Patagonia - the future of social impact enterprises?

Patagonia has been one of the best social impact enterprises in the world for a while now. In the past few weeks, they've taken an even bigger step in being a trendsetter for social impact enterprises.

Patagonia is now owned by two different organizations: the Holdfast Collective and the Patagonia Purpose Trust. This structure isn't your typical hybrid for-profit/non-profit setup. It's way better than that and could have implications for social enterprises moving forward.

Could this structure be the future of social impact ventures?

The problems with current social impact enterprises

Currently, there are 3 main models for creating social impact enterprises or just ventures that are impact driven. Another way to think about them is that they’re missional enterprises - enterprises that have a singular overarching purpose that could dramatically benefit the world or a significant community.

The 3 main models are: B-Corporations (B-Corps for short), Hybrid (A for-profit corporation and a non-profit organization partnership), and a 1% pledge. Let’s go over what the 3 are and some of the challenges that typically come up with each.

B-Corporations

You’ve probably heard about these and have seen the B-Corp icon on packaging or other marketing materials.

As Gusto defines it, “A certified B Corp is a for-profit business that has gone through a rigorous review process to ensure that it’s socially and environmentally responsible. “

Where it’s complicated is that there is a legal structure for a B Corp and then there’s a B Corp Certification that is completely separate from the legal structure. The B Corp Certification is completed by a third party called B Lab. Many legal B Corps have the B Corp Certification from B Lab, but it’s not a requirement.

The vice versa is true too. You can have the B Corps certification from B Lab and not be a B Corp legal entity. So, if you are a sole proprietor, a LLC, or a traditional C Corp, you can have the B Corp certification from B Lab.

If you’re wondering why these two B Corps are different, it’s because legal entities are important, but at the same time they’re not. Before I go on this rant, I’m going to mention I’m not a lawyer, so don’t take this as legal advice.

Legalese out of the way, legal entities are really for liability and economics. What they are traditionally not for is setting a purpose of an organization. For example, it almost never makes any sense for a small business to be a C-Corp or B-Corp legal entity. Especially if it’s only one or two owners. A LLC makes way more sense legally and economically. This is because a one or two person business doesn’t need to be worried about having shares of a company and have the ability to sell shares. A LLC is a middle ground between a C-Corp and sole proprietorship. It’s enough protection for the business while providing some economic relief because corporations typically have greater taxes than a LLC.

So, if you’re a small business, but want to have the B Corp certification as part of your business, the B Corp Certification by B Labs allows you to still have access to the B Corps standards as a LLC.

This is nice for many as it allows you to be accountable to social and environmental standards more legally no matter what type of venture you have. The B Corp legal entity really cements the legal accountability, but isn’t available in every state in the United States just yet. Most states do and it seems like eventually every state will have it, but currently, that’s not the case.

So, B-Corps have been a popular option for many purpose driven entrepreneurs as you can operate as a for-profit which gives you a ton of flexibility and still ensure that you’re a purpose driven company even after the founder leaves it.

There’s more to it, but that’s the basics! Speaking of flexibility, let’s move on to the hybrid situation where there’s a for-profit organization and a partner non-profit “tied” together.

Hybrid (For Profit & Non-Profit Organizations partnered together)

This hybrid for-profit and non-profit setup can be complicated but not as complicated as understanding the B Corp legal entity and the B Corp certification.

A hybrid situation is when there are two separate entities that are very heavily partnered together, one being a for-profit entity and the other being a non-profit organization. These two organizations have to be separate entities legally and have a clear line of differentiation, especially if the same people are involved in both organizations.

Typically, the for-profit organization will donate a lot of their profits to the non-profit and that’s how the non-profit organization will operate. For this to really work, the for-profit organization has to have a profit and generally, a decently big profit.

The reason some will create this hybrid setup is because a non-profit organization can have tax deductible donations and is required by law to have a charitable cause. This charitable cause is a double-edged sword though as if the non-profit is acting out of line with that charitable cause, they can lose their non-profit and tax exempt status. The for-profit business funding the non-profit allows the non-profit to not worry about that potential issue and the for-profit business has a lot of flexibility still. This flexibility is key for things like hiring, benefits and pay, and direction of the two organizations. A key factor is ownership. The for-profit business has owners while the non-profit is a “non-stock organization”.

I don’t love this model for two reasons. One, it feels like you’re duplicating a lot of processes and that’s always inefficient. The paperwork just to set up both entities can be a lot and if your organizational structures are complicated from the start, it always feels like it’ll get more messy as time goes on. Two, all of the power is in the for-profit organization. The non-profit is just getting the scraps of the for-profit business and the for-profit business could just cut off profits to the non-profit at any point in theory.

There may be good intent to have this setup from the start and it could work for sometime, but a change of leadership in these two organizations could always have a change of heart.

We’ve now covered two different legal setups for social impact ventures: B Corps and this hybrid situation. Let’s cover one more setup that isn’t as legal that is becoming more popular: the Pledge 1%.

Pledge 1%

The Pledge 1% movement is pretty simple. The request is that a company donates 1% of either equity, time, product, or profit towards philanthropy. The Pledge 1% is not a legal commitment and is purely what they say it is, a pledge. A voluntary pledge.

There’s no audit, there’s no legal commitment by the venture. It’s purely voluntary and no one is truly validating how much an organization is giving back to philanthropy.

For all of those reasons, I’m skeptical of how impactful Pledge 1% really is. Yes, there can absolutely be positive impact by this Pledge 1%, but if you’re building a venture and you want to say that you’re creating a positive impact on society, I feel like there are so many more impactful ways to do this than just signing a document that is essentially a pinky promise with no one checking you on it. It feels much more like a PR stunt than actual impact. Again, that’s not for all, but I can see how it could be used that way and that never excites me.

If you’re creating an impactful venture, please do more than 1% and be intentional about how you’re being impactful. Not just for PR or vanity metrics.

I’m not completely against Pledge 1% as it can be a good thing, but it’s not something I’m sold on.

Enough about Pledge 1%, let’s move on to why Patagonia’s solution may be the future of social impact ventures.

Why Patagonia’s solution is interesting

Patagonia’s solution to ensuring Patagonia is staying on its mission to be an organization that is “fighting the environmental crisis and defending nature” is a really interesting solution. In a lot of ways, it’s building upon the hybrid situation I mentioned earlier about having a for-profit venture and a non-profit organization. However, it’s way more clever than what I’ve ever seen before when it comes to a hybrid setup.

In Patagonia’s solution, they have setup two organizations: the Patagonia Purpose Trust and the Holdfast Collective. The Patagonia Purpose Trust owns all of the voting shares (aka all of the decision making power) and the Holdfast Collective owns the rest. This may sound like it has the issues I mentioned earlier about hybrid situations where the for-profit organization has all of the power and the non-profit is just getting scraps. In this situation, that’s not really the case.

The voting shares that the Patagonia Purpose Trust owns is only 2% of the economic shares of Patagonia. This means that yes, the trust has decision making power on how Patagonia itself operates, but only earns $2 for every $100 brought in. The $98 left over goes to the Holdfast Collective. For the Holdfast Collective to have 98% of the economic rights to Patagonia is a huge deal - especially when Forbes estimated that Patagonia made over $100 million in profits.

A non-profit organization with that economic power is a mightily powerful organization.

I love this setup because it creates alignment when it comes to the mission of Patagonia. The Patagonia Purpose Trust can focus on the business end of Patagonia and make sure its operating well while the Holdfast Collective can focus on the mission of environmental sustainability. The decisions that either one is making impacts one another, but they’re both aligned in what they’re trying to accomplish. The economic rights of the trust aren’t this extravagant percentage that will be manipulated. It seems just right.

For example, let’s say Patagonia does make $100 million dollars in profit this year. Only $2 million will go to the Patagonia Purpose Trust while $98 million will go to the Holdfast Collective. For an organization that wants to ensure that it's fully aligned with its mission, this economic model seems wonderful. It’s enough funds to make sure the people in the trust are paid well and to keep the lights on comfortably while the Holdfast Collective can make a ton of impact with $98 million dollars.

From an operational standpoint, it makes the roles of leadership really clear. The Patagonia Purpose Trust stays focused on how to run an apparel business while the Holdfast Collective focuses on being a great non-profit organization. For one organization to try to do both of those things is like asking leadership to be a unicorn. Having leaders that can have both of those skillsets is pretty much non-existent. Running an apparel business is completely different than running a non-profit. This structure by Patagonia separates these roles and it is clear as day who is doing what. I love that.

Why this could become a trend, not a fad

Now, that’s all a lot to process and think about. The question I have is “is this a trend or a one-time event?”

I strongly believe that the majority of founders want to build a venture that yes, makes money, but more importantly creates a significant positive impact on the world. All of the hard work, long nights, and sacrifice it takes to build a successful venture doesn’t ever seem like it’s worth it for most if it doesn’t produce a significant positive impact.

As founders want to make sure their venture doesn’t lose its mission after they leave it, this solution by Patagonia seems like an amazing way of solving this age old problem of how to structure social ventures.

Does this structure have some complications in it? Absolutely. Is this the most complicated structure ever though? Absolutely not.

We won’t know what this will all turn out to be in the end, but over the next few years and decade, we’ll for sure know how this new structure will pan out for Patagonia. My gut tells me that this structure will not only work out well for Patagonia, but also for other ventures that want to ensure they are having the positive impact they want to have.

If you found this video helpful, I would love it if you could give it a like, and if you’re looking for other content like this, you can check out other videos on this channel like this one here!