What determines a successful exit for an impact startup?
Our members Big Society Capital published an interesting blog recently answering the question' What determines a successful exit for an impact start up', written by Nicholas Andreou, Associate Venture Impact Partner, Big Society Capital.
You can read the original article here on Big Society Capital's website.
In his blog Nicholas writes: Exits are a significant milestone in a startup’s journey. They are the moment when ownership of a company changes hands, helping to determine the return for earlier investors and the future for the company. For an impact-driven startup, they are equally important as the nature of the exit will determine whether the venture will go on to create outsized impact or otherwise.
With the first UK venture impact investing funds beginning to reach maturity, we are expecting exits of impact startups to become more frequent. We’ve just had an exciting exit in our underlying portfolio: the acquisition of Credit Kudos by Apple, an investment made by the Fair by Design fund managed by Ascension which Big Society Capital backed in 2017.
This has triggered some interesting conversations about the interplay between exits and impact. We wanted to share these thoughts in the hope that we start a conversation about the dynamics here. Our view will likely evolve over time as we engage with others and see more exits happening.
While there are a few different routes to exit, here we focus on the common strategy of acquisitions. This is where a startup sells their business to another (often larger) organisation. The recent acquisition of Credit Kudos triggered these conversations but it’s also of particular interest because this could be the most complicated exit scenario from an impact perspective. We frame our thinking under three broad questions.
1. How could an acquisition enhance impact?
Enabling scale of the company being acquired by allowing access to the buyer’s customers
Being acquired can provide a new customer base and the financial resources to be able to scale impact. When Airbnb acquired Accomable, a startup which provided accommodation accessibility data for users with disabilities, that was a key consideration for the founders. According to a BBC article: Co-founder ‘Mr Madipalli said the sale would enable it to finally meet customers' demands. He said up until now the website had not had enough cash or staff, meaning it could only fulfil about 5 to 10% of booking requests. "We see the need every day, which is why we wanted to team up with a bigger player".’
Enabling the buyer’s scale of impact by acquiring new customers
Where the buyer also has impactful products and services, they can expand their impact by making their product available to the new customers they have acquired. When digital health platform Babylon acquired Higi, Higi’s public statement noted that the acquisition allowed: ‘Babylon to extend its highly scalable technology platform and digital-first healthcare solutions to Higi platform users.’
Enabling other channels to enhanced impact
Another possibility is that an acquisition allows the venture to expand its impact in other ways apart from scale. For example, additional resources could see the company being acquired attempt to reach more underserved or disadvantaged people or to develop features in its product that enhance impact. This would likely be some time after acquisition and given the nascent state of impact exits to date, we haven’t seen a compelling example yet.
Helping impact become more mainstream for the buyer
It’s conceivable that part of the reason for buying an impact company is an interest in the ethos and values held by the management team of the company being acquired. This might result in the buyer moving towards more impact over time. For example, one study looked at over 100 mergers and acquisitions across Europe and concluded that: ‘Our results show that the post-merger ESG performance of the acquirer increases following the acquisition of a target that has higher ESG performance than that of the acquirer in the premerger stage.’ While this is around ESG and not impact, we think that the logic may hold here as well and excited to see how this plays out over time.
Signalling to the broader market
This one may apply outside the specific transaction, in that an acquisition of an impact startup could have positive signalling across the entire market:
- It signals to emerging entrepreneurs that launching an impactful business is viable, thereby potentially increasing the number of impactful companies that are founded.
- It also signals to investors that these companies are viable investment opportunities with exciting returns potential. This increases the flow of capital to impactful propositions.
- Finally, it also signals to other companies that they should be considering impact companies as viable targets for acquisition. This helps to increase the exit options for impact-driven founders.
These signals could help to create positive flywheels as they drive mutually reinforcing benefits for impact startups across the whole ecosystem.
2. How could an acquisition undermine impact?
Failed acquisition hampers impact growth
Acquisitions are complex at the best of times and fail for many reasons including culture clashes, poor integration processes, lack of buyer bandwidth and so on. If this were to happen in the case of an impact acquisition, intentions aside, it would be difficult to create the desired impact. This therefore remains one of the main risks.
Impact is not at the core of the acquisition
There are many reasons that a buyer could acquire an impact focussed company. It could be for the impact thesis but it could also be for access to the talent, technology or customers. In these cases, there may be impact drift over time where impact falls down the priority list. This could lead to stagnation of impact or in some cases even negative impact. For example, if innovative technology brings benefits to its users but management is not thinking about accessibility this could lead to worsening inequalities if one group can access the tech easily, but another cannot.
Given the range of possibilities, the ecosystem is beginning to think about the key factors in determining whether impact is sustained and enhanced post-acquisition. Here we focus particularly on the factors within the management team’s control.
3. How can companies being acquired optimise for impact?
Understand who the buyer is and why they want to buy the startup
A key consideration here is the nature of the acquisition, in other words who the buyer is in terms of mission, vision and values as well as their purpose for acquiring the company. These factors will determine how successful integration is and how aligned the two entities will be in decision making and strategy. Ultimately this is what determines whether impact is achieved over time or not. As such, these are important questions to be asking when considering an acquisition offer. If there are any concerns, it’s up to the company being acquired to decide whether the impact risk is worth the potential upside.
Ensuring the acquisition and integration goes smoothly
Ultimately, if the acquisition fails then no impact will be achieved and so the traditional considerations around cultural alignment, communication etc. all play a role here. This is covered by others in much greater depth.
Ensure impact is a source of value for the company
If impact is driving value in the company being acquired, then even impact agnostic acquisitions would want to sustain and enhance impact. In these cases, the success of the business model or product or service is tightly linked to impact delivery, and so incentives are aligned. We’ve written about how impact can be a source of value in increasing customer retention, mitigating risk and attracting top-tier talent.
Governance and accountability mechanisms around impact pre and post-acquisition
Impact startups are experimenting with several mechanisms to ensure that impact is embedded directly into governance. These can all help to preserve impact upon exit. The case of Innocent’s acquisition by Coca-Cola is a good example of this playing out in practice. One common approach is to use standards and certifications of impact like the B-Corp certification. This embeds social and environmental considerations into Articles of Association and operational practice helping to maintain a focus on impact. Examples here include CIRCA5000, Hylo, Ophelos, Oyster, and Sweep which are either certified or pending B-Corp companies.
Another approach is to have a dedicated body responsible for impact oversight. One example is mental health startup Togetherall’s ‘Guardian Council’ whereby a group of mental health experts is tasked with ensuring the organisation stays true to their social mission. One of the main considerations behind the council’s formation was to prepare for preserving impact upon exit. This approach had demonstrated success elsewhere post-acquisition. Unilever agreed to set up an independent board when they acquired Ben & Jerry’s to help maintain their social mission. This is one of the factors which is largely credited for the success of mission preservation.
A final approach is to measure and publicly report on impact. This creates a dynamic whereby a startups’ key stakeholders are holding them to account on their impact performance. This is a growing trend with more and more startups undertaking rigorous impact measurement including Second Nature, Wagestream, and Olio.
Hiring impact-driven talent and create a culture where impact is prioritised
Focussing recruitment and retention on individuals who care deeply about the impact mission of the company helps to ensure that post-acquisition there are still champions of impact working for the original cause. Similarly, creating a culture that prioritises impact will help to sustain this focus post-acquisition. These elements are particularly important as founders may move on during or shortly after an acquisition and are usually the stewards of impact. Emilie Stephenson of Innocent suggests that the Innocent culture is one of the main things which has helped the brand stay true to its social purpose after acquisition by Coca-Cola.
Impact is an emerging area, and the venture ecosystem is still experimenting with how best to create, sustain and scale it. Thinking about impact across exits is a critical piece of the puzzle which is only just coming onto the radar. We expect many others to be increasingly thinking about this as it becomes directly relevant to them. We hope to give people a starting point and encourage the ecosystem to have a conversation about what we need to get right to maximise the potential for impact via acquisitions.