Surfing the Waves of Social Enterprise.

From Wikipedia: “A social enterprise is an organization that applies commercial strategies to maximize improvements in human and environmental well-being.”

As a co-founder and investor in multiple companies, organizations, and startups that either have positive social change at their core, or folded into their missions, I have been immersed in the social enterprise world for close to a decade.

Over the last few years, I have taken a half-step back to try and observe what’s been transpiring in the space more objectively. Why? I’m actively trying to ascertain whether continued impact investing makes economic sense for me. I have found myself both enchanted and disenchanted, and while my intentions are to continue to put energy and capital into world-positive efforts, I’m at a place in my investing career where I’ve decided to pause and take stock of my experience thus far.

When I look back on my investing history with a glass-half-empty mentality, it’s riddled with questionable bets and company failures.

Some companies with the most noble intentions and missions—including the first organic skin care company, a “buy-one-give-one” condom company, a sustainable couture brand, and others—have wreaked havoc on my wallet. I made these investments with my heart more than my brain. Conversely, my decidedly non-social enterprise bets in technology, food, and booze have fared much better.

None of the above suggests that all of the social enterprises in my portfolio are failures. In fact, several investments do indeed show some promise.

I have seen one exit so far (even though that one was admittedly so-so) and I am hopeful that there may be a few more to come. Translation: I’m batting about .350 so far. Not bad for high-risk, early stage investing actually. But of those still chugging along, there is no indication of an exit anytime soon…and most have yet to stop burning cash and move into the black. All of the above serves to merely illustrate my personal experience.

But what about social enterprise on a more macro-level? And why should I even be looking at the macro-level?

I’m closely involved with two social enterprise platforms designed to scale globally: COMMON, a digitized creative accelerator and community for social businesses and projects, and 17Solutions, a physicalized convener and accelerator dedicated to helping startups identify marketplace opportunities within the 17 United Nations Sustainable Development Goals and build innovative and profitable enterprises to help achieve these goals.

This means that I not only want to make sure I’m tracking impact investing, but that I remain a true and passionate believer in the upside potential of social enterprise. Accordingly, I’ll identify some of the positive signals in the impact space.

Patagonia is a great company to start with. It is an enormously successful brand that is practically timeless. Their accomplishments range far beyond profit margins. In many ways, they redefined the zeitgeist and set the standard for corporate behavior in not only the outdoor industry, but in the apparel industry as a whole. Their social contributions include creating pressure on other brands and labels to more sustainably manufacture their products. Founder Yvon Chouinard has even consulted with Wal-Mart on green practices and, importantly, Wal-Mart has acted on it.

Next up, Toms shoes. Half of Toms was acquired at an overall valuation of over $600 million. This is arguably one of the most successful exits in the space. I love seeing this, as it validates that companies focusing on positive impact can not only be profitable, but even wildly successful. Toms stirred the imagination and opened up consumers’ wallets by ushering in a new way to give when you purchased their products. I’ll actually highlight this later on.

And I would be remiss to not spotlight Tesla. While still a cash-burning machine, Tesla has completely disrupted the auto industry. At the time of this writing, Tesla has a market cap larger than GM. The market has spoken and we are indeed in a new world, and the industry has been forced to respond. Like Patagonia, Tesla’s impact goes beyond its sales success. The electrification of the auto industry could very well result in a massive reduction in fossil fuel demand and CO2 emissions.

I also highlight the above companies for reasons other than the love of their brands by consumers and the large-scale social impact they continue to make. I look at them as pioneers in their respective “waves.” The hypothesis I’m noodling with suggests there are multiple waves of socially responsible business. I believe we are in the midst of a third wave and headed into a fourth. To properly illustrate this, I’ll start at the first wave:

Wave 1: Sustainability-focused businesses.

In Wave 1, we see companies that began in the ‘70s, ‘80s and ‘90s that were founded on the principles of health, responsible stewardship of our planet, and corporate giving in general. Four players, Patagonia, Ben & Jerry’s, Newman’s Own, and Clif Bar are excellent examples.

The founders of these companies had an authentic and passionate interest in sustainable business practices. Patagonia became a voice in the environmental movement, and Clif Bar became a force for good in food.

At Clif Bar, employees are granted time for socially positive volunteerism, so it’s no wonder turnover is so low. Importantly, both Clif Bar and Patagonia are sustainable companies, in the sense that they are still around, profitable, and growing. Along those lines, Newman’s Own, founded by the late actor Paul Newman, was founded on the principle of donating 100 percent of its profits to charities. To-date, they have given away almost half a billion dollars.

Ben & Jerry’s, one of the true leaders in the food industry in terms of responsible sourcing, works with a dedicated group of family-operated dairy farms in their quest for a healthier connection between the land, the animals, and the people that care for them. Ben & Jerry’s had a financially successful exit and was acquired by food giant Unilever, but has not lost its mission or history of growth. In fact, Unilever looks to Ben & Jerry’s to inform other brands and is even making new efforts to support the 17 United Nations Sustainable Development Goals.

Wave 1 companies essentially ushered in an era of business responsibility and bucked the trends of corporations at that time that were (and many of which still are) far more focused on driving costs down and driving sales up. The sustainable practices of Wave 1 companies remain alive and well, and for decades have provided inspiration and instruction to other brands.

Wave 2: One-for-One giving businesses.

While companies have donated and distributed product for decades to those in need, Toms was the first brand to codify and broadly popularize a “buy-one-give-one” model.

While Toms has been challenged on this practice (see below), it has not only been a strong attractant for consumers, but has also inspired many other businesses in different categories.

Examples include Warby Parker, Ethos Water, and new variants that offer slightly different versions of giving such as Skoop Superfoods (of which I confess I’m a co-founder) that collaborates with the Chef Ann Foundation to provide fresh fruits and vegetables for kids in public schools for every package of powder sold.

Warby Parker donates a pair of glasses for every pair sold so that those in need of corrective eyewear can study or work. Ethos donates $.05 USD for every bottle of water sold to help support water, sanitation, and hygiene education programs in water-stressed countries.

This model appears here to stay. However, there are examples of brands that put mission over profitability and have unfortunately failed as a result, often before they could even launch.

The one-for-one brands who have experienced success have had their own stumbles along the way. For example, some (Toms included) eventually recognized that the donated products they were providing for people in need either weren’t an exact fit with the real need, or addressed a symptom rather than the core underlying cause of the problems. The smart ones changed their donation practices, or created a revised model that included contributing to causes that are focused on addressing root problems, in addition to their existing donation practices.

Consumers still have a high regard for buy-one-give-one models, and continue to purchase these brands over others in the same category. Provided a company can generate real margins and profitability, this model will likely remain viable if it addresses true core needs, and doesn’t come off as a donation gimmick or “social responsibility washing” to an increasingly sophisticated consumer base.

Wave 3: Public Benefit Companies.

We are in the midst of a business revolution whereby more and more companies that are harnessing the power of business to solve social and environmental problems are actually codifying the B Corp guidelines and/or incorporating as a Public Benefits Corporation (PBC). Some companies are starting off as B Corps and others are re-missioning to become such.

Patagonia, Ben & Jerry’s, and publicly traded Natura are among those that became certified B-Corps later in their existences. PBC corporate structures exist across over 30 states now.

As a PBC or B Corp, a company considers multiple stakeholders (society, workers, the community, and the environment), in addition to shareholders when operating and making decisions. A PBC creates a solid foundation for long-term mission alignment and value creation. It protects mission through capital raises and leadership changes, creates more flexibility when evaluating potential sale and liquidity options, and prepares businesses to lead a mission-driven life post-IPO. (1)

It’s important to note the differences between a B Corp and a PBC.

A PBC is a legal incorporation status and like a limited liability company (LLC), it encourages a company to make the above considerations a business priority. A Certified B Corp is a third-party certification, similar to LEED or Fair Trade. B Lab, a non-profit, administers this credential and independently assesses companies based on social and environmental criteria. Companies typically pursue certification because of the additional credibility brought by third-party review. While some PBCs are not Certified B Corps and vice versa, many are both. (2)

We are seeing more and more new PBCs and B Corp-certified companies every day. This is incredibly exciting, as some startups are forming themselves in this way, while more and more Wave 1 and Wave 2 companies convert. This wave has significant momentum and, fingers crossed, more large multinational companies will adjust their practices, take the plunge, and reorganize as such. This is a perfect segue into the next Wave:

Wave 4: Profit-Focused Social Enterprise.

I believe we are headed into a fourth wave of social enterprise, wherein social impact and sustainable manufacturing will simply be expected by B2B customers and B2C consumers. Why? Because we are now faced with very real and pressing global challenges, from climate change to a refugee crisis to food security issues.

We are living in a world with finite resources and are approaching a crossroads as a species where we not only have to make a choice, but must find the will to start addressing these major challenges.

Further, our personal health, the health of society, and the health of the planet, and how corporations are positively or negatively impacting these, is gaining political awareness and consumer commentary. If corporations don’t choose to dramatically adjust all aspects of their sourcing, manufacturing, and distribution, they will likely be forced to align with this reality and adapt their business practices.

From Pepsi (aspartame), to SeaWorld (Killer Whales), to Kraft (artificial coloring), to Abercrombie & Fitch (Muslim Applicants) to United Airlines (passenger treatment), companies are feeling more pressure than ever before to revamp some, if not all of their business practices and conform to higher expectations of transparency and governance.

And whether it’s a perceived (or real) integrity issue, or something structural to their mission and business activities, consumers are making their voices heard by being more vocal in social media and voting for or against their practices with their dollars.

There is no arguing that a profound behavioral consumer shift is occurring.

Automotive companies, for example, are not just complying with government-mandated fleet mileage requirements when developing electric car platforms, but are responding to very real competition and consumer demand (witness Tesla’s Model 3 order book) This category is an excellent example of top-down, bottom-up pressures, the current administration notwithstanding. Soon, the energy sector will have to adjust as well. This will be driven in part by competition (renewable energy), part shareholder demand, and part public image.

I would hypothesize that as resource, consumer, shareholder, and governmental pressures mount, that the term social enterprise will eventually fade as there is simply no choice but to include planet and people as importantly as profit. Social enterprise will give way simply to “enterprise.”

If you are a company that is behaving irresponsibly, consumers will turn to other brands and/or government* will force you to pay for your negative externalities such as pollution, health impact, toxic manufacturing, distribution practices, and more. Eventually you will either have to change dramatically, or you will go out of business.

* The current U.S. administration notwithstanding, this references a future American government administration state, and many other current and future government states around the world. 

Conclusion:

The tension between profit and planet/people will no doubt carry forward as “socially-irresponsible” corporations strain to adjust to a new reality, and new business models we haven’t even conceived of yet will emerge to compensate and tamp down the growth-at-any-cost mentality that exists in the marketplaces currently. Accordingly, there may be other waves in the future that have yet to be identified.

What is incredibly exciting is that a true movement has begun.

Large packaged food companies, for example, are chasing healthier trends around elimination of GMO ingredients and more sustainable production. In the startup world, venture capital investment in social enterprises is rising, while overall venture investment has fallen over the last two years. It’s happening in almost every business sector.

As for my investment patterns? I value sustainability in both senses of the word. After all, you can’t make a real social impact if your business fails.

Accordingly, I have adjusted my own approach to impact investing to emphasize market fit, leadership, growth, and profit potential as business-critical. These criteria are as critical a business mission as the social mission itself. And if startups meet all these criteria, well then I’m potentially game to look at them from an investment standpoint.

As I think about social enterprise through the lenses of COMMON and 17Solutions, I stay energized and positive despite some of the early failures of my portfolio companies. And while COMMON’s journey in this space began almost eight years ago, and 17Solution’s journey almost two years ago, the fires are stoking hotter and hotter.

It’s important for all of us to continue “doing sh*t that matters” and supporting social enterprise. An important part of that is inspiring, enabling, and powering each business both within our communities, and at large, to have the sales and profit potential to scale and stay in business.

Otherwise, what’s the point?

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Sources: 

(1) BenefitCorp.net

(2) Venture Beat, April 30, 2017

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Author: Rob Schuham
Image: RobSchuham.com
Editor: Catherine Monkman