As Republicans gather in Cleveland, it's easy to miss an important experiment taking place a few minutes away from the convention center. Evergreen Cooperatives – an unusual worker-owned business – is emerging from its startup phase. It brings an innovative model of job creation with the potential to scale up and improve lives across America.
Evergreen got its start in 2008, when the Cleveland Foundation brought local leaders together to improve lives for low-income residents of the depressed local economy. The founding institutions (which locals call "anchor institutions") include the Cleveland Foundation, Case Western Reserve University, University Hospitals, the Cleveland Clinic and local government.
Rather than pour grant money into conventional anti-poverty programs, the anchors sought to create jobs that would fund themselves without ongoing subsidy. But they rejected the conventional strategy of luring employers with tax breaks; these deals often go bad. Instead the anchor institutions sought a "sustainable business model, one that could be replicated and expanded," according to Tom Zenty, CEO of University Hospitals, one of the anchors as well as an important customer of Evergreen.
Initially, Evergreen took on the challenge of providing laundry services to local hospitals. Cleveland is a major medical center, with University Hospitals alone needing more than 3 million pounds of linen cleaned each year. The startup team integrated social responsibility and environmental sustainability into the business plan:
- A lower-income inner-city workforce – the business was designed to employee people with limited education, limited work experience and in some cases nonviolent criminal records.
- A co-op ownership model – teaching and training workers to think like owners, giving them a financial stake in the business and an opportunity to create some wealth for themselves.
- A sustainability focus – An LEED-certified facility that avoids toxic cleaning chemicals, reduces waste and lowers carbon emissions.
With seed capital provided by the anchor institutions and contracts for laundry services, Evergreen opened its doors. Like many startups, Evergreen ran into problems and made some mistakes: It expanded too quickly into new areas before it had made its core business profitable. And it wasn't utilizing its capacity fully which led to losses.
A new CEO, John McMicken joined in 2014. He began taking Evergreen through a transition, hiring stronger managers to head each business unit, improving marketing, fine-tuning the ownership structure, restructuring contracts, boosting sales and more. Two of the anchors – University Hospitals and Case Western – provided additional grant funding and two private individuals lent capital to help it through.
It was a particular challenge to get the employee-ownership dynamic working right. "We hadn't done a good job educating people on how the role is different as a worker-owner" said McMicken. "How are profits shared, how are profits calculated, what can you vote on, what can you not vote on?" All these questions needed to be sorted out.
With strong leadership, additional capital and solid execution, Evergreen has reached solid ground. Two of the three businesses – Evergreen Cooperative Laundry and Evergreen Energy Solutions (a retrofitting business) – are now profitable. The third business, Green City Growers, provides hydroponically grown gourmet produce, and it is on track to break even this year. The company now employs about 120 people, many of whom would otherwise have a hard time finding work. Revenue streams are more diversified: At this point only about 15 percent of revenue comes from the original anchor institutions. "This has been a very successful enterprise," says Zenty.
Evergreen is a closely watched test case for socially responsible and environmentally sustainable business everywhere. Can a business like this survive on its own after an initial infusion of patient capital? Or is it a not-quite-real business that needs continued subsidy – either a direct cash infusion or a commitment from customers willing to pay above-market prices?
Evergreen's experience suggests three important lessons. First, having a social or environmental mission won't save a business if it can't execute on the basics. If anything, it's harder to manage the triple bottom line than the conventional single financial bottom line.
Second, if a business is pursuing a social mission that leads to a higher cost structure, it needs to identify a market segment that pays a premium. For Evergreen's hydroponics business that meant carving out a niche between low-cost conventionally grown lettuce and premium-priced fully organic lettuce. The social justice story "gets us in the door," says McMicken, but not much more. Evergreen has found a quality-sensitive customer who gladly pays more for cleanliness, size, flavor and consistent year-round availability.
Going forward, businesses like these have an opportunity to monetize the social impact they are able to deliver. Social impact bonds (also called "pay for success" bonds) open up a path for companies to get compensated for reducing poverty, homelessness, recidivism or other ills. These bonds have the potential to fill the gap between the cost structure of a social enterprise like Evergreen and the prices it can charge.
As cities struggle to create jobs and reduce poverty, the possibilities for replicating Evergreen have never been greater. This unique enterprise is charting a path that many will follow.
David Brodwin is a co-founder and board member of American Sustainable Business Council. This blog is adapted from a column recently published in U.S. News & World Report July 28, 2016.