When Petra Kassun-Mutch decided to launch Fifth Town Artisan Cheese Company, she was neither a farmer nor a cheese maker. Kassun-Mutch had seen a need to establish an environmentally and socially responsible artisan-scale dairy in a small town. Her goal was for the dairy to leverage and serve the local community, providing economic opportunities for local dairy farms and promoting leading-edge sustainable design.

An innovative and contemporary artisan dairy

Kassun-Mutch had 18 years of executive-level business experience and keen entrepreneurial skills. She taught herself everything about the product, the people and the industry. Kassun-Mutch was set on running an innovative and contemporary artisan dairy. Fifth Town opened its doors in July 2008, producing fine handmade cheeses using local goat and sheep milk. It combined traditional methods, contemporary tastes and craftsmanship ethics with local terroir.

Situated on 20 acres of agricultural land on the eastern edge of Prince Edward County, Ontario, the Fifth Town dairy processing, retail and educational facility integrated the practice of artisan cheese-making with advanced sustainable design. Its building achieved Platinum LEEDaccreditation in March 2009, becoming Canada’s only LEED-certified dairy and the first Platinum LEED manufacturing facility in Canada. In 2009, Fifth Town was awarded the Ontario Premier’s Award for Agri-Food Innovation Excellence.

Fifth Town—Canada’s eighth B Corporation—was equally dedicated to its social priorities. Its focus on community engagement and socioeconomic and educational diversity was evident in its mission statement: to enhance the wellness and quality of life in the community. “I knew we couldn’t succeed without the community being behind us,” says Kassun-Mutch. “It takes a village to raise a child; it takes a community to raise a dairy.”

Fifth Town’s cheese sold very well right from the start. With its innovative approach, solid public relations, careful planning and execution, excellent staff and strong community support, the company attracted 5,000 people to its retail location each week. It earned $1.5 million in its first 18 months.

The company grew to over 16 employees and seven farm suppliers and, at its peak, generated over $1.4 million in annual revenues. It earned a grand champion award for its goat cheese only six months after launch, and later won dozens of more awards for its cheese and sustainability initiatives.

Insurmountable challenges

Despite this success, Fifth Town eventually faced insurmountable challenges and the company is no longer in operation. The first obstacle it faced was that it took nearly four years to open its doors due to a vast array of regulatory requirements, involving nine ministries at different levels and 62 industry regulations.

As well, as Fifth Town did not anticipate its rapid rate of growth, its founders miscalculated the amount of working capital they would need to fuel the growth. The company’s undercapitalization was compounded by the problems of the global financial crisis―securing more investment was difficult in 2008, and lenders continued to remain risk-averse over the next two years.

When designing the facility, Kassum-Mutch forecasted incorrectly that 50% of sales would mostly likely come from soft cheese. It turned out that it was the hard cheese that won awards and generated much higher margins. With the long-term view in mind, Fifth Town went ahead with an unanticipated expansion.

And yet another complication arose when Kassun-Mutch and her husband divorced. They had founded the company believing that a simple incorporation would suffice. There was no structure in place to manage shareholder rights or conflict resolution. With their divorce, Kassum-Mutch’s husband sought to divest himself of his share of the company’s obligations and this initiated complex legal proceedings.

New management believed that Fifth Town would be more “sellable” to mainstream investors if it no longer supported its original brand message, position and mission. Thus it cancelled the company’s B Corporation status and removed all references to the sustainability commitment from the website. Sales began to drop significantly despite efforts to sell more cheese through larger-scale customers. This created elevated operational losses that the founding investors could not absorb.

“Many social entrepreneurs don’t plan to exit,” explains Kassun-Mutch. With no exit strategy in place, she found it difficult to attract new sources of cash. Venture capital funds were out of reach and there was significant capital debt to absorb. Most venture capital funds were looking for deals in the range of $5 to 10 million, with a clear exit strategy to ensure a competitive return on investment.

Lessons learned and shared

With the community no longer supporting the company’s more mainstream direction, sales dropped by 30% in less than six months. Fifth Town ceased production in June 2012. “Being a values-based community startup can give you a huge lift sales-wise at the beginning,” shares Kassum-Mutch. “But it also means if you change the values upon which the company was built, the drop in sales will be much more significant.”

Fifth Town was sold in November of 2012 at a fraction of its asset-based book value. “In a social enterprise, the business failure is harder because of all the covenants you’ve made with the community,” reflects Kassun-Mutch. She notes that many businesses can fail due to the breakdown of a partnership and that other entrepreneurs can prevent a similar outcome by including mechanisms for partnership breakdown in their original agreements.

Kassum-Mutch is determined to move forward. She adds, “I learned a great deal. In my next venture, you can be sure I’ll have the most awesome legal set-up you’re ever seen.”

The Case Studies in Social Innovation database is a joint initiative between SiG @ MaRS and the Ontario Ministry of Research and Innovation.