If Xavier Helgesen's sole concern were boosting his company's profits, the decision would have been easy. Helgesen's $17 million business, Better World Books in Mishawaka, Ind., collects textbooks donated by students at 1,000 colleges and resells them online. At first, the company gave 15% of its revenues to charities that combat illiteracy. But after a year or so, Helgesen knew it wasn't working. "We were recording losses," says the 29-year-old. And the company wasn't able to contribute to its employee profit-sharing plan, which Helgesen considered a vital part of Better World Books' compensation package.
Clearly, the company needed to keep more of its profits. But this was a social enterprise, one founded as much for its mission to do good as to make money. Helgesen eventually made a tough decision, cutting to 7.5% the share of revenues earmarked for most of the company's nonprofit partners, and funding the profit-sharing plan before splitting the remainder 50-50 with those partners.
The goals of making money and doing good are often at odds. But that is not stopping a growing number of entrepreneurs from starting hybrid businesses. These so-called double- or triple-bottom-line companies, which seek social or environmental returns as well as profits, and often all three, began popping up in the '70s and gathered steam in the '90s as organic food caught on and a new generation of entrepreneurs recoiled from corporate excesses. About 20,000 such companies—roughly four times as many as five years ago—now exist, according to Jay Coen Gilbert, co-founder of B Lab, a Berwyn (Pa.) nonprofit that rates social enterprises.
At first glance, socially responsible companies are hard to pigeonhole. Their goals range widely, entailing anything from curbing pollution to educating students about substance abuse. The product itself—organic baby food, say—may be central to the mission. Or a company might hire employees from disadvantaged neighborhoods or offer a great package of benefits. That variable nature can make it difficult to distinguish them from the many companies that boast about their environmental efforts or philanthropy when their main lines of business are not socially responsible, or worse.
A closer look, however, reveals that these companies' social and environmental goals aren't add-ons or marketing ploys. They're the raison d'être of the company. "It's part of the DNA of the business," says Matt Lombardi, entrepreneurial services director of the Investors' Circle, a 14-year-old angel investment group focusing on social ventures.
Of course, detractors insist that the very notion of building a business around a social agenda is misguided. They argue that companies can do more good by being as profitable as possible and assisting social causes through philanthropy or volunteerism. Others suggest that social problems are best addressed by nonprofits. "Starting a social venture is one approach, but not the only approach," says David Vogel, Solomon P. Lee Distinguished Professor in Business Ethics at the University of California's Hass School of Business. Says T.J. Rodgers, founder and CEO of Cypress Semiconductor in San Jose, Calif., whose corporate giving program works with charities providing food and shelter: "Working directly through a local nonprofit is the most effective approach."
But social entrepreneurs believe that a corporate structure is the most efficient agent. As profit-seeking businesses, they are spared the need to chase a limited supply of grant money. They also have more tools to motivate employees and lure top-notch talent. Says Seth Riney, the 33-year-old founder of PlanetTran, a Cambridge (Mass.) limousine service with an all-Prius fleet: "If you are for-profit, you have an extra feather in your cap when you are recruiting, and you can give stock options and performance-based bonuses a nonprofit can't."
Still, running a hydra-headed venture is tricky. And serving more than one master is never easy. "Unquestionably, it is more difficult to manage and grow a business that is accountable to multiple constituencies," says Gilbert.
Costs can be higher than at conventional businesses, and investors must be willing to accept potentially lower and slower returns. The result, says Vogel: "Many, many companies don't make it."
But you can succeed, if you proceed with care and follow a few basic rules. Choose a business model that fits your mission and covers extra costs. Find like-minded investors. Figure out how to measure nonfinancial results to prove you're not giving just lip service to your social goals. And like any entrepreneur, be willing to change your business model when necessary.
JUSTIFY YOUR MODEL
Your first job is to create a business with a product or service that people will want and an effective way to sell it. "Just because you have a social mission doesn't mean you have a right to exist in the marketplace," says Gilbert. To earn that place, approach your social mission with the heart of a bean counter, refining it until you have a goal you can achieve.
Four years ago, Riney, an engineer and software consultant, decided he "wanted to found a company that could change the world." He created a business that would change a little corner of it. After thinking about ways to encourage public use of environmentally friendly cars, Riney started PlanetTran in 2003. Most limo operators treat chauffeurs as independent contractors, but Riney gives all his workers, drivers included, salary and benefits. Revenues for the 25-employee company were $1.3 million in 2006.
In some cases, the impetus to start a company may come well after you've committed to a social agenda. Seven years ago Melinda Olson, a registered nurse with an interest in herbal medicine and organic products, started making remedies for her pregnant friends' heartburn and morning sickness. "It wasn't my intention to start a business," says the 56-year-old. "But the more products I created, the more it became obvious that there was a real need for them." Earth Mama Angel Baby, Olson's $1 million company, uses recycled materials for packaging its organic, preservative-free lotions, shampoos, teas, and other products for pre- and postnatal women and babies. Two of the Clackamas (Ore.) company's 11 employees are refugees. "We prefer to hire people who are most in need of a job," says Olson. "It dovetails with our larger mission."
But like most multiple bottom liners, Olson found that her ideals came at a high price. She figures she spends 15% to 80% more for organic ingredients, and as a result her gross margins are 12% to 15% lower than those of her competitors.
Socially responsible companies can also rack up costs ancillary to their central mission. Eric Olsen, vice-president of advisory services at Business for Social Responsibility, a San Francisco nonprofit, says if you're a socially motivated entrepreneur, "everything in your four walls will have to be consistent with that position." At Borrego Solar Systems, a 107-employee El Cajon (Calif.) company that designs and installs solar electric systems, CEO Aaron Hall, 28, makes sure the company's 15 trucks use biodiesel fuel, which costs about 10% more than conventional fuel, and that it contracts only with shipping companies also using biodiesel. "Fulfilling our missions means we have to take steps that may cost a little more money, but are the right thing to do," says Hall.
Sometimes, though, complying with your mission statement will actually lower your costs. Earth Mama's Olson packs her shipments with post-consumer-waste newsprint, which she gets from local printing companies at little or no cost, and reuses bubble wrap and cartons and containers, saving 40% to 45% on packaging. At Better World Books, Helgesen salvages shelving from libraries that are relocating.
Or you can trim costs the old-fashioned way: by streamlining operations. In 1999, Melissa Joy Manning, 35, started her eponymous Oakland (Calif.) jewelry design and manufacturing business with the mission of providing a living wage to artists, including a competitive salary, health-care benefits, and a 401(k) plan.
But last year, she wanted to open a showroom in New York and add e-commerce to her Web site, and she wasn't sure she could find the capital to expand and still offer the same compensation to her 20 employees. Manning hired a production manager to find ways to manage raw materials costs, among other things. She changed the production process from an assembly line to having a single employee handle an entire piece. Costs fell 15% for the $2 million company. "If I couldn't grow without sacrificing my ideals, I'd walk away and do something else," says Manning.
You can also improve cash flow by selling goods that command a premium price. Nine years ago, John Sage, 46, and his friend Chris Dearnley, 47, founded Pura Vida in Seattle to sell Fair Trade coffee grown by farmers in underdeveloped countries, and to give a portion of revenues to charitable organizations serving the poor in Central America. They paid $2 a pound for beans, twice the normal price, and charged customers about 70% to 100% more than conventional java.
That sounded good, but profits still didn't pour in. Pura Vida's business took off only when the founders rejiggered their strategy. They originally sold to religious groups, but revenues stalled at $1.8 million. Then administrators from several colleges contacted them, and Sage and Dearnley realized they had found their niche. They began marketing to campuses, a move so effective that in 2005, students at American University staged a protest, demanding that the college choose Pura Vida as its coffee supplier. The 12-employee company's revenues reached $3.6 million in 2006.
FUNDING YOUR GROWTH
Most social entrepreneurs bootstrap the launch of their companies. But once you prove your business can work, you can find investors—provided you seek ones that understand your company will measure its progress against both financial and social yardsticks. A 2003 McKinsey study of the Investors' Circle found the socially responsible companies it funded had an annual return of 10% to 14% from 1992 to 2001, vs. 33% for all venture capitalists in those years. And 77% of the members said they would accept a "social discount" if the company met social and environmental goals.
If you do approach conventional investors, be prepared for skepticism. Pura Vida's Sage raised about $5 million in debt and equity in the last five years, mostly from angel investors. But he encountered considerable reluctance along the way. "People would tell me, 'It is neither fish nor fowl, and you'll end up doing a lousy job,'" says Sage. Furthermore, many socially minded entrepreneurs are loath to take money from conventional investors, fearing they'll make demands that will compromise the company's missions. "If your investors are looking to maximize every penny, there's going to be a problem," says Andrew Savitz, author of The Triple Bottom Line.
GAUGING YOUR PROGRESS
Every investor will want to hear about the progress your company is making, which leads to the vexing problem of how to measure a social enterprise's nonfinancial achievements. The typical approach is to tailor the metrics to the business, often somewhat informally. Better World Books looks at how much money it has raised for charity since starting six years ago: $2.3 million for their primary literacy partners and $1.2 million for 55 other charities. Riney measures the reduction in carbon emissions achieved by his fuel-efficient fleet. Customers can log onto PlanetTran's Web site to see, based on their usage, how much they've cut emissions, and corporate clients receive detailed monthly reports.
One approach, pioneered about 10 years ago by the Robert Enterprise Development Fund of San Francisco, evaluates companies according to what it calls a social return on investment (SROI), identifying the benefits of a business' social activities and calculating their economic value. Another method, from the Global Reporting Initiative in Amsterdam, assesses companies for their economic, social, and environmental performance. The organization recently published an online handbook to help small businesses use the guidelines. And Gilbert's B Lab rates social enterprises against criteria relating to the environment, employees, consumers, community, and leadership. Businesses complete a survey touching on such measures as the percentage of revenues from green products; respondents that score well are certified "B corporations." Companies must also amend their articles of incorporation to affirm that management will consider the interests of employees, the community, and other stakeholders.
As you juggle competing interests, you can find help from organizations such as the Columbia Business School Research Initiative on Social Entrepreneurship and Co-op America, a Washington (D.C.) group that links green businesses with one another. They won't make running a profit-making company with a social mission easy. But with issues such as global warming and sustainable agriculture now top of mind, this could be the best time to try it.
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