How (not) to sell out

Most successful startup companies have to make a decision at some point: whether, or how much, of the company to sell.

The goal of many entrepreneurs is to grow a company, sell it and move on to the next venture. In the world of mission-driven business, however, entrepreneurs are faced with an additional issue: how to grow their companies without sacrificing values for profits. In addition to honoring the founder’s own ideals, green businesses risk the loyalty of customers and employees who are set to bolt if they sense even a whiff of “selling out.”

Such is the predicament in which“green” business leaders are finding themselves, as consumers—and thus big business—become increasingly more interested in “going green.” It is difficult territory to navigate, but companies that have done so, whether successfully or not, offer hope and valuable lessons to other startups contemplating the next move in their growth strategy.

Becoming a sell-out
Greg Steltenpohl, founder of Odwalla Juices, and Paul Hawken, co-founder of Smith & Hawken and author of well-known business books Natural Capital and The Ecology of Commerce, are both noted businessmen who embraced the ideals of environmentally responsible business long before “green” was a buzzword.

Both started and grew their own successful companies, imbuing them with respect for people and the environment. Both became well-known for their companies’ unique business models. Both championed the potential profit in sustainable business. And both found out the hard way what can go wrong when a sustainability-minded founder gives up majority control of a company.

Steltenpohl remained an active member of the Odwalla board when it went public. But in the 18 months after he stepped down as board chair, he saw the company move drastically away from what he had built, and sell entirely to Coca-Cola (NYSE: KO). Though Steltenpohl has noted a cultural shift at the company, perhaps the largest change at Odwalla since the Coca-Cola buyout has been its customers. Several small natural foods stores and co-ops—many of them amongst Steltenpohl’s first customers—began boycotting Odwalla after it became part of Coca-Cola, particularly in 2006 when the company made headlines for human-rights abuses and environmental violations at its bottling plants in India.

“No matter how carefully you craft your policies, in the end, if it’s a corporation, it’s part of the capital system,” Steltenpohl wrote about the experience in New Enlightenment. “And unless you have safeguards built into the structure of your organization, your company can be taken over and diverted through a series of processes that are a combination of intentionality and the momentum of the system itself.”

Disappointed as Steltenpohl was in what Odwalla became, he can at least be thankful the company doesn’t bear his name. When the topic of home and garden store Smith & Hawken comes up, the bristle in Paul Hawken’s voice is still sharp 15 years after he ceased all connection with the business. “It has no relation to what Dave and I started,” he says. “We were an organic company. Scotts [Miracle-Gro] (NYSE: SMG) owns it now, a company that pushes herbicides and pesticides for people’s lawns.”

Although both remain distrustful of large corporations, Hawken and Steltenpohl continued on in business and built new companies; Steltenpohl went back to the juice business after swearing it off for years and co-founded Adina World Juices [see “Juiced again,” SI, April 2006], while Hawken got into technology and research and hasn’t looked back.

Growing it alone

Privately-owned Clif Bar maintains a focus on sustainability with in-house systems and perks, including well-organized, colorful recycling facilities.Courtesy Clif Bar.

For some founders, the idea of their company becoming more corporate jars them into rethinking their business model. Perhaps the most famous example is Patagonia. The outdoor company was experiencing unprecedented growth in the early 1990s, when a recession weakened the company’s financial performance. Founder Yvon Chouinard was forced to downsize and nearly lost the company to its debt holders. According to the company’s well-honed story, the experience drove Patagonia to limit growth and devote its resources to expanding its environmental and activist missions.

Similarly, when it came time for Gary Erickson to sell majority control of his company Clif Bar to Quaker Oats back in 2000 (See “Raising the Clif Bar: Gary Erickson,” SI, March 2006), he backed out just before the papers were signed and set about turning Clif into a model sustainable business. “When I backed away from that $120 million deal, it became an opportunity to do business in a different way,” he says.

Erickson established several new practices at Clif Bar once the decision was made to stay private, he explains, from the company’s casual Thursday morning meetings, in which management shares breakfast and information, to the company’s commitment to organic ingredients, renewable energy and happy employees.

“Staying private gives us the freedom to define success not only by business growth but by our unique business model, which allows us to reduce our impact on the environment, to create positive changes in the community and to create a healthy, happy work environment for our employees,” he says.

And in fact, keeping direct control is the only way to be 100 percent sure of where your company is headed, according to Bill Bates, senior mergers and acquisitions partner at King & Spalding in New York. “At the end of day, unless you have control, arrangements can be changed; even a contract could be modified by majority consent and, if you’re no longer in control, you can’t do anything about it,” he explains.

Selling out and staying put

Some entrepreneurs have found a way to navigate corporate buyouts without sacrificing their startup goals. Stonyfield Farms CEO Gary Hirshberg, for one, spent two years pounding out the details of his deal with Groupe Danone. In the end, Danone acquired 85 percent of the company. Hirshberg retained a majority of voting seats on his board (three out of five) and granted Danone the right to veto in only two cases: acquisitions and capital investments over $1 million. “I was happy to give them those, because in both cases you’re dealing with something that will eventually become their property, whether it’s another company or a new factory,” Hirshberg says.

In Hirshberg’s case, part of the impetus to sell was to give his investors a favorable exit, although he says there was no pressure coming from that end. “I didn’t have a deadline or anything like that,” he says. “I just felt a moral obligation to do that for them. But I didn’t want to sell and I didn’t want to take it public because I saw Ben & Jerry’s go through that and lose complete control of their business.”

Instead, he sought the sort of arrangement he now has with Group Danone—a strategic partnership. Danone bought out Hirshberg’s shareholders, but left him with his shares, which made him independent and in control as much as possible, he says.

It’s a very rare arrangement and not technically a buyout, according to Jeffrey Haas, a professor at New York Law School. “Deals in which the entrepreneur keeps control are really not sales, but rather “investments” in the company made by third parties,” he says. In a true sale transaction, the buyer wants to run the company as it sees fit, he explains.

Although the sort of partnership Stonyfield and Danone have may be unappealing to some buyers, Danone has benefitted greatly from its involvement with Stonyfield, according to numerous interviews with company brass.

“Danone wanted to get into the organic business by purchasing or partnering with a company, but also no one in their company had any real knowledge about the business, so for them, they were looking to not only get a position in the market with this company but also were open to having a deal with me,” Hirshberg says.

Which gets at what Hirshberg views as any mission-driven entrepreneur’s strongest bargaining tool: knowledge. “One of the things I emphasize to entrepreneurs … is to promote your own knowledge, your own core competence,” he says.

In his case, Danone was interested not only in the organic food business, but in Stonyfield’s ability to post double-digit growth numbers every year for 20 years without advertising. Hirshberg says he gave dozens of presentations on the subject at Danone’s corporate offices in the years following the merger. While Stonyfield ultimately launched an advertising campaign in 2003 in order to raise its visibility in an increasingly crowded and mainstream organic market, Hirshberg maintains advertising comes with diminishing returns, and says he still gets called into Danone to run through advertising alternatives with the company’s executives. He has also become the company’s representative in the organic world, along with his sister, who is the vice president of Stonyfield’s natural resources division. Together, the two sit on a variety of Danone task forces. Most recently, Hirshberg says they have been spending a lot of time with Wal- Mart (NYSE: WMT), which has asked Danone for guidance on its organic purchases.

What will customers think?

Frederick Schilling, who sold his organic, fair-trade specialty chocolate company, Dagoba Organic Chocolate, to Hershey Corp. in 2006, still keeps a close eye on cacao sourcing. Courtesy Dagoba.

Perhaps due to Hirshberg’s reputation, or the details of his deal with Danone, or the very public way in which Danone has embraced Stonyfield’s values, Stonyfield has not seen a backlash from its customer base.

Ashland, Ore.–based organic-chocolate manufacturer Dagoba, however, was not so lucky. Blogs and social networking sites were awash with “Dagoba sells out to Hershey—so sad …” postings when the company was bought by Hershey in 2006, and founder Frederick Schilling received his fair share of critical e-mails. Still, Schilling maintains it was absolutely the right move to make, at the right time. He says Hershey had approached him in 2004 about selling, but he felt the company was too young at that point. By 2006, he was looking for a way to increase Dagoba’s production capacity and needed a big partner to do it [see “Hershey kisses up to Dagoba,” SI, December 2006].

“The brand was bigger than the actual company—it was known, respected, but what sort of impact were we really having?” Schilling muses. “As a small company, your impact is limited to your volume, and to increase our impact, and grow, getting into a larger framework was the right thing to do.”

While Schilling wanted Dagoba’s production to expand in order to increase the overall size of the organic cocoa market, Hershey was looking simply to enter the organic market, and to expand its leadership role in the dark chocolate market, which experienced 49 percent growth from 2003 to 2006, according to a report prepared by market research firm Euromonitor in 2006. The growth rate has been attributed to recent media buzz around the health benefits of dark chocolate’s antioxidants, which may explain why, in the 12 months since the Hershey buyout, Dagoba has launched 18 new products (four additions to its “Classics” line and one entirely new product line called Apothecary), all blending dark chocolate with other ingredients that lay claims to health benefits, such as acai, goji berries and guarana.

That larger framework also allows Dagoba to maintain tighter control over the quality of its product, which is important given the company’s highly publicized recall in 2006 after high levels of lead were found in a shipment of its chocolate bars.

“The nice thing about Hershey is that they are a chocolate manufacturer, so they have great experience and technical knowledge, particularly in terms of quality assurance, and knowledge about cacao and the manufacturing process,” Schilling says.

Although Schilling didn’t spend two years negotiating the way Hirshberg did, he maintains the very nature of organic chocolate ensures that business will continue as usual at Dagoba.

“Ninety-eight percent of cacao is grown by millions of small, independent family farms, and on small farms the model is always multicropping. In itself, as a commodity and industry, cacao is really a sustainable crop, and in terms of the environmental aspects of our product, Hershey would keep that up simply because of the nature of the supply chain and cacao as a commodity,” Schilling explains, adding that organic cacao is in short supply in general, which means there will always be a premium associated with it, whether Dagoba insists upon it or not.

Schilling, who is still the “Founding Alchemist” at Dagoba, though CEO has been dropped from his title, says he understands why people call him a sell-out, although he doesn’t agree. “I sold my company to a company I have a lot of respect for, and also I’m not going anywhere,” he says. “I may have passed the company and brand management to a brand manager, but I’m going to be involved in cacao the rest of my life, and I will always hold my mission and beliefs.”

Having your cake and eating it too
Small companies looking to grow have a few options: Scale back operations to focus on expanding one key mission, get more investors, find a strategic partner, or sell to a larger company with similar values. In all cases, however, the founder has to remain at the company, safeguarding its mission and culture. Which raises the question: Is it possible to sell a company entirely and ensure that the company carries on as planned?

Yes and no, depending on who you believe.

Legally, there’s not much one can do. As mergers and acquisitions expert Bill Bates points out, licensing the name of a company or product entitles the seller to certain rights—the buyer can only continue to use the name under certain conditions. He adds that sellers who retain some stock can negotiate minority rights, which at least affords them blocking power in some cases. So, for example, if a company sells 60 percent of its stock, it can negotiate a deal in which the company can’t exit its initial line of business unless 75 percent of the board agrees.

These are the sorts of deals, however, that can make a company unattractive to a buyer, New York Law School professor Haas says. “The more restrictions on the ability of the buyer to run the company as it sees fit, the lower the price the entrepreneur will receive,” he explains, adding that the types of conditions he has seen buyers agree to are not laying anyone off for a year, or continuing to make a charitable donation the company has always made.

Schilling and Hirshberg disagree. “I have worked for the last 15 years to genetically encode our commitments to sustainability into the fabric of our business so that it’s inseparable,” Hirshberg says. “Our sustainability ‘agenda’ is not an agenda. It’s just how we do business. It’s a relationship we’ve built with our suppliers and a bond of loyalty with our customers that is the Holy Grail of consumer products,” he continues. “I believe we have built resilience for our mission by baking and coding it into everything we do.”

Schilling, meanwhile, says the impact of his mission on the industry as a whole means more than whether a specific company continues on its course. “People have to look beyond the brand and look more at the mission that brand stands for,” he says. “I’ll always be part of the World Cacao Foundation, and Dagoba’s mission will always be injected into the larger chocolate community, even if I were to leave.”

Schilling continues: “People need to think about, if that founder leaves, what is that person going to do now? For me, I will always be involved with chocolate and I will always hold to my beliefs, so I will always have an impact on the industry.”

It comes back to impact
Though he expresses regret about what happened with Odwalla, Steltenpohl has gone on to inspire other business leaders and to build a new juice company that he hopes will have an impact as well. Hawken has influenced numerous large companies to think more about social and environmental impacts. Erickson and Chouinard stand as exemplars for entrepreneurs who want to be both independent and profitable. Hirshberg has navigated a partnership with the corporate world unscathed, and continues to work for change from within. And Schilling’s success with Dagoba affords him the stature in the World Cacao Foundation to advocate for the interests of organic cacao farmers.

The key is to build real and lasting systems that withstand change, whether buyouts, leadership changes, or even government regulations. “I was building windmills in 1977 and Reagan came in and slashed funding for renewable energy tax credits and eliminated an entire industry with the stroke of his pen,” Hirshberg says, “That was a very sobering, brutal wake-up call to me that as long as this vision of a more sustainable future is dependent on vulnerable things like that, there’s no chance.”