Getting Serious about Social Enterprise

I love it when circumstances leave a gift-wrapped insight on my doorstep. I had such a serendipitous moment last weekend, about new approaches to combining social good and wealth creation.

A week ago I was at Menorca Millennials 2018 (as an alumnus) to attend the Community Days and check out this year’s batch of new startups.

This year Menorca Millennials introduced a focus on Sustainability — specifically, how to reconcile the conventional aspirations of a startup (profits, exits etc.) with the UN’s Sustainable Development Goals.

As part of this theme, Matthias Ummenhofer, founding partner at Mojo Capital, and Jaime Vera of the European Investment Fund, gave a talk on impact investing: the practice of directing funding to businesses that intend to have a positive social or environmental impact in addition to traditional profit objectives.

Serendipity strikes! In the plane on the way to Menorca, I had just read this article in The Economist on effective altruism.

I was introduced to effective altruism last year by David Goldberg, co-founder and CEO of Founders Pledge. This group collects commitments from startup founders to donate a percentage of their personal exit windfalls to charities vetted using Effective-Altruism criteria. I signed the pledge myself immediately after meeting David and learning about his organization.

Coincidence is not causality, sure. But I could not ignore the symmetry:

• Impact Investing applies social-good principles and criteria to venture-capital-style financing.
• Effective altruism applies venture-capital-style principles and performance criteria (e.g. “dollars spent per child’s life saved”) to philanthropy.

Was it possible these two trends might someday converge? Would that be a good thing?

On the plane back, skimming above Mediterranean clouds, I dozed off. I dreamt of three dials, labelled: People, Profits, Planet. An NGO could dial “Profits” to zero and one/both of the other dials to some high value. An “in it for the money” entrepreneur could leave “People” and “Planet” at zero and dial “Profits” way up.

To complicate matters, in the effective altruism mindset, optimizing for profits can sometimes yield the greatest social impact. If you have the skills and relationships to manage a hedge fund, you could do that, donate 50% of your earnings to finance the missions of fifteen (or more) Peace Corps volunteers, and still live quite comfortably. This is less personally satisfying, but has greater impact, than joining the Peace Corps yourself. You’ll also have a tough time convincing your friends you’re an altruist, but an effective altruist cares more about what it is than what it looks like.

Upon waking up, I had to face some difficult truths about my own preferred approach to building a social enterprise, a method known as Triple Bottom Line: there isn’t one “right” way to set those dials. And it’s not a zero-sum game: if we collectively neglect the People or Planet dials, Profits will go wayyy down at some point.

Triple Bottom Line or #3BL is seductively simple: treat social and environmental impact as measurable business objectives, on a par with profits. But it does not follow that all three objectives should be given equal weight. One could attempt some kind of cap-and-trade arithmetic; that’s already popular for dealing with carbon footprints. Regardless of specific rules or metrics, what matters most is the commitment to run a business with these three objectives in mind.

There was a third element in my serendipitous epiphany (“serendipiphany” ?). Before leaving for Menorca I started drafting an application of our “mission” for SErtified.org. This organization provides a much-needed service: objective third-party validation of social entrepreneurs.

I immediately ran into trouble with the draft, because Hubrix doesn’t have a specific do-good line item in its plan; nor will our efforts benefit a specific identifiable population, such as children or blind people. We want “doing good” to be part of our organizational DNA, not just another business activity. This includes policies like:

• Our salary ratio (including full-time contractors) is capped at 4:1.The highest-paid employee can earn no more than 4X what the lowest-paid one earns.
• Our products will be free, forever, to any student with a valid student ID
• We evaluate our overall performance following 3BL criteria

An Effective Altruist will see in these policies evidence of a systematic effort to have maximum and lasting social impact. But it makes for a lousy grant application; and it doesn’t fit the criteria to qualify for many sources of social-enterprise funding.

This is a problem, not just for Hubrix but for everyone. If we focus only on businesses with an explicit social benefit in their product or service, the number of businesses that can be funded will remain a minority, and some will shoehorn a social benefit into a business model that may not really warrant one.

Let’s give equal respect and support to businesses that are social enterprises because of how they do, not just what they do. That way there is a path for every single business to become a social enterprise. If the pizzeria, the house-building contractor, and the plastic-recycling startup can all be social enterprises, if there is a clear path and clear incentives for every single business to adopt some kind of triple bottom-line, the global impact will be extraordinary — surely far greater than if we just support the obvious cases.

This can happen quickly once:

• Impact investors rethink their defining criteria for social enterprise
• Philanthropists become less draconian about non-profit status as a funding requirement
• Third-party validation and certification focus on total impact/benefits, not just “what it looks like”

Please share, comment, build upon, refute and discuss this post. Debate on these questions can make all of us better social entrepreneurs.

“Clouds” Photo Credit: Thomas Richter via Unsplash

Originally published at www.hubrix.co on June 12, 2018.