Profitable Social Entrepreneurship
For as long as I can remember, I’ve wanted to save the world. I’ve wanted to create comfort where there was poverty, understanding where there was ignorance, love where there was violence. I want to save orphans, widows, animals (even the ugly ones), and I want to usher in a new age of deep community.
When I was a preteen I thought saving the world looked like control: political power wielded beneficently. I wanted to be the “president of the world.” When I was a teen I thought saving the world looked like knowledge: high technology would lift people out of the mire.
Now I’m sure it’s neither and both of those. The issue is actually incentives.
The structure you see in the world today is created by incentives.
Rain Forests are destroyed because a group of people has stronger incentive to sell lumber than it does to save the ozone. Everything that exists is allowed to exist by incentives that all align to add up to exactly what you see.
The only way to effect any mass action is to align the incentives of the people you want to act with the action you want them to take.
For example, we want people to start small businesses, so we should make starting small businesses easy and cheap. We should make them more attractive than working a normal job. We want companies to stop dumping toxic waste into rivers, so we make it more costly to dump than not. We want charitable donations, so we make donated money exempt from taxes.
Incentives and Entrepreneurship
Entrepreneurship is ultimately about aligning the incentives of your customers with your own. In my business, people need information about their health and well being, and I can provide it for a few dollars to them. That information didn’t exist in the world before I helped create it, and every time a customer buys a book, that person’s life changes for the better, and I’m more able to change other people’s lives as well because I can continue creating and selling those books.
When you begin to think in terms of incentives, business stops being a struggle to figure out how to convince people to give you money, and starts being a process of simply moving toward the right place and the right time to provide a good or service that you know your customer will need.
Entrepreneurship isn’t always about money though. When you start an organization whose purpose is to effect social change or support a social good, then you become a “social entrepreneur.”
These organizations tend to be nonprofits. The Salvation Army for example. They are organized to get people to give their stuff away in order to redistribute it to poor people at very little cost to those people.
They have to continuously beg for donations of both “stuff” and money, because no one is incentivized to give away their belongings and money for no benefit. People donate to them because of other incentives, like tax write offs and the warm and fuzzies. You can screw people all year long, but when you donate your old TV to the Salvation Army you get to moonlight as a Good Person™. Good for you.
Most people want to help the world if they can, but why would the best and brightest—the ones we need most urgently to solve their world’s looming issues—dedicate their lives to begging and scratching?
They wouldn’t, there’s no incentive. “There’s no money in charity,” as they say. But what if there was?
Profitable Social Entrepreneurship
There can be money in charity, but only when it stops being a charity and starts being a business. That happens when the primary source of revenue is not driven by external incentives (like with the Salvation Army), but incentives that are intrinsic to the business model itself.
For example, there’s a company called A to Z Textile Mills operating out of Tanzania, Africa. It employs over 7,000 people who otherwise wouldn’t have jobs. Those people create a special kind of mosquito netting that is substantially cheaper than alternatives. The nets are sold at a profit to other members of the community to prevent the spread of Malaria, a major cause of death in the region.
A to Z is a perfect example of profitable social entrepreneurship—all the incentives are aligned. The more nets sold, the more people have jobs and the fewer people die of malaria. It’s net win for everyone.
Social Businesses can Justify Their own Existence
The fundamental difference between a social venture and a charity is that the social venture justifies its own existence financially
The fundamental difference between a social venture and a charity is that the social venture justifies its own existence financially, so it can continue indefinitely, without support from donors.
Fund raising sucks up much of the effort of charitable organizations and it falters at exactly the wrong times. Think of a soup kitchen run by a Church. Donations are lean during hard times, when people need that food the most.
But during Malaria season, people need more nets, so they buy more nets, and more nets can be created with that revenue, and the cost per nets goes down which is great for the people who need them.
The incentives are aligned and it’s a positive spiral towards a net gain for everyone. The incentives intrinsic to the business model are aligned to help people in exactly the right way at exactly the right time.
Sustainable Social Entrepreneurship
The nonprofit ecosystem is complicated. Not all nonprofits make their money from donations, and not all donations are from individuals.
Some nonprofits sell related goods and services that support the philanthropic arm of the organization. Others have institutional donors who donate for branding purposes. Those nonprofits allow the donor to affiliate with an act that wouldn’t be efficient to do themselves, but which they want to be associated with doing.
Those are just two examples of alternative models that nonprofits can use, and I think they are both better than begging for individual donations. I also think they are both worse than making the charity core to the business.
when the profitable arm is the charitable arm, it can never be cut
Imagine you own a construction company that builds concrete block buildings. You have masons, accountants, web designers, and marketing people. When times get tough, you’re not going to fire the masons. You’re going to cut funding to marketing or to the company website in order to let the construction crew, who are the life blood of your company, continue bringing in money.
Similarly, when your institutional donor has a bad quarter, its nonprofit branding initiative might not seem so critical. But don’t blame the institution. If you are the type of nonprofit that internally runs a profitable arm to support the charitable arm, What do you do when the profitable arm isn’t so profitable? You have to cut back the charitable arm.
My point is that when the profitable arm is the charitable arm, it can never be cut unless the nonprofit stops operating. It becomes the life blood, the construction crew at a construction company. That’s sustainable.
Needed: the Best and Brightest Entrepreneurs
Social Entrepreneurship is not for the faint of heart. You’ll need all the skill and cunning of a run-of-the-mill entrepreneur, but you’ll have the added difficulty of ensuring that your profitable venture helps your customers and the community at large, which will require dedication and smarts that far outstrip your average porn site or Popsicle stand operator.
I’ve spun almost a 100,000 words on this blog teaching you to think clearly and live courageously. To live in the light of truth and power, and to create your own destiny. I’ve been pretty quiet about what you should do with all that power. Now you know: you need to save the world.
You need to figure out how to give so much value to your customers that it explodes into society at large, and people beat a path to you to pay for the things they and their neighbors desperately need.
That cloying emptiness in your gut and the tug to do “something” has now spoken to you proud and clear. The nagging fear that you’ll never find customers or make something of yourself has come full circle and told you exactly what to do to fill your life.
There are plenty of niches and nooks and crannies that you can own to be a part of the change, all you have to do is find one and make it happen. Get something started and iterate until the world is a safe and sane place. You have everything you need, now go do it.
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