Purpose should pay
Why private profit in social enterprise could unlock serious impact
“You want to make 50 million dollars selling violent video games to kids, go for it. We’ll put you on the cover of Wired magazine. But you want to make half a million dollars trying to cure kids of malaria, and you’re considered a parasite yourself.”
Dan Pallotta nails the wrong-headed thinking that often surrounds remuneration in social enterprises in his 2013 TED talk.
I’ve lost count of the number of times I’ve nearly exploded when someone (who, hilariously, often earns twice or three times as much as me) judges me for leaving open the possibility of making a personal profit from running a social enterprise. “Of all the career paths to choose from, do you really think I chose this one for the money?!” I scream at them incredulously (in my head) while I force myself to listen patiently and smile.
Sometimes, social entrepreneurs themselves can also reinforce the message that personal gain is antithetical to social mission. I know of many founders of social firms (social enterprises that employ their beneficiaries) that pride themselves on paying their employees the living wage but earning less than that themselves. What dark irony.
In a recent Financial Times article profiling two businesses doing something socially useful with their profits, Brewgooder founder Alan Mahon revealed that he was the lowest paid member of staff in his company and Celia Hodson, of Hey Girls, declared herself totally unpaid. I don’t know about Mahon and Hodson’s personal circumstances but they set a worrying standard. As part of an article that positions social enterprise as an antidote to the “high executive pay that has hit big charities”, there is a dangerous message being sent out: decent pay (or any pay at all) for the founder isn’t a necessary condition for social enterprise success. Or, worse: would-be founders, you must forgo fair remuneration to succeed in this field. Any aspiring social entrepreneur of average means and rational mind must surely conclude: this is a mug’s game.
And even when you can take the leap, the lack of early-stage risk capital known as the ‘missing middle’ means that achieving real scale — much less securing any personal reward for your hard graft — is an unlikely feat.
Until we can fix the underlying incentives of founding a social startup, we are hamstringing our efforts to tackle the big issues of our time.
So, how to make social entrepreneurship pay?
As I’ve already argued, I think a culture of openness about the financial realities of starting something is a good place to start. If you are comfortable enough to not need a proper salary, acknowledge why you’re able to do that — be it a well-paid career in a past life or inherited wealth. Don’t let the vacuum lead people to believe that you’re a Mother Theresa-style martyr or, worse, that you think all social entrepreneurs should be thus. Know that by staying silent you risk pulling up the ladder for potential social startup founders who don’t have the savings, inheritance or family support to make a go of it.
But the most power to change this situation lies with funders and investors. So, here are three things I would urge them to do:
1. Demand that founders are paid properly
‘Pay people more’ is easy to say, much harder to realise. We can’t just magic up more money to increase everyone’s salaries. But investors and funders can play an active role in making sure that social enterprise leaders are paid properly rather than, as is so often the case, scrutinising and questioning the pay of senior staff as if they’re in it for a quick buck.
Taking this stance will mean funders spend proportionately less on direct delivery which, as Clara Miller explains so comprehensively, they are often loath to do. But, if we want to build a field with a sustainable flow of talented leaders, we need to make wiser funding decisions.
2. Offer more risk capital to social startups
It’s hard to build a profitable social enterprise — harder than achieving the same feat with a regular business, I think. It takes time to find a model that really works. And time costs money. David Floyd points out in this excellent post that the handful of household name social enterprises in Britain — like The Big Issue and Divine Chocolate — needed serious investment to get to scale.
So we need patient capital in much larger sums than is currently available. Perhaps instead of dishing out 1000s of small grants that are restricted to everything but salary (as is too often the case) we could offer unrestricted investment of say, £200,000, to a much smaller number of high potential social startups.
Having been rude about UnLtd’s small grants programme in my previous post, I should acknowledge that they are also making really positive steps towards addressing the missing middle with their Impact Fund.
3. Get comfortable with private profit
The Silicon Valley trope of young men sleeping in rented out garages and eating ramen as they build the next unicorn tech venture is powerful. The narrative of social entrepreneurship has borrowed so much from this story apart from one key factor: that elusive pot of gold with the Founders’ names on it at the end of the rainbow.
Just like our distaste with social entrepreneurs earning big salaries, the idea of founders making personal profit from a social business’ gains also leaves us queasy. We have to get over this. In the right contexts, the profit motive is pretty good at driving innovation.
As Economist Audrey Choi has spoken about, the capital markets are still relatively untapped as sources of investment for social startups — and they will remain so until we recognise that investors and founders need to benefit financially for the whole system to work.
Linked to the risk capital point above, we need charitable funders to get into bed with commercial investors and back for-profit social ventures. Grants can leverage further money — de-risking investment opportunities for angels and impact investment funds, for example.
Funders should do away with the arbitrary requirement of their grantees to reinvest over 50% of profits ‘back into the social mission’. Such conditions evaporate follow-on investors’ incentive to finance the venture’s next phase of growth. Without further investment the enterprise’s scale and, as a result, social impact will be curbed.
Of course (understatement alert!), the profit motive can lead to bad outcomes — a rush to exit instead of long-term value creation, environmental damage and other negative externalities — but it should be part of the mix when we’re thinking about how to build an effective response to our country’s thorniest social issues, from the housing crisis to the isolation of older people.
Without the crutch of using charitable status or profit distribution caps as, let’s face it, crude and ineffective proxies for social mission, we need to find new ways of ensuring that philanthropic money and public money is invested wisely.
That means focussing on impact — and the potential for further impact. Not easy, but essential.
I can think of many things worse than for social investors and funders to move their focus from misguided, limiting and often hypocritical judgements of Founders’ motivations to whether or not our efforts actually work.