Making money while doing good

Making money while doing good


isn’t easy, but more companies are proving it can be done. Here are some successful strategies

December 14, 2007, 5:00PM EST  – 
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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