How To Invest—and Exit—With Impact and Return
Renewal Funds Follows Four-Question Framework for Mission-Aligned Exits
“The point of our investments was mission, not profit,” says Carol Newell, founding investor and principal of Renewal Partners, an early investor in B Corps Stonyfield Farm and Seventh Generation and the predecessor to Renewal Funds. “And part of the Renewal Funds mission is to prove that you can get a good return on it.”
Renewal Funds, which evolved out of Renewal Partners in 2008, is a venture capital firm investing in early growth stage companies in Canada and the United States. Renewal Funds currently has two funds (Renewal2 and Renewal3) and a total of $98 million under management, with investments in more than 20 companies with six realizations and only one write-off thus far.
Between Renewal2 and Renewal3, Renewal Funds has 193 investors from the U.S., Canada and Europe, including more than 20 charitable foundations. They are approaching the end of the Renewal3 investment period, and although for regulatory reasons they cannot publicly discuss plans for future funds, given their track record and appetite for scaling impact, my bet is that Renewal3 isn’t their last fund.
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“Overall, we invest in companies that we see as fundamentally changing the way that industry works,” says Paul Richardson, Renewal Funds co-founder and managing partner. “We’re not a typical venture fund in that we’re happy to support companies that have long-term, steady growth periods, rather than short-term skyrocket investment periods.”
Renewal Funds is game-changing in part because of its investment thesis and portfolio company management strategies, and perhaps most of all because of the quality of the partnerships that Renewal Funds secures for its portfolio companies upon exit. Last year alone, Renewal Funds helped secure four high-impact acquisitions for four of its portfolio companies.
“Everybody thinks about mission investments, and everybody’s talking about impact, but thinking through how you exit, making sure that you do it in a way that respects the people who built the company and its purpose is critical,” Richardson says. “Three out of the four portfolio companies that we sold in 2017 were B Corps at the time that they exited, and the other one would have definitely qualified, had they applied. A sale transaction for that type of company requires consideration of a broader set of stakeholders.”
For those in a hurry, check out the infographic below that summarizes “The Four Questions For A High-Impact Exit.” For those want to hear directly from a leading impact investor, here are some highlights from a recent conversation I had with Paul Richardson.
Let’s start at the beginning. How does Renewal find the right investors for your fund?
Richardson: It’s been a good time to try and find partners because more people are becoming interested in aligning their money with their values. We start all of our conversations with our investors around the fact that we are a mission-focused venture fund, and the mission side of what we do is as important as the financial side. We don’t talk about short-term IRRs; we talk about goals over the life of the fund.
I think this helps to align people to the idea that we’re going to be patient with their capital, and they should be patient with us to see how things transpire. We look at all of our investors as equally important, and so whether you’ve invested $250,000 or $2.5 million, you have exactly the same terms with us. And by having such a large network of investors, we have this incredible source of intellectual capital and experience that we can bring to bear to help our companies, if necessary.
What does it mean to think about mission-aligned exits, and how does that show up in your fund management and relationship with your portfolio companies?
Richardson: One of our goals in all of our investments is to support the company, not only during the time that we’re partnered with them, but also to look at the company as a living and breathing thing that should go on and become bigger and better after our involvement. If we work with a company where mission shows up throughout everything they do — their product is a mission-oriented product and the people are a mission-oriented group — there is a high chance that the group interested in supporting that company after Renewal will be mission-aligned. But, it’s not necessarily a foregone conclusion.
We are not a private-equity company that owns and controls a company that we invest in; we are generally a minority investor. We can’t fully control how the exit goes, but in most companies we work with, we develop a level of understanding and involvement that aligns us with the employees and co-investors and allows us to help make sure that we do have a mission exit.
So when we look at selling a company, we ask four main questions:
- Will the employees, the people who have truly built the company, be treated fairly?
- Will the product or service that we have been trying to support with our dollars be further supported by the buyer?
- Does this buyer have the capacity to take the company to a new height beyond the level that an early-stage investor like Renewal can?
- And how likely is it that the community and mission of the company will continue to be supported?
How does that play out in the real world? Can you describe one of your exits from last year?
Richardson: We made our first investment in organic, fair-trade foods company Alter Eco back in 2010, and the company has grown its revenues approximately 10 times over the time that we’ve been invested. I was chair of that company for the last three or four years, and we’ve had a board seat throughout. Alter Eco is a B Corp and represents exactly what a B Corp should be — started by people who were smart, mission-first people who care about building a product that matters.
Along with our co-investors in the 2010 series A round and the company management, we decided it was the right time to find a buyer who could inject new capital and take it to the next level. All of us felt aligned in the idea that there was a next step that the company could take, and a larger source of capital would be helpful.
We started the process by making it clear to the investment bankers that that mission was going to be a key element, and that any bid that was just financial would be very difficult to consider. We as a company and board went out to look for people who were aligned that way. We found a buyer, NextWorld, who has created an Evergreen fund. Alter Eco’s B Corp status was a positive feature, as we found the buyers wanted Alter Eco to remain a B Corp through the process.
NextWorld Evergreen is a large fund with a lot of capacity to build the brand. They are committed to Alter Eco’s organic and fair-trade values, and to keeping all employees who wished to remain with the company through the transition. The company is staying in the premises that it was occupying, and is expanding its offerings within the organic and fair trade space.
Were the other exits last year as successful?
Richardson: Aquatic Informatics, a B Corp whose platform allows researchers and policymakers to make informed decisions regarding scarce surface fresh-water resources for effective conservation and use, was also an early investment of Renewal2. At the time, Aquatic was a small, water-data management company and we became involved as the only institutional investor, and supported the company through its substantial growth over the years.
Mike Cormack, our venture partner, was on the board, and I was in close contact with the management. We ultimately started a process with a group who are the largest water investors that we know of, XPV Water Partners. They have a fund in the U.S. and in Canada, and have over $400 million in assets focused on water. After a long get-to-know-you period and assurance that Aquatic’s management and employees were comfortable with the buyers, management and the board closed the deal with XPV in the summer of 2017. Aquatic being a B Corp came into play in a helpful way as we determined how certain details would be treated; the certification helped focus some of the conversation through the process.
The third B Corp exit in 2017 was Better Bean. The founder of Better Bean believes that the world would be a better place if we ate more beans, which as a crop are better for the planet and as a food are better for our health than animal proteins. So his company Better Bean makes a fresh, refrigerated bean product — a convenient alternative to dried or canned beans that we tried and loved. We invested early, as the main outside institutional investor. One lesson that we collectively learned in Better Bean was that when you are creating a new category, it may take more marketing and retail heft than a typical small food company has, so we worked hard with the company to help develop their product and to help get them into the right places.
Ultimately we decided, collectively with management, that having a large partner with significant distribution reach would be the best way of expanding Better Bean and realize our collective goal of getting the world to eat more beans. We landed on a deal with the venture arm of Hain Celestial. They were interested in the bean product, and as a relatively new venture initiative, they were absolutely committed to working with a small company like this and showing that it could be built up.
Part of the team got to stay in Portland, and the founder and the other employees kept their jobs, and Hain brought in new people to help grow the brand.
The other exit, Sweet Earth Foods, was a sale to Nestlé, which may have raised some eyebrows from a mission perspective. How did you manage a mission-aligned sale to a company like Nestle that isn’t necessarily known as a leader on these issues?
Richardson: We initially became involved with Sweet Earth because we loved the entrepreneurs, Brian and Kelly Swette, and we loved the product. The co-founders have had very successful backgrounds with very large companies, and decided to put their own money to grow the plant-based protein world. They bought a facility in California, built it out, and started to build Sweet Earth Foods. Everything was plant-based, with seitan being the basis for most of their product.
We got involved fairly early on, as supporting a company innovating in plant proteins and growing consumer acceptance of them was aligned with what our investors cared about. The company did extremely well during the time that we were with them, and grew much more rapidly than almost any other food company I’ve seen.
So, Brian and Kelly built a large team, and a large facility. Because of their growth, all sorts of people, from private equity to other strategics, were interested in talking to Sweet Earth. In ultimately doing a deal with Nestle, although we were the second largest investor in Sweet Earth, the bus was definitely driven by Brian and Kelly. The chief considerations were a commitment from Nestle to keep the plant operating, with eligible employees and management team in place, and to amplify the mission of sustainable, plant-based foods. Of more than 150 employees, I know only one of the senior employee who has left. And Nestle committed to keep the brand as a plant-based protein brand.
We’re absolutely proud to have been involved in the tremendous growth that happened while we were co-owners. But a company like Nestle—with its distribution channels, resources and expertise—can accelerate the growth of Sweet Earth’s plant protein products beyond where we as a group collectively could take the brand. And the co-founders saw Nestle as the right partner to do that. With the commitments on the facility, people and product in place, we collectively believed that Nestle as a buyer can take this brand to become a really important and impactful brand, worldwide, over the next five to 10 years.
If you were to summarize how to invest and exit with impact, how would you sum it up?
Richardson: You have to be clear from the beginning what is important to you, because everyone has different ideas about mission. We have a very particular idea about mission at Renewal, and we’re clear in our minds what that means. Mission-alignment has to exist in every aspect of a company for us to be involved in the company.
Second, you have to be able to wait and do a deal at the right time. You can’t expect to be able to find a mission-aligned exit instantly when you’re in trouble. So the time to think about your exit — and start discussions with your partners about who the right people might be to exit with — must come earlier rather than later. And you have to take the time to learn about the people you may deal with.
The final thing is that you should not be afraid to ask for what’s important to you on the exit. In a number of these exits that we’ve discussed today, the sellers were able to ask for assurances from people that you wouldn’t think you would be able to get in writing, and we did. You should not be afraid to ask for what is right and ask for it fairly early on, because it really helps flush out who’s just talk and who’s real, in terms of their further commitment to mission.
As more funds market themselves as impact investors, how does Renewal continue to differentiate itself?
Richardson: We benefit from long-term participation in the space. Ten years ago, when we went out to raise Renewal2, we were able to show people all the companies that Renewal Partners had participated in and talk about what that participation meant. At that time, when impact investing wasn’t quite where it is now, we had an ability for people to see how we had actually dealt with people over time, rather than just talk about what we would do.
And I think the fact that we now have had two successful funds and another 10 years of involvement in this space is proof of how we act upon our mission commitments, in almost any situation. This exit conversation is just part of that larger, long-term commitment that is hard to get without a long-term presence.
One of the things that is critical to continuing to grow the sector is to have certifications like Certified B Corporation and GIIRS, both of which we earned early and have supported throughout. It’s absolutely relevant to our investors that we participate, and we work hard to get as many of our companies to participate as well, because it’s a fantastic way of measuring impact.
Some of the companies who’ve never even heard of B Corp come back to us after we’ve introduced them to it, and their employees are super-excited about it and thinking about how they can continue to improve their impact metrics. For us, the certifications have been wonderful in terms of something that our investors care about, but it’s been even more exciting to see the impact that they have had on the companies that we invest in.
This article was originally published in Forbes. B the Change gathers and shares the voices from within the movement of people using business as a force for good and the community of Certified B Corporations. The opinions expressed do not necessarily reflect those of the nonprofit B Lab.
