How Investors Really Feel About B Corps
Do Investors ‘Hate’ B Corps? The Evidence Says Emphatically No.
A recent Bloomberg article discussed the shareholder activist campaign at Etsy, a publicly traded online market that is a Certified B Corp (a certification of environmental, social and governance performance maintained by the nonprofit B Lab, the company where I work). The article states that “Public-market B Corps are rare because investors hate them.” Nothing could be further from the truth.
Investors Are Putting Their Money Into B Corps
Since nearly all B Corps are privately held companies, it would be reasonable to start by asking if venture-capital firms invest in B Corps. They do. In fact, at this point, nearly every major Silicon Valley venture-capital firm has invested in a B Corp. They are investing in them because they believe these businesses will earn VC-level returns — and satisfying B Lab’s rigorous standards of environmental, social and governance performance is part of these companies’ formulas for success.
Let’s look at some B Corp investment activity from the past few months: Altschool, an education company that has already raised $130M from the venture community, announced a $40M raise just this month. In April, Lemonade, a peer-to-peer personal insurance startup, received a strategic investment from Allianz, after having closed a $34 million Series B round in December. In March, Data.world, an Austin-based tech startup, announced that it had secured a $19M Series B round from Chicago Ventures, Fyrfly Venture Partners, Hunt Technology Ventures LP, LiveOak Venture Partners, Shasta Ventures, and Sherpa Asset Management AG. Other venture investors in B Corps include Benchmark Capital, Founders Fund, Andreessen Horowitz, GV, Prelude Ventures, Tao Capital Partners, Khosla Ventures, S2G, Collaborative Fund, Blueberry Ventures, Thrive Capital, General Catalyst and Sequoia. Bottom line: Venture investors do not “hate” B Corps.
On the other hand, as the article states, public-market B Corps are rare. Of more than 2,100 B Corps around the world, there are only four traded on major exchanges: two in the U.S. (Etsy and Laureate Education), one in Brazil (Natura), and one in Australia (Silver Chef). A fifth public-market B Corp, Rally Software, was acquired for $480 million in 2015.
But four is not that many — why are there so few public-market B Corps? Because they are new, and taking time to reach the public markets. But just as the idea has spread from small companies to venture and private equity-backed entities, B Corps will inevitably move into the public markets. It is already happening.
February saw another IPO by a B Corp, Laureate Education, a KKR-backed higher education company with campuses around the world. Laureate raised $490 million in that transaction and also closed a $383 million private equity pre-IPO round in December, which included Apollo Management, KKR and the Abraaj Group. Subsequent to the IPO, a Fidelity fund disclosed filed a 13G disclosing that it had bought 10 percent of Laureate’s Class A Common Stock on the open market. The company received a green light from its law firms, from its investors, and from its bulge-bracket investment bankers. None of these investors or advisers appear to “hate” B Corps.
Expect more public-market activity: In April, Danone, the French multinational, announced that it had combined all of its U.S. operations into DanoneWave, a $6 billion revenue company that intends to certify as a B Corp by 2020. The same week, Danone’s CEO, Emmanuel Faber, said that he wants to create a path to certification for the publicly traded parent company as well. Other public companies, including Campbell’s Soup, own B Corps.
The Benefit Corporation Legal Structure Helps Long-Term Investors
The Bloomberg story is also wrong to assert that investors resist B Corp certification because it requires businesses to become “benefit corporations.” In brief, benefit-corporation governance is required for certification of many B Corps, and means that directors must account for the interests of all stakeholders in their decision-making — not just shareholders. To date, there has been no investor resistance to this concept in the public markets. While benefit corporations (just like B Corps) are still new, they are viable and attractive to investors in both the public and private markets. Investors have put almost $1 billion into benefit corporations in the last six months alone, as the recent spate of B Corp financing activity shows — every recent B Corp investment discussed in this article was also an investment in a benefit corporation.
Thus, rather than “hating” the responsible nature of benefit corporations, the equity markets are quickly coming to understand the value of authentic commitment to all stakeholders. While many in the public markets continue to value short term share price over long term value, more investors are beginning to understand the advantages of investing in companies that account for their impact on all stakeholders: witness the recent successful shareholder proposal on climate change at Occidental Petroleum, sponsored by CalPERS, the world’s largest public pension fund, and supported by asset managers like BlackRock, the world’s largest asset manager.
In fact, BlackRock’s Chairman, in a recent letter to CEOs, articulated an investment philosophy that embodies that very ideas that B Corp certification and benefit corporation governance put into practice:
We look to see that a company is attuned to the key factors that contribute to long-term growth: sustainability of the business model and its operations, attention to external and environmental factors that could impact the company, and recognition of the company’s role as a member of the communities in which it operates.
Do investors hate B Corps? The evidence says no.
Frederick Alexander is the Head of Legal Policy at B Lab, a Pennsylvania-based NGO focused on creating tools to allow business act as a force for good. His book, “Benefit Corporation Law and Governance: Pursuing Profit with Purpose,” is scheduled to be published by Berrett-Koehler Publishing in the fall of 2017.
