We focus this Greenhouse Perspective on the difference between sustainability – the sector – and sustainability as a way of building a company for the long term; as a blueprint for an enterprise that can withstand the ups and downs of business cycles and take the body blows dished out when markets and the economy sometimes go sideways.
Sometimes, we have a name problem. For better or worse, Greenhouse is our name, our brand, and our identity. As such, it could understandably be assumed we are a “green” or cleantech fund, where a focus on sustainability is central to our core sector focus. That assumption would be right, but not always.
Even from the start, we were never a purely green fund, largely because we never wanted to take full sector risk (a good move given the rise and fall of cleantech between 2007 and 2009). We always felt Greenhouse had far more to do with seeding companies and building them – ‘growing’ them – the old fashioned way. (The Silicon Valley spray and pray approach where lots of capital goes in and only a few winners come out doesn’t seem like a logical game to play.)
Sustainability, therefore, is as much an ethos of how companies should be built and operated for the long haul, rather than the pure green sector focus that our name sometimes implies. It suggests an ideal where entrepreneurs can and should create something lasting to hang their hat on, and employees and stakeholders have something of far more permanence to depend on. This is not a noble cause. It makes good business sense and, as we’re seeing more and more, young entrepreneurs crave this approach. The next younger generation of entrepreneurs, particularly millennials focused on health, wellness and sustainable living, are slightly different than that sliver of founders still dreaming of their next Twitter, LinkedIn or Uber. This new class of entrepreneurs seeks to create companies of lasting value, not businesses purely to be flipped by investors. They want the enterprises themselves, the company cultures and what they represent, to reflect the permanence and ‘sustainability’ inherent in the products and services they are creating.
We have recently looked at a company that’s a hybrid delivery platform for fresh local organic food where you can subscribe to monthly deliveries of the freshest produce and specialty food items imaginable. It’s somewhere between Whole Foods and Fresh Direct and any number of subscription models for fresh food currently in the market, yet one where you can order a la carte, where there is pick up or delivery, where they can curate your delivery items for you, and where the freshness and price is exponentially better than the best local Whole Foods market. It’s a crowded space and there’s much diligence to be done. But the Founders are equally picky. They want investors who will be in for the long term, who will embrace their mission and who see the company as something larger than food delivery. This is meaningful to them, and as a capital efficient entity already generating several million dollar revenue run rate and potentially requiring less than $1M to get to break even, they can afford to be choosy.
Frankly, this emerging focus from entrepreneurs on creating companies focused on sustainability as a sector yet built around the notion of sustainability as a way of operating a business, is refreshing. It’s the polar opposite of what has permeated the Valley since eBay, Google, Yahoo and the likes became household names and created fantasies that stepping off of a plane at SFO meant a clear straight path to becoming a billionaire. The sustainability focused entrepreneur is far more interested in creating a company where profits matter, where employees are hired with the desire to retain them for the long term, and where investors can help achieve breakeven with smaller amounts of capital.
In many ways, the recent upheaval in the markets as a result of the fundamental crackling of China’s economy has been an even further argument for this approach. As with most manias, China’s manic growth was unsustainable, largely because the day was going to come when there simply wasn’t going to be enough demand to keep up with supply, where debt was going to laden down project after project, and where the Chinese economy hadn’t built within itself the sustainability necessary to fuel growth on its own. A day of reckoning had to come.
Ironically, this has been music to our ears. The perception of lousy markets and bearish conditions scare off other investors who could be competition for future deals, as much as it ratchets up the pressure on entrepreneurs to understand that investment capital might soon be scarce. (As my dad says, “Money doesn’t grow on trees you know!”) At times like these, deal terms often become more attractive, and companies understand they will now have to do more with less. When it comes to building sustainable enterprises for the long term, this is exactly what we are seeking. Anytime you can argue for more investor friendly terms with less capital in and yet have founders agree there’s still a way to operate more efficiently, that’s a good day.
In fact, if we look at the best companies in the current portfolio – the most profitable ones we have –have proven this through good times and bad. Profitability has been in place for several years, investment capital has been kept to a minimum, growth rates remain at 50% or more and employee retention has been extremely high. That’s the kind of sustainability we like and believe in.