As an owner of capital who wants to use it to improve the world, my professional life has been divided into two parts. On the one hand, I seek to smartly grow that capital through investments. On the other hand, I seek to use capital for the public benefit through charitable and other giving.
I have long sought ways to bring these two areas of work together by making investments that incorporate the public benefit and, more importantly, to create a framework for other like-minded investors to do the same. I want to be able to invest with scale in businesses that don’t maximize for shareholder value but instead are willing to reallocate some benefits to other stakeholders. I believe that in many cases harnessing the power of commercial enterprise, whether by increasing public benefits or by reducing harm, can result in changes that are out of reach of the non-profit sector. But unlocking this opportunity will require financial innovations that allow large flows of capital to move in and out of these types of investments.
My newest venture, Athletes Unlimited, seeks to explicitly blend profit and purpose through disruptive innovation in professional sports. With an ambition of building a substantial media and entertainment business, we have created a network of professional sports leagues using a new model. We play five-week seasons using a custom-built scoring system that makes every single play count toward the final result and crown individual champions in team sports. We have already launched leagues in three sports — all for female athletes — with plans to add more over time.
These on-field innovations are being matched off the field. Athletes Unlimited is giving athletes an unprecedented role in the development of our leagues and substantial influence over all key decisions, functionally eliminating team owners. We are committed to developing our athletes as civic leaders and elevating them as role models. We are developing policies and business practices that lead with our values. And with the hope of building a model that can vastly expand the opportunities for investors willing to trade financial return for impact, we have developed a new way of financing the company that links profit and purpose at the core of the capital structure.
Building a Marketplace
Opportunities to invest in businesses that are explicitly willing to trade shareholder financial return for public benefit — which I’ll refer to here as social enterprise — do exist, but they remain a niche minority in the growing impact investing landscape, small in scale and targeted at specific social problems or geographic areas. Most of the businesses that stake a claim to labels like inclusive, accountable, and stakeholder capitalism follow the “doing well while doing good” maxim that dominates commercially promoted impact investing. Companies like Ben & Jerry’s — a wholly owned subsidiary of Unilever since 2001 — are able to expand their market appeal or increase their prices by touting their socially-minded business practices to consumers, but ultimately they make no compromise on their goal of maximizing profits. There is no Unilever of social enterprise.
The emergence over the last decade of benefit corporations — a legal structure that requires directors to consider interests other than shareholders — has been a major step forward in challenging the idea that shareholder profit must always be the bottom line. But the benefit corporation structure alone provides no benchmarks for how to strike a different balance, nor any mechanism for how to exchange value based on the benefit created.
For social enterprise to reach the scale and ambition of modern corporations we must find ways to fill those gaps and allow dynamic flows of capital similar to conventional equity markets. This idea — creating a marketplace specific to social enterprise — is not a new one; the challenge has vexed advocates for decades. How do we create a market that incorporates both financial value and social value, the so-called second bottom line?
To create a fully functioning marketplace for social investments, we need to solve two key problems: first, we need a mechanism for the investor to signal how they value the impact being created, the same way that price signals an investor’s financial expectations for a company. And second, we need some way for price — the first bottom line — to relate to this new impact signal.
For years, the effort to solve these challenges has focused on measuring the social impact of companies. Transparency and accountability would provide the assurance that impact was being created and a marketplace could then follow, the argument goes. The focus on metrics has indeed led to important advances in conventional capital markets as ESG (environmental, social, and governance) ratings have become more commonplace, providing investors with information about a company’s non-financial performance.
But ratings and metrics don’t really solve even the first of our two problems. They can give some objective assessment of impact based on specific criteria (wages, carbon footprint, board composition, etc), but they cannot signal how an individual investor values those different criteria. More importantly, the metrics say nothing at all about interests that are not captured by the measurement (professional opportunities for female athletes, for example). Ratings of all kinds have an important informational role, but have not been able to anchor a marketplace for social investments.
I believe that the answer to the challenge of finding a market signal for impact may lie in a new way of thinking about distributing the economic value of the firm that is embedded in the corporate structure. At Athletes Unlimited, we have developed a unique way of financing the company that gives investors the opportunity to achieve a satisfactory financial return while directly supporting the non-financial mission of the company. We are calling this new security “mission equity.”
In a conventional corporate structure, equity holders are the owners of all residual value after liabilities are repaid. The potential value is unbounded and, for several generations at least, the prevailing orthodoxy has been to maximize the financial value that accrues to shareholders. By contrast, when purchasing interests in Athletes Unlimited, investors agree to a limit on the financial return they might receive on their investment. Or, to look at it from the other way around, investors signal clearly a return at which, if all goes well, they will be satisfied and are willing to forego surplus returns.
In the capital structure, the mission equity as a class is still the residual owner of the value of the company, but unlike the unlimited upside of conventional equity the financial benefit each investor may receive from this security is limited by the cap they agree to up front. Instead of dividends, all distributions to investors take the form of a share repurchase at a price established at the time of issuance, and the repurchased shares are set aside as a pool to further the mission.
In the case of Athletes Unlimited’s initial investors, that repurchase price is set by a formula using a compound rate of return from the initial purchase price, but any formula could be used (simple interest, fixed price, spread against a benchmark return, etc.). It is important to emphasize that the use of an interest rate does not create any form of guaranteed return. It is, essentially, like equity with an attached call option. The call option is held by the company, but must be exercised at the same time for all shareholders in lieu of distributions.
A Market Signal for Impact
The cap that an investor is willing to accept on their return adds a second signal — in addition to price — that reflects the value they place on the company’s non-financial mission. In Athletes Unlimited, for instance, one investor may be inspired by the focus on civic engagement. A second may be compelled by the opportunity to enhance professional opportunities for female athletes. And a conventional venture capitalist will insis