Posted by Tom Foremski - April 21, 2015
I recently met with Davis Smith, founder and CEO of Cotopaxi, an e-commerce startup that recently raised a $6.5 million Series A round, for a total of $9.5 million --the largest amount ever raised from institutional investors by a Benefit Corporation.
A "Benefit corp" or B Corp is a legal designation that differs from the normal "C corporation" whose fiduciary obligations are to maximize shareholder profits or risk lawsuits. B Corps have a legal duty to fund a humanitarian mission from their profits.
Cotopaxi does good from the profits in selling outdoor gear. Each backpack, jacket, or water bottle is linked to a specific humanitarian project.
Smith grew up in a family that greatly valued service to the community and helping others. He realized at an early age that he wanted to make a big difference in the world but wasn't sure how to do it.
His inspiration for doing good was a Philippines incubator founded by a very successful entrepreneur, Steve Gibson. After idolizing him for years, Smith ran into him by chance in an elevator, and managed to sit down and speak with him. To do good, he was told, first become good at being an entrepreneur.
This inspired him to start his first business with his cousin, building and then selling pool tables online. This grew into a thriving business and quickly became the largest US seller of pool tables. He sold that business in 2010 and returned to school to get an MBA.
Upon graduation from Wharton, Smith started another business, this time in Brazil, selling diapers and other products online for families with babies. It became the largest e-commerce site of its kind in Brazil.
"We grew very quickly because were lucky enough to catch the beginning of an online boom in Brazil." The rise of e-commerce mirrored the fast growing economy and the rise of a large middle-class and their new families.
In 2014 he decided it was time to fulfill the commitment he'd made in talking to Steve Gibson, to use entrepreneurship to do good in the world. He left his business in Brazil, moved back to the US and founded Cotopaxi, which donates as much as 10 percent of its profits to projects across the developing world.
He was inspired to fund humanitarian projects in Latin America because of his travels. He speaks about an encounter with a street urchin, a young boy he met in Peru. The boy was terrified of returning home to an abusive father because he had had his shoe-shining kit stolen and that was his only means of income.
Smith helped the boy and the incident stayed with him. "I returned to Peru thirteen years later and managed to track down the boy. It has become a truly meaningful relationship to me and to him."
Cotopaxi is different from Patagonia, which also sells outdoor gear and converted to a B Corp.
"Cotopaxi was founded as a B corporation from the very beginning. It is ingrained in our culture. Our mission is also humanitarian based vs. environmentally based."
Doing good is ingrained in Cotopaxi culture and its tag line: "Gear For Good" further underlines its social mission.
Having a social mission is great for recruitment. Smith says that millennials care more about working for a purpose than previous generations. A month after their launch, they had over 300 job applications.
"B" for beware...
Smith was initially advised not to register Cotopaxi as a B Corp but to convert later because it would be hard to get investors. He's glad he ignored that advice because the B Corp. designation was authentic to his company's brand and mission and VC investors picked up on that authenticity, which helped attract rather than repel investors.
Cotopaxi is rapidly developing a cult following. The products are extremely well designed with an emphasis on high quality and durability. Every detail is thought-through and well executed.
For example, the polar-fleece lined jacket carries the label "Proudly made in Bangladesh." The standard label on machine washing ends with "Launder Garment Separately But, Whatever You Do...Have Fun And Do Good While Wearing This Garment."
Events drive sales...
Its approach to marketing is also well done and profitable! Cotopaxi organizes regional 24-hour "Questivals." These involve thousands of people racing to complete a range of tasks such as volunteering at a soup kitchen, and hiking a mountain, or other tasks from a list of more than 300 tasks. A $35 entry fee comes with a Cotopaxi back pack and a chance to win more products.
Smith says this greatly helps raise awareness of company products because Questival competitors are asked to share photos of themselves online as they complete each task. And each Questival generates a small profit. Questivals have been held in San Francisco and more than 20 US locations.
Foremski's Take: Cotopaxi's success in raising money as a B corporation serves as an important signal that top Silicon Valley VCs see advantages in B Corp startups. Doing good and making money are not incompatible.
In fact, a self-sustaining business operation with a social mission has advantages over one that has none. Many surveys have shown that it's important to millennial consumers.
Cotopaxi will undoubtably help other B Corp startups raise funds. However, Smith is an exceptional entrepreneur with a fabulous track record of building companies. The problem VC investors face is finding experienced teams lead by people such as Smith. There's no shortage of capital but there is a shortage of Smiths in the world.
It will be interesting to see if his leadership can inspire Silicon Valley's serial entrepreneurs to start their next business as a B Corp from the beginning.
With competition for engineering staff at tremendously high levels, the prospects for working at a B Corp startup versus Google or Facebook could be significant for recruitment. Saving the world easily trumps the perks of a free lunch and a bus to the office.
The return of corporate social responsibility...
Ten years ago when Google went public, social corporate responsibility was the prime focus of its offering. The first thing you saw in its S1-filing was a letter to shareholders in which Google founders explained that their goal was not profits but to do good, to make a difference in the world. It was the reason why they created a share structure that gave them 10-times the voting rights, so that they could preserve their vision from future shareholders.
Google's pursuit of that vision has faded from public view. It's a mistake because the engineering community is still very much interested in doing good, and in working for an organization whose ambition is to make a big difference in the lives of as many people as possible.
Cotopaxi's funding and its success is a sign that doing good is not a fad -- it is something that should be part of every startup's business model.
Humanitarianism as a Service...
But it's not easy to source and fund humanitarian projects. Smith might do well to consider developing a back-end "humanitarian" platform that other B Corps could plug into and offer as part of their e-commerce efforts.
Frictionless humanitarianism could be a killer business opportunity with a global impact given our addiction to an always-be-shopping consumer lifestyle.
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