Impact Moats: The unfair advantage of doing good

Building mission and responsibility into your startup is good for your karma and even better for your business defensibility, because it drives a wedge between customer’s willingness to pay and your operational costs. This is how.

Social impact toiler paper company, Who Gives A Crap, recently announced they would be donating $5.8m to sanitation projects in developing countries after experiencing record sales in a turbulent economic environment. Speaking on the StartUp Playbook podcast, Founder, Simon Griffiths, was asked about the business’ recipe for success. Amongst other things (including the toilet paper frenzy this year), he cited the company’s “impact moat” — a take on the phrase “competitive moat” commonly used to describe a business’ competitive advantage.

This got me thinking about impact as a strategic decision, not just a values-driven one. How does impact factor into building a business that can not just get in the game, but also win?

What is competitive moat?

“Competitive moat” is a common term used in VC. In simple terms, competitive moat is the unique set of characteristics of your business that allows it to win over the long-term against competitors.

Good moats drive up the willingness to pay for your product, drive down your operational costs, and can’t be easily copied by competitors. This moat could be healthy mix of your brand (à la Tesla), network effects (hello, every social media platform), switching costs (if you’ve ever tried changing banks, you’d know this one), or economies of scale (if you’re a startup, this typically doesn’t apply yet).

You may also hear about moats like intellectual property and speed of execution. These are important, but not necessarily long-term advantages. Intellectual property requires perfect retention of your employees or expensive patents with limited lifetimes, and speed only matters so long as you can keep it up (and in the right direction).

VCs, like medieval rulers, are obsessed with moats. So let’s break down the impact moat.

The impact difference drives consumer demand

The best understood effect of being impact-driven is it being a source of differentiation for customers, which has an upwards impact on willingness to pay.

To take a toilet paper-y example, if there are two different brands of 4-ply, extra fluffy toilet paper on the supermarket shelf that are the same price, and one is recycled while the other isn’t, which are you inclined to buy?

Consumers are increasingly values-driven in their consumption and consumer-driven brands are taking notice. Adidas made 5 million pairs of ocean plastic sneakers in 2018, and committed to 11 million in 2019. In the same year, Australia Post finally went carbon-neutral after a public call-out campaign from Sendle.

For many leaders, this is where impact’s strategic utility ends. They roll “ethical” or “green” into the product title, assign a few percent of the marketing budget to corporate social responsibility, and trundle on. But they’re leaving big value on the table. These leaders miss out on how building mission and responsibility into the DNA of your business drives down your operational costs. How so?

Mission-aligned employees don’t quit

First, mission-driven businesses typically experience lower recruitment costs and higher productivity because there is lower employee turnover. We’ve all felt the effect on your motivation and headspace when you believe in the mission of the company you’re working for, and perhaps more viscerally in the opposite direction when you don’t believe. Backing this up, a 2015 study found that employees who morally identified with their company were significantly less likely to quit.

Simon Griffiths adds colour to this effect. On his thought process of why he left jobs in engineering and investment banking to start an impact toilet paper company, he quotes:

“These two other jobs, they weren’t working on things that I actually really cared about. So thinking about what that meant for me, I couldn’t unlock the other 30% of my potential”

Ethically-run businesses stay in the game

Second, mission-driven businesses attract employees that behave ethically in a virtuous circle, and ethical behaviour reduces the risk of legal, financial, and publicity costs associated with getting caught breaking the law or behaving overly riskily. Granted, there is usually an increased cost of governance associated with being ethics-led, but a holistic stakeholder management approach has another benefit in competitive dynamics: well governed businesses are more resilient than their competitors, especially in downturns, allowing them to stay in the game (a prerequisite for winning).

This was illustrated during the Great Recession, when it was observed that public B-Corps had a better growth rate than comparably sized companies. Meanwhile, the continued outperformance of Future Super’s ethically-screened investment portfolios despite COVID-19 downturns suggests that the market agrees that mission-driven businesses are more resilient.

Who Gives A Crap leverages impact moat better than most, driving home their impact story to build consumer love that is the envy of other brands, while attracting and retaining great talent and thriving in the face of a market downturn. Following their record donation this month, they continue to expand globally and scale their impact at incredible speed.