The Social Entrepreneurship Spectrum: For-Profit With a Social Mission
For some businesses, social impact can be measured by the size of the checks they write. For others, the mission is woven directly into the business.
The Classic Example
Founded in 1988, Seventh Generation started as a mail-order company for green household products. Under the leadership of CEO Jeffrey Hollender, it became a $150 million brand. Still, the company's recent history illustrates the challenges faced by socially ambitious, for-profit entrepreneurs. In 2009, Hollender became chairman of the board and handed CEO duties to former Pepsi executive Chuck Maniscalco. A year later, after a controversial deal with Walmart, Seventh Generation's board announced it was ending its "employment relationship" with Hollender. Maniscalco stepped aside, and the company is now led by John Replogle, formerly of Burt's Bees.
The Model Works Best When
1. The product is the social vehicle. In other words, the product or service being sold triggers the social or environmental change.
2. The user has the ability to pay most, if not all, of the purchase price. In the best cases, the product or service is a response to market demand. In others, a third party—for example, a school district or hospital—helps make up for the user's lack of funds.
3. The business cannot be separated from the social mission. Toms Shoes, for example, donates a pair of shoes for every pair sold. The social impact is intrinsically tied to the business proposition; without it, Toms is just another shoe company.
As with any business venture, the sky is the limit. A social mission can be a potent marketing and recruiting tool and an effective differentiator from the competition. A new generation of so-called impact investors is targeting for-profits with social missions, broadening the base of potential backers. The government is also getting involved: The Obama administration's Startup America initiative has allocated $1 billion for an impact investment fund.
To prove their value to investors, social entrepreneurs running for-profit companies must quantify not only their financial results but also their social impact, which is no easy task. Also, there's no guarantee that the social mission will be preserved as the company grows. Should a business take on traditional equity partners, merge, or go public, it can become difficult to protect the mission. Founders may start with good intentions, but once the business expands, they (or their boards) often must put fiduciary duty to shareholders ahead of the social mission.
The Tax Implications
Despite the good intentions of mission-based for-profits, they pay the same corporate income tax as other businesses. Like all for-profits, they are permitted to deduct up to 10 percent of their income in charitable contributions. They cannot receive tax-deductible donations.
Counterfeit drugs are a big problem in the developing world. PharmaSecure, based in Lebanon, New Hampshire, and New Delhi, generates unique codes for prescription bottles. Consumers text those codes to drugmakers to verify a prescription's authenticity. So far, the codes have been printed on 10 million bottles, and the company has contracts for another 100 million by the end of 2011.
For every nutrition bar San Francisco–based Two Degrees Food sells, the company donates a package of vitamin- and nutrient-enriched peanut butter to a malnourished child in Malawi. The start-up, which has raised $1.3 million in seed funding from angel investors, made its first shipment of 10,800 nutrition packs in mid-February.
Drop the Chalk
This New Orleans company makes an online application called Kickboard, which allows teachers to track academic performance. Last year, Drop the Chalk received $100,000 from the investment firm First Light Ventures; Kickboard's beta version is being used in 15 schools.