Navigating Capital Raising as a B-Corporation: Opportunities and Challenges
B-Corporations, recognized for their commitment to social and environmental responsibility, navigate a unique path in the business world, especially when it comes to raising capital. The dual focus on profit and purpose sets B-Corporations apart, presenting both advantages and hurdles in the pursuit of capital partners. This article delves into the impact of B-Corp Certification on the capital-raising process, highlighting the pros and cons companies may encounter.
The Capital Raising Landscape for B-Corporations
Certified B-Corporations strive to balance profit with the planet and people. This approach can significantly impact the process of raising capital, including the types of likely investors, the due diligence process, and corporate governance discussions, among others.
The Rise and Influence of “Impact Investors”
When seeking investment, B-Corporations are often attracted to a specific subset of the financial community that values sustainability and ethical business practices alongside financial returns. These investors, often referred to as Impact investors, are individuals, groups, or institutions that allocate capital with the intent of generating not only financial returns but also positive social and environmental outcomes. Unlike traditional investors, who primarily focus on financial performance, impact investors aim to also address global challenges such as climate change, poverty, and inequality through their investments. This approach is rooted in the belief that capital can and should work to create a more sustainable and equitable world.
Impact investing spans a wide range of sectors and industries, including renewable energy, sustainable agriculture, microfinance, affordable housing, and healthcare, among others. Investors may use various financial structures, such as equity capital, debt financing, and even grants to support businesses, nonprofits, and funds that align with their environmental or social impact goals.
The field of impact investing has grown significantly in recent years, attracting attention from mainstream financial institutions, philanthropic foundations, and individual investors. This growth reflects a broader shift toward responsible and sustainable investing, driven by a growing recognition of the interconnectedness between social, environmental, and economic well-being.
The Process of Raising Capital
Raising capital as a B-Corporation is not altogether different than raising capital as a C-Corporation. For B-Corporations, this will also include several key steps that detail the company's commitment to transparency, accountability, and social impact:
Preparation: Articulating the company's environmental and social impact alongside its financial potential is crucial. This includes preparing detailed reports and forecasts that highlight both economic performance and environmental and social contributions.
Targeting the Right Investors: B-Corporations often target Impact Investors, social venture capital firms, and ethical investment funds that are more likely to value the company's mission. However, companies shouldn’t entirely rule out traditional financial investors. If the company’s financial profile and growth story are exciting and the company has a specific brand advantage due to B-Corporation Certification, traditional investors such as family offices, Private Equity and/or Venture Capital firms may also be viable partners.
Due Diligence and Negotiation: Potential investors will conduct a thorough evaluation of the financial and legal health of the B-Corporation prior to an investment. In addition, the three main criteria of becoming and maintaining B-Corporation Certification, verified social and environmental performance, legal accountability, and public transparency will be thoroughly assessed as part of the diligence process. Similarly, terms of an investment may include specific clauses related to maintaining or enhancing social and environmental performance, particularly if the investors also have an impact mandate.
Benefits of Raising Capital as a Certified B-Corporation
Alignment with Impact and Socially-Motivated Investors: B-Corporation Certification is likely to appeal to Impact Investors who are specifically looking to support businesses that align with their mission-driven investment thesis.
Differentiation in a Crowded Market: The B-Corporation Certification can help companies stand out to potential investors by demonstrating a commitment to environmentally responsibility, ethical business practices, and long-term sustainability. In addition, leveraging the B-Corporation brand as a marketing tool in fundraising efforts may help companies reach investor audiences specifically aligned with their current and future goals. Many investors view the focus on sustainability and ethical business practices as indicators of long-term viability and resilience, making Certified B-Corporations attractive investment candidates.
Access to a Supportive Community and Network: The Certified B-Corporation network can provide valuable connections, resources, and support during the capital-raising process. Connecting with fellow B-Corporations who have forged the same path may illuminate opportunities and create new networking opportunities.
Potential Difficulties of Raising Capital as a Certified B-Corporation
Perceived Financial Trade-offs: Some traditional investors may still perceive a trade-off between an environmental or social impact and financial returns, potentially limiting the pool of potential investors. B-Corporations would do well to lead conversations with traditional investors by sharing the financial growth profile of their company, then sharing evidence that investing in sustainable business practices leads to improved financial outcomes as shown in multiple research studies including a recent initiative through the NYU Stern Center for Sustainable Business and Rockefeller Asset Management.
Rigorous Reporting Requirements: The need for detailed impact reporting to maintain Certified B-Corporation status can be resource-intensive, potentially diverting time and resources from other areas of the business. While the recertification process takes place every three years, there are ongoing impact tracking and disclosure requirements that will have to have committed resources.
Pressure to Balance Profit and Purpose: Maintaining the balance between profit and purpose can be challenging, especially when facing investor expectations for outsized financial performance. Aligning expectations between company management and potential investors prior to closing a fundraising can help alleviate this pressure in the future.
Being a Certified B-Corporation presents a unique set of opportunities and challenges in the capital-raising process. While the certification can attract like-minded investors and differentiate a company in a crowded market, it also requires a careful balance of profit and purpose. By effectively leveraging their commitment to social and environmental responsibility, Certified B-Corporations can navigate the complexities of raising capital, securing the resources they need to grow and deepen their impact.
A proud Benefit Corporation, the team at Keene Advisors is well-versed in understanding the unique benefits and challenges of raising capital as a Certified B-Corporation. We became a Certified B Corporation in 2016 and were recognized as Best for the World in 2017 and again in 2018 and 2019. It is part of our stated mission to partner with other innovative socially-responsible companies in their quest to grow. Read more about our Areas of Expertise and Contact Us today for a complimentary consultation.
Disclaimer:
This commentary is intended for general informational purposes only. Keene Advisors does not render or offer to render personalized financial, investment, tax, legal or accounting advice through this report. The information provided herein is not directed at any investor or category of investors and is provided solely as general information. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action. Keene Advisors does not provide securities related services or recommendations to retail investors. Nothing in this report should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.