Potential benefits or points of interest of steward-ownership and aligned financing for investors

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The following content includes a mix of perspectives: insights supported by scientific research, observations based on our practical experience, and assumptions or hypotheses about potential effects based on our practical experience. Where scientific evidence exists, we have provided sources.

  • You and your company as the selling point: You are steward-owned/ only raising money in this way and if investors want to be part of that journey, they will need to get on board.
  • Opportunity to join a growing trend: Steward-ownership and aligned financing is a model that is currently growing and more and more companies – like yourself – will only take capital that is set up accordingly. Investing in your business in a steward-ownership aligned way allows the investor to experiment with this model, make first experiences in investing in such a way and how that works within their own business model.
  • Steward-ownership-aligned financing as a financing structure for successful, profitable but non-typical venture capital/ private equity investments: Most investors understand that not all companies are typical venture capital/ private equity cases and many great investment cases are overlooked. Some investors might be interested in ways to finance successful, impactful, and potentially profitable companies that may not become the next unicorn but can still provide them with stable, adequate returns (More on this argument can be found in Aner Ben-Ami’s article “Don’t go chasing unicorns). 
  • Different risk-return profile, different asset class? Steward-owned companies have a reduced focus on short-term valuation and more focus on profitability, cash flow and long-term success of the company. For investors, this means less dependence on volatile company markets. It also means that the company is often under less pressure to scale quickly and, in general, are exhibiting less risky behavior (there are exceptions from this!). You could argue that there is a different risk-return profile for steward-owned companies than for other companies. This different risk-return profile can offer diversification not only by market or business model but by company type.
  • More direct path to liquidity for investors: In some cases, coming to liquidity not through an exit (which might take a lot of time to get the company to a place where this is economically interesting or even be impossible) but through next financing rounds or the company paying back the investor from their own finances can actually provide a clearer, more direct path to liquidity for investors. 
  • Greater downside protection: In some cases, steward-ownership aligned financing can result in a greater downside protection than traditional venture capital. As you design your structured exit, there is a predetermined methodology of how investors will receive liquidity. If the company doesn’t fail but even “only” becomes moderately successful, it will in some capacity redeem the investment.
  • Business models with lower financing risk: Steward-owned companies tend to have by intention business models with lower financing risk. By prioritizing purpose over profit extraction, they naturally operate with greater capital efficiency and with less financial extraction over time, they build long-term stability, making them a more secure investment. Steward-owned companies also tend to have earlier real proof of concept and are thus more planable.
  • Passionate, purpose-driven entrepreneurs: It can be argued that founders/ entrepreneurs in a steward-owned company are more purpose-driven and more connected to the business in itself than in many other companies. They are intrinsically motivated and have a high intentionality and passion for the purpose of the company. So it is less likely that they abandon ship and, as investor Patrick Knodel put it, they are less likely to let go and master even difficult situations. This can of course also apply to entrepreneurs in other companies! 
  • Vision holders with understanding of what’s going on in the driving seat: In steward-ownership, the entrepreneurs are vision holders and understand what’s going on in the company; they are in the driving seat instead of whoever is the highest bidder. This can lead to a closer connection between steward and company and lead to more efficient and purpose-oriented steering of the company.
  • Steward-ownership can lead to a reduced team risk: Transitioning to steward-ownership means having to talk consciously about power, money, ownership, governance, visions for the future, etc. Teams that have jointly transitioned to steward-ownership have had these conversations – which in other companies often lead to conflicts between the founders/entrepreneurs, sometimes even resulting in complete abandonment of the joint project. Data also shows that steward-owned companies have a higher retention rate of employees and management, ensuring more stability and consistency in the company.
  • Steward-ownership can be a competitive advantage for companies: In some cases, steward-ownership leads to a competitive advantage for companies, e.g. in cases where customers and other stakeholders value the commitment of the company to steward-ownership. Steward-owned companies are shown to act with greater long-term orientation and have a higher survival rate (6x higher than comparable companies after 40 years).

 

Sources: Børsting, C. and Thomsen, S. (2017): “Foundation Ownership, Reputation and Labour”, in Oxford Review of Economic Policy, 33 (2), 2017, p. 317–338 Hansmann, H. (1980): “The Role of Nonprofit Enterprise.”, in The Yale Law Journal, 89(5), 835–901.; Kuhn, J. and Thomsen, S. (2014): “The Demography of Danish Foundation-owned Companies.” (working paper),  in The Research Project on Industrial Foundations. Available at http://www.tifp.dk/; Thomsen, S., Poulsen, T., Børsting, C., Kuhn, J. (2018): “Industrial Foundations as Long-Term Owners.”, in Corporate Governance. An international review, 26 (3).

  • Role-based rights and responsibilities: Investors in steward-ownership-aligned financing have a more role-based relationship to the company. Instead of automatically receiving voting rights, their involvement depends on the role they want and can take on in the company, creating clear role definitions and expectations. This setup allows each investor to contribute their specific expertise more effectively – and it certainly doesn’t mean they can’t still have a voice in the company!
  • Trust-based relationships: We often experience that steward-ownership-aligned financing leads to more transparent and trust-based company-investor relationships due to the clear expectations, roles and early conversations around money and power in the company. We see that relationships gain a new depth when it’s free from the formal power one party has over the other, and creates room for open, solutions-focused discussions, especially in challenging times, which enables issues to be addressed early and openly. 
  • Dilution of ownership in conventional investments: When investors invest in companies using conventional equity investments, sometimes the situation occurs that over time, more and more shares are sold to other investors who gain larger and larger stakes. As a relatively small early investor, the situation can occur that the investor at some point sits at the table with large, non-value-aligned investment firms – potentially not very connected with the purpose and mission of the company –, the founders or entrepreneurs they trusted have exited and their stake is too small to have a say. Steward-ownership-aligned financing ensures that while entrepreneurs and founders can change, the stewards with connection to the company’s purpose and operations stay in charge and that investors won’t be put in a situation where larger investment firms or corporations take over and are their new counterparts in the company.
  • Building more intentional financing structures: If investors want to invest in a way that solves problems for the world instead of creating more, they cannot only look at what they invest but also look at how they are investing. Albert Einstein once said: „You cannot solve problems using the same way of thinking that created them“ – but currently a large part of the investment world is doing just that. Steward-ownership doesn’t - actually provides a new way of thinking of investments and companies. Steward-ownership-aligned financing challenges the shareholder primacy and growth maxim of conventional financing structures and paves the way for more intentional, mission-aligned ways of investing.
  • Purpose-orientation: For investors that also invest because they are supportive of the purpose of the company, the purpose-orientation in steward-ownership can be quite a benefit. Ultimately, steward-ownership-aligned financing creates a structure in which there is no automatism or pressure of putting shareholder value over purpose, the company will remain purpose-oriented in the long run.
  • Contribution to systemic change while investing: Steward-ownership-aligned financing contributes to more independent and purpose-oriented organizations and counteracts shareholder primacy, wealth and power concentration. For some investors, investing in a way that supports the economy they want to build and be part of is a huge argument.
  • More impact-aligned impact investing (in case of impact-driven companies and investors): Many impact investors are currently using conventional equity investment structures to invest in mission- and impact-driven businesses. They then track how the company and its impact is evolving over time – and then make an exit, after which their involvement and tracking of the company ends. However, the exit often (not always) leads to situations in which the mission of the company is slowly but surely lost (“mission drift”) and maximizing shareholder value becomes more and more important. Steward-ownership would be a way for impact investors to ensure that the company stays purpose-driven beyond their involvement in the company, leading to a much deeper and more focused impact. 
  • No automatic growth maxim: Where conventional venture capital and private equity investments are based on an implicit growth maxim (the company needs to grow in value to be sold, buyers speculate on the company growing further in value to sell again, and so forth), steward-ownership-aligned financing is based on the company creating value in a way that leads to it being able to pay back the investor. This doesn’t automatically mean scaling further and further but rather scaling only if real value is created – i.e. taking on just as much capital as needed to achieve that.
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