relation to company
practices) led to politically motivated regulation; share
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13. Types of Exit: How can exit/impact go right?
 “Baked-in” impact
 Example: Cell Bazaar, mobile-phone based
“Craigslist” in Bangladesh, targeted at BoP
populations
 Acquired 15 million customers in four years,
acquired by Telenor
 Owners of the company preserve the mission
 New Belgium Brewery: 100% employee owned
via leveraged buy-out completed in 2012
R/P

14. Learnings: What Should You
Consider?
 Investments (money in)
 Look for baked in impact- inherent in product or service
 Is serving the target impact beneficiary a MUST HAVE for
company growth, or a NICE TO HAVE?
 Ownership club- bound by shared responsibility for
mission
 Work backwards from perpetuation (“how might we…”)
 Potential “carrots and sticks”:
 Special redemption rights for mission perpetuating exits
 Formula price for sale to ESOP/Cooperative/Foundation
 Debt with contingent warrants (exercisable if exit is NOT
mission aligned)
 Exit (money out)
 Explore and understand options early (long shadows)
 Reducing options may reduce return, but increase R

15. Your turn: Kickboard
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16. Your Turn: Kickboard Case
One company
Four different stage owners
 Founder (Freddie)
 FFF- Convertible Debt (Maggie Mission)
 First “outside” investor: Samantha Seed
 Investment Fund: Iggie Impact
 Now, two acquisition offers on the table.
 Mainstream Educational Media Enterprises, Inc. (privately held;
well known provider of products and services to schools; 50
years old)
 Regenerative Education Partners (cooperative owned by
teacher’s pension funds; 8 year history operating charter schools
in 10 states)
 In the next 15 minutes, determine which you would prefer, and P

17. Read outs and Questions
 What did each investor decide to do? Why?
 Freddy Founder
 Maggie Mission
 Samantha Seed
 Iggie Impact
 Questions?
 THE END (next steps as rolling credits)
R/P

18. Next step idea: The Pixar Story
 Once upon a time _____
 Every day ____
 One day ____
 Because of that _____
 Because of that ______
 Until finally _____
Write this for the enterprises you are
speaking with—and yourself!

19. Further Reading: Toward
Regenerative Investing and
Ownership
 Living Purpose
 “creating conditions for life”
 Rooted Membership
 “ownership in living hands”/ no absentee owners
 Mission-controlled Governance
 “humans at the helm”/ not dependent on any 1 person
 Stakeholder Finance
 “capital as friend”; control mechanisms (ESOP,
foundation)
 Ethical Networks
 “reinforcing shared values”
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M. Kelly, Owning Our Future 2012