Stephen Barnett, CEO
Companies have always existed for two reasons: to maximise profits and solve problems. In an age of global climate change, resource scarcity and social inequality, the nature of those problems has started to change.
Today, the holy grail of most aspiring entrepreneurs is a business that delivers financial returns and has a positive environmental and social impact.
So-called double and triple bottom-line startups sound great in theory. In practice, however, it’s difficult to achieve financial success while also solving the world’s problems. Rare is the company that can jump through every funding and corporate hoop to come out on the other side with its integrity – and bank balance – intact.
Purpose-driven startups, of which Util is one, will have an environmental or social motive. That motive, whether it drives or detracts from outsized financial returns, is likely to be a passion of the founding team.
There are several ways in which a business can succeed and deliver on its purpose. Founders may target ‘moonshots’, with the timeframe for success measured in decades rather than years. They might sell their products to those who need them rather than those willing to pay the most. They could even give away a percentage of their hard-earned profits.
In general, none of these approaches undermines a company’s ability to deliver a return for investors. But for a startup seeking funding, they may very well be called into question.
Let’s take the three stages of a startup’s life: Survival, Getting Serious and Selling Out.
First, Survival. At the beginning, startups will do almost anything to survive. Founders will travel across the country for the slightest chance of investment, pivoting based on the feedback of their latest rejection.
This stage is a serious threat to the purpose-driven founder. What’s more important, survival or integrity? If the latter starts to slip, can it be reclaimed once food is on the table?
Finding mission-aligned investors helps to overcome some of these challenges. However, often the success of early stage fundraising is predicated on volume of investor meetings. Limiting the investor universe could be startup suicide.
What’s more important, survival or integrity?
Should our noble startup make it through the first funding gauntlet without losing its purpose, it will reach the next stage: Getting Serious.This typically arrives between Series A and Series C funding. Here, capital converges on a number of well-established metrics, leaving little room for extra-financial pursuits.
Our company is suddenly competing for investment against a host of startups that don’t have to consider purpose on top of traditional metrics. What should the founder do? Forget purpose and compete on a level playing field, or seek out a shrinking number of mission-aligned, later stage investors? It’s at this point that many founders find their purpose eroded little by little.
But let’s assume this startup makes it to the final stage, Selling Out, with its purpose intact. Exploring exit options, our founder encounters the biggest challenge yet: how to exit without losing the company’s purpose.
If no mission-aligned strategic acquirer bites, private equity might beckon. In this scenario, purpose will be the first casualty. Alternatively, the founder could float the company, moving from the relative calm of private ownership to the choppy waters of public markets. But here, quarterly earnings rule the waves.
Of course, companies can and do hold onto their purpose as they mature.
They often choose to stay private (Patagonia) and family owned (Lego) with no intention of ‘selling out’ (Kickstarter). As a result, they can deliver on their social or environmental purpose free of any external pressure. But growth tends to be slow and organic.
For other companies (BeyondMeat; Tesla), purpose is inexorably linked to the core business proposition. However, these take an unusually long investment view, with public and private markets forced to keep the faith for decades.
Critically, these examples are exceptions to the rule. If global issues such as climate change and social inequality are to be addressed, we need more companies that put an emphasis on people and planet as well as profit.
Thankfully, change is afoot for purpose-driven startups.
At the Survival stage, the number of organisations that back purpose-driven companies is growing. Some even offer venture-style support to innovative not-for-profits (Y Combinator and EffectiveAltruism).
Regarding the Selling Out stage, capital markets are starting to take a more long-term approach to investing. This is reflected in the tide change against quarterly reporting, with many companies now reporting on an annual or biannual basis.
On a large scale, however, we have a long way to go before investment decisions rest on both long-term financial and non-financial investment returns. And before that can happen, the entire concept of what we mean by success in capital markets needs to evolve.
If we leave it too late, the problems we’re trying to solve may no longer be solvable.