The Patagonia Model
In the early days of CircleUp, when we were confused about some issue or challenge, my co-founder often asked 'What does XX do?', with XX being some admirable and experienced person/company.
It is much easier to answer the question 'what about this particular solution applies to me' than it is to answer 'of everything we could possibly do here, what is the best path.' In fact, many times we could adopt someone else's solution without any change . Other times, we looked at what another organization was doing and modified to fit our values and circumstances. Always, working from an existing model expedited our process.
I'm sure many other founders follow a similar path. The press, blogs, podcasts and venture capital firms all amplify and disseminate these 'best practices', whether they are indeed best or not, helping an entire industry anchor around a modal approach to a given problem. The prominent use of stock options in Silicon Valley with the same four-year vest is one example. Someone develops an idea, it percolates, and then it becomes a 'norm' for how things should be done.
All of this is background for why this week's announcement from Patagonia is such a huge deal. Patagonia is perhaps the most respected leader in the conscious capitalism movement, constantly wrestling with how to balance profits and purpose for much of the forty plus years of operations.
Yvon Chouinard wrote "the company is the product" in Let My People Go Surfing (highly recommend). I interpret that to mean: whether you are selling sweaters or cybersecurity, the work of a founder is to build an organization, not sell a product. The lasting impact of the founder's work is how the organization impacts its stakeholders, and, importantly for Chouinard, who benefits from the economic value created.
We now have a model, a very public model, for how the value created by establishing a wonderfully productive brand and company can be distributed to a cause rather than a person.
- Patagonia was controlled by the Chouinard family. The company generates about $100M each year, and is worth about $3M.
- Rather than selling their shares, or passing them on within their family, the family created an independent Patagonia Purpose Trust to retain control of the company in perpetuity.
- Patagonia will continue to operate as a private, for-profit corporation. The Trust holds the governance rights - only 2% of the shares - providing it voting control over the for profit company. The Trust's purpose is to fight climate change. It will use its voting control to ensure Patagonia, the for profit company, retains the social purpose it has always had in balancing profits and purpose. As Yvon Chouinard wrote, "Earth is our only shareholder."
- The Chouinards then donated the other 98 percent of the shares, the common shares, of Patagonia to a nonprofit organization called the Holdfast Collective. The nonprofit will receive all of the company’s profits and use the funds to combat climate change.
In June, I lamented the sale of Clif Bar to Mondelez because the acquiring company would not maintain the same balance between shareholders and other stakeholders in that business. I could have written the same when Whole Foods sold to Amazon, Honest Tea sold to Coca-Cola or Ben & Jerry's to Unilever. We now have a powerful counter example. The Patagonia Model can anchor a new norm for exiting founders.
While the Chouinard family decided to sell all of their shares, there is nothing in the model that necessitated that. The company could have, for example, used a bank loan to increase their cash position and provide a special dividend to shareholders prior to the donation of the shares to the Trust and nonprofit.
In other words, the Patagonia Model does not need to rely on the incredible philanthropy of founders to ensure purpose driven brands can find a permanent home. There is space between what the founders of Clif Bar received ($2.9B in cash for their sale) and what the Patagonia founders received ($0).
The Patagonia Model now exists. All purpose driven founders - and their investors - must now consider if selling to a private equity firm or strategic investor fulfils their goals. Many, I hope, will follow this new path.
Did you like this post? In one click, please let me know