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John Sage: Blending Capitalism & Philanthropy

John Sage is a co-founder and president of Pura Vida Coffee. The company was founded in 1998 by John and his partner, Chris Dearnley, and serves a “funding engine” designed to generate ongoing financial support for a wide range of charitable organizations. Pura Vida (“Pure Life”) Coffee produces co-branded coffees for such partners as Habitat for Humanity and World Vision. and donates 100 percent of net income to benefit at-risk children living in coffee growing regions of the world. John manages the general business operations of Pura Vida Coffee from the company’s administrative office in Seattle, Washington.

Prior to launching Pura Vida Coffee, John spent nine years working in various high-tech and consumer marketing positions. John helped Starbucks formulate the strategic plan and earned income strategy for its charitable foundation in 1997. Prior to that, John served as vice president of marketing and business development for Starwave Corporation, a leading Internet media company acquired by Disney. Before joining Starwave in 1994, John spent five years at Microsoft, serving as a senior product manager for consumer products and later directing the marketing for the company’s flagship application product, Microsoft Office.

He serves on the boards of the Bertschi School, the Institute for Business, Technology, and Ethics and has served more than 10 years on the Board of Governors of Opportunity International, a micro-credit lending organization based in Chicago.

John holds a B.A. in American studies from Stanford University and an MBA from Harvard Business School.

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Ethix: In what ways is Pura Vida a distinctive coffee company?

John Sage: Like others, we believe we offer a very good cup of coffee at a competitive price. Beyond this, we are different in three ways. We have customers in all 50 states and we consider ourselves to be a national company, and yet we have only 20 employees. We’re a retailer but we don’t have any physical retail presence. The only places you can go to sit down and enjoy a cup of Pura Vida coffee are at about two dozen Pura Vida branded cafes on college campuses.

A second differences is that we only carry what’s called “Triple-Seal” coffee, meaning that all our coffees have been certified as being produced according to the principles of fair trade, they’re certified organic, and they’re certified shade grown. Where other companies have added just a few fair trade and organic coffees to their product line, our commitment is that 100 percent of our coffees will be certified fair trade, organic, and shade grown. The customers who are buying from us tend to care very passionately about the principles of fair trade and environmental stewardship.

Finally, we have a very different business model, one that combines the bottom-line mentality of a for-profit with the social mission of a non-profit. We are a charitably-owned coffee company with a mission to help children, families, and communities in coffee-growing regions. That’s something that attracts a certain type of customer.

Tell us about your business model.

We use capitalism to do four things, and we describe our social mission along these four axes. The first is to empower producers. The second is to educate and motivate consumers. The third is to inspire business leaders. And the fourth—our ultimate goal—is to serve the poor. That framework enables us to unpack our social mission.

Empowering producers is largely captured in our commitment to fair trade. This means that we’ve adopted an independently certified set of guidelines that creates a guaranteed floor price, or minimum wage, for 100 percent of the coffee that we buy, which is currently above the commodity price by about 25 percent. These guidelines also guarantee that the farmer directly receives the bulk of the money for his crop. Finally, we prefinance much of the crop for the farmers so that they are not “held captive” paying exorbitant rates of interest to local lenders during the period that their crop is growing.

The second pillar of that mission is to educate and motivate consumers. We want to tell our customers about our farmers and create emotional linkages between farmers and consumers, putting a face on fair trade. We’ll serve over 25 million cups of coffee in the next twelve months, and our cups and packaging tell the customer that when they buy this cup of coffee, they’re supporting the farmers, families, and communities that produce Pura Vida coffees.

We have a very different business model, one that combines the bottom-line mentality of a for-profit with the social mission of a non-profit.

Third, we have a business model that works, demonstrating that customers, investors, and employees can find great products, financial and social “rewards” from Pura Vida. We’ve built a company from scratch that now has customers across all 50 states and a group of “social investors” who have collectively invested more than $2 million to fund the company’s growth. Judging by the number of inquiries that I get from business schools and other entrepreneurs, asking questions about our legal, tax, and capital structures, we believe this idea can take off.

And then, last and certainly not least, is the commitment to ultimately use all the resources at our disposal to serve the poor. And that’s where we really go back to the original mission, which was to create a sustainable funding source for the work that my business partner does in Costa Rica. This involves feeding, clothing, and educating at-risk kids. We’re in regular contact with over 500 kids in four neighborhoods through a variety of programs. As the company grows, we expect to extend the reach and scope of our charitable programs beyond Costa Rica and into other key coffee countries such as Ethiopia and Indonesia.

So the profits from your company go to the poor, rather than to the shareholders?

That’s correct, at least as classically defined. We’re not asking our employees to come and work here for free. We are not asking them to check their competitive nature at the door. We really believe that you can blend those things that others believe are at odds. That you can be tough-minded and tender-hearted at the same time, as Martin Luther King said. And so the most glaring manifestation of that vision is to say that rather than reward shareholders in the classic sense, we’re going to distribute those profits to the kids and the families and the communities where our products come from.

In this case, what motivates the investors if they are not going to get a return?

Well, I didn’t say they wouldn’t get any return. The investors that we’ve attracted are people who share three traits. They all have means, so this is for accredited investors only. They’re all very philanthropically-inclined; they’ve thought strategically about their legacy. And they believe in the multiplication power of capitalism to produce multiple returns on initial investments. We go to them with a blended message that says we will provide you with a reasonable rate of 6 percent return on your capital, a little better than a T-bill but certainly not commensurate with the risk. But the payoff is that once they have recouped their initial $50,000 investment for the unit they’ve bought, plus the interest that has accrued and been paid out to them, we give them an “equity-like” stake in the coffee company, entitling them to a share of future net income that’s distributed as the coffee company grows and achieves that profitability. The condition we put in the option agreement is that they have to designate a charitable entity of their own choosing as the recipient of that future cash flow.

So it appeals to the investor on two levels. One, it gives them the sense that they have long-term participation in the venture. But it also gives them a real personal sense that the things they care most about will see the long-term financial benefit if this pays off. But it requires somebody to think in those blended terms, and there are a whole lot of people who have a distinctly binary view of their philanthropy and their financial world, and they specifically don’t want to blend the two because they think they’ll suboptimize for both.

Their charity comes out of one pocket and their earnings come out of the other pocket.

The fair trade standard has become a useful form of shorthand for consumers who want to know that companies like Pura Vida are actually doing what they say they are doing.

Exactly right. But I definitely believe that there is a cultural shift taking place here too, where more and more people who are my generation and younger are increasingly comfortable with the idea of a blended return. And where I find the greatest prevalence of the binary thinking, with a few exceptions, is in the World War II generation, where there was a distinct sense that when you were in church or writing your checks at the end of the year for your favorite charities, there was no expectation at all of any sort of personal benefit; you just did that freely, and that was it. And at the same time you could go into Nordstrom and spend with impunity on a pair of new shoes or a new suit. Those worlds were really kept apart. But more people who’ve been raised with things like Ben & Jerry’s ice cream, or Working Assets long distance service, or Athena bottled water, or Odwalla juice, or Paul Newman’s products see an emotional gratification in knowing that the company is using its profits for social good, defined largely.

You could apply that business model to other things, so why did you choose coffee?

Two reasons. First, it grew out of a deep friendship with Chris Dearnley, my partner in this venture, who was also an important spiritual influence for me at Harvard Business School. He had worked in microenterprise in Latin America prior to business school and had a belief that business and economics could be used to transform communities and literally bring life to the poor. When I met him I had a “Berkeley radical,” naive optimistic view that maybe I could use business to help the world, but it wasn’t really well thought out. It was really after watching him leave the business world and go full time into working with the poor in Costa Rica that I was just captivated by the decisions he had made in his life.

We met on the first day of business school at Harvard in 1987. I admired the work that he was doing, the passion and vision he had, but it struck me that he always seemed to be short of funds. For someone who had that kind of commitment and vision to be scrounging around for a couple thousand bucks every month, to buy food and put a roof over his family’s head, that seemed really unfortunate to me. And even though a number of us were supporting him financially, it didn’t come close to meeting his potential.

We had a meeting in California, and after playing golf he handed me a bag of coffee. I had been doing some consulting work for Starbucks and knew the coffee business, and it looked like great coffee. So I asked him how much it cost. He looked a little offended, because I didn’t even say thank you. The bag of coffee cost him three dollars, and that was a ten dollar bag of coffee in the States. And I said what if we could take coffee from Costa Rica and tell the story of your work, tell the story of the farmers, use the web as the means by which we would conduct the transactions and create the emotional linkages, and then put all the profit back into supporting your work, using the bag as the medium to tell the story. And he said, “We could call it Pura Vida—‘pure life’—that’s how we greet one another in Spanish. It’s full and rich, with double meaning.” And so, it came about that way, rather than sitting down and doing a regression analysis!

Now I’ve come to see that it was fortuitous that it’s coffee, because coffee has many properties that I think make it attractive. Coffee is associated with community and ritual and is tied very directly to parts of the world where there is always economic need. So unlike a product like ice cream or bottled water or salad dressing, there’s much more of an opportunity to create an emotional connection.

Let’s talk about fair trade. It has a very pure sound to it, but there are critics of the fair trade movement who would say this is a label that’s filled with politics. It doesn’t really guarantee the very principle that it sounds like it stands for. How would you respond to that?

I would say that in certain instances that those criticisms are true. We didn’t jump into fair trade immediately because we knew most of our farmers, we knew the prices we were paying were all at or above the fair trade threshold, and we had for many years been members of a non-profit buying cooperative, Cooperative Coffees. It’s a non-profit organization made up of 14 small roasters like Pura Vida. We’re the largest of the 14. But we have direct buying relationships with more than two dozen farms in a dozen countries. We had all the audit trail, all the paperwork, and all the personal relationships that gave me a very high confidence that we were meeting the spirit of the fair trade standard. So I was a begrudging convert to the power of the seal, since we were already living by the spirit of that agreement.

So why did we decide to get TransFair certification on all our coffees? It’s very rare that you’re going to find a consumer who cares enough to want to see the bills of lading, or visit the farmers in country, or ask for the audit reports. So in effect what the fair trade standard has become is a useful form of shorthand for consumers who want to know that there’s an objective third party who did the homework and provided the neutral, independent examination to ensure that companies like Pura Vida are actually doing what they say they’re doing. Certain market segments, particularly on college campuses, value such a label. TransFair has done a good job of getting consumers to understand that the presence of that seal on the bag means de facto that it’s a “just” bag of coffee. They also do a good job of setting the standard high and then providing the follow up and independent verification that the standards are being met.

And who keeps track of them?

TransFair is part of a global organization based in Germany called FLO—Fairtrade Labeling Organizations International. It has independent oversight and a multi-national governing body that is subject to audit. So TransFair is one of the arms that provide the independent oversight and the audit capability, because they go in country and make sure that the farms and communities are actually achieving the benefits of fair trade—of which the price paid for the coffee is only one.

Wages paid to workers is another…

Right, and pre-harvest financing so that they’re able to sustain their families in between harvests. It means that the coops that are growing the coffee are democratically elected. There’s quite a list of requirements.

What happens if the price of coffee rises above the price established by fair trade?

Once the price for coffee goes above $1.26, we will pay whatever the going rate is for super-premium coffees. So the pricing component of fair trade will go away.

Our ultimate goal — is to serve the poor.

But remember that two of the primary goals of the fair trade certification process are that the “money trail” to the farmers can be audited (ensuring that they get paid, rather than middlemen) and that much of the coffee be prefinanced (providing capital to the farmers between harvests). These two very important elements will continue to be in play no matter what the price is. So the value of the TransFair certification mark, and the trade tenets as a whole, continue to be significant no matter what the price is.

And what is the risk when it comes back down?

Our prices will come back down to the fair trade “floor price” of $1.26—a price that ensures the farmer can feed his family, tend to his coffee crop, and send his children to school. There’s a classic macroeconomic, pure capitalist point of view that would say fair trade is trying to manipulate markets. If there’s a glut of coffee, well then the price should go down.

If this were a perfect market, you could move immediately from one product to another, but it is not a perfect market. Aren’t you supporting the farmer in a time of rapid price decline when it would be impossible to move to another product?

That’s a good point. Not to say that there aren’t other ways to do right by your farmers, but I think making the commitment to fair trade, with all that it stands for, is really important. And I think there was dissonance in my spirit when we would stand up and say, “Half of our coffees are fairly traded.” We’ve chosen to work with customers who not only expect a great cup of coffee and a good price, but who want to know that every possible penny of social value is being squeezed and turned back into those communities.

Back to your business model, could a publicly-traded company carry out the blended model with charitable giving that you’ve described?

I don’t think a publicly-traded company could. Our investors understand, accept, and value the idea of a “blended return”; they are willing to see their “upside” measured in a long-term, evergreen-funding stream that funds their own charitable priorities. But there are already about a half dozen companies that are in existence who have either spent time over here studying our structure, or have talked to me on the phone, who are trying to do similar things. And there are even a group of investors out of Investor’s Circle in Boston, about 25 of them, who have come together to look at what it might take to create an alternative capital market designed to mobilize funds for charitable purposes. They’re raising a $10 million fund right now, expressly for the purpose of funding their own companies like this.

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