What Is a Social Business Venture and Is It Right For You?

I’m refocusing on the crux of cause capitalism: building a business to drive social (or environmental) change because I believe that the force of capitalism can be used to solve many of the problems we face and because it’s in companies’ best business interest to do so.

I see cause capitalism is a continuum with CSR and cause-related initiatives (like PRODUCT(RED)) at one end and non-profit social enterprise at the other (like Living Goods).  In the middle of the spectrum is the social business venture (which I frequently call purpose-driven business).

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A social business venture:

  • Is specifically conceived and structured to drive social change;
  • Generates profits but doesn’t prioritize maximizing earnings for shareholders. Instead, profits are invested in the population or cause the enterprise serves and reinvested into the business; and
  • Attracts investors looking for both financial and social returns. This structure (as opposed to a non-profit social enterprise or hybrid social venture) gives the company greater financing and scaling opportunities because it can assume debt and equity.

In their book on social enterprise, The Power of Unreasonable People, John Elkington and Pamela Hartigan call this structure Model 3.  I want to be clear that Model 3 is not better than Models 1 or 2–Leveraged Nonprofit Venture and Hybrid Nonprofit Venture, respectively.  Each model supports different missions and needs.

Briefly,

  • Leveraged Nonprofit Ventures (Model 1) tackle market failures that are extremely difficult to resolve with a for-profit model. “Generally [Model 1 enterprises] operate where the market air is too thin for mainstream businesses to even think of venturing.” For example, enterprises serving the bottom of the pyramid.
  • Hybrid Nonprofit Ventures (Model 2) serve “populations that have been excluded or underserved by mainstream markets.” Making a profit is possible, but the organization isn’t predicated on it. The enterprise recovers some of its costs by selling a product or service.  One example is Greyston Bakery.

There are different forms of social business ventures even within the definition here. This week, I’ll highlight some social venture businesses and look at the challenges and benefits of this model.

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4 Comments

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  1. Brian Howe July 28, 2010 at 12:34 am #

    Hi Olivia,

    Another great post! There is one part of the definition of social business venture, however, that might be strengthened. If a social business venture has to reinvest all profits in the business (point two), then it likely cannot attract investors looking for financial returns through equity offerings (point three). It could, as you note, run on debt financing because that doesn’t require the distribution of profits.

    What do you think? Am I misreading your third point?

    I really like the overall def though and plan on using it for some materials I’m developing (giving credit, of course!)

    Cheers,

    Brian Howe
    @socialbizlawyer

  2. admin July 28, 2010 at 9:04 am #

    Brian,
    Really appreciate the comment. You bring up a good point. The way I see it (which might need amending) is that social venture businesses can still make a profit, some of which is reinvested into the business and into the cause/communities it’s serving, but some of which is re-distributed to investors as needed.

    But, I haven’t been through this process as an investor or a business. I would love to hear from others and any other thoughts you from your experience, Brian.

  3. tayo social July 28, 2010 at 7:34 pm #

    This is a great reinforcement for some ideas run thru my mind as I search for a sustainable solutn to a major human capital ( youth deployment) issue in my state Lagos Nigeria and I will surely give my ideas a lot more thought. Thanks to social business venture.

Trackbacks/Pingbacks

  1. How Turning His Non-profit Into a Profitable Company Helped His Social Mission–with Aseem Das - July 28, 2010

    [...] World Centric evolved from a nonprofit to a nonprofit with a revenue-earning component to a for-profit social enterprise. Today, World Centric makes fully compostable household products including utensils, plates and cups. You can find the brand in Whole Foods and Cost Plus World Markets and when you take out from your sustainable deli. It’s a profitable company rooted in a strong social mission. It’s a terrific story to profile this week on Cause Capitalism as I’ve been focusing on social business ventures. [...]

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