NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Social entrepreneurship is on the rise. Echoing Green reports that while social business proposals with for-profit elements made up only 15 percent of their applicant pool in 2006, that number has since risen to nearly 50 percent. And flourishing social businesses have emerged in practically every sector. Despite Amazon’s dominance, BetterWorldBooks has sold or recycled more than 300 million used books, and generated over $27 million to fund literacy programs and libraries in the process. Outdoors wear company Patagonia has given $89 million in grants to organizations tackling local environmental issues, and did an estimated $800 million in sales in 2016. Even Google has a social innovation arm, the X Lab, which works to “build and launch technologies that aim to improve the lives of millions, even billions, of people.”

Yet despite increased adoption, diverse success stories, and votes of confidence from the likes of investing titan BlackRock, many early-stage social entrepreneurs struggle to convince investors that their ventures will be profitable. In a Boston Business Journal article, Kevin O’Leary, an investor featured on Shark Tank, states that entrepreneurs trying to make money and social change are “very likely to be conflicted.” Phil Wong, co-founder of Misfit Juicery, confirms in a recent Stanford Social Innovation Review article that he has “been in rooms where investors shut off the second your vision incorporates your mission.” The article goes on to ask: “If we want to support the development of early-stage social enterprises, the driving question becomes: What is the competitive advantage of a founder calling their business a social enterprise?”

The goal of my undergraduate thesis was to answer this question. Through three case studies and seven interviews with social entrepreneurs, I sought to identify the advantages of pursuing a double-bottom line. What I found is that the conflict between profit and purpose cited by O’Leary and other investors is often an obstacle. But I also discovered that there are times when this tension leads to moments of balance, creativity and ingenuity, and these moments demonstrate the distinct value of the practice of social entrepreneurship.

Doing Right by Local Communities

The first example of a creative, entrepreneurial response to profit-purpose tension that I encountered came from an interview with Josh Carn-Saferstein, the COO of PATOS Shoes. PATOS, which was featured prominently in a BuzzFeed article on brands that “actually help struggling Latin American artisans,” has partnered with traditional Peruvian textile makers to use local materials to create a modern sneaker.

Carn-Saferstein explained that PATOS has always ensured that the Peruvian manufacturers “benefit from PATOS immensely.” For instance, the company pays these manufacturers five times the minimum wage in Peru – a decision that has affected its bottom line. “Our margins aren’t great,” he acknowledged, “but at this point they’re good enough to run it in a way that we can still be profitable and still keep the core of what PATOS is.” The company also chooses to source all materials for its shoes from within one hour of the factory. This decision may have been made simply for cost-effectiveness, but it also ensures that PATOS shoes are truly locally made, providing support to the local community at every stage of production. This balancing act between profit margins and mission fulfillment has enabled PATOS to grow and establish a toehold in the highly competitive U.S. footwear market.

Many companies attempt to brand themselves as socially conscious, sometimes with problematic results: TOMS Shoes, which has received a lot of criticism for its buy one, give one business model, is perhaps the most relevant example. However, though PATOS sacrifices profits by allowing its social mission to infuse every stage of production, it has won the trust of its customers. The company’s genuine commitment to manufacturing shoes in a way that is sustainable and beneficial for local Peruvians has established the kind of authentic brand that even TOMS Shoes has struggled to achieve.

Balancing Open Access and Financial Sustainability

I found a second example of business success as a result of tension between profit and purpose in the story of Scott Sherman and the Transformative Action Institute (TAI). TAI teaches people to create change in their lives and the world around them using a research-based set of principles. After Sherman and his co-founder taught TAI’s pilot course at UCLA, and students voted it the number one course on campus, Princeton, Yale, Harvard and others all wanted their own versions. Sherman faced a major business question: How was he going to scale?

Instead of licensing TAI’s content or setting up an exclusive consultancy, he decided that TAI would give away its intellectual property. Anyone can access the materials that Sherman used to teach his course, and anyone can develop their own version of his training. “The reason,” he told me, “is we did not want any barriers to entry.” Only those who want TAI to help them develop or teach customized programs need to pay. At an Ashoka conference, a Wharton professor criticized TAI’s business model, calling it horribly unsustainable. Ironically, soon after that, Wharton became one of TAI’s first premium customers, paying one million dollars over four years for TAI to run their social entrepreneurship program.

Sherman estimates that TAI reaches one hundred thousand young people per year, and its free, flexible curriculum has spread virally. Its materials are used in over 200 colleges and universities across the United States and ten African nations. The balance Sherman and TAI struck between open access and financial sustainability offers another example of the ways an entrepreneur can creatively navigate the tension between profit and purpose.

Using Profits to Advance the Mission

One last example of the potential benefit of this tension comes from Philip Wilson, CEO of Ecofiltro, who recently published an article here on NextBillion about his business.

Although Ecofiltro’s mission is to get water filters to rural Guatemalans, selling in villages was not initially profitable. But Wilson’s robust commitment to a dual-bottom line meant that, although he moved into more profitable urban sales of filters, he decided to use those profits to make the rural sale of filters financially sustainable. “I needed the urban sales because we were trying to figure out this rural puzzle,” Wilson told me.

The company’s rural filter sales have now scaled, and this past year, for the first time, rural sales have started to break even and generate marginal positive returns. Wilson’s experience demonstrates how embracing the pressure to generate both profit and positive social impact can actually help in solving certain business problems.

I do not mean to argue that conflict between profit and purpose is always a good thing, nor am I suggesting that entrepreneurs should seek out this tension. Many social ventures align revenue generation and mission fulfillment, eliminating profit-purpose tension entirely. Others fail because they find this tension impossible to overcome. But after hearing stories of success, failure and everything in between, I urge investors not to dismiss aspiring entrepreneurs simply because they aim to make a positive impact as well as an attractive profit. And I urge people to look past the stigma around double-bottom line businesses, and realize that there is more to each story than conflicting objectives. Social entrepreneurship is here to stay, and its efforts to transcend the conflict between money and meaning may just be its most valuable contribution to the world.

Eli Etzioni is a 2018 graduate of Claremont McKenna College and Development Manager at Urban Surf 4 Kids. His thesis, “Making Money and Making Change: Understanding and Overcoming Tension between Profits and Purpose within Social Entrepreneurship,” can be found at https://scholarship.claremont.edu/cmc_theses/1845/.

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