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How to Do Well With 3 Types of Do-Gooder Investors

How to Do Well With 3 Types of Do-Gooder Investors
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Many startups come to me today with dual bottom-line goals: They want to profit and fund a humanitarian bent. They’re often inspired by Warby Parker, the hip-eyewear seller that donates specs to people in the developing world. I salute these founders’ intentions, but they may not realize how hard a social mission slams into investors’ short-term expectations. As a venture capitalist, I almost always have to take a pass. But the well-intentioned aren’t out of luck: These are three potential paths they can take.

Benefit Corps. They’re commonly known as B Corps, and they bake in protections from investors who want to compromise a startup’s social conscience in the pursuit of maximizing shareholder value. If you make yourself a B Corp, investors know what they’re in for when they buy in. How does that play out? We’re all finding out together: B Corps have been authorized for only a few years in most states. (Warby Parker is one of them.)

Low-Profit Limited Liability Company (L3C). Like B Corps, L3Cs enjoy protection from activist investors -- but it’s their unique access to capital that sets them apart. They act like a B Corp in purpose but enjoy the benefits of a nonprofit in tax structure. That means they can legally receive investments from large mission-driven foundations that can invest only in nonprofits. Foundations may prefer putting money in L3Cs because it enables them to pursue their mandate while hopefully earning a return.

Impact Investors. These investors are often ideal. Usually, they take the form of high-net-worth entities such as corporate or personal foundations -- the Gates Foundation or the more recent Chan Zuckerberg Initiative, for example. They’re more interested in advancing a cause, which means they’re more tolerant when purpose starts to trump profits. But beware: They may be so taken by your cause that they disregard your stability. Other investors will notice this and may stay away.

So good luck, do-gooders. Don’t despair if your pitch falls flat on Sand Hill Road. Just remember this: It’s a lot easier to save the world when the bottom line is strong.    

This story appears in the April 2016 issue of Entrepreneur. Subscribe »