What do you do if you’re a mission-driven company that would like to raise outside capital, but have no intention of selling the company?
That’s the dilemma faced by a growing number of indie-minded entrepreneurs that want to grow their companies while staying true to their values. Traditional Medicinals, a pioneering maker of organic herbal teas, syrups and other natural products, is the latest company to show how it can be done. Co-founded by Drake Sadler and Rosemary Gladstar in 1974, the Sebastopol, Calif.-based company today earns more than $50 million in annual revenue and employs 170 people.
Throughout the company’s successful 43-year history, it has never taken an outside investment from a non-friends or family investor, and most of the company is still owned by Sadler and his family. But for the company to reach its growth potential, that had to change.
“Over the years we’ve had a few friends and family own minority stakes in the company. Without their financial help along the way, we would not be the company we are today,” says Blair Kellison, CEO of Traditional Medicinals, a certified B Corp. Historically, if a shareholder wanted to sell their shares, the company purchased them and retired them, he explains. “With the company continuing to grow each year, the board came to realize that was not a good use of our earnings, which should instead be invested in supporting the company’s growth. But with our stated goal to never sell the company, there was no other market for shares in the company.”
Traditional Medicinals (TM) decided it was time to take outside investment — but it was committed to finding an investor that shared its values and would support only the growth that aligned with the company’s mission. “Investors and their expectations around return and exit will drive the overall strategy of any company, like it or not,” says Kellison.
That’s when the company started to work with Big Path Capital, a B Corp. investment bank that advises companies and institutional investors who are focused on sustainability. Together, they set out with what Kellison calls “the lofty goal of creating a private, liquid market for about 20 percent of the ownership of the company.” He adds, “This was quite challenging and unique, as most all investors’ first question is about the company’s exit strategy.” How would they find investors for a company they planned never to sell?
Fast-forward to April 2017, when a third B Corp, The Builders Fund, announced a minority investment in TM. The Builders Fund is a GIIRS-rated, private-equity fund that invests in “high-growth, purpose-driven” businesses.
“We see an exciting opportunity to help build a leading/next-generation, holistic wellness platform across multiple product categories,” says Tripp Baird, managing partner of The Builders Fund. “On that path, we see a strong financial upside and, as importantly, the opportunity to build a business that generates strong value across its corporate ecosystem, from its employees and customers to the communities in the 37 countries where it sources its pharmacopeial-grade herbs.”
In The Builders Fund, Kellison and Big Path Capital saw a similarly values-driven partner. “Ultimately, The Builders Fund sees companies like Traditional Medicinals as a better example and higher version of the best of capitalism,” says Michael Whelchel, co-founder and managing partner of Big Path.
The alignment of shared values was key to all three players’ involvement in this investment — all three are Certified B Corporations, for example.
“It’s no accident all three parties to this transaction were B Corps.,” says Kellison. “This transaction involved preserving the mission and the long-term independence of TM, and a social mission is in the DNA of every B Corp. The entire thesis for the investment was based on the mission and values of all three parties involved in the transaction. When this is the case, the negotiations can go more smoothly.”
In an interview with B the Change, from which this is excerpted, Kellison shared his insights and the advice for fellow mission-driven entrepreneurs:
Understand investor expectations
“Taking on outside investors is one of the most strategic events for any company. Investors and their expectations around return and exit will drive the overall strategy of any company, like it or not. All investors deserve the ability to earn a return and have an ability over time to exit their investment. For a mission-driven company that intends to remain independent, it can be nearly impossible to attract investors.”
Align your goals
“All growing companies need money and all are excited at the prospect of receiving equity financing, but you must be cautious and make sure your goals and expectations are aligned with your investors. If not, you will quickly create a stressful situation for both you and your investors. The time to avoid that is in the term sheet. The terms and preferences spell out how you will work together under the many different scenarios that will play out over time.”
Don’t rush the term sheet
“Take lots of time on the term sheet process, which is arduous and tedious. During this time, you’ll get to know each other and determine whether you’ll be good long-term partners. Don’t sign a term sheet that says “standard terms” and “standard investor preferences,” as there is no such thing. Don’t ever sign a term sheet that only spells out the valuation and the amount to be invested; that is important, but that is the easiest part of the process.”
Don’t sell out
“Don’t sell your company. The world needs more mission- and values-based companies, and today’s consumers are looking to such companies for all of their products and services. Instead, raise money from an impact investor, hire a good team, and let the idea and products that launched your company and your mission and values reach their full potential.”
Read the full interview with Kellison, Baird and Welchel on B the Change, a Medium publication run by the nonprofit B Lab.