Vital Farms IPO Shows Acceptance Of Stakeholder vs. Stockholder Values On The Market

FORBES // By: Christopher Marquis

From its start as an egg business with 20 hens on a small 27-acre plot of land in 2007 to its current-day network of  200 small family farm partners, Vital Farms, an ethical food company, has maintained its commitment to sustainability and ethics. The company’s attention-grabbing IPO this year — raising $200 million in capital — is the latest step in its growth journey, positioning the Certified B Corporation as an example of a business maintaining its purpose-driven mission while building its bottom line. 

Now listed on the NASDAQ and part of a small group of B Corps that are publicly owned, Vital Farms grew to become the largest U.S. pasture-raised egg brand in the U.S. over 13 years with a commitment to its stakeholders that include its crewmembers, farmers , customers, consumers, community, the environment, and stockholders. Gaining B Corp Certification in 2015 reinforced Vital Farms’ commitment to these stakeholders and reflected its board of directors’ belief in the company’s operations, says Russell Diez-Canseco, President and CEO at Vital Farms.

“Our board was made up almost entirely of impact investors who are very supportive,” he says. “They believed in our mission and actually behaved in a way that supported our mission and decisions made with all stakeholders in mind. Sometimes it meant raising money or to compensate a different stakeholder that year. And that was totally supported.”

Recently I spoke with Diez-Canseco as part of my research on businesses with a social mission to learn more about why Vital Farms decided to pursue an IPO as a route toward growth while also elevating its stakeholders and creating positive impact.

Christopher Marquis: How did Vital Farms make its journey to be a publicly traded company? Can you share some of the process and the key people involved, such as directors and investors?

Russell Diez-Canseco: For several years, I have attended the Conscious Capitalism CEO Conference. One year it included a session on how to better align sources of capital and the demands on that capital, in terms of returns and time horizons, with the mission and the purpose of conscious companies. Because it seemed like there was some misalignment. Building a sustainable, enduring company for the long haul in the spirit of conscious capitalism doesn’t align with a five-year liquidity horizon, right? That’s a challenge that we all face. 

Our founder, Matt O’Hayer, took the approach of using growth capital a little bit at a time. So every year or two years, we would do a fund raise. We had plenty of access to add capital in the private markets and, more importantly, from impact investors. That was the key for us. Because our board was made up almost entirely of impact investors who are very supportive. But even they — the very best, most aligned investors you could ask for — still have to put the money back. 

We got to a point where the valuations were starting to get higher and the size of the company was starting to get bigger. We hit some natural limit of our ability to just keep doing what we’re doing without having to sell out. 

We could sell the company to a strategic acquirer, maybe somebody who’s already in one of the businesses we’re in or maybe an adjacency. We could sell the company to a controlling interest, to an investor, maybe a private equity firm. Or we could go public. And we did not necessarily believe that the private options would result in a fundamentally different valuation than the public option. But what the public option let us do was remain independent. 

Marquis: What kind of reaction did you receive as a B Corp and purpose-driven company when you were meeting with investors during the pre-IPO “road show?”

Diez-Canseco: Certainly, we get the question, well, how are you going to keep doing the right thing when you’re subject to the pressures of being a public company, and short-termness? The reality is, we’re a B Corp and a public benefit corporation. So everybody who invested in us at the IPO and since knows that our board has a fiduciary responsibility to ensure that we are delivering on our commitments to all stakeholders, not just stockholders,and we may make choices on behalf of the company that do not maximize shareholder value. And then we had a successful IPO. 

So I think the market embraced what we’re doing, because they did it with their eyes wide open. They wanted to invest in a company that actually behaved the way we were telling them we behaved and believed what we told them we believed. And they didn’t want to see a big change in that. 

Marquis: You mentioned there are times where you may have to make decisions that may not be in the shareholders’ best interest. Do you have any examples of where you’ve prioritized another stakeholder ahead of the shareholders? 

Diez-Canseco: I used to have more of a fixed mindset that if the company is only generating so much economic value and you want to reapportion that in a way that doesn’t maximize shareholder value, essentially, it’s just charity. If you want to do charity or philanthropy, why wouldn’t you just give the money to the shareholder and let them choose who they want to give it to? And what I’ve come to firmly believe is that when your work can make it sustainable for all of your stakeholders, you actually grow the pie. It’s not just reallocating fixed resources. So I might argue that everything we’ve done has, over the long haul, ensured great shareholder outcomes. 

The example I’m going to give you, depending on your time horizon, can look like it wasn’t in the best interests of shareholders, right? But ultimately, our shareholders did pretty well.

In 2015, much of the world, but especially the United States, was affected by an outbreak of avian influenza that posed a threat to domesticated poultry in the United States and other countries. There was a huge contraction of egg supply in the United States. Anybody selling eggs had a pretty good year, including us. 

As often happens in agriculture in America, there’s a boom and a bust cycle. So a lot of egg companies saw that profitable moment in time and projected it forward and said, “We need to put a lot more chickens into production, because there’s so much money to be made.” The last time that had happened, there was a three-year gap between the boom and the bust, meaning it took three years for all those excited farmers to add enough chicken to tank the market. But in 2016, it tanked less than a year after the peak. And at the time, it affected us as well. 

We were in a moment in time when we simply had too many eggs. And our eggs, because our standards are so high, cost more. Our contracts with our farmers had lots of ways in which we could say, “Hey, you know what, farmer? I know we have a contract. If you look at this clause on this page, if we’re having this situation, we don’t have to buy the eggs from you, so we’re going to stop buying your eggs until we need them again.” The impact of that would have been to bankrupt them. 

Our solution was to ask a bunch of farmers that are getting close to going out of production or haven’t yet gone into production if we could pay them to stay out of production for a while. And that was going to cost us millions of dollars at a time when our revenue was well under $100 million. 

If we bought the eggs, we’d need to raise money. If we paid them not to produce eggs, we needed to raise money. Or we could simply leave the farmer holding the bag. And with nary a moment’s hesitation, our board unanimously said, “How much money do you need to raise to take care of those farmers?” And we actually did a fund raise. They took dilution to raise enough money to pay farmers to sit idle. 

So the short-term impact was a huge hit to cash flow, a huge hit to dilution for our shareholders. The longerterm impact is that I believe we are the brand of choice for the very best farmers in this country. We have a long waiting list of farmers that would love to work with us. And I think it’s because they can trust us to keep our word. 

So was that in the best interests of shareholders? Well, in the moment, maybe it didn’t feel like it. But in the spirit of building an enduring brand that does create value over the long haul, it was the only right answer.