Research

For Profit Social Ventures
by Jane Gravenstine Brown, Fuqua MBA 1997

We live in an age in which boundaries between government, nonprofit and business sectors are blurring. This boundary blurring has led to a new breed of social entrepreneurs creating for-profit organizations explicitly to serve social purposes. Can these innovators “do good” and “do well”? CASE Faculty Director Greg Dees and Managing Director Beth Anderson recently published a paper to help would-be for profit social entrepreneurs address some of the challenges of using a for-profit organization to serve a social objective. It appeared in the "Social Entrepreneurship" special issue of the International Journal of Entrepreneurship Education. Below, Anderson discusses some of the issues addressed in the article.

Brown: What is a For-Profit Social Venture (FPSV) and can you give some examples?

Anderson: For-profit social ventures are legally incorporated for-profit entities explicitly designed to serve a social purpose. While their primary goal is social impact, their for-profit structure requires paying attention to a “double bottom line” - dual social and financial objectives that guide managerial decision-making and determine success.

For example, ShoreBank Corporation is a for-profit bank holding company that was established to demonstrate that a commercial bank could profitably invest in inner-city neighborhoods that were being neglected by other financial institutions. ShoreBank currently pursues what it calls a “triple bottom line” of “building wealth for all in economically integrated communities, promoting environmental health and

operating profitably.”

Cooperative Home Care Associates (CHCA) is a for-profit, worker owned cooperative in South Bronx, NY. CHCA aims to create social value by providing opportunity for low-income, predominantly minority women while also profitably improving the quality of the home health care industry. According to recent statistics, CHCA offered above average wages and benefits to over 550 African-American and Latina women, 75% of whom had been dependent on public assistance. Moreover, nearly 80% of CHCA’s employees with over one year’s seniority shared in the cooperative’s ownership.

Brown: What are some of the unique challenges of combining a profit motive with social objectives?

Anderson: Many of the biggest challenges surround performance metrics. In traditional for-profits, while it does require judgment, there is accepted, regulated practice for determining the financial bottom line. However, measurement of social impact is far more complicated. First of all, many social benefits cannot be translated into pure dollar terms. This reality makes direct comparison of financial and social performance difficult. Even when not trying to convert social impact to economic terms, social benefits are often difficult to measure in an efficient, timely, and reliable way. Social benefits are often intangible and hard to quantify; it can be difficult to determine causality; the impact may be best evaluated in the distant future. Thus, it can become all too easy to focus too heavily on the more familiar, tangible and straightforward economic measures of success. Despite the fact that many organizations are making great progress in this arena, social impact measurement challenges make it extremely hard to demonstrate success convincingly and to make strategic decisions about investments, resource allocation or practical cost/quality tradeoffs that will affect both the economic and social bottom lines.

In addition to measurement challenges, combining objectives from two different fields can make it difficult to build an integrated organization. For-profit social ventures require individuals who have skills and interests traditionally associated with two different worlds – business and the social sector. Hiring employees who can function well in both worlds can be challenging. Furthermore, external pressures on a for-profit social venture – from competitive markets, investors, and even consumers – may compromise social value creation. On the other hand, social and political pressures may threaten financial performance.

Brown: Given these challenges, why would social entrepreneurs adopt a for profit structure?

Anderson: Many social entrepreneurs believe that for-profit structures have virtues that are not easily mimicked by nonprofit or public sector counterparts. They often have a desire to harness market forces for social good, freeing them from a “dependency” on philanthropic resources while also freeing up these resources for other causes. Additionally, they may want to demonstrate viable market opportunities in arenas typically neglected by mainstream for-profits, perhaps in hopes that over time, mainstream institutions will move into these underserved markets. Some for-profit social entrepreneurs believe that market discipline, when appropriately channeled, helps spur efficiency and innovation. For-profit social entrepreneurs may also have a personal desire to “do well” while “doing good.” For profit enterprises offer a potential upside that exceeds the financial rewards commonly found in the social sector, which may also improve their access to skilled personnel. Notably, many social entrepreneurs may be attracted to the perception that for-profit social ventures are more sustainable and scalable, though there is no compelling evidence to this effect.

Brown: What sources of capital exist for FPSV?

Anderson: There seems to be an emerging field of investors interested in social and environmental, as well as financial, returns. In 2003, Columbia Business School’s Research Initiative on Social Entrepreneurship (RISE) surveyed the “double bottom line private equity landscape,” identifying 59 venture capital funds, private foundations and public charities in the U.S. that have social or environmental goals for their investments. In addition, groups like Investor’s Circle are convening individual angel investors who are interested in more than just a financial return. In many instances, the social or environmental objectives of these investors are achieved indirectly rather than through investing in true social ventures. For example, they may invest in women-owned or minority-owned businesses, or businesses that make environmentally-friendly products or provide employment in an economically distressed area. Nonetheless, some of these socially-oriented funds, organizations and angel investors do invest in for-profit social entrepreneurs with a primary social mission.

Regardless of the specific source of funds, targeting socially oriented investors allows social entrepreneurs to pay particularly close attention to issues of ownership and control. While these investors will expect a financial return, they are more likely to appreciate the complexity and experimental nature of the undertaking, to place equal or greater value on social performance, and to be patient while the venture tests and refines its model. As the venture proves sufficiently profitable to attract more financially oriented investors, money can be raised from diverse sources, as long as control remains in the hands of those attuned to the mission. Some of these type of mechanisms include debt offerings, limited partnership shares, as well as forms of common and preferred stock with diluted or no voting rights.

Brown: What are some strategies for maintaining a focus on social impact within a for-profit social venture?

Anderson: Our paper outlines a variety of strategies for social entrepreneurs to consider, but some of the most critical surround personnel, alliances, and measurement. People are critical to the success of any new venture, and as I mentioned earlier, building a strong team with the appropriate blend of skills and values can be a challenge. In our opinion, in for-profit social ventures, values should drive personnel decisions as much or more than skills. Secondly, strategic collaboration with nonprofits may help for-profit social ventures ensure profitability without sacrificing social performance. Finally, despite the challenges associated with measuring social impact, social entrepreneurs should measure performance creatively and test assumptions rigorously. A social purpose venture should begin with a clear understanding of how both social and economic value will be created and measured, but with a recognition that the strategy will likely need to be continuously refined and redefined as critical assumptions are put to the market test.


Special Issue Discount from Senate Hall for CASEconnection Readers!

This article, "For-Profit Social Ventures," appears in the International Journal of Entrepreneurship Education (IJEE) and is the first article featured in the IJEE Special Issue on Social (and Educational) Entrepreneurship, sponsored by the UCLA Institute for the Study of Educational Entrepreneurship (ISEE) and the Kauffman Foundation. CASEconnection readers may download this article for free (click here for the PDF version of this article).

For this special issue, editors Marilyn Kourilsky and William Walstad conducted an exhaustive search for scholars in the United States who could best improve our understanding of social and educational entrepreneurship. Seven individuals or teams of scholars were selected to prepare papers. The introductory chapter by the editors outlines the rationale for the issue and gives a comprehensive lead-in to all the articles featured (click here to download the PDF version).

As a special offer for CASEconnection readers, publisher Senate Hall invites you to view the abstracts of all the other articles featured and purchase this special issue at a discounted rate of $25.00 at www.senatehall.com/special.php. Select "Special Issues Pricing (Academic Inst.)" in order to receive the $25 price.

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