Where Are the Exits for Social Enterprise?

The venture and startup industries in the tech world are highly influenced by the nature of the exits that businesses and investors can expect. As the social enterprise space grows and more venture firms fund early stage ventures, the field is beginning to face a major question of to whom social businesses sell, and how do they do it without selling out.

In the Web 1.0 bubble, internet industry exits were all about initial public offerings. More recently, caused in part by the new barrier to IPO created by the much-reviled (at least in Silicon Valley) Sarbanes-Oxley legislation, the exits have been largely about acquisitions.

This may seem like insider baseball, but the nature of the exit has dramatic effect on both the aspirations of entrepreneurs and the calculus of investors. The young entrepreneurs I met around the Bay Area are increasingly looking at building something useful, but relatively unambitious, and hoping for a quick turn around and sale to Google, Yahoo, Microsoft, or one of the other biggies. That's not to say that some aren't still swinging for the fences, but there is a clear shift.

For investors, they have to think differently about what the average exit looks like, and what the upper-bounds of a homerun really are. Although all of these numbers seem insanely large coming from the nonprofit field, there is a major difference between making a few billion off an IPO and a few hundred million in a sale to Google.

In the social space, the idea of for-profit venture capital for good is still in its infancy, and the nature of exits is still up for grabs. In the past, the field has seen the frustrating example of a company being acquired and having its social and environmental commitments be forced lower and lower down the priority chain.

Today, social venture firms like Good Capital are not only working to make smart investments in high performing companies, they're also experimenting with specific financial structures to make it harder for acquirers to gut social and environmental commitments.

Part of the answer has to be a natural maturation of consumer demand where the social difference is at the core of the competitive advantage of a product or service, in such a way that to change that emphasis would be to disrupt profits. But that's easier said than done.

What is the answer? Where should social enterprises (and their investors) look for financially and socially rewarding exits?

(Photo: orangeacid)