The status of investing in steward-owned startups in the Netherlands

Is it possible to invest in a company that aims to be ‘self-owned’, decouples voting rights from economic rights and caps the economic returns for investors? The short answer is: yes! Steward-owned companies, including startups and scale-ups, can be as ambitious as any other company and provide investors with a decent return. This article highlights insights from our own experience and interviews with half a dozen investors. If you want to know more about how investing in steward-owned startups works, read an introductory article about investing in steward-owned startups (in Dutch) and a recent article on three ways to structure investor returns.

Investors

An overview of investors that have experience with investing in steward-owned companies:

  • • Business angels: After an initial investment from the founders themselves, business angels are typically the first external investors. Because of the informal nature of business angels and a strong connection with the founders and mission of the company, business angels are quite open to steward-ownership.
  • • Public impact funds (like regional development agencies and Invest-NL): AKEF and Oost NL recently invested in funding rounds of steward-owned startups, paving the way for other funds.

  • • Pension funds: Many institutional investors have experience with investing in publicly listed steward-owned companies like Novo Nordisk and Maersk. Translating that experience into investing in earlier stage companies is yet an untapped opportunity.

Want more names of investors? You can find an overview of more investors here.

There is a small but growing number of funds that specifically aim to invest in steward-owned startups, some of which are currently raising funds:

What do investors perceive as advantages, disadvantages and challenges of steward-ownership? The interviews highlighted steward-ownership provides clear benefits for purpose driven investors. But let’s start with the hard part – the disadvantages:

1. Disadvantages

Exit horizon: Most VC funds have an exit horizon of 5 to 10 years. Investment deals are structured to work towards an exit and sell the company within that period. This creates a focus on short term valuation and results. Steward-owned companies however work towards balanced and profitable growth and are structured to stay autonomous, meaning investors can’t work towards a ‘big bang’ exit and sale of the company. Steward-owned companies rather offer a ‘structured exit’ by sharing profit with investors. This requires a longer horizon and can be a mismatch with the horizons of most VC funds

Limited number of investors: The limited number of funds that are currently able to and interested in investing in steward-owned companies creates an inherent risk that a steward-owned startup won’t be able to be successful in a subsequent funding round. Although the number of interested investors is increasing, this is currently a disadvantage for steward-owned startups that need more than one funding round before reaching profitability.

2. Challenges:

Capped economic return: Most VC funds bet on having a few startups that will go through the roof and compensate for many startups that fail. Most steward-owned startups however offer investors a ‘capped return’. After receiving that return, shares are transferred back to the company. While a capped return might work to compensate an investor for its contribution to one startup if everything goes well, it might not compensate for the investments in its portfolio that don’t work out. Finding the right (capped) return is a balancing act and extra challenge in the negotiation process, although it can be easier than valuation discussions in typical VC backed startups.

Selecting the right stewards: Many investors are used to having direct voting rights and a number of reserved matters they can veto, to be able to influence the startups they invest in. Not having these rights requires confidence in stewards that hold the voting rights, to be able to help the company become successful. In the early years, founders are typically the most important stewards. Independent stewards might get more important once a company becomes profitable and more mature. The topic of stewardship and selecting the right stewards requires continued attention and trust. In practice, an independent golden shareholder typically helps startups and their stewards to stay within the boundaries of steward-ownership.

Profit and ambition: Making sure the company also focuses on becoming profitable is one of the most important tasks of the stewards. In practice, mature steward-owned companies are not less profitable or ambitious than their counterparts. Due to a lack of data, we can’t yet claim this also holds true for steward-owned startups, but at most steward-owned startups the founders are very motivated and also incentivised to make their company profitable. Like investors, the founders don’t work towards an exit but can do well economically if the company does well. This aligns their interests with the interests of investors.

3. Advantages:

After the disadvantages and challenges, we end with the advantages!

Better decision making: When major decisions are made by stewards who are in love with the mission of the company and are either independent or closely connected stakeholders, investors agree this can result in better and more balanced decision making compared to decision making by shareholders only. Clearly, this advantage is connected to the last two challenges mentioned above.

Exist instead of exit: Most VC-backed companies cease to exist because they are either acquired or go bankrupt. This is not a great feature and you could wonder what the social costs are of this. The goal of steward-ownership is to enable a company to exist and realise its mission, which might even fit better with the original intention of impact VC’s. Should impact VC’s reassess the goal of working towards a big bang exit and rather help impact driven startups to exist to realise their mission?

Being mission-driven: For customers (especially in the public sector) and employees, steward-ownership is a USP for companies. Customers profit from a stable and autonomous mission-driven supplier that won’t cut corners or introduce profit maximising price hikes. For employees, working at a mission-driven company creates a psychological basis for deeper motivation, knowing it is about achieving the purpose and not about making the founder and investors very wealthy. For investors who want to drive systemic change, knowing the company stays mission aligned can create a high trust relationship.

The landscape for investing in steward-owned startups in the Netherlands is evolving. While the dynamics of steward-ownership require investors to adapt their traditional approaches, the potential advantages of better decision-making, mission alignment, and long-term value creation are compelling reasons for impact driven investors to explore steward-ownership. As more funds gain experience with steward-ownership structures and the ecosystem continues to mature, we hope to see increased capital flowing toward startups that prioritize purpose alongside profit.

In upcoming articles we will delve into ways to overcome the challenges identified, how steward-ownership can play a key role in achieving systemic change, and further explore opportunities for investing in steward-owned startups

Credits: Robin Tharakan from steward-owned startup Alkemio contributed to the interviews and gathering insights.