August 29

Scott Anderson

Weekly Roundup 8/29/14 – Getting In While the Getting’s Good: Why the Bain Capital, TOMS deal could be the first of many

“Corporations are people, my friend.”

Republican Presidential Nominee Mitt Romney’s response to a voter during a campaign stop earned him scorn and was widely ridiculed during the 2012 campaign. The notion of corporations as citizens, with nearly all the same rights under the U.S. Constitution as individuals, is still an intensely debated matter, as it filters through the courts, campaign finance law and corporate taxation policy.

Romney earned his fortune as co-founder of the private equity giant Bain Capital. And so it came as a surprise to some when last week Bain Capital announced it would take a 50 percent stake in TOMS. Perhaps more than any other social enterprise, TOMS’s mission has fixed itself in the minds of many consumers as a corporation that is all about, well, people. Through its buy-one, give-one model, where for every pair of shoes sold the company donates another to an impoverished child, TOMS says it has helped place soles on 10 million pairs of little feet.

What’s even more surprising about the transaction is TOMS’s valuation, as quantified by Bain, at north of $625 million.

TOMS founder Blake Mycoskie told The New York Times he will hold a 50 percent stake in the company, will pick up the new title “chief shoe giver” and will continue developing new product lines, even though Bain will help him find a new CEO soon. (TOMS already sells glasses and coffee, through the buy-one, give-one transactions, so it will be interesting to see what else Mycoskie has in mind).

“My dream is for TOMS to be the most influential and inspirational company in the world,” he said.

He’s also using a chunk of the Bain money to develop a new investment fund.

“The fact that they came up with this idea on their own says a lot about Bain,” he told the Times. “We got a great partner who believes in our model and not changing that, but on top of that wants to make a difference in people’s lives through philanthropy.”

Bain similarly found value in TOMS product and the relationship it has with customers.
“It tells the world something about them,” Ryan Cotton, a Bain principal told the Times. “That’s a really powerful business model.”

Going into the Social Capital Markets Conference (SOCAP14) next week, the TOMS/Bain deal was reverberating throughout social media and on the conference portal. Most of the reactions were positive, although many continued to question buy-one, give-one, or BOGO as its sometimes called, which some see as ultimately counterproductive for development and local communities and craftspeople who find themselves awash in free shoes. We’ve posted several articles critical of BOGO, including: When the Shoe Doesn’t Fit: An Investor’s Take on One-for-One Models and TOMS Shoes and Consumerism’s 3 Biggest Sins.

Michael Van Patten, founder and president of Mission Markets, wrote on the SOCAP message board that the news was “very positive” considering a socially focused company like TOMS can unlock liquidity from a firm like Bain. The deal also stands to give impact investing a shot in the arm as it looks to build credibility with mainstream investors.

“Without mainstream investors and major capital markets player involvement (yes Goldman, Merrill, Morgan Stanley, etc.) impact investing will struggle to scale and continue to depend on one-off transactions with little information,” wrote Van Patten. “But its success in supporting private market transactions, which is where the space currently lives, will depend on companies accessing viable exit events such as TOMS. Impact investing will have a short shelf life if the investments cannot provide a return on invested capital.”

Will Poole, managing partner at Unitus Seed Fund, was also upbeat about the long-term implications.

“Based on my interactions with TOMS, it’s clear that they are serious about driving more impact while still maintaining the deep consumer engagement that their ‘One for One’ model has created. This level of PE-fueled scale-up could take them a long ways to expanding the franchise and showing that impact and profits can come hand in hand, at scale,” Poole told me over email.

Myra Donnelley, vice president of resource development at for-profit social enterprise Eniware, found it an “interesting marriage” but was more circumspect.

“… as TOMS has also shown, the true cost of engaging rich consumers with the charitable distribution of free stuff in low-income countries is damag(ing) to local markets and retard(ing) economic development,” Donnelley wrote. “Because of the inversion of scale (10 million U.S. TOMS shoe buyers vs. 3.2 billion people living on less than $2.50 a day) it seems infinitely more sensible, sustainable and more respectful of human dignity to view, as Paul Polak so eloquently advises, lowest income people as potential customers and work to address their market needs as consumers and producers of goods. TOMS seems to have made some better steps in this direction with their water and health partners. I look forward to their continued evolution away from BOGO marketing toward true job creation/poverty alleviation in emerging economies.”

I get the split here. This could well be the biggest deal in the impact investing/social enterprise world of the year, and at the same time, many have lingering concerns about the effectiveness of the TOMS model, which presumably would grow exponentially with the Bain buy. That would mean putting a flawed model on steroids thanks to Bain, critics contend.

But insomuch as it’s possible to separate the BOGO model from TOMS, here’s one thing we know about Bain: It doesn’t do public relations investing. Bain only gets in when it stands to make a profit – which at the end of the day is the reason it’s called impact investing – and not, say, “impact donation.”

Bain’s undoubtedly done its due diligence and there’s little doubt the other private equity players interested in finding the next TOMS will be doing theirs.

A brief holiday for your NB team

In honor of the Labor Day holiday on Monday here in the U.S., NextBillion’s editors are taking a breather. But we’ll resume publication on Tuesday. And, we’re gearing up to bring you coverage of two important events next week, SOCAP14 and the Microcredit Summit. Please click those respective links to see preview coverage and to follow our coverage.

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Scott Anderson is the managing editor of NextBillion.

business development, impact investing