Table of Contents
In many ways, it’s much easier to start a business that only needs to focus on the bottom line, so why create a venture that requires not only this but much more? Because for many, the challenge posed by social business is much more rewarding. Social entrepreneurs get to combine their passion for a social mission with their business expertise, innovative ideas, and drive to pursue an entrepreneurial spirit. For many, this offers an experience that can’t be matched by a traditional, solely profit-driven business model.
Social businesses are becoming increasingly popular, especially among young entrepreneurs and MBA grads who want to give back to the community. Before diving headfirst into your own social venture, however, it can be useful to learn a bit more about some of the more successful business models and companies that are already on the market and to learn just what you’ll need to do in order to make your own social business successful, too. You may just realize you’ve got a lot of work ahead of you before you’re ready to launch the next big social business.
Models of Social Entrepreneurship
Just as there are many ways to make money, there are many ways to use that money to give back to communities, whether local or global. This variety offers entrepreneurs a lot of creativity in coming up with a way to align their social goals with a business model that meets or exceeds their needs for funding.
Social businesses can choose to operate either as for-profit or nonprofit. For-profits find funding from investors, which must be repaid through equity or dividends. In these arrangements, finding a way to make the business profitable, not just beneficial, to a social mission is essential.
Nonprofits have more leeway. Their financing comes from donations, either from individuals, foundations, or corporations. Instead of a financial return, these donors expect to see a social return on their investment. One drawback, however, is that nonprofits are heavily reliant on donations, which may not always be steady. Interestingly, there is also a middle road. Some businesses will build a for-profit branch to raise money and support development, while also having a non-profit branch to focus on their community goals, which allows them to seek assistance from donors. Which works best depends heavily on the type of business, its goals, and how much funding it will need to reach them.
While nonprofits and for-profits are the major divisions, within these there are a wide range of business models that create a lot of diversity in how businesses give back, find funding, and operate on a day-to-day basis. Understanding the benefits and potential problems of some of the most popular models is key to building your own future social venture, as you’ll either want to emulate some of these elements or avoid the problems associated with them through better planning and design.
Buy One, Give One
This model of social entrepreneurship is well-known, perhaps because of the incredible success of the shoe retailer TOMS, which uses buy one, give one to provide needy individuals with shoes for each pair that is purchased. Yet TOMS is hardly alone in using this business model to give back.
BoGoLight, Warby Parker, FIGS, Roma Boots, and One World Futbol Project are all examples of businesses using this model to not only bring their goods to consumers, but also to get them to those who may not have access to things like lights, sporting equipment, school uniforms, and eyeglasses.
Perhaps the most well-known name among these in recent months is Warby Parker, which has become a successful business without many even knowing about their buy one, give one policy. Since it was founded in 2010, the company has raised $56 million in funding from investors and has sold (and in turn distributed) more than 250,000 pairs of glasses. In fact, it hit its sales targets for the first year within three months of being in business.
What is Warby Parker doing right? It’s selling something people really want: low-cost glasses. By blending need for function with fashion, Warby Parker has become an in-demand brand, and one not solely known for its buy one, give one model. Focusing on building a strong business and fulfilling a market demand has made it possible for the company to give back on a much larger scale and has created a sustainable foundation for the future.
Warby Parker founder Neil Blumenthal told Mashable, “We want to demonstrate that you can build a profitable, scalable company that does good in the world and does not charge a premium for it.”
While buy one, give one seems like a solid way to both reward consumers and get needy individuals the help them need, it isn’t a perfect model and those looking to emulate it will need to tread carefully.
One of the biggest problems is that often, buy one, give one doesn’t do much to actually change the real issues surrounding a social issue. TOMS has received a lot of criticism in recent years for just this reason. While in the short term, giving children a free pair of shoes helps them, it doesn’t solve the deeper health, poverty, and economic issues that cause them to not be able to afford shoes in the first place. Some critics have even asserted that it makes things worse, by undercutting local merchants.
It doesn’t seem to have phased consumers — at least not yet — as the brand remains incredibly popular and often imitated, but that doesn’t mean that interest in the brand won’t flag going forward if consumers decide they can do better buying shoes (or any other product) from another business that has a better model.
Another common way that businesses pursue a social mission is through focusing on supporting local businesses, producers, and suppliers. This strategy not only boosts the local economy, but depending on the product, may also reduce waste and foster a more sustainable, earth-friendly way to do business.
One great example of this type of model in a for-profit business is Whole Foods. The Austin-based retailer was born out of a mission to provide consumers with access to safer, healthier foods, often working through a partner network of farmers and partners to get those foods. Facing criticism for not providing enough local produce, the store responded by utilizing their existing network to buy more produce from local producers. In an effort to buy more local food in the future, it also created the Local Producer Loan Program, which hands out up to $10 million in low-interest loans each year to independent local farmers and food artisans to help them expand their businesses and perhaps even become a product carried at one of the retailer’s stores.
Working with local businesses and entrepreneurs comes with a lot of benefits and can help to build a loyal consumer base, but it isn’t always easy. Seeking out these businesspeople, making lasting connections, and being able to find enough merchandise to fill consumer needs can be challenging when working on a purely local scale. There may simply not be enough product on hand, or seasonal variations can make it impossible to maintain consistency in availability.
For some for-profits, it may not make financial sense, and only those with a strong eco-friendly brand may be able to justify the additional costs that this can pass along to consumers. It’s important to note that because some local and sustainable products are more expensive, not all consumers will be able to shell out for the premium associated with them. This can limit the market and may make it hard to scale and grow further on down the line.
Donating to the Community
Want to run a for-profit business that isn’t just focused on making money? One of the easiest and most popular ways to do so is by giving some of those profits back to the community in the form of donations, products, or service from employee volunteers. In recent years, Target has begun funding education in this way, donating 1% of profits to local schools. Since the program was founded in 2010, the big box retailer has donated more than $679 million to K-12 schools and education programs.
Yet giving back doesn’t have to just be financial. One great example is the nonprofit Goodwill Industries. Through profits generated by a network of thrift stores, the organization funds services for job training, employment placement, and other services for those who have disabilities, lack education, or face any number of job placement challenges. The company describes itself as < a href="http://www.goodwill.org/wp-content/uploads/2011/12/Goodwills-Successful-Social-Enterprise-Model.pdf">social enterprise but one that isn’t just focused on profit, instead crafting a triple bottom line of “people, planet, and performance.”
Goodwill has been around for more than 100 years, but the business has retooled itself in recent years to appeal to a younger, hipper audience. Donated items are auctioned online and boutiques and trunk shows have even showed up at South by Southwest.
To stick around for so long, Goodwill must be doing something right, but giving back to the community isn’t always as easy as it might seem. For this model to work, businesses have to be able to balance profits and purpose, finding a product or market niche that hasn’t yet been filled by another business. They also need to be able to easily quantify the benefits they’re providing to a local community and to ensure that the funding, goods, or service they’re providing to a community are actually having the intended effect. Without being able to demonstrate this, it’s nearly impossible to build brand and customer loyalty.
Tips for Starting Your Own Socially Conscious Business
Learning about what other businesses are doing to promote social change is interesting, but most civic-minded entrepreneurs want to know how they can get in on the game themselves and use their own great ideas to shape their communities and change lives.
Although many of the aspects of starting a social business are the same as starting any business, there are certain aspects you’ll need to carefully consider that are unique to more altruistically driven types of ventures. Here are some critical questions every social entrepreneur needs to ask him or herself when starting a new business.
- Are you for profit or nonprofit? According to Dana Brown, program director at The GroundFloor, a social business incubator and investment fund, one of the first things that aspiring social entrepreneurs need to do is to figure out whether their idea is best suited for being a for-profit or a nonprofit. Each has their own model for how they generate revenue, and some ideas may simply work better under one model.
- Do you have a solid business plan? Brown cautions aspiring social entrepreneurs from jumping into their social mission too quickly. “The market for social businesses is getting really crowded so entrepreneurs need to make sure they have a viable business model before focusing on purpose.” Purpose alone, she says, isn’t enough to get the attention of investors or to stake a claim to a part of the marketplace. “If you can put together an outstanding business plan from a factual standpoint then the fact that it’s furthering a social purpose is just gravy,” she says. “You have to fill a market need because after the honeymoon is over you still have to be able to compete.”
- Can you quantify your social impact? Once a solid business plan is in place, however, entrepreneurs should pay attention to how they’re going to measure their social impact, and it’s critical not only to have goals in place but also solid, quantifiable ways to detail just how many people they’re helping. “From day one you’ve got to be able to quantify your profit when you make it,” Brown says. “The same goes for your social impact. You’ve got to be able to showcase how many people are being assisted to your investors and your customers.”
- Are you living up to your brand promise? Most consumers have heard stories about businesses that weren’t really giving back what they said they were and as a result, building trust is an even more critical aspect of starting a social business than any other kind. Brown offers two suggestions to help build your brand and become a name consumers associated with legitimacy. First, she suggests that social businesses be incredibly transparent about their income and social output. This can mean putting out annual impact reports or showing off results.
- How will you balance profit and impact? Even if you’re planning to start a nonprofit, you’ll need funding to keep you up and running. Finding a balance between the two can be challenging, but not impossible. Clifford Holekamp, a professor of entrepreneurship and director of the entrepreneurship platform at Washington University’s Olin Business School, says that profit and impact need not be in conflict. “Elegantly designed social ventures increase the social value being generated in concert with the growth of the enterprise,” Holekamp notes. Essentially, a well developed business plan will ensure both always stay in balance.
- Will you have enough funding? It’s not uncommon for social entrepreneurs to underestimate how much funding they’ll need to get started because many don’t have a realistic expectations of how long it will take to generate substantial revenue for the market. “Social entrepreneurs can be particularly guilty of overestimating market adoption because of the passion they personally have for their mission and their assumption that most others would share that enthusiasm,” Holekamp says. As a result, it’s critical that social entrepreneurs not let their social vision cloud their business projections.
- Are you ready for the challenges? Starting any kind of business isn’t easy, but social entrepreneurs can face unique challenges. “In a commercial business, defining success can be easily connected to net income and return on investment,” Holekamp says. “Social entrepreneurs have the additional task of determining what defines success, winding a compelling way to measure their social impact, and educating and communicating this message to their stakeholders.”
- Do you have the passion? While all entrepreneurs are passionate about what they do, those starting social ventures need to be especially so, because they’re not just selling a product but also a social mission. “First, be inspired by your understanding of a problem or need in the world and your desire to do something about it. Then explore the possibility of developing a social venture to help address that need,” advises Holekamp. Being passionate and building an authentic business will be central to that long-term success of your business.
Secondly, she says it’s smart to learn more about the thought leaders or researchers in the space entrepreneurs are addressing. “Get them to be a spokesperson for your idea. This can break barriers down in peoples’ minds, because these people have more credibility than you do as a new voice in the marketplace.”
There are many ways to build a business that focuses on more than just the bottom line and can actually play a valuable role in addressing serious social, environmental, and health issues for people around the world. While passion and purpose are important, entrepreneurs can’t let them get in the way of focusing on the fundamentals that make any business, social or otherwise, successful: a solid business plan, investors that believe in the project, and an as yet unfulfilled market niche. Those who can strike a balance, however, may just find that their business expertise can do much more than make them successful; it might just change the world.