Why We Haven’t Taken on Investment

Why We Haven’t Taken on Investment

Azavea celebrated its 20th anniversary as a company last year. Over the past two decades, we have grown and been profitable most years, and we have done so without any external investment, other than the original $15,000 in savings I had when I started. However, as a growing technology company, particularly one that develops innovative, new technologies, we attract a fair amount of attention from potential investors. Over the past decade or so, I have had at least one inquiry a week from an array of potential investors and/or buyers. In some cases, I talk to these folks, and I often learn something from them. But 20 years on, we have still never taken on investor capital. Why is this the case?

What investor capital would mean at Azavea

An injection of cash could be beneficial to a company like ours in a number of ways. It would enable us to grow more quickly. Funding would enable us to make investments in new technologies and invest in sales and marketing, both of which would help Azavea potentially grow more quickly. And I want to see Azavea grow over time. I see growth as a good thing. First, we can have more impact in our corner of the universe; as Azavea has grown, it has enabled us to take on larger, more complex projects. Second, scaling an organization is a very different challenge from maintaining an ongoing operation,  and growth creates new opportunities for colleagues to take on these new challenges and advance professionally.

Most investors want to see a return on their investment. Wanting an ROI is not a bad thing. As the original investor in Azavea, I want the organization to be profitable and to see a return on my investment. However, my time horizon is generally longer than most. Almost all of the investors that contact me are funded by other investors, whose funds have a limited timespan – usually 3 to, at most, 10 years. Those investors want to invest and then exit; most do not invest for the long term. The idea of very long-term investments – such as permanently holding a company – is one that’s fairly rare. I have tried to build Azavea for the long term, and along the way, I’ve made decisions that were not strictly in the interest of near-term profits. Further, I’ve regularly given priority to our mission – advancing geospatial technology and applying it for positive impact – over financial returns. Investors who want to see a return on their investment in a few years would drive a distinct bias toward near-term financial returns over other considerations that I care about at Azavea.

Stakeholders versus shareholders

In thinking about my attitude toward potential investors, it may help to describe why Azavea exists in the first place.  It has been twenty years, but I can recall at least two distinct reasons for starting Azavea. First, we exist to fulfill a particular mission – we invent new geospatial technology and apply it for good. Second, Azavea exists to create an environment for learning, growth, and development of the people who work there. This latter point is also somewhat selfish; I too want to work in an organization where I have a lot of opportunities to learn and grow.

These two reasons for Azavea’s existence are not the concerns shared by a lot of other companies. Most companies operate for the sake of the investors or shareholders. That’s a common notion in modern American capitalism, but it hasn’t always been the case. Historically, companies have existed for many different reasons.

While I am the sole investor in Azavea, and, to some extent, I care about the time and money I’ve invested, I also believe in a kind of capitalism that’s not just for the investor. There are a number of terms that folks have developed around this type of thinking: conscious capitalism, stakeholder capitalism, etc. Whatever you call it, these terms embody the idea that there are many types of stakeholders, and they vary from business to business. Azavea’s stakeholders include employees, our customers, the communities we serve, and our mission. If we were to accept a capital investment from a partner that is not aligned with our organizational purpose, there would either be significant friction or there would be incentives to sacrifice the interests of stakeholders in order to fulfill requirements around growth and profitability.

Prioritizing stakeholders

Azavea has been in existence for 20 years, and we have been a certified B Corporation for half of that time, finishing our 4th recertification in 2021. We’re also a member of the Tugboat Institute, a group of privately held companies looking to grow sustainably while prioritizing what they call the 7 P’s: people, purpose, perseverance, paced growth, pragmatic innovation, private firms, and profit. Both of these associations have encouraged us as a company to prioritize our multiple stakeholders, especially when it comes to ownership and investment.

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The idea of companies that operate for a broader set of stakeholders is not a new idea. There are many companies that have been operating this way for decades, but it has not been part of the mainstream of business thought until fairly recently. In a previous blog, I wrote about some examples that suggest a renewed interest in stakeholder capitalism, including Larry Fink’s annual letter to Blackrock’s investees, Senator Elizabeth Warren’s Accountable Capitalism Act bill, and the Business Roundtable’s commitment to all stakeholders (which includes employees, suppliers, and the communities in which they work).

It has been a few years since these statements and proposed bills, and groups like the Business Roundtable have received a fair bit of criticism because while they made a bold statement, there is a sense that nothing has really changed. Nonetheless, these statements represent a sea change in the rhetorical culture of how companies operate.

Still, most of these companies are primarily controlled by their shareholders. They are traded in the public markets, and there’s a limit to how much they can diverge from the interest of the shareholders. At the end of the day, the owners (shareholders) appoint boards of directors and make decisions for the company. The owners of the company decide what priorities the company has, and we’ll have to have different ownership and decision-making models before we can expect to see different behavior on a societal scale. We have a long journey ahead as a society before we’ll see a stakeholder capitalism model that truly incorporates and involves all affected stakeholders in organizational decision-making.

Funding growth for the long term

So Azavea hasn’t taken on investment capital, but we’ve managed to grow in most years, nonetheless. So how have we funded growth? There are three main ways:

  1. Instead of distributing profit to shareholders, we have retained profits in the business as funds to fuel future growth;
  2. We have funded investment in new tools through research grants, such as the federal SBIR program and other tactics; and
  3. We have a line of credit with our bank, so if we have cash flow issues, we have some emergency funding to draw on.

All of this seems okay while the company’s doing well. I’m often asked, though, what happens when the company’s not doing well? Do you compromise your values or your mission?

I can’t say that I’ll never sacrifice our values or mission, but a recent example might illustrate the decisions we’ve made. In spring 2018, Azavea lost several large contracts all within a couple of months of each other. The consequences were that we didn’t have an operating profit in 2018 or 2019. When a company’s revenue declines and it isn’t profitable, the normal response would have been to let people go, cut benefits, or make other changes. Because I didn’t have to answer to investors, I made a commitment to not let people go or cut benefits as long as I could, with the justification being that we would need those people when the company was able to win back more business and the company was growing again. And that is the way it played out. We returned to profitability in 2020 and I’m proud of the fact that we were able to get through a tough time without any layoffs.

In addition, during that time we faced opportunities to take on work that would have departed from our project selection guidelines. We opted not to take on these opportunities – they included work that related to energy extraction, work with the Department of Defense that could be directed toward warfighting, and others. Not having investors that were motivated primarily by profit meant that we could weather this rough patch without having to sacrifice our values, mission, or people.

This might suggest that Azavea would never take on outside investment. This is not the case. I would welcome outside investment. Ownership matters and having a more diverse ownership structure for Azavea would be a positive development for me and the company. It is my goal not to be the majority owner of Azavea five years from now. However, whether we integrate some kind of employee ownership structure or we take on outside investors, the motivations of those new owners will need to be aligned with the company’s mission, values, and interests of its stakeholders, including investors, employees, and our clients alike.