1. National Gathering of Social Entrepreneurs December 2002 www.virtueventures.com Social Enterprise Exit Strategies

2. ©Virtue Ventures 2002. All rights reserved National Gathering of Social Entrepreneurs December 2002 Many for-profit exits don’t apply to social enterprises Who: n Investors and owners exit How: n Raise additional capital through secondary offerings from other investors n Sell company to third party* n Initial Public Offering (IPO) shares of the company are sold to “take out” original investors

3. ©Virtue Ventures 2002. All rights reserved National Gathering of Social Entrepreneurs December 2002 Social enterprise exits Who:  Funders and parent organizations exit How:  Access new funders  Earned income  Debt financing  Merge  Spin-off  Transfer  Franchise  Close  ESOP  Sell

4. ©Virtue Ventures 2002. All rights reserved National Gathering of Social Entrepreneurs December 2002 Reasons for Exits n Donor requirement n Opportunity n Divestment n Self-sufficient n Need new funding n Strategy

5. ©Virtue Ventures 2002. All rights reserved National Gathering of Social Entrepreneurs December 2002 Preconditions for Exits n Good leadership and management  Including the ability to plan strategically n Solid organizational structure n A track record of meeting objectives n Positive social outcomes and evidence progress toward achieving mission n A clear vision for the future

6. ©Virtue Ventures 2002. All rights reserved National Gathering of Social Entrepreneurs December 2002 Exits relate to capacity... Governance Impact Management Operations Structure Vision

7. ©Virtue Ventures 2002. All rights reserved National Gathering of Social Entrepreneurs December 2002 …. and funding needs Investor Perspectives, Tuan, Emerson, Roberts Foundation 2000

8. ©Virtue Ventures 2002. All rights reserved National Gathering of Social Entrepreneurs December 2002 … and timing "My work is done. Why wait?" — George Eastman, founder of Kodak, in his suicide note

9. ©Virtue Ventures 2002. All rights reserved National Gathering of Social Entrepreneurs December 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 experience several exits Development Stage

10. ©Virtue Ventures 2002. All rights reserved National Gathering of Social Entrepreneurs December 2002 Before you start n Valuation n Due Diligence n Partnership Assessment n Risk Assessment n Legal Structure n Ownership n Human Resources

11. ©Virtue Ventures 2002. All rights reserved National Gathering of Social Entrepreneurs December 2002 How exits work n Two case studies:  Spin-off  Merger

12. ©Virtue Ventures 2002. All rights reserved National Gathering of Social Entrepreneurs December 2002 Spin-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

13. ©Virtue Ventures 2002. All rights reserved National Gathering of Social Entrepreneurs December 2002 Pros 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

14. ©Virtue Ventures 2002. All rights reserved National Gathering of Social Entrepreneurs December 2002 Spin-off lessons n Need methodology n Prepare for spin-off at the outset  Separate office, staff, systems n Know intricacies of capital markets n Understand legal frameworks n Define roles and relationships of players n Specify post spin-off parent/new venture relationship in writing n Keep process transparent

15. ©Virtue Ventures 2002. All rights reserved National Gathering of Social Entrepreneurs December 2002 Merger process Merger 1. Introduce idea 2. Leadership buy-in 3. Negotiation 4. Legal issues 5. Process planning 6. Due diligence 7. Team building 8. Incorporation 9. Merger complete

16. ©Virtue Ventures 2002. All rights reserved National Gathering of Social Entrepreneurs December 2002 Pros 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

17. ©Virtue Ventures 2002. All rights reserved National Gathering of Social Entrepreneurs December 2002 Merger 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

18. ©Virtue Ventures 2002. All rights reserved National Gathering of Social Entrepreneurs December 2002 Mainstreaming exits will take a coordinated effort n Social entrepreneurs:  Take long-term vision (beyond funding cycle)  Plan strategically for funding and capacity building n 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. n Funders:  Develop financial products and niche markets.  Transfer investees to funders in different markets.  Support capacity building.

19. ©Virtue Ventures 2002. All rights reserved National Gathering of Social Entrepreneurs December 2002 Final thoughts on social enterprise exits “Know when to hold ‘em, know when to fold ‘em, know when to walk away and when to run” - Kenny Rogers

20. ©Virtue Ventures 2002. All rights reserved National Gathering of Social Entrepreneurs December 2002 Merger 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