Download - National Gathering of Social Entrepreneurs December 2002 Social Enterprise Exit Strategies
National Gathering of Social EntrepreneursDecember 2002
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Social Enterprise Exit Social Enterprise Exit StrategiesStrategies
©Virtue Ventures 2002. All rights reservedNational Gathering of Social EntrepreneursDecember 2002
Many for-profit exits don’t Many for-profit exits don’t apply to social enterprisesapply to social enterprisesWho: Investors and owners exit How: Raise additional capital through secondary offerings from other investors
Sell company to third party* Initial Public Offering (IPO) shares of the company are sold to “take out” original investors
©Virtue Ventures 2002. All rights reservedNational Gathering of Social EntrepreneursDecember 2002
Social enterprise exitsSocial enterprise exitsWho: Funders and parent organizations exit How:
Access new funders Earned income Debt financing Merge Spin-off Transfer Franchise Close ESOP Sell
©Virtue Ventures 2002. All rights reservedNational Gathering of Social EntrepreneursDecember 2002
Reasons for ExitsReasons for Exits
Donor requirement Opportunity Divestment Self-sufficient Need new funding Strategy
©Virtue Ventures 2002. All rights reservedNational Gathering of Social EntrepreneursDecember 2002
Preconditions for ExitsPreconditions for Exits
Good leadership and managementIncluding the ability to plan strategically
Solid organizational structure A track record of meeting objectives
Positive social outcomes and evidence progress toward achieving mission
A clear vision for the future
©Virtue Ventures 2002. All rights reservedNational Gathering of Social EntrepreneursDecember 2002
Exits relate to capacity...Exits relate to capacity...
PilotStart Up
GrowthExpansion
MaturitySustainability
Governance
Impact
Management
Operations
Structure
Vision
©Virtue Ventures 2002. All rights reservedNational Gathering of Social EntrepreneursDecember 2002
……. and funding needs . and funding needs
Investor Perspectives, Tuan, Emerson, Roberts Foundation 2000
©Virtue Ventures 2002. All rights reservedNational Gathering of Social EntrepreneursDecember 2002
… … and timingand timing
"My work is done. Why wait?"
— George Eastman, founder of Kodak,
in his suicide note
©Virtue Ventures 2002. All rights reservedNational Gathering of Social EntrepreneursDecember 2002
Funding Needs
Exits are not single events, but rather a series of steps
Seed Capital Start up Primary Secondary Mezzanine Mainstream
Pilot Start up Growth Expansion Maturity Sustainability
A social enterprise may A social enterprise may experience several exitsexperience several exits
Development Stage
©Virtue Ventures 2002. All rights reservedNational Gathering of Social EntrepreneursDecember 2002
Before you start Before you start
Valuation Due Diligence Partnership Assessment Risk Assessment Legal Structure Ownership Human Resources
©Virtue Ventures 2002. All rights reservedNational Gathering of Social EntrepreneursDecember 2002
How exits workHow exits work
Two case studies:Spin-offMerger
©Virtue Ventures 2002. All rights reservedNational Gathering of Social EntrepreneursDecember 2002
Spin-off processSpin-off process
1. Incubation
4. Track Record & Success
2. Capacity Building
Parent
SE Project
3. Infrastructure & Systems
7. Exit
5. Sources Technical Assistance
4. Diversify Funding
6. Separation
©Virtue Ventures 2002. All rights reservedNational Gathering of Social EntrepreneursDecember 2002
Pros and cons of spin-offPros and cons of spin-off
Pros definitive exit separate legal entity
actualizes own culture, priorities and growth
market/customer driven
mission focused continuity for target population
frees resources for other programs
Cons difficult to cut ties with parent
process can be drawn out and emotional
risks collapse if systems or management are weak
requires major capacity building
parent has little control
must raise own money
©Virtue Ventures 2002. All rights reservedNational Gathering of Social EntrepreneursDecember 2002
Spin-off lessonsSpin-off lessons Need methodology Prepare for spin-off at the outset
Separate office, staff, systems Know intricacies of capital markets Understand legal frameworks Define roles and relationships of players
Specify post spin-off parent/new venture relationship in writing
Keep process transparent
©Virtue Ventures 2002. All rights reservedNational Gathering of Social EntrepreneursDecember 2002
Merger process Merger process
Merger
1. Introduce idea
2. Leadership buy-in
3. Negotiation
4. Legal issues
5. Process planning
6. Due diligence7. Team building
8. Incorporation
9. Merger complete
©Virtue Ventures 2002. All rights reservedNational Gathering of Social EntrepreneursDecember 2002
Pros and cons of mergersPros and cons of mergers Pros
combines resources (human, financial, asset)
leverages synergies cost savings increase likelihood of success
continuity for target population
may eliminate competitor
increase possibilities for funding
Cons tension around leadership, decision-making and sacred cows
post-merger fallout some jobs lost larger enterprise may tax management/capacity
threat of watered-down mission
fragile process
©Virtue Ventures 2002. All rights reservedNational Gathering of Social EntrepreneursDecember 2002
Merger lessonsMerger lessons Clarify issues of asset ownership and revenue at the beginning
Hire a third party to negotiate and facilitate process
Allow time for planning, process and post merger settling period
Allocate merger budget Human resource issues are the most sensitive and delicate
Process is fragile can fall apart any time Personalities/cultures matter Involve all stakeholders Keep process transparent
©Virtue Ventures 2002. All rights reservedNational Gathering of Social EntrepreneursDecember 2002
Mainstreaming exits will Mainstreaming exits will take a coordinated efforttake a coordinated effort
Social entrepreneurs:Take long-term vision (beyond funding cycle)Plan strategically for funding and capacity building
Funders and social entrepreneurs: Plan exits at the beginning of their relationship. Align exits to capacity building & financial milestones.
Advocate to create enabling legal environment. Funders:
Develop financial products and niche markets.Transfer investees to funders in different markets.Support capacity building.
©Virtue Ventures 2002. All rights reservedNational Gathering of Social EntrepreneursDecember 2002
Final thoughts on social Final thoughts on social enterprise exitsenterprise exits
“Know when to hold ‘em,know when to fold ‘em,know when to walk away
and when to run”
- Kenny Rogers
©Virtue Ventures 2002. All rights reservedNational Gathering of Social EntrepreneursDecember 2002
Merger guidelinesMerger guidelines
Financial Agreement of intent Due diligence Financial/asset
agreement Human Resources
One CEO or ED HR plan - staff roles,
gaps and redundancy, HR policies and pay
Reporting relationships Organizations
Similar mission, target population, priorities
Governance Shareholders agreement Board roles and bylaws
Operations Brand enterprise Merger process plan Culture evolves Legal
constraints/impact External
Lawyer Negotiator Auditor