Ross Baird

NexThought Monday – How 5,000 Stranded Flip-Flops Almost Doomed Three Social Startups

Five years ago this summer, Village Capital made its first investment – in Feelgoodz, the first U.S. fair-trade rubber company, which sells comfortable flip-flops that are responsibly manufactured in Thailand, Vietnam and Guatemala. Feelgoodz got a major purchase order from Whole Foods that January, and got Village Capital to back its first shipment.

Village Capital’s investment funded Feelgoodz’ first major line of production, and when the flip-flops reached U.S. shores, demand was so high that customers had bought the whole order. Village Capital received a positive return on its investment, returned the proceeds to investors, and reinvested the principal in Kickboard, which now is helping teachers manage data better to improve student performance in over 40 states. Kickboard took Village Capital’s first $100,000 investment and has now raised over $7 million in follow-on capital.

Seems like a great story about how entrepreneurs can build great businesses that also benefit the world, right? Then why is the headline at the beginning of this story so depressing? Like any entrepreneur trying to change the world, the saga of Feelgoodz – and the intertwined stories of Village Capital and Kickboard – are much more complicated – and far more interesting and inspiring – than the CliffsNotes presented above.

This story started with an idea about how to provide opportunity to solve major problems in society. At that time in 2010, I had been working with entrepreneur Bob Pattillo and the team at their investment group, First Light Ventures. As we began investing in entrepreneurs solving major social challenges, we noticed three major problems:

  • The supply of great entrepreneurs dramatically outweighed the supply of capital to support them;
  • The cost of deploying capital into new ideas was keeping investors on the sidelines;
  • And most importantly, a counterproductive power dynamic shaped which innovations got a chance: The people with ideas were very rarely the people with capital, so people were building ventures that investors liked, rather than building ventures that customers demanded.

Rather than reviewing thousands of business plans and only investing in a few ventures, like most other venture firms, we knew there had to be a better way.

We started thinking: How could capital better reach entrepreneurs, in a more productive way than the status quo? Bob and I had experience in microfinance, where the “village banking” methodology, of entrepreneurs conducting peer due diligence on each other (vs. pitching a loan officer), empowered millions of small-scale entrepreneurs worldwide and enabled billions of dollars in capital to go to small businesses.

Taking this principle to the next level, we asked the team, “What if entrepreneurs could invest in each other?” The idea of Village Capital was born.

One prominent venture investor called the idea “bonkers.” Another said that it would be a “shark tank” – entrepreneurs would rip each other apart. A third said that there was no way “non-experts” had the expertise to know how to pick a good entrepreneur. But Bob and I felt strongly that we were on to something needed, and above everything else, something that could democratize entrepreneurship.

In 2009, Village Capital launched its first pilot in New Orleans, in partnership with the Idea Village, a great local organization promoting entrepreneurship. The program gathered 12 entrepreneurs from across New Orleans with businesses improving society for a four-month training program. The core principle of Village Capital has always been peer-selected investment – entrepreneurs decide where all risk capital goes. At the end of the program, entrepreneurs would decide two investments of $100,000 each.

Yet the entrepreneurs, as always, decided to break the rules. Midway through the program, Kyle Berner, the founder of FeelGoodz, received fantastic news. Whole Foods had just picked up his line and submitted an enormous purchase order of 5,000 rubber flip-flops. Kyle was ecstatic – but there was an obstacle he needed to first overcome: He needed to ask his fellow entrepreneurs in the program for an advance of $25,000 so he could fill the order. Even though the entrepreneurs had spent a significant amount of time with each other, and were well on their way to trusting each other, it was a huge request.

Kyle brought his problem to the group. He told them that he understood the risk involved, and that the investment decision wasn’t until the end of the program, but that he would pay them (and Village Capital) back as soon as he filled the order for Whole Foods. This was his chance, the start that seed-stage entrepreneurs can only dream of. Would they trust him and give him the advance?

The entrepreneurs discussed it and the Village Capital team decided to give them the ultimate say: Entrepreneurs voted to advance him the $25,000.

And the program continued smoothly and the winning company was Drop the Chalk (now Kickboard for Teachers), which became Village Capital’s first peer-selected investment. Jen Medbery, a coder who was a founding teacher at a New Orleans charter school, developed Drop the Chalk to allow herself and fellow teachers to use data to improve student learning. Jen was excited to receive investment and planned to use the money to hire enough technical and programming support to pilot her technology in New Orleans charter schools. Kyle, with the Whole Foods purchase, was on track to pay back the $25,000 he had borrowed, and the future for both of them seemed bright.

Then, disaster struck. In April 2010, BP’s Deepwater Horizon drilling project in the middle of the Gulf of Mexico burst, spewing oil into the Atlantic Ocean just off the shore of New Orleans. At the same time, a cargo ship with an order of 5,000 of FeelGoodz’ fair trade rubber flip-flops was entering the Gulf of Mexico. A seemingly innocuous coincidence, Kyle soon felt the effect of the environmental disaster where it hurt the most: His flip-flops were stuck in the Bahamas and likely would not make it to New Orleans until October.

Whole Foods responded to the news with a dagger: October’s not a great time to sell flip-flops, they told Kyle, and we might not be able to honor the purchase order. Without the Whole Foods revenue, Kyle would be unable to repay the $25,000 loan and Jen would be seriously constrained in launching her pilot to improve school systems across the U.S.

At Village Capital, the team tried everything. We priced out how Village Capital could buy flip-flops wholesale from Kyle and re-sell them at the University of Alabama. Bob was looking into raw rubber prices. And I was telling the Feelgoodz story to any media outlet that would listen. Kyle was pre-selling flip-flops on his website – but no one bought.

Luckily, a blogger named Nathaniel Whittemore, writing for the activism platform, picked up on the situation. He wrote a blog, “BP Oil Spill Claims Another Victim: An Aspiring Entrepreneur,” with a call to action that anyone who (a) cared about entrepreneurs seeking social good, and (b) were angry about the environmental disaster created by the BP oil spill, could act with their dollars and buy a pair of Feelgoodz. Not only that, as Nathaniel outlined in the story, but all the profits that Feelgoodz made would be reinvested in Kickboard to improve education.

The Feelgoodz story caught on nearly instantly. The New Orleans Times-Picayune, several environmental blogs and ultimately a senior leader at Groupon read Nathaniel’s telling of the story. Groupon was ultimately so moved by the story – and its impact on three startups (Feelgoodz, Kickboard and Village Capital itself) – that selling Feelgoodz became the “Daily Deal” in Groupon communities across the U.S. Feelgoodz’ 5,000 flip-flops sold out in four hours.

The power of peer support and a viral story had a ripple effect. Kyle was able to pay back the loan, and now runs a national organization with sales coast to coast. Jen was able to launch her pilot and her innovative education technology has surged to the forefront of U.S. education reform, and has contracts in over 40 states with major organizations such as KIPP and Teach for America.

And the impact for our organization, Village Capital? Nathaniel was so intrigued by the peer review concept – and how entrepreneurs would rally around each other to build change – that he wrote a follow-up article describing the model “as if angel investing and microfinance had a baby,” and the Rockefeller Foundation became one of the earliest financial supporters of Village Capital. This tagline and Village Capital’s exposure caught the attention of a number of major supporters – including Anthony Bugg-Levine, then of the Rockefeller Foundation, who featured Village Capital and Nathaniel’s tagline in his book on impact investing, and early microfinance investors Jim Sorenson and Chilton Capital Management, who seeded a major Village Capital investment fund several years later.

And the story that motivated the Groupon buyers continues to have a ripple effect: Thanks to early support from people such as the DOEN Foundation, Rockefeller, Sorenson Impact Foundation and Chilton Capital Management, Village Capital has reached 450 entrepreneurs through programming, invested in 51 companies who have served over 6 million customers, and initial capital such as Kyle’s $25,000 has led to over $110 million in follow-on capital.

We were recently reminded of how far FeelGoodz has come during a trip to Raleigh, N.C. Village Capital was participating in the Rise of the Rest tour, a bus tour that promotes startups in non-traditional startup hubs led by AOL Founder Steve Case, who invests $100,000 in an early-stage venture during each stop. Five years after FeelGoodz needed $25,000 to meet demand, we stumbled across a FeelGoodz store on a major downtown street in Raleigh, featuring hundreds or pairs of flip-flops dangling in the windows.

Though Village Capital is now growing rapidly using the power of communities of entrepreneurs, we never forget about the time we got our own break because of one oil spill, two entrepreneurs in need, 5,000 Groupon buyers, and a story that no one could stop talking about.

Ross Baird is the executive director, Village Capital.

business development, impact investing