Lotus Foods, a global pioneer in heirloom, organic and regenerative rice cultivation just announced … [+] an investment of $22.5 million from Grounded Capital. The company has supported innovative growing methods that mitigate climate change and empower women, which is shown by the rice plant on the left. On the right is a rice plant grown by conventional methods.
In the rapidly evolving social enterprise landscape, financial strategy often plays a crucial role in determining the success or failure of mission-driven businesses. In fact, poor financial management is cited as a key factor in the failure of 60% of social impact investments. With this in mind, David Guendelman founded Do Good CFO to provide fractional CFOs to support social enterprises in their growth and sustainability efforts.
I recently spoke with Guendelman about the critical role that strategic finance plays in the sustainability of social enterprises. Read below for more on how mission-driven businesses can align their financial strategies with their broader goals of social and environmental impact, and why it’s essential for such enterprises to choose their financial partners wisely. As our discussion reveals, the intersection of finance and mission is not just about numbers—it’s about building resilient, impactful organizations that can stand the test of time.
The services that fractional CFOs can offer range from securing patient, mission-aligned capital to ensuring robust financial planning and cash management. A key illustration of this process is Do Good CFO’s longtime client, Lotus Foods, a global pioneer in heirloom, organic and regenerative rice cultivation who just announced an investment of $22.5 million from Grounded Capital, a San Francisco-based investment firm focused on deploying capital that supports healthy social, ecological and financial systems.
Christopher Marquis: First, tell me more about the recent financial news from Lotus Foods and what part Do Good CFO played in that.
David Guendelman, founder Do Good CFO
David Guendelman: Do Good CFO’s first client in 2010 was a mission-driven company called Lotus Foods. The company aimed to revolutionize rice cultivation worldwide by pioneering farming practices to combat climate change, enhance farmer livelihoods, and empower women.
Fast forward to today and Do Good CFO has been at Lotus Foods’ side for almost 15 years as the business has scaled its revenue 20xand imported nearly 60 million pounds of organic certified rice from a network of family rice producers across multiple countries, transforming lives and farming communities.
Lotus Foods is now a global leader in heirloom, organic, and regenerative rice cultivation and rice-based noodles. Most recently, the company secured a $22.5 million investment from Grounded Capital, an investment firm dedicated to supporting ventures that promote healthy social, ecological, and financial systems. Grounded Capital’s substantial investment is a game-changer for Lotus Foods that will fuel Lotus Foods’ further expansion into a diversified consumer and customer base and enhance Lotus’ positive impact by enabling deeper investments throughout its value chain including sourcing rice from new communities.
Over these 15 years, Do Good CFO has assisted Lotus Foods in numerous areas, from raising patient, mission-driven capital to understanding margins for product pricing and building the infrastructure the team needed for business growth. Do Good CFO has been crucial in helping Lotus Foods navigate times when cash was tight, given that much of the company’s capital is tied up in inventory and related working capital.
Solid financial planning has enabled Lotus Foods to manage risks proactively, maintain liquidity, and extend cash as long as possible. As CEO Andrew Burke put it, “Cash is the lifeblood of any business. In our business, given our long supply chain, inventory is the primary use of cash. Do Good CFO supported Lotus in successfully navigating long supply chains, swings in inventory, COVID, and freight disruptions by predicting cash shortfalls ahead of time, which allowed us to communicate with our investors in a way that gained their trust in tight situations.”
Today, Do Good CFO is still at Lotus’ side nearly 15 years since we started working with them. As CEO Andrew Burke says, “As our business has grown, our needs have changed. Do Good has adapted with us and has been able to provide support whether we are seeking debt, going through due diligence on a raise or are looking for financial tools to help us become better operators.”
Marquis: Why is it so important that impact entrepreneurs raise mission-based capital? How can they ensure that happens?
Guendelman: Mission-driven businesses, such as those in regenerative food and agriculture, need a long runway to grow a sustainable business and therefore are not a fit for the venture capital investing model, which expects a quick scale-up and exit. In contrast, mission-driven capital, at its best, is more patient and is willing to stay in the relationship through thick and thin. As Lotus’ co-founder Caryl Levine explains, “founders need to have a long-term view, and investors have to have a long-term view as well. In any business, there are ups and downs, highs and lows. You can go from a moment of thrilling growth to an external shock that sets you back. With the wrong investors, they’ll take that opportunity to say, ‘Sorry, we’re out,’ but investors with a long-term view understand that there are ups and downs in a business. If the DNA, vision, and road to recovery are still there, then let’s stay.”
It’s crucial to diligently vet your investor because selecting an investor is akin to choosing a life partner. When business is booming, Investor relationships are typically smooth, but when challenges arise, an entrepreneur finds out if they have a trusted partner by their side. As Andrew Burke, Lotus’ CEO, pointed out “The difficulty now is that many investors speak to their focus on mission-aligned businesses. The big lesson I’ve learned is you need to spend significant time vetting potential investors. You have to feel comfortable that these are the right people for you, and they’re going to be there for you when you go through those choppy times.”
Therefore, in a capital raise, it’s essential to engage with several investors and interview them thoroughly. Pay careful attention to the kinds of questions they ask. If the diligence questions that investors ask you are overwhelmingly about financial returns, they might be a different breed than those who spend a similar amount of diligence time learning about the business holistically, understanding its mission, and getting to know the entrepreneur.
Marquis: What is strategic finance and why is it so critical for social enterprises?
Guendelman: Strategic finance is distinct from what we’ll call operational finance. Operational finance is more day-to-day and includes things like closing the books, paying bills, collecting, and short-term cash management. In contrast, strategic finance is forward-looking and incorporates strategic planning and capital strategy. Strategic finance can anticipate future challenges and see around corners to ensure long-term viability, which is why veteran CEOs frequently say that their CFO is their co-pilot.
Strategic finance covers core areas, including: organizational strategy for profitability and cashflow, decisions about resource allocation (new hires, new products, new locations and more), setting performance targets that align with strategy, raising mission-aligned capital and communication of financial performance and strategy.
Strategic finance is crucial for all organizations, but it is uniquely vital for mission-driven organizations for two reasons.
First, mission-driven organizations face dual challenges: that of achieving profitability while also having a social and environmental impact. As a result, there are frequently added costs to fulfill the mission, and there can be tension between profitability and impact. Strategic finance is a key tool for balancing these competing objectives. When a mission-driven entrepreneur has a CFO at their side as a strategic financial thought partner, they are better able to evaluate potential future scenarios, quantify them and assess tradeoffs.
Second, mission-driven organizations need mission-aligned investors who are willing to work through tough situations with the companies and be patient. Both entrepreneurs and investors need to take the long view and realize that social entrepreneurship is a marathon, not a sprint. A mission-driven CFO can support an organization in attracting capital that is aligned with the mission.
Marquis: Can you give some examples of things that mission-based businesses specifically need to do and/or be aware of financially?
Guendelman: Mission-driven businesses need to take the long view because the challenge is twice as hard as a conventional business. For mission-driven businesses, that means being scrappy, focusing on early profitability, and working with small, agile teams that can adapt to what is and isn’t working. Scrappy means keeping losses low, tightening your cash conversion cycle, being really efficient about managing inventory, and taking debt rather than equity when possible.
At Do Good CFO we like to say “No Margin, No Mission” because if the company isn’t financially sustainable, you won’t achieve your mission. Companies with weak margins don’t have the cash needed to adapt when unexpected shocks occur. So margins are a key leverage point to a successful business, and you need to be asking questions like how profitable is each unit I sell? Do I have customers that are unprofitable? You have to be disciplined and refrain from selling through channels characterized by high volume but low profitability. You certainly can’t lose money on each product and expect to make it up on volume. And you have to get your gross margin right before you can scale or you will burn through your cash quickly.
If you do all of this well, you limit the total amount of equity you need, and you preserve founder ownership and control over the mission. That, in turn, allows you to focus on raising the right amount of equity from the right partners who share your values.
Marquis: What are some top questions that mission-based brands should ask of their financial partners, from potential investors to fractional CFO candidates?
Guendelman: When interviewing potential investors, ask questions that test value alignment between founder and investor. For example, ask: “What is the duration of the fund in total and how much time remains?” This is critical because a short time horizon for the fund means increased pressure to generate an exit. Another good one to ask is: “What rate of return are you targeting? Who are your Limited Partners (LP’s)? What are their return targets?” Two more examples include: ““When there is a tradeoff between financial return and impact, how do you think about that?” and “Can you speak to portfolio companies you have supported during tough times?”
When seeking a fractional CFO, here there are some important questions to ask:
Does this person understand your business? It’s critical to find a CFO who understands your business because financial strategies vary between industries. Inventory-based businesses, for example, have specific needs for cash planning and risk management; non-profits also have unique reporting requirements. Moreover the CFO should have experience working with similar size organizations; CFO’s from larger organizations may have difficulty adjusting to resource constrained environments.
Can they help you attract mission-aligned capital? Providers of mission-driven capital are a distinct group, and a CFO who is well-known in the space can significantly boost your credibility and provide a valuable network of contacts.
Do they have a strategic approach? A fractional CFO should offer strategic financial guidance, not just oversee bookkeeping and budgets. It’s not uncommon for some CFO’s to get caught in the weeds of all the numbers they sift through. It’s critical to find a CFO who has an eye on the big picture, has the experience to see around corners and can help you make key decisions and avoid strategic pitfalls.
Are they a strong communicator? A good fractional CFO can clearly convey complicated financial information to you, your team and potential investors, some of whom will not have a background in finance. Strong communication skills are always important for a CFO, but this is doubly true if the founder doesn’t have a background in finance. The CFO should also be a culture fit; keep in mind that a CFO who has never worked in a mission-driven organization may not communicate in the language of your team.
Do they have bandwidth? To be effective, a fractional CFO needs sufficient bandwidth to dedicate to you and then needs to stay with you over a long enough period to make an impact. Volunteer CFO’s or CFO’s with day jobs can appear inexpensive until they don’t have the bandwidth to deal with major issues or they don’t pay enough attention to foresee a key risk; that’s when things really get expensive. At their best, fractional CFOs are relationship investors who build long-term relationships with your team because entrepreneurship is a team sport
Marquis: How does a company know when it’s time to bring on a fractional CFO and what are some benefits for them in doing so?
Guendelman: There are five top signs an organization needs a fractional CFO:
The first is that the organization is growing quickly, is at a crossroads, or is at an inflection point. In these situations, decisions are often made between strategic paths, such as whether to expand an existing initiative or develop a new one. Frequently, the organization needs a multi-year strategic financial plan to guide future growth and provide strategic insights.
Another sign is that the organization needs to raise mission-aligned capital or secure a major grant. In these cases, the organization often needs to evaluate what type of capital to raise, how much to raise and how to structure the terms. Board members, investors, or lenders will typically require effective financial communication, scenario planning, and quantification of business plans at these junctures.
The third sign to bring on a fractional CFO is that cash is tied up, either in inventory, operations or restricted grants, and needs to be unlocked. The organization may be struggling with cash flow management, potentially due to complex working capital cycles, numerous SKUs, or significant inventory.
A fourth sign is uncertainty about product pricing, margin viability, or the path to break even. Well-run organizations have detailed cost analyses that ensure prices are set to generate strong margins. Organizations must also have a clear path to break even. For non-profits, this includes leveraging earned revenue options to reduce dependence on philanthropy.
The last sign is that the Accounting and finance department needs an overhaul to improve efficiency and effectiveness, or if a controller or other key members of the department have been replaced.
One thing we hear advisors say over and over is that one of the biggest mistakes is waiting for a crisis to consider solid financial management. Well-run companies invest in strategic financial management rather than reacting to crises.
