dots2David Chen, founder of Equilibrium Capital Group, interviewed me with respect to my perspective on the Ben & Jerry’s transaction and what it means for sustainability companies raising money going forward.  Below is the substance interview.  It appears on David’s blog Conscience & Commerce™: Mission Driven Commerce. Equilibrium Capital Group and Cascadia Capital have joined forces to try and help mission driven organizations solve their funding challenges.

conscience & commerce:  grappling in the real world with capital market realities

a case example:  ben& jerry’s

in the area of sustainability, we find a set of entrepreneurs who were counter-culture rebels who went on to create a new type of business model that aligned their core values and aspirations with their business objectives and products.

one can argue that the success of these companies is the execution this set of core values and beliefs about sustainability into products, their internal business practices, and therefore into their brand.  in other words, every where you scratch in these companies, in their relations with partners, vendors, customer, you find consistency and authenticity.  the core values are so real, they are a decision support system for their employees.

the irony is that with success, even these firms need to deal with founder/owner transitions, expanding the shareholder base, shareholder liquidity, expansion capital, strengthening the balance sheet, and insuring long term access to capital.  yet paramount in these capital decisions and structures are those core values and aspirations.  even the words “exit & exit strategy” are antithetical to their objective: to create an enterprise that is both financially sustainable, but also a platform for impact and change. the traditional options don’t seem to fit:  selling out to a PE firm, selling to a strategic corporate buyer, IPO, or becoming a consolidator (and that begs the issue of capital access).

we have an opportunity to probe this topic with our good friend bryan jaffe from Cascadia Capital, a leading middle market investment bank with a focus on technology/media, sustainability, and renewable energy sectors. bryan brings deep industry and product expertise in the food industry.  in particular, we are interested in bryan’s perspective on Ben & Jerry’s sale to Unilever, executed by his prior employer Gordian Group, LLC.  in that transaction we learned first hand the need to ensure that capital and company share a common ethos and what it takes to protect the founders and corporate missions from traditional shareholder restrictions. how can you preserve and propagate the very values that created the success and the value in the brand.

Q?:  what was the compelling reason for considering this transaction?   where were founders ben & jerry during this transaction?

BRYAN: Ben & Jerry’s had both a great product and a loyal customer following, but it was an operationally challenged company.  It lacked the case volume or financial muscle to underwrite its own distribution system, which put them at a competitive disadvantage.  As the business matured, earnings growth did not keep pace with investor expectations, and the stock price languished.  There were also stumbles on the mission side of the business, which brought negative publicity.  Shareholders became restless and the directors began to feel the pressure associated with being fiduciaries.

The board brought in a new CEO and hired an investment banker to evaluate alternatives.  While a number of options were pursued, ultimately the market spoke and a strategic sale was deemed to be in the best interest of shareholders.  Unilever could solve the distribution problem.  While Ben and Jerry were both active in the business and influential board members, their voice became somewhat muted due to the public company governance structure.  Net net, the price Unilever was willing to pay was so high relative to the prevailing equity price that the board and founders were hamstrung.  It wasn’t any great secret that Ben and Jerry were opposed to the sale.  Jerry Greenfield’s recent interview in The Guardian confirms that he still has regrets despite the structure of the deal, which was designed to ensure continued adherence to the company’s mission.

Q?:  from where you stood, what were the core values and aspirations in this company?  what did ben & jerry’s stand for? what were the values in the brand? how much had changed with the departure of the founders, ben and jerry?

BRYAN: Ben & Jerry’s was the first real double bottom line company.  They took the concept of balancing social responsibility with economic responsibility to a new scale.  The brand stood for more than just great ice cream.  While they were interested in profitable growth, they felt they had a larger responsibility to the environment in which they operated.  The social mission was the enterprise mission and it drove the corporate, business and functional strategies for the business.  That customers remained loyal over time served to validate this operating model, since consumers were not wanton for choice in the category.

Ben & Jerry’s core values centered on a symbiosis with partners, employees and the community.  Ben and Jerry utilized their company platform to redistribute wealth and help partners who were also trying to achieve a social good.  Ben and Jerry, as individuals and as a collective, stood for a balanced ethic, creating harmony between self-interest and ones obligation to others.  It was a “yin and yang” between values and creating value.

Ben & Jerry’s has continued to perform under the Unilever ownership.  However, I believe some of the authenticity of the mission has been compromised.  At the very least some of the irreverence is gone, since you can’t play the David v. Goliath card anymore.  However, the erosion of the mission started before the sale, when the company was forced to modify its salary cap structure to attract professional management.  The public company ownership structure also undermined the mission.  Unilever continues to adhere to the tenets of the deal, but to them it is a business.  They haven’t expanded the mission beyond their contractual obligations. The question is what will change if the business under performs.  A deep consumer recession may test that theory.

Q?:  what did each party think they were buying or selling?  what were the differences in the ethos?

BRYAN: Unilever was buying a brand and the opportunity to exploit that brand with their distribution and branding muscle.  They approached the transaction from a traditional public company ethos – the ability to accrete earnings and therefore drive value for their shareholders.  Unilever took on the social responsibility aspect as a means to get access to the brand; it was part of the purchase price so to speak.  At the same time, they believed that owning Ben & Jerry’s would enhance the perception among consumers that they were socially emancipated on some level.   You will note that Unilever now features a “values” section on their homepage, which includes addressing environmental and social concerns.

Ben & Jerry’s thought it was buying a solution to their distribution challenges and a means to perpetuate the social mission of the business.  Unilever convinced Ben and Jerry that this was an opportunity to grow the company’s social commitment.   The difference in ethos was evidenced in the structure of the deal.  If this was a marriage of like minded enterprises Unilever would not have had to take the steps they did to convince stakeholders their interest was authentic and their intentions were pure.   On its face, some people might wrongly conclude that at a high enough price, the social ethos could be made malleable, but that was not the case.

Q?:  what happened after this transaction? and with your “evolved” insights on sustainability, what would you have done differently?

BRYAN: For the most part it appears that Unilever has lived up to their end of the bargain contractually – “letter of the law”.  But again, Ben & Jerry’s has performed for them as an asset, so there was not a substantial incentive to deviate from that strategy.  However, they have done little, if anything, to expand the mission of Ben & Jerry’s.  That is where people should be disappointed.  In 2005, Walt Freese, CEO, acknowledged some softening of adherence to the company’s true mission.  What is interesting is that some a smart such branding organization would not see this as undermining the brand.

With respect to what I would have done differently, in short I would have never taken the company public, not on the terms that were implemented.  At the very least, I would have established two classes of common and kept voting with respect to a change of control in the hands of the founders. That was a viable option at that time.  I’m not sure that is true to today.  Additionally, I would have kept the board small so as to limit dilution of the founders influence.  Ben & Jerry’s had a large unwieldy board.  That all being said, I think ultimately there was not an appropriate construct available to raise the monies necessary to grow the business while fully insuring adherence to the mission.  This is why you haven’t seen more double bottom line companies go public.  A new solution must emerge for this class of companies.

Q?:  what new framework would you apply to these unique mission balanced firms as they consider the issues of founder/owner transition and shareholder liquidity?

BRYAN: Over the past five years we have seen health and wellness and sustainability emerge as investable categories and pools of capital have been raised to fund companies with missions that fit within these industries.  At the highest level, the market is moving in the right direction.  Yet, firms like DBL Capital and TBL Capital don’t have access to the funds necessary to help larger sustainable companies reach the next level.  They are also seeking venture like returns and institutional governance structures.  This does not work for many mission based organizations.

It is my view that today there are pools of capital, outside the institutional context, that would invest in later stage sustainable businesses without receiving the rights afforded to shareholders of public companies or venture capital/private equity firms.  Eventually, I think there will be institutional funds that fund later stage deals on these same terms that emerge as well.  However, more success stories are necessary before that happens at scale.  The question is through what means to organize the existing pools of capital, how to match buyers and sellers and what rights to offer each side to clear the market.   At the base level, you have to consistency of ethos between issuers and investors.