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Is a for-profit social venture impossible?
I am collaborating with the Graduate School of Business here at Stanford, and usual working with students is always an intriguing and fruitful experience, which I usually cherish a lot. We did touch a quite interesting matter of what a social venture really is during a discussion on the project. Do all social ventures include a non-profit approach or can you have social ventures based on a ‘purely’ for-profit model? Can a commercialised approach ever do any good?
I am fully confident that you can and in some sense we really should pursue it, especially to obtain financial sustainability and decrease the dependence of external funding. Funnily that would mean that you have a wider manoeuvre space, and thus you have better control over your social venture.
What is really a social venture? Much simplified and according to me, a social venture is any venture in which you also value a (good) social outcome of the same. The very abstract word ‘social outcome’ could be discussed in length (which I will not), but refer to literature on measuring success in social venture. It is very much an interesting matter in itself. Personally and of course much simplified, I think we could consider a good social outcome as anything that makes the life or the earth itself to become a better place to live. Let’s keep this simple and leave it as that.
What amazes me is that so many people think that a (good) social outcome never can be married to the thought of a commercial activity. This puzzles me. Why? I see no reason why a good social outcome is inconsistent with a for-profit approach. I especially remember speaking to one of the last year fellows on this matter. He told me that an outcome of a project might even be better when people have to pay for the project. This is a very interesting thought, which has stayed with me since that date.
What is it in us that make us feel that it is better to pay something, even though extremely small? I think it is quite simple. The sense of ownership is still quite strong in us, but also the need to give back to someone that helps us. When someone offers you a hand you normally want to give back something. Probably it is as simple as keeping your self-respect. The more you feel like you are dependent on another person, the less self-esteem you usually have. I think you get it.
However, I think it is important to remember that there is a narrow path to walk on here. Having an approach that is for-profit can quite easily be turned in to an exploiting approach, where any good social outcome will be shadowed. Here the management of and leadership in these projects become increasingly important. The need for good managers and leaders become ever so high in those ventures, but we have all those people out there.
Hybrid business models, corporate social responsibility and industrial anthropology are some examples why I believe the trend is really towards such business models instead of the traditional highly fund-dependent ones. There will of course exist ventures where this approach is impossible, but for all other cases I think it is really a good idea to look at such business models.
Thus, I think it is important to keep an open mind about this and realise that for-profit is not by definition evil or bad.
Dear Erik,
I appreciate your post. I think there may be many reasons why we are better off being a for-profit as an alternative to a nonprofit in the pursuit of wide and deep social impact. In my building of TAVOS, I realized through the business planning of the social enterprise that there were two ways to cover the high costs of a Latin American-scale deployment: either dedicate my life and one of the others to fundraising and not work directly with the people I want to serve or look for income-generation strategies to make every community unit of the initiative sustainable. I decided for the latter. Some of my reasons were:
1. I rather devote myself to care of the people I want to serve and let the market dynamics push my organization to listen, than devoting my life to fundraising to end up detached from the end beneficiaries.
2. The communities I am trying to serve are highly entrepreneurial. 50-60% of the economy in Latin America is informal. That means that Francisco in Catia, a low-income suburban neighborhood in Caracas, wakes up every morning thinking how he will make it to bring food to the table the next day. Francisco and 100 million other Latin Americans are better served by bringing opportunities they could use to tap into their spirit than by bringing charity that will leave them highly vulnerable if the funding gets dry.
3. A for-profit will make the social impact sustainable and scalable if we are serving well the needs of the target population. If we are failing, the market will tell.
4. Embedded in my last comment, the for-profit approach forces better learnings of the market and customers than the nonprofit approach.
I do agree that there is a challenge in leading and executing with integrity a hybrid social/business-mission venture. But I think that it holds true for any enterprise today. There is also an interesting discussion about for-profits with organizational and governance structures that "lock" their social mission, for example: a parent nonprofit or member association. But that is a whole new discussion.
Cheers,
jose
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Jose Arocha
Weblog: http://blog.telarideas.com
Project site: http://www.tavos.org
This is a good discussion and I think you both make a number of important points. Particularly, I agree that a for-profit model reduces (or can even eliminate) dependency on donors and therefore is both more sustainable and potentially more responsive to the needs of its constituency over the interests of its funders. Also, Jose's comments remind me that there must be a large group of people who are socially-minded but not non-profit oriented, who are more interested in creating a people-positive enterprise than becoming fund-raisers or being beholden to donors. Hybrid social enterprise potentially brings these peoples' energies and capital into play.
I think the for-profit social enterprise has a lot going for it. For one thing, it has a self-sustaining dynamic, whereas a program based on grants is essentially on life support. A for-profit enterprise also has a natural tendency to find opportunities to replicate itself, rather than being limited by available funding.
But what does it take to make a for-profit that's actually for-people? Even if ownership is in the hands of a non-profit, that doesn't guarantee that the for-profit is itself a for-people social enterprise. The non-profit parent could easily see the "greater good" of generating income for itself as trumping the necessity for people-positive behavior from its subsidiary. For example, the Hughes Medical Group's ownership the defense contractor Hughes Aircraft in the '70's and '80's.
I do think there's an inherent tension between profit-making goals and service-oriented (or altruistic) goals. Regardless of charter, there are going to be decisions about allocation and focus of resources, pricing for goods and services, and ultimately generation and application of capital for expansion vs spending on services or wages for which there are no right or wrong answers and on which right-minded people might easily disagree. Particularly, a traditional non-profit mindset might lead to very different answers than a for-profit one. The hybrid enterprise requires an alternative sort of thinking.
One model that occurs to me is a for-profit that is designed to create an ecosystem of surrounding micro-enterprises for which it creates a market by purchasing goods and services. This enterprise could be paired with a non-profit which provides things like micro-finance access and job-skills and training for the local entrepreneurs. The central for-profit would have written into its charter a set of ethical guidelines, such as fair-trade and living wage practices, and a set of operational directives such as prioritizing local suppliers and graduates of the non-profit's training programs, but would be unburdened from directly providing services, and would be free to use its profits either for expansion or to fund the associated non-profit as it saw fit. Whether this enterprise becomes exploitative is dependent on its management and ownership, and it might be vulnerable to being viewed in various lights by people of differing perspective, but I think inherently the model has some merit.
One might even take your question one step further: are there particular types of enterprise which can only be successful when done as a for-profit? And further, are there types of business in which for-profit social enterprises might have an edge over traditional for-profit businesses?
Erik:
I agree with this observation and would like to work with you on this thought.
Gerard
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