The Future or Fancy? An Empirical Study of Public Benefit Corporations

The public benefit corporation (“PBC”) is one of the hottest developments in corporate law. The sine qua non of this new form is that directors are required, under their fiduciary obligations, to consider a social purpose beyond the traditional profit-seeking duty. The PBC is thus seen as different from the traditional corporation, which in some measure must be devoted to a for-profit goal. Indeed, the PBC has been hailed as the “new corporate form”: one that permits a corporation to both “do well” and “do good”—earning money, while also serving a social purpose.

Critics of the PBC argue that it will be used for “purpose washing,” allowing companies to don the garb of social good for public relations purposes while actually pursuing a purely for-profit motive. Other critics contend that the current corporate form already has enough latitude to serve diverse purposes. Advocates counter that the PBC will do nothing less than transform U.S. capital markets, arguing that the profit maximization norm has contributed to a litany of preventable social ills, from global warming to income inequality, declining job stability to political corruption. Proponents assert that by incorporating values beyond simple profit-seeking into a company’s “DNA,” the law can tame capitalism’s worst excesses while retaining its many virtues.

But these are theories. Not only is there no empirical study of any of these arguments, we lack even a more fundamental picture of PBC foundation and formation. Are PBCs being funded? If so, by whom? To what degree? We aim to close this gap by conducting an empirical study of early-stage investment in PBCs. Our strategy is to examine the universe of PBC formations and the types of investment they receive. Early-stage investors—consisting of the usual range of angel investors, accelerators and incubators, venture capital funds, and private equity—present an interesting test case for PBC funding, because the investors themselves often have profit-maximizing incentives and fiduciary duties. Through early-stage investment we can discern whether for-profit investment is occurring in PBCs, and if so, whether it is different in kind from traditional VC funding. This allows us to assess the development of PBCs and the potential for future large-scale utilization of the form by mainstream companies. This study of early-stage investment also provides some suggestive evidence on how PBCs are being used: do they appear to serve wider purposes, or are they simply purpose-washing devices?

We collate a dataset of all Delaware-registered PBCs that received investment between 2013 and 2019, and examine the type and scope of investment in these companies. We find that early-stage investment in PBCs is indeed significant (over $2.5 billion), and includes well-known companies such as Allbirds, Lemonade, and Numi Tea. Moreover, we find that PBCs are being funded over a wide range of mostly consumer-focused industries (banking, food, education, technology, and more), by traditional, for-profit venture capital investment firms. Our evidence suggests that PBC round sizes are slightly smaller than their purely profit-seeking peers, but that on average investment occurs at similar stages to traditional startups.

Our results confirm that PBCs are being utilized as for-profit investment vehicles at a steady rate. PBCs are attracting investment, despite their split focus. We find that consumer-focused PBCs receive higher average investments that their non-consumer peers. At first blush, this supports the purpose-washing hypothesis, but we also consider alternative possible explanations.

We conclude by drawing some new theories on the future of investment in PBCs. We theorize that PBCs still have significant hurdles to widespread adoption. One of the primary drawbacks to widespread use of PBCs is the lack of case law on the scope of fiduciary duties and certainty of board action under the new statute. The investment patterns and flows that we find show that this has not deterred investment, but also that the PBC has not garnered unmitigated support from the VC community.

We argue that, based on our results, PBC status remains a secondary driver of early-stage investment and, by proxy, more widespread for-profit investment. VCs and other investors appear willing to tolerate the PBC’s wider purpose, but want to ensure some for-profit motive, and they focus on consumer-facing companies where PBC status is more likely to buttress a for-profit purpose. We suspect that the implication of this is that the widespread use of the PBC remains some way off, but that groundwork is being laid for more significant adoption. This will only come once there is a greater network of companies and lawyers familiar with the form and willing to have their companies opt in to the PBC framework. Until then, PBCs are likely to be the purview of small and start-up businesses.