Case Study No 37: FRUIT OF CARE and Thierry Baudon & Mid-Europa – Mixed Financing for a Social Enterprise Start Up. Introduction In 2011, at the Central and Eastern Europe (CEE) Private Equity annual event in London, Thierry Baudon was awarded
Support to date from the Thierry Baudon & Mid-Europa and other philanthropists:
the “Golden Egg” Award, an award given to a philanthropist that has been an outstanding supporter of social enterprise. Why was this happening at a professional event rather than
Capacity: USD 28,000
at a charity ball or fundraising dinner? Because the CEE event
Financial: Equity: USD 5,000 Grant: USD 87,000 Loan: USD 55,000
is where the Golden Egg Award is traditionally given to individuals who take an engaged investment approach to their philanthropy. The way that Thierry conducts his philanthropy is very closely tied to the way he conducts his
Total: USD 164,000
business activities. As a successful private equity investor, his approach is to become highly engaged, getting to know the companies closely, examining the leadership team to see if they have the vision and management capacity “to go for the full marathon as opposed to the 100 yards” and a product that really has sustainable demand. It’s this same equation that Thierry believes should be applied to the social enterprises that he and his firm are supporting in the region including the Hungarian social enterprise FRUIT OF CARE.
The
context might be different, but the drivers are all exactly the same. And once Thierry and his colleagues make a decision
to
socially
invest;
the
approach is also the same.
Thierry Baudon receives the Golden Egg Award (2011)
Case Study No. 37: FRUIT OF CARE and Mid-Europa
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Working with NESsT to guide FRUIT OF CARE´s management to make the right decisions, use diverse and timely philanthropic financing
to slowly grow the business, and take certain
calculated risks knowing that this could potentially lead to higher social returns. FRUIT OF CARE The aroma of herbs and spices penetrates the soap-making workshop.
At a table, Marianna
Balázs (44) and József Juhász (43), are intently rolling small balls of soap. They are a couple and always work side by side in the soap workshop, peacefully, without a word. Though they are silent, the tenderness in their gestures as they Marianna and József, two employees of the soap production workshop
roll and pass the soap from to each other speaks volumes.
They seem to represent the very
meaning of the phrase "FRUIT OF CARE". Judit, the Manager of the workshop, who guides the employees as they make the soap, shares her opinion, "I can absolutely see a positive change in our employees since they started working in the soap workshop for FRUIT OF CARE. They thrive when they can count on a steady, day by day activity, because this makes them feel secure. As a plus, working with their hands on a regular basis for rolling soap has also improved their motor skills." The soap workshop is one of eight suppliers of FRUIT OF CARE, a Hungarian social enterprise that sells attractive home decor and gift products made by people with disabilities.
The enterprise trains suppliers and their
beneficiaries to make its line of product – among them beautiful soaps, candles, toys and preserves. The key clients of the enterprise are companies and their employees who are interested in the products, and also individuals, particularly middle- and upper-income women. Case Study No. 37: FRUIT OF CARE and Mid-Europa
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way, the model is quite unique since often in this part of the world, marginalized communities are given makeshift or busy work, whose products never leave the warehouse. Despite the fact that it’s a seasonal business, FRUIT OF CARE maintains the suppliers working throughout the year, providing permanent employment to 180 people who would otherwise have great difficulty in entering the labor force. In 2010, the enterprise spun out of its parent organization, which was also one of the enterprise´s suppliers that had gone through a rigorous business planning process but no longer wished to manage the business. Given its proven two-year track record, visionary leader, and strong business plan, the decision was made to create FRUIT OF CARE, a limited liability company. The four founders- NESsT, the CEO
FRUIT OF CARE entered the NESsT portfolio in 2010 (Aron Jakab, Manager of FRUIT OF CARE, pictured bottom left)
Aron, and two colleague organizations - each took an equity stake in the company which made it possible to create a new entity. The legal form existing in Hungary made equity investment possible in this case, whereas with many other social enterprises this would not be an option. The amounts were small given limited funding available on the part of most of the founders. The decision to develop this as a company and to provide equity from the start was based on several factors. The first consideration was the growth and replication potential of the social enterprise. The second was the opportunity for a good exit once the market developed and FRUIT OF CARE became an internationally successful brand and company. The desirability of the products and the value proposition of this business contributed greatly to these decisions. The business plan showed that FRUIT OF CARE could increase its sales nearly 5-fold while providing employment for 800 beneficiaries in four years. To do this, FRUIT OF CARE would increase the number of clients, mostly companies, as well as the size and frequency of orders. In order to reach higher levels of production, emphasis would be given to growing the number of existing and new products from current and new suppliers.
Case Study No. 37: FRUIT OF CARE and Mid-Europa
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Parallel to this initial equity stake, grants were also necessary both from NESsT and other donors in order to build the basic business infrastructure and the team as well as to cover the social costs associated with employing people with disabilities. The business plan estimates that it will take FRUIT OF CARE four years to break even, and it would be difficult for them to cover these costs strictly from sales projections.
“Throughout our work with NESsT, we have always experienced maximum help and cooperation. Their support and partnership is delivered with high standards and professionalism. � Aron Jakab, Manager of FRUIT OF CARE
Aron speaking about the FRUIT OF CARE experience at Social Enterprise Day, Hungary, 2012
In 2010, the market showed a very good response to the FRUIT OF CARE concept and the company had a very good first year exceeding its sales projections. NESsT also offered a working capital soft interest loan to cover inventory costs, and expected it to be repaid from 2011 Holiday revenues. Unfortunately 2011 turned out to be a less positive year as a result of the recession, so the loan had to be rescheduled to 2013, when increased sales efforts and sales to new target groups are expected to produce high revenues again. In order to ensure that the enterprise would achieve these targets, a new injection of funding was provided in the form of grant and loan support was provided in 2012.
The thinking behind
these social investments was to make sure that FRUIT OF CARE had the needed funds to strengthen its business and sales capacity, and of course the working capital needed for the The FRUIT OF CARE stand at Social Enterprise Day, Hungary, 2012
Case Study No. 37: FRUIT OF CARE and Mid-Europa
new holiday products.
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Alongside this philanthropic financing, there has been a strong focus on building the capacity of the team to manage and grow the business. One challenge has been that the CEO is spread too thin, trying to manage the production, sales, marketing and financial sides of the business. With the equity and grant support provided, Aron has been able to dedicate more time to growing the business, finding new clients and overseeing the marketing strategy, while leaving the production and operations tasks to the team. This has not been easy given that the team is fairly new and there is a steep learning curve. The other challenge is growing competition coupled with the recession in Hungary which has led to a decrease in the sale of gifts and home dĂŠcor items. Here the response has been more targeted sales strategy, trying to capture larger clients and to keep production costs down while maintaining the number of suppliers and beneficiaries.
The fruits of care
Thierry Baudon and Mid-Europa The use of mixed philanthropic capital- equity for startup and scaling, grants for the social costs of production and loans for working capital alongside a very strong doses of capacity support have been critical to the early stage development of FRUIT OF CARE and totally consistent with Thierry´s vision. Thierry has been involved in Central and Eastern Europe even before joining Mid-Europa, the largest private equity firm in the region.
He has been
concerned about social issues facing the region since the fall of the Berlin Wall, and felt that as Case Study No. 37: FRUIT OF CARE and Mid-Europa
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a private equity company, they should take advantage of their position and skills, and try to join hands and assist populations and some segments of society with great difficulties. Clearly Thierry and the firm could have made the choice to write a check to a charity, but as someone who takes calculated risks in his professional life in order to reach higher stakes, he decided to apply the same rationale with his social investments. To do this, Mid-Europa chose to work with NESsT. According to Thierry, the organization showed a great deal of discipline in its work, and through its Private Equity Shares Program, was teamed with other private equity firms interested in bringing their business acumen and philanthropic support to solving issues in the region. They were a natural partner- “acting like a fund in concept, but with grant money, received by partners of all the firms contributing”. It has the governance and logic of a private equity fund – potential candidates have to submit a business plan, go through a screening process and then get support from philanthropists to help them implement their business plans and become ideally self-reliant.
“Given the history of Central Europe, it is most important for us as private equity practitioners to reach out to social enterprises and share our ‘toolkit’. NESsT has been a great catalyst in this respect, and its dedication and track record have to be commended.” Thierry Baudon, Mid-Europa Managing Partner
In supporting social enterprises like FRUIT OF CARE, Thierry applies the same thinking that he applies to his business. “What makes private equity unique is not about sophisticated financial engineering, it’s more the ability to separate from the chaff, and identify commercial ventures that will work. “ In his view, FRUIT OF CARE responded to the key drivers of enterprise success - a motivated management team; a good product and a size that allows the participants or beneficiaries in the enterprise to know that they are part of its success. Case Study No. 37: FRUIT OF CARE and Mid-Europa
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The biggest limitation, according to Thierry, is the size of the model since most social enterprises tend to be fairly small. The constraints are many, and you need empathy and that does not coincide with scale. “You cannot throw 40 million euros and hope it will work.” The philanthropic support that is needed is much smaller. In the case of FRUIT OF CARE, the combination of grants with loans and some equity seems to work, particularly since the company was spun out and needed start up investment to build the team and business, but also needed grant support to cover production costs. However, there are many challenges still to confront. Those that cross the threshold like FRUIT OF CARE need to manage their enterprise in a proper way – day in and day outgenerating revenue, managing costs, anticipating investments, assessing their products against the market. They have to compete – so they need to provide a product or service that people want.
So, according to Thierry, hardnosed private equity guys are necessary to help
them through that hard growth phase. And this way, the couple in the soap workshop, as well as the many other people with disabilities, will have dignified employment.
Case Study No. 37: FRUIT OF CARE and Mid-Europa
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