Can a For-profit Entrepreneur Be a Social Entrepreneur?

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Can a for-profit entrepreneur be a social entrepreneur? Can the Executive Director of a non-profit be an entrepreneur? Yes and yes!

At the Entrepreneur & Social Entrepreneur Meetup on Tuesday I was having a great discussion with a new friend named Phil. Phil asked me a question I’ve heard often recently, “Can I still be a social entrepreneur if I run a for-profit business and not a non-profit?”

In my view, the answer is a resounding yes.

What is an Entrepreneur & What is a Social Entrepreneur?

To me an entrepreneur is “someone who rearranges resources to create value.” To me a social entrepreneur is “someone who rearranges resources to create value.” There is no difference. The line is wonderfully blurry. Let me explain.

An entrepreneur is someone who rearranges the resources of land, labor, capital, and entrepreneurial ability to create a product or service that provides value to others. Whether the entrepreneur is doing this within a for-profit corporation, in which the net profits are either reinvested in the corporation or distributed to the shareholders or a non-profit corporation in which the profits are fully reinvested into the corporation, he or she remains an entrepreneur.

Non-profit founders and directors have customers and products too. Traditionally the customers of a non-profit are its donors and grant makers and the product is the social value it produces. If the product is not valued, customers (donors) will stop giving and leave.

Today, the black and white world of non-profits and for-profits is graying. If you want to change the world for the better, it is an open question as to whether you can make a bigger impact in a for-profit or a not-for-profit company.

Profit’s Correlation With Social Value Provided

As long as the for-profit entrepreneur a) competes within the laws of a competitive market system b) does not create short-term profit for the company by externalizing the costs of the off-balance sheet destruction of the environment and c) does not exploit its labor force, the only way for the entrepreneur to make a profit is by creating value for others.

The more the ethical entrepreneur helps others, the more profit he or she will make. Profit for an ethical entrepreneur who has not exploited the environment or labor force to gain that profit is not an ugly sign of exploitation but rather a laudable sign of value created. The successful and profitable entrepreneur has rearranged resources in such a manner that the value of the output created exceeds the sum value of the inputs.

For the ethical for-profit entrepreneur, as products are produced that help others, social value is created. The very act of building your business creates jobs, provides product and services that others value, and enables you to give back to your local and global community.

Your for-profit business can often be more sustainable than a non-profit business as you are not reliant on grants and donations to grow. While you have a disadvantage of not being able to receive tax-deductible donations, you have the big advantage in the labor market of being able to offer a wonderful thing called stock options to employees, which enables you to attract top talent and enable all to participate in the value-creation.

One of the most important things you can do as a for-profit entrepreneur to enable you to make a social impact is to be profitable. As Joel Makower argues in his book Beyond the Bottom Line, “One
of the most socially responsible things most companies can do is to be profitable.” Without profits one cannot pay taxes, provide jobs that pay well, give back to a community, or invest in innovation.

Five Ways a For-Profit Entrepreneur Can be a Social Entrepreneur

So for a for-profit entrepreneur, if you really want to be a ’social entrepreneur’ here are some suggestions:

1. Give all your employees stock options. Requiring a team member to be there a minimum amount of time (like 6 months) before they earn the options is okay. Vest the options over a few year period (3 or 4) to help with retention.
2. Treat your employees well. Show that you care about them. Offer health insurance and good working conditions. While you have to manage to results and that requires being a professional firm that tracks performance, you can do many little things that create a good work environment and culture that actually help the firm reduce costs, retain great people, and attract a better team.
3. Ensure your net impact on the environment is at least neutral, if not positive. Don’t externalize the cost of environmental damage. In other words, don’t profit off of destroying the environment, even if it may still be legal to do so. Take into account the full cost of any environmental degradation or destruction in the production of your products and services. Look up the supply line and ensure your suppliers also neutralize their impact on the environment. –> Quick Case Study: Last Month, Walmart introduced a Sustainability Product Index that asks each of its suppliers fifteen questions on energy, climate, resource use, and labor practices. It has asked its suppliers to respond by October 2009. It is using this data to understand the practices of its upstream supplier network (of over 100,000 suppliers) and provide a Sustainability Index for each of its suppliers. Walmart is also creating a “consortium of universities that will collaborate with suppliers, retailers, NGOs and government to develop a global database of information on the lifecycle of products – from raw materials to disposal.”
4. Have a formal corporate social responsibility policy. A particular CSR structure I’m fond of is called the 4-1s program, in which you set aside 1% of company profit (or 1% of payroll if you are venture-backed and not yet profitable), 1% of employee time, 1% of product, and 1% of equity to contribute back to your local and global community. –> Quick Case Study: At iContact, we have been contributing 1% of payroll since 2007. In 2008 we contributed $55,000 to 37 different non-profit organizations. In 2009 we’ll reach $100,000. We are now expanding our CSR program based on the 4-1s model to include 1% of employee time (up to 2.5 days of paid time-off per year to be spent on community service products), 1% of product (we are providing iContact free to any non-profit organizations in the Triangle), and 1% of equity. Don’t wait until you’re 60 and wealthy to give back. Start from day one and create an integrated giving model. You can read about iContact’s Corporate Social Responsibility Program here.
5. As you succeed personally, give back. A great differentiator for the for-profit entrepreneur is that you and those working with you can become wealthy through the appreciation of the value of your stock ownership as you scale your ability to help others. If you’re fortunate enough to have a liquidity event (go public or get acquired) use your personal resources to invest in other entrepreneurs and social entrepreneurs who are changing the world for the better, contribute personally to the organizations (and candidates) that you feel are making the biggest positive impact for humanity, and vote with your dollars as a consumer and doing your best to purchase from companies who have a similar view about corporate social and environmental responsibility.

There is a movement of socially responsible companies that is defining our generation. These socially-responsible for-profits, sometimes informally called B Corporations instead of C or S corporations, can make a huge positive impact on the world, up and down supply chains.

There are networks springing up for socially responsible professionals such as the Social Venture Network and Net Impact.

Companies like Vestergaard Frandsen, Salesforce.com, Danone, Stonyfield Farms, and Whole Foods are leading the way in this integrated social business model. They are doing well not in spite of their social mission, but often partially because of it.

There is a new genre of books focused on how to use business to change the world. There are many, but my favorites are The Business of Changing the World, Creating a World Without Poverty: How Social Business Can Transform Our Lives, The Power of Unreasonable People: How Social Entrepreneurs Create Markets That Change the World, and The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits.

There are now publications that focus on the socially responsible business owner, including Stanford Social Innovation Review and Good Magazine (founded by the son of INC. Magazine). There is even a newswire just for social responsible news called CSRWire. There is even a stock index called the KLD400 for socially responsible companies!

There are venture capital firms that now focus on investing in socially responsible companies. These include Good Capital and SJF Ventures.

What Ben & Jerry’s and The Body Shop started is becoming wonderfully mainstream and necessary as a new generation that connects and collaborates globally like none before it becomes corporate leaders.

While I am generally a fiscal moderate who believes in the ideology of individual freedom and liberty, Milton’s Friedman’s 1970 assertion that ‘the business of business is just business’ was wrong. As Peter Drucker argued in 1942 in The Future of Industrial Man, companies must have a social dimension as well as an economic purpose.

Five Ways a Non-Profit Director Can Be An Entrepreneur

As a Non-Profit Director, you are an entrepreneur as well. You have a product and a customer, and you are working to rearrange limited resources to create value.

For the non-profit entrepreneur, today earned income models are becoming the norm rather than the exception. While 501(c)(3) non-profits have a benefit of being able to receive tax deductible contributions, these contributions are often unpredictable and at times can influence a non-profit to go in an undesired direction.

The age of non-profits being able to rely solely on donors and grants is over. For a non-profit entrepreneur, an earned income model exists when the non-profit company sells a product or service to others and gains net income on that sale which is reinvested in growing the non-profit in a sustainable manner. The line between non-profit entrepreneurs and for-profit entrepreneurs is indeed getting gray.

While you are required to reinvest practically all your net income back into the organization, you have a great advantage. As a registered 501(c)(3) you can accept tax-deductible monetary contributions from individuals and corporations. You can apply for and receive grants from foundations. You can also receive in-kind donations from local companies or receive discounts or pro-bono work from service providers.

At the end of the day, just because you cannot distribute net income to your shareholders doesn’t mean you aren’t an entrepreneur. Here are some ways you can be entrepreneurial as a non-profit founder or director:

1. Create an earned-income model. Find a product or service you can sell to others. Just because you have to reinvest your profits, doesn’t mean you can’t make a profit. You don’t have to give away everything. The more value you create, the more you will can earn and the more you’ll be able scale your organization to serve its mission. –> Quick Case Study: As an example, a non-profit I’m the Board Chair of this year, Nourish International, has an earned-income model. Nourish teaches college students to run entrepreneurial ventures on its campuses. These ventures range from ‘Hunger Lunches’ with corn bread and beans to poker tournaments to selling medical scrubs. Nourish then takes the net profit from the students’ ventures and funds a portion of administrative overhead at the national office and contributes to community-based non-profit organizations in the developing world that work to reduce extreme poverty and hunger. This past summer Nourish sent 58 of its students to nine projects in developing countries. Nourish’s model is growing and it now chapters on 29 college campuses.
2. Have an entrepreneurial mindset. Just because you have donors doesn’t mean you don’t have to have a sense of urgency and work quickly and efficiently to produce results and compete. The market for non-profit donations is competitive and contributions will go to those that are well-run and maximize positive human impact with minimum dollars (or at least maximize human impact in the fields that those with resources most care about, a substantive difference). While there seems to be a somewhat unfortunate reality that some well-established non-profits with celebrity representation or large budgets can often get the bulk of available contributions and crowd out perhaps more deserving smaller NPOs, many of these established non-profits were start-ups once as well and only came to be influential by being efficient, achieving their mission, and attracting larger and larger contributions and grants.
3. Hire people who are smart, ambitious and driven. Don’t settle for poor-performers. As a Non-Profit Director you have the ability to attract talented, caring staff members that are willing to work hard for less than market pay. Use this to your advantage. There are driven, smart, ambitious, educated, and talented individuals in the work force that want to work for a non-profit. Too often I have seen non-profit entrepreneurs settling for lower quality team members and not managing their performance. Hire A players who are passionate about what you are driving to achieve and empower them to be entrepreneurial, take risk, and grow the organization.
4. If You Aren’t Maximizing Social Value, Consider Merging. One of the issues in the non-profit world is that it is rather challenging for one non-profit to merge with or be acquired by another non-profit. This creates the reality that there are often dozens if not hundreds of small non-profits inefficiently and disparately going after the same cause. Industry consolidation and M&A in the business world happens naturally as controlling shares can be purchased in private or public markets. For a non-profit this is not possible so it is up to the humility of the founder to consider whether a merger could create a better social outcome. Allowing for the benefit of competition and time it takes to start-up, test your model, and make it scale–consider shutting down or merging your organization with a more efficient or larger organization if you feel like your organization isn’t best using resources to create positive social value. Non-profit mergers can allow the combined entity to share resources, reduce overhead costs, and go after bigger grants while achieving the shared mission.
5. Run your non-profit like a business, because it is. Non-profit organizations sometimes use their non-profit status as an excuse not to seek to be efficient, employ staff performance management systems, or make the tough decisions for-profit businesses have to make to survive and thrive. Being a non-profit does not mean you should not seek to earn profit. It simply means you must reinvest this profit. The more profit your organization can make the faster it can scale and grow and achieve its mission (of course don’t make a profit in a manner that goes against your values and mission!). After all, your non-profit corporation is a business, just one that has committed to reinvest its profits every year back into the business and not distribute them.

What type of organization should I work for to make the greatest positive impact?

Often the best answer to the question “what type of organization should I work for to make the greatest positive impact” is a gray hybrid to the old-school black and white. The answer is often a for-profit business that is socially responsible and integrates the concepts of social business into its organization, or an entrepreneurial non-profit organization that is run like a business, efficiently and with a sense of urgency.

And finally, today the boring and bureaucratic public sector is slowly but surely changing as it is again becoming cool for smart driven people to work in government. The bureaucracy that is Washington D.C. can only change if it is infused with entrepreneurial, efficient management that has a sense of urgency and passionately cares about making a positive difference.

Comments & Thoughts?

I’d love your comments on this post! Particularly if you have any examples of companies that truly integrate social responsibility into what they do, interesting models of corporate social responsibility, or examples of non-profits that are run like an entrepreneurial businesses. Also, I’d love any thoughts on the graying of the for-profit and non-profit sector and any thoughts on infusing entrepreneurial principles and efficient management into government. Thanks for reading! – Ryan