Guest blog: Daniel Fireside, posted on October 17, 2017, on Equal Exchange - http://equalexchange.coop/blog/avoiding-the-exit-strategy-trap
One of the first questions investors ask of a company is, “What’s your Exit Strategy?”
In other words, when are you going to go public or sell your company to a larger company so I can cash out with 10 times my original investment?
With a conventional profit-driven company, this might not be a big deal for consumers, workers, or suppliers. For companies primarily with a social mission, however, it means the end of the mission. But you can’t get that investment money without having a plan to sell out – call it the Exit Strategy Trap.
We’ve seen it over and over among companies that were once our peers in driving change in food and consumer products. (Dr. Phil Howard has put together an excellent graphic of the consolidation of the organics industry.) Despite the rosy statements when big piles of cash are being exchanged, once the mission-driven company becomes a cog in the machine, it ceases to be an agent of change.
How did Equal Exchange avoid this Exit Strategy trap? It’s not because we don’t get offers. We get them all the time. It’s not because we’re more noble or purer of heart. A lot of folks at our company would welcome a windfall payout in exchange for our ownership stock.
The answer is in three parts.
First, our democratic worker co-operative model means that a decision like this would have to be approved by 2/3 of the worker-owner members of the co-op, and we each get an equal vote. Unlike faceless corporate investors, we’d be voting to end the social part of our company for ourselves and our co-workers. We’d have to look them in the face, and look at our reflection in the mirror.
Second, we’ve figured out how to raise the investment capital from sources that mirror our social mission, from over 600 investors, dozens of mission-driven lenders, and over $2 million from our own workers. You can find a deeper description here: http://equalexchange.coop/blog/cooperative-capital.
Third, recognizing the Exit Strategy Trap early on, the workers in the company adopted what you might call the “No Exit Strategy.” Essentially, this established a rule that in the event of a sale of the company, we couldn’t keep any of the money. All loans and investments would be returned at face value, but all the net proceeds of the sale must be donated to another Alternative Trading Organization. All we’d get is a new corporate boss.
By taking the money off the table, we took away the temptation to ever sell out. What stays on the table is a shared obligation to run the company for the benefit of all stakeholders: farmers, workers, consumers, and the environment. Why would we ever want to have an exit for that?
Written by: Enkhtuya Boldbaatar, Dairy Specialist, EMIRGE Mongolia
Just like any business group or SME seeking to grow and expand, cooperatives often have to come together and make important decisions regarding the type and size of investment necessary to increase their production and improve member livelihoods. But, it is not always the case for various producer groups in Mongolia who are constantly faced with external and internal challenges, leading to ineffective decision-making processes around investment.
In my experience, I have seen SME support programs or NGOs provide equipment or machinery at no cost to cooperatives and producer groups, along with very limited training on how to effectively operate and use them to grow and expand. This form of support ends up being counterproductive, as the equipment or tools end up being underutilized, sometimes rusting in a member’s back yard or even never used at all because the equipment requires further investment. Other types of ineffective investment I have witnessed are mainly due to: (1) lack of coordination among the members to assess their specific needs before acquiring inputs or equipment, and (2) lack of proper training on best operational practices. Here are some cases of failed investments I have personally encountered:
Example 1 - Fodder cutter:
In August of 2017, Members of a local cooperative in the Darkhan-Uul province borrowed a fodder cutter from another group, which obtained the equipment for free under the Disaster preparedness project and never used it. By the time the members of the cooperative tried to use the equipment, they realized that it was not actually a fodder cutter, but instead a grain mill. Furthermore, the equipment did not have any power input socket.
Example 2 -Sprinkler irrigation:
A sprinkler irrigation system was given to a local cooperative under the Markets and Pasture Management project in 2015 and was kept without use. After planting green fodder plants such as oat and peas in early July in the group’s fodder field, the members attempted to install the system to irrigate the land; but when they tried to connect the system to a well, it was discovered that many small parts such as fans and hoses were missing. The group members spent a great deal of time and effort to put together missing parts and get the system to operate. However, the system did not work properly and was not good for further use. They had to replace it in early August.
Example 3 - Distillation equipment:
The senior management of a local cooperative made an incorrect assessment of the conditions and opportunities of the group, and invested resources in the acquisition of distillation equipment. However, due to improper planning, lack of communication with the coop members, and lack of training and experience in using the equipment, the cooperative has not been able to use it for over two years now.
Under the EMIRGE program, partner cooperatives have received capacity building in their specialization, business advisory services and market linkages that are tailored for their daily activities, and have enabled them to make smart decisions for their own investments. Cooperatives have learned how to make investment decisions around important products and inputs such as irrigation systems for greenhouses or small farm fields, small tractors, milk cans, curd dryers, and lactoscans. Our partner cooperatives are now able to vocalize their needs to supporting organizations for additional equipment, parts, or tools that are needed for their daily operations. This approach lowers the risk of aid reliance for the farmers, which is always in short supply and not always matching their actual needs. Our results on the EMIRGE program have demonstrated that choosing agribusiness training over donations are well-paired with the objectives of our partner cooperatives and groups.
For instance, Devjikhuguuj group, one of the program partner cooperatives, approved and implemented a decision to invest in an irrigation system to protect crops from drought, and increase harvest. This turned out to be a solid investment as the group was able to double their harvest compared to the planned quantity. Many other partner cooperatives are also working with great enthusiasm to expand their businesses in the coming years by: (a) applying investment best practices, (b) learning and developing their ability to acquire and utilize new equipment and technology, and (c) generating new business ideas and initiatives.
Smart investments are key to development.