Treating diseases, addressing climate change, expanding access to healthy food or creating new methods of learning. These are just a few of the major social challenges that companies–yes, companies–are working to solve. Of course, the public and nonprofit sectors continue to play a critical role in tackling these challenges, but we’ve also witnessed an increasing number of entrepreneurs building companies whose products and services offer scalable solutions to improve our communities, while at the same time generating financial returns.
Because of their unique goals, companies that have a mission to turn a profit and do good have a different set of questions to ask than traditional enterprises when they’re getting started. What are the critical questions you should ask if you want to be a for-profit social enterprise? Here are six things to think about:
Social enterprises are created to solve a social challenge using the power of the market. And it’s important to consider that mission when developing your business plan, planning to raise capital, and implementing your strategy. For example, social electric energy company U-Light aims to provide a simple, affordable and reliable source of electricity to people living off the grid. Over “1.2 billion people currently live off the grid around the world, with millions more suffering from power outages. The biggest implication of this lack of electricity is the lack of light.”
It’s important to know what is at the heart of what you are trying to achieve. U-light and many of the most successful impact companies find that being excellent in their core products and services builds the scale and sustainability for maximum social impact over time.
Startups that are focused on social impact have some unique challenges as they build out a business model, and this is sometimes referred to as the “serving two masters” challenge. While there are plenty of companies who have found the right model and balance, new companies face common decisions that pit profit against purpose. Imagine a 1-for-1 company with a model similar to Toms. Now imagine that this new company is facing losses and some hard decisions need to be made. Would you compromise the social impact to make budget, or would you insist on finding others ways to make necessary cutbacks?
In general, investors are focused on growth, profits, and valuation. This means social enterprises need a business model that can demonstrate value in the markets they serve in relatively short order, while remaining true to a social mission. And it means carefully choosing partners and investors who are in lockstep with the social mission, so that when tensions arise, everyone has the same value set against which decisions are made.
Once a company has committed to a social mission and a sustainable business model, it’s then time to ask the question: “how will we measure our impact?” This is becoming increasingly important as impact investors ask companies not only for their financial projections, but also for how the business model contributes to solving a social problem.
There are a number of resources that can help a social enterprise to plan to measure its impact and to track how it’s doing. B Lab, for example, provides a free tool that enables companies to measure their social and environmental performance, benchmark against peers, and improve. Other models, particularly the 1-for-1 model, make this form of measurement straightforward, such as Warby Parker, which recently announced that it has given away over a million pair of glasses to those in need. Revolution Foods is fulfilling its mission “to build lifelong healthy eaters by making kid-inspired, chef-crafted food accessible to all” by counting the number of meals its serves in schools and through retail distribution each week.
The bottom line in measurement is knowing how you will define impact and being clear with internal and external stakeholders both as you set out and frequently along the way.
Like any business, social enterprises need to develop a plan to assure there is sufficient capital to fund operations. Some social enterprises find a path to raise early “family and friends” support, but once you consider outside investors, it is a different ballgame. If your business model ensures that as the company grows, so too does the impact, you should feel compelled to be on a track to maximize growth. To do so, you’ll likely have to consider taking outside investment.
It’s important to understand that investors often expect a successful “exit” in the relatively short term (five or so years)–the ability to cash in on the equity stake at a premium. Some companies choose an IPO path, others entertain acquisition offers to meet this need, or sometimes there is a “recap” which brings new investors in to buy out the earlier investors. For a social enterprise, here again there needs to be careful consideration given to those with whom you align. Have they bought in fully to the business model and to the passion around impact?
Impact investing is a relatively new sector, but there have been some exits–one recent example is an affordable organic baby food company, Happy Family. The company found success with a growing share of the $1.7 billion baby food industry comprised of consumers who are increasingly interested in ensuring the food their children eat is high quality. Last year, Happy Family was acquired by Danone, a global company focused on bringing health through food to as many as possible. Happy Family’s CEO, Shazi Visram, put the acquisition in a perspective consistent with the company’s mission: “this will allow us to further our goal of providing organic nutrition to more children.”
It’s important for social enterprises to take time to craft their stories in a way that appeals to both investors and consumers. More than an “elevator pitch,” social enterprises need a “passion pitch” that incorporates clear intention, measurement standards, and transparency each step of the way. Greyston Bakery, whose mission is to give jobs to hard-to-employ people has a slogan that reads, “We don’t hire people to bake brownies. We bake brownies to hire people.” This short, elegant statement conveys the mission of the organization. Of course Greyston Bakery knows if it doesn’t provide wonderful, tasty offerings as a first order of business, there will be no social impact. A peek at the Greyston website shows consumers delectable brownies, cookies and other delights, and they compete well in a crowded category.
Choosing the right corporate form is important to being able to raise capital from the right investors and partners. Social enterprises could certainly register as a C corporation, much like any other company. But, there are other forms—such as a B corporation, low-profit limited liability Corporation, or 501(c)(3) nonprofit with a for-profit subsidiary—that might provide more flexibility. As you’re starting out, it’s worth taking the time to consider the options available to you in your state.
While we’re still in the early days of impact investing–which means there is still much to learn– we are incredibly encouraged by the momentum we’re seeing both in the growth and prevalence of social enterprises and the volume of investors who are interested in companies that generate both a financial and social return. These key questions–corporate form, approach to storytelling, planning for scale and capital, measuring impact and the problem you’re ultimately trying to solve–are just a few of many that aspiring social enterprises should ask as they get going, and continue to revisit as they grow.
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