5 ways purpose-driven companies do better than others.
by Felix Staeritz, CEO of FoundersLane.
Step into any university intro to management class and you might see students studying Milton Friedman’s famous 1970 essay, “The Social Responsibility of Business is to Increase its Profits”. But what happens when business leaders take such a narrow focus? And what happens when consumers and employees demand more from companies?
Friedman couldn’t have predicted that purpose — a term that includes social responsibility — drives whether a business makes it. But without purpose, a company might struggle to increase profits or drive shareholder value.
What is Purpose?
A company’s purpose cannot simply be to make money. As Simon Sinek said in his 2009 TED Talk, profit is a result of purpose, not the other way around.
Purpose is the reason your company exists. Sinek introduced the idea of purpose with the phrase, “start with why”. In this framework, entrepreneurs think about their core belief, not what they are trying to sell. In fact, he believes that companies should sell to those who believe in the same things they do. This is how entrepreneurs can think about aligning their purpose with their customer base.
The Harvard Business School frames purpose as “having a concrete goal or objective that can benefit society as a whole”. This moves the discussion from purely profits to how your company’s product or service is making positive change in the world.
At my company, purpose is built into everything we do. As an entrepreneur, I’ve seen how heavily the European economy depends on large, established corporations. I also know that those companies have an immense competitive advantage in their fields, especially heavily regulated and high investment industries related to health and climate.
But these same companies struggle to cope with disruption from startups and to reap the benefits of the fourth industrial revolution. That’s why I started FoundersLane with Andreas von Oettingen and Michael Stephanblome in 2016 — to help these pillars of the European economy create innovative solutions to solving our biggest problems.
That same purpose is why we founded Fightback and why we developed the Entrepreneurial Co-Creation (ECC) model.
But how does having a purpose benefit a company? Let’s take a look at five areas: creating loyal customers, recruiting talent, growing profits, aligning initiatives, and attracting investment.
Purpose Creates Loyal Customers
Consumers are increasingly demanding more than just a product or service — they want to feel good about a purchase. As shoppers become more sophisticated, they can sniff out brands that exist only to make a profit and brands that have insincere missions.
While Millennials are more likely than other adults to consider a company’s values when making a purchase — almost 70% factor this in — more than half of adults use values in their decision making process too. This is catching on with Gen X consumers and Baby Boomers. Taking a stance on societal issues that align with your purpose can actually drive sales: 75% of people are likely to start buying from a company that supports issues they agree with. The sword swings both ways on this one, with almost 60% of people saying they would stop shopping with a company if that company supported an issue they didn’t.
In one study, price was less important than the company’s values. And once you hook those consumers, eight out of ten of them are more loyal to purpose driven brands. But it doesn’t stop there.
Purpose Helps Recruit and Retain Top Talent
Entrepreneurs need smart, talented employees and high employee turnover can derail ambitious plans. Finding the right people is difficult: one study found that one third of senior leaders say this is their most challenging managerial task. That same study found that high performers were 400% more productive than average performers — meaning getting and keeping the right employees is crucial to your company’s growth.
So how does purpose attract and retain employees? For starters, 90% of employees in purpose driven companies are engaged in their work. That’s compared to a lowly 32% in companies that aren’t driven by purpose.
But does that really lead to lower turnover? The data says yes. Millennials are 5.3 times more likely to stay at purpose driven companies than those without.
Purpose Leads to Higher Growth
With happy employees and loyal customers, it’s not surprising that companies with a clear purpose outperformed the S&P 500 by a factor of ten between 1996 and 2011. And more recent data backs this up: Korn Ferry found that purpose driven organizations had yearly growth rates at three times their industry average.
But what happens within a large multinational with many brands, some purpose driven, some not? A study by Accenture found that of the top 40 brands under Unilever, almost half focused specifically on sustainability. Those environmentally driven brands grew 50% faster than other Unilever brands and drove 60% of the company’s growth.
Purpose Helps Align Initiatives
When your purpose is clear, it’s much easier for the team to agree on what initiatives to pursue.
“we as ecosystem leaders, we, as a community, should not support any entrepreneurial activity that is not based on responsible, sustainable development and with very clear rules and very clear impact, aims and purposes”
For my book Fightback, I interviewed Plamen Russev, investor, philanthropist and chairman of the Webit Foundation. He said that “we as ecosystem leaders, we, as a community, should not support any entrepreneurial activity that is not based on responsible, sustainable development and with very clear rules and very clear impact, aims and purposes”.
In other words, leader’s following Russev’s advice save time on picking their initiatives because everything is measured against the company’s purpose.
In our day to day work, we partner with corporations building hybrid ventures. We help make sure their purpose is clear to everyone, so that the corporation and entrepreneurs have the right scope of operations. This leads to fewer corporate leadership alignment meetings and unnecessary decisions.
Corporations can also use purpose to guide them in decisions on building, buying or partnering. In many cases leaders find their purpose is better suited by partnering to build or by acquiring a startup than building a venture themselves.
Purpose Attracts Investors
The investors of yesterday might only have cared about quarterly returns, but increasingly they want to know how a company plans to handle the biggest challenge of our time: climate change.
“Climate change has become a defining factor in companies’ long-term prospects.”
Companies that either deny the science or have no plans to address climate change are risky investments. In a letter to CEOs in his investment portfolio, Larry Fink, the CEO of BlackRock (the world’s largest shareholder) wrote, “Climate change has become a defining factor in companies’ long-term prospects.” He continued by saying, “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.”
In the letter, Fink describes how conversations with clients around the world had pushed BlackRock in this direction — investors wanted to reallocate their money into sustainable companies. In other words, they wanted to back purpose driven companies.
BlackRock isn’t the first investment firm to shift its portfolio to support founders with a purpose, and it won’t be the last. Expect more investors and venture capitalists to follow.
If Fink is right — and I think he is — capital will rapidly move from companies that follow Friedman’s tenants of profit first to companies that are driven first by values.
Bottom Line
Purpose is more than a trend: it drives growth. Making sure that your company is clear on its purpose and communicating that with employees, customers, and investors will drive growth and create a positive impact in the world.
We are driven by a mission to shape the world for better now. Want to know how?
1. Take a look at the Fighback Sessions to access the webinars that help accelerating in the new normal.
2. The Fightback Now book explains how you can leverage your assets to shape the new normal.
Fightback Now book by Felix Staeritz and Dr. Sven Jungmann. (coming soon)
3. If you enjoyed this story, you might also like our bi-weekly The Lane newsletter on the matters of Business, Innovation and Entrepreneurship:
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Felix Staeritz is the founder of FoundersLane, the leading corporate venture builder in climate and health, where he works with 30 of the Forbes 500 companies on the next groundbreaking technological innovations. His experiences as a founder and entrepreneur, where he’s led companies to IPOs, and his activities as a business angel and investor have taught him to recognise when VC-financed startups reach their limits. Therefore, Staeritz looks for ways to combine the strengths of corporations and entrepreneurs and is driven by implementing solutions in a short period of time. As a member of the Digital Leader Board of the World Economic Forum, his core concern is to solve our major societal challenges with innovation.
FoundersLane creates new, fast-growing digital companies in categories that are highly topical and current. FoundersLane counts more than 100 founders, experts and entrepreneurs with great expertise in the fields of medicine, health, climate, disruptive technologies such as IoT connectivity, AI, and machine learning. Clients and partners include SMEs and corporations as well as more than 30 of the Forbes 500 companies, such as Trumpf, Vattenfall, Henkel and Baloise. FoundersLane is active in Europe, MENA and Asia with offices in Berlin, Cologne, and London.
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