How To Rapidly Scale A Mission-Driven Company Without Selling Out
"What if we don’t want return-hungry investors as shareholders in our company?" This is a question we often get asked, especially at flourishing start-ups. They are afraid that money motivated investors will harm their progressive, mission-driven companies. Are there other, more sustainable, investment options? Yes! Take the case of BuurtzorgT and Purpose Evergreen Capital. They show an alternative way to deal with investors.
BuurtzorgT (not to be confused with Buurtzorg) is an independent mental health-care organization. It was founded by Jos de Blok (also founder of Buurtzorg) and Nico Moleman in 2013.
While Buurtzorg focuses on delivering neighborhood care, BuurtzorgT delivers mental health care at home. And, broadly, they follow Buurtzorg's unique vision, principles and organizational model of self-managing teams.
The autonomous teams at BuurtzorgT typically comprise a psychiatrist, a psychologist and five or six psychiatric nurses. Each team is responsible for mental health care in a dedicated region.
BuurtzorgT has been successful from the beginning, and is growing rapidly. In 2014, they had only 3 teams. Now, there are 40—all over The Netherlands.
And revenues have grown rapidly too—at around 50% per year. (In 2019 they were €13.1M. In 2020 they forecast €18M.)
Fast growth looks good, initially. But some companies get into trouble when they face cash-flow and working capital problems.
And the bigger the cash-flow problems, the bigger the chance they are forced to look outside to raise working capital.
BuurtzorgT faced this problem. Their growth led to a chronic shortage of working capital, forcing the founders to search outside.
The search for money
But the founders were sceptical about taking on new investors. Why? Because, typically, investors invest money in exchange for some control over the business.
BuurtzorgT was especially wary of investors who not only want to make money on the loans but, ultimately, want to sell their shares for high returns.
The founders feared this could jeopardize their unique mission and principles. For founders with such scepticism there might be only one choice: don’t take investor money.
How To Rapidly Scale A Mission-Driven Company Without Selling Out
But the BuurtzorgT founders didn't like that choice. So they searched for an alternative—an investor not focussed primarily on high returns and who would allow them to stay mission-driven and independent.
In late 2019 they found such a partner—German investment company, Purpose Evergreen Capital.
Together with Purpose Evergreen the BuurtzorgT founders developed a novel and sustainable investment construct based on "steward-ownership", an alternative to the usual "shareholder-primacy ownership" model.
Sustainable investment construct
The sustainable investment construct developed by BuurtzorgT and Purpose Evergreen has (at least) four interesting principles:
1. Separating ownership and control
In the steward-ownership model, shares are divided into two kinds:
- Ownership shares (without control of the organization)
- Controlling shares (without ownership of the organization)
The basic premise is that ownership and control can be separated. Which means investors can only have part ownership of the shares, with the controlling shares held by the organization.
The organization’s controlling shares are held by 'stewards', whose goal is to serve and support the organization in pursuing its mission. They have formal control over the company, but no economic interest in profit maximization.
In the case of BuurtzorgT, they have issued and sold new ownership shares to their investor Purpose Evergreen Capital for a few million euro's. (The exact number is confidential). This means the investors have no say whatsoever over BuurtzorgT, and they cannot interfere in the business operations.
The controlling shares of BuurtzorgT are in the hands of the founders, de Blok and Moleman, who act as stewards of the organization. This is, however, temporary. Once the employees are prepared, the founders will transfer their controlling shares to new stewards for a nominal fee of €0.01.
2. Foundation with a golden share
Besides separating the ownership and controlling shares, there is also a priority share ("golden share") issued to a foundation. This foundation then has special control over any amendment to the organization's articles of association.
To be clear, this foundation does not belong to anyone. It has only one board with its own statutory mission to monitor the mission of the organization. The result? Decisions of the board must support the mission of the organization, not the maximization of profits.
The existence of this foundation with a golden share allows the mission to be dominant and leading. And with control held in a foundation, the organization can no longer just be bought or sold.
BuurtzorgT also has a golden share in the hands of a foundation. This foundation guards the mission of the organization and the rules of the games for both the stewards and the investors.
This guarantees the stewards will also have to act in the best interests of BuurtzorgT. They cannot do things that are in their own interest but run counter to the organization's mission.
Moreover, the golden share doesn't only prevent BuurtzorgT from losing sight of its mission. It also means the organization can never be sold to an investor who runs off with the profits.
3. A buyback guarantee
The investors and the organization also agree the investors can only hold their ownership shares temporarily, and the organization holds a buyback guarantee.
In the case of BuurtzorgT, it is agreed that the organization will buy back Purpose Evergreen Capital's shares in a number of years (they expect in 5 to 7—depending on the growth rate of the organization). They also agreed to buy back the shares for the same price.
During these years, the investors are not allowed to sell their shares to another party. This means ownership shares must always return to the organization. So, once the loan has been repaid, BuurtzorgT will own itself again.
4. Limited investor's returns
In this construct there are limited returns for the investors. There will be fair interest payments on the loan, but other wealth generated by the organization cannot be privatized by them. Instead, these profits should serve the mission of the organization, being reinvested or donated.
BuurtzorgT also pays interest to Purpose Evergreen Capital. This, however, is significantly lower than 10% (the exact number is confidential). They would have paid a typical private equity firm at least 12%.
Beside interest payments to the investors, all other money remains in BuurtzorgT to serve its mission.
The future of investing?
Is this construct developed by BuurtzorgT and Purpose Evergreen Capital the future of sustainable investing?
What do you think? Please let us know in the comments below.
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Thanks for sharing this model. It seems well aligned to a proven business with long term forecasts (projection of buyback in 5-7 years of growth). The levels of risk in BuurtzorgT are pretty low, they have built something really incredible on all fronts.
I am curious how a model like this could work at an earlier stage in the growth of a mission driven business? For a business that isn't primarily profit driven and is looking for long term sustainable, in the early stages with much higher levels of risk, how can these principles be applied? How does it impact how fast we can really grow in healthy ways?
Are there companies that have done this or something similar well at early stage?
Glad you shared this as I have been looking into such mechanics for a while.
I have a similar question to Joshua and it relates to this being viable on a larger scale with many more VCs/Investors. When investing at an early and risky stage (maybe this example is not your typical early stage startup as they have a very proven management team and already good revenue...it feels like a bank loan could as easily have worked if they have good revenue track record) you are expecting a lot of your investments not to pay back which is why typical early stage investors require a high return on a very few investments, in order for their model to work and for them to have limited Partners who invest money into their fund in the first place. So do you either need to find an investor/fund where return is not their primary driver (e.g. impact family fund) or does this not work for most investment vehicles who invest at often pre-revenue, and definitely pre-profit stage?
Perhaps I have not understood how it works or maybe you are targeting this at growth-stage businesses and I have simply projected my own early-stage context on your article :) If so, have you got good examples for the earlier and riskier business stage?
I am really pleased that you have shared this. i have been interested in this model for years. It was first used, I believe, by two fair trade companies in the UK (Traidcraft and Cafedirect) around 20 years ago. I have noticed an increasing interest in this model in recent years, and have myself helped three clients adopt the model (and i wrote a blog about it on my medium channel last year). I think there is a lot of education needed to persuade traditional investors to buy in. but i believe with the increasing disillusionment with existing investment models, this new thinking will catch on.
This sounds very hopeful in making it possible to move towards co-ownership which is what lies beyond steward ownership.
One thing that I find troublesome is that distribution of shares is static (i.e., each party gets so many shares forever). The other thing that worries me is how is ownership determined? who does it? how centralized it that decision? Determining ownership by static shares opens the door to these kinds of question.
One way to fix it is to layer an agreement on top of it specifying on how the distribution of ownership will happen, how it can change on a recurring basis, the process to determine the amount of ownership, how wealth extraction is calculated, etc.
In any case, it is very hopeful that this is being tried at all.
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