Making money doing good

Pieter Oostlander from the European Venture Philanthropy Association sketches a continuum ranging from for-profit companies all the way to charities, with impact investment and venture philanthropy somewhere in the middle:

One end of this continuum is pure profit and on the other end we find pure good. The color-coding sees profit pictured in red –stop, danger–, while charity is pictured in green –go, sustainable. The core of the problem, which we will examine here, is that making profit and doing good exclude each other. They are communicating vats- more of one necessarily means less of the other.

Let’s examine the two extremes sides of the continuum by observing the positive and negative aspects.

In capitalism, profit is in principle a good thing. Profit, after all, is the return on investment for growth. Profit is a reward for entrepreneurship and it provides independence and room to act. It allows for employment and job creation. It is a reliable measure of creating value, making it a strong marketing tool. The productive way to create profit is to create additional consumer value and capture revenue for doing so. Additional consumer value means providing products and services that consumers really value and doing so at affordable prices. This often requires innovation: creating new products that consumers really need.

Profit can also be created in destructive ways, whether by externalizing costs (pollution), irresponsible exploitation of resources or labor, or through unfair monopoly rent. Some products may be highly profitable while not necessarily good for human beings. The major conglomerates of the world produce most of the consumer products that we rely on for our everyday purchases, and yet many of them do so at the cost of social and environmental degradation. Some of the largest companies make profits as monopolies or by operating as cartels. They also tend to avoid paying taxes.

On the other side of the continuum, we find charitable organizations and foundations whose sole purpose is to give money away for social or environmental improvement. Most NGOs fall in this category. We might think that pure charity, giving money to good causes, is always a good thing. It is clear that giving money away in terms of dire need, after natural and humanitarian disasters is always good; it immediately helps to alleviate suffering. These are times when pure charity has a clear beneficial role.

On the other hand, charitable giving, or doing things without seeking to be paid in return, raises some serious issues regarding lack of market feedback, user dependency, or lack of appreciation resulting in careless use. The normal design and feedback mechanism of business are missing, which can lead to ineffective processes and interventions that disrupt local economies.

There are two additional problems with charity, even when it has only positive consequences. The first is that it not sustainable. Money has to be made somewhere to be given away somewhere else. If you think of projects that are going to do good but which are not self-sustaining in terms of profit, and will always remain dependent on donors, then the survival of that process is at always at stake. Charity may be excellent for emergencies and temporary interventions, but not as good for actions that need to be sustained over a long period of time.

Second, there is an inherent problem with scaling charity. A process that makes money can scale up quite quickly because it has its own engine of profitability – profits can be reinvested, and serve as collateral for expansion loans. Charity dependent on donor money is impossible to scale without also having to scale the amount of gift money.

The problem of assuming that the solution lies in the middle of our charity-profit continuum is that having more of one automatically means having less of the other. Impact investment yields a lower return than normal investment. The more impact, the less return; the more return, the less the impact.

This comprises the riskier aspect of this thinking, the belief that impact investment or corporate social responsibility is always a good thing. The detrimental assumption that you cannot have both creates a deadlock of compromise, thereby giving the sense that more of one is less of the other. Doing so risks missing the really sweet spot where you do good and also make money. For that you need to collapse the continuum by finding an approach that benefits both. Could businesses focus on doing good as their normal practice?

There is a growing recognition that money can be made through fair trade products. The old thinking is that people are happy to pay a premium in order to have a fair trade product. Some of these have a certain cachet, a luxury appeal, which makes it easy for us to pay for a superior quality product. Good examples of this include Tcho chocolate, Ben & Jerry’s ice cream, and Innocent Smoothies. Tesla Motors focuses on the positive goal of carbon reduction while still turning a profit.

The new thinking however is that fair trade products are now competing in price with normal products. In this way, non-fair trade products can be crowded out. Customers are convinced that by purchasing this product, they receive the best quality while supporting the kind of society they want. Tony Chocolonely used the extremely effective term “slave-free chocolate” in marketing, thereby raising awareness about the plight of cocoa farmers. It became a successful brand in itself, and also managed to shift other chocolate producers into certifying their cocoa for fear of losing out. Even though these small, pioneering companies are often bought by larger conglomerates, they manage to change long-established practices for the better.

Nobel Peace Prize Laureate Mohammed Yunus argues that economic development is really the way to emancipate the world’s poor. Their economic activity, if guided suitably by small-scale investments in the forms of loans, would revolutionize the world. Microcredit is the idea that you don’t need to give money away to the poor, because the poor are credit-worthy. Microcredit companies can be financially very sound companies with high repayment rates- they ask for high interest rates. They distinguish themselves as enterprises and not charities.

Yunus’ other concept is the social business, a functioning enterprise that focuses on having a positive social impact above making profits. One of the pilot projects was a partnership with the French conglomerate Danone to provide vitamin-reinforced yoghurt to children in Bangladesh, with the aim of strengthening young children against avoidable and debilitating diseases.

THNK advisory board members also subscribe to this credo. Ravi Naidoo champions “commercial activism”, which he defines as making money on activities that change people’s lives. He designed a trek across Africa, which boosted the continent’s confidence as a whole while also stressing connectivity by bringing wireless telephony along the way. This was a way of combining marketing with social change; raising awareness by using the tools of commerce. Architect Ben van Berkel consistently informs his clients that creating sustainable building solutions from the start of a design project tends to be much cheaper. Being good also makes sound business sense.

The way we think about charity is also changing. The old paradigms are about endowing foundations and giving money away to projects. The new thinking is that charitable organizations are companies that must produce a quantifiable return on investment. The money given by charitable entrepreneurs’ targets specific projects, such as the Bill and Melinda Gates Foundation’s drives on malaria and polio. Small-scale entrepreneurial projects, for example designing a more user-friendly condom, are also funded. These types of charities behaving more like companies in that work toward specific targets and Key Performance Indicators.

Making money doing good requires a new perspective and some learning. For-profit companies can start considering doing good as a core activity of the company.

This is more than showing Corporate Social Responsibility, or giving back to the community through an employee charity scheme. The idea is to look at the entire process, and asking where the good is being served. Whether all companies will be able to do that, or whether they risk being displaced by companies who will is still open to debate.

Learning also happens in the other direction. There is a tendency for social entrepreneurs to look for funding in the form of subsidy or charity. The deeply-held belief that real social impact cannot be a profitable enterprise stops them from taking a critical look at their own business plans. Why can’t you get people to invest in your dream, since you believe that it will be profitable as well as have positive social impact? Those who have a specific agenda about improving the world need to think about how to make money by doing so.

What if the fundamental assumption were that you should always do something that is both good and profitable? What if that became the new benchmark, and what if that became the first question that you ask when you start a company? This new perspective will bring together idealists with a vision about making the world a better place with entrepreneurs who know how to build a business, run a team, and deliver a product or service. Financiers will play a key role in designing these companies right from the beginning and attract investors in for-profit companies. We can rethink the driving forces of capitalism. When something is of value to someone then that value can be measured in many ways, among them money, as money is one of the means by which people express value.

From the point of view the social entrepreneur, what mindsets do we need to change? Doing good and making money do not need to be at odds. What prevents us from achieving both is often cultural bias. This isn’t a rational choice, but rather an “emotional dependency” – we have learned to accept that one will compromise the other, when in fact there shouldn’t be any practical conflict.

What does this mean for entrepreneurs? Be aware of your old frameworks around funding and profit. Realize that this traditional model of profit versus good is still entrenched in our collective mindset, that this is the prism through which we see the world. Take “making money doing good” as a starting point for your business model, a mantra for development, and be wary of reaching compromise about your principles too soon.

How can we become pioneers in this? If our project has a truly positive social impact, then how can that value be monetized? Conversely, if the product or company is financially wildly successful, how can that success be achieved by at the same time making a lasting social impact?