Home > Lean Post> Why Social Entrepreneurship is Dead
Search Posts:

Why Social Entrepreneurship is Dead

by Nathan Rothstein
September 24, 2013 | 6 Comments | Post a Comment | Permalink

Social Entrepreneurship is dead. You may have missed this news, unless you started a business thinking the "social" component of your startup would lead you to financial sustainability… and then the funeral slapped you in the face.

Project Repat
Project Repat production in Fall River, MA

When we started Project Repat last year, we spent a lot of time in “social enterprise” circles, but quickly it became apparent that there were not enough people in the country who knew the phrase existed to be able to run our business on that philosophy alone. Even though many people in Boston were interested in our business because of our social mission, we knew we were not going to last if a handful of “social entrepreneurs” said they liked our mission. It was only when we discovered a way to make a product for a much more affordable price that we became sustainable.

Early on we were told that there were thousands of people who wanted to invest in social enterprises, but these “social impact investors” were difficult to find. As soon as we told investors we were a social enterprise, they lost interest and referred to us as "do gooders," a term synonymous with not making money. When we pitched our business to social impact investors, our 2-3x returns were passed over for the potential of 10x returns in the tech sector.

A few months ago, Daniel Gross wrote in Newsweek/Daily Beast about the success of Chobani yogurt. He tells the story of how everyone told the founder Hamdi Ulukaya that he needed to make yogurt as sweet as possible or the American consumer would not buy it. Instead, he made it less sweet and thicker. In the last 12 months, Chobani has hit over 6 billion in sales. They opened a $450 million dollar plant in Idaho, plus their supply chain partners employ thousands of people here in America. They are doing good while doing well, but interestingly, they are not considered a social enterprise. To many, Chobani is “just” a business, since they are not giving away one yogurt per every one yogurt sold (think Tom’s Shoes).

But being just a business—a business focused on becoming as big as possible, while thinking about the social and economic impact of their supply chain—is exactly what has made them successful. Chobani makes a healthy product that is good for American consumers and is investing in American factories in places where de-industrialization has ravished communities. This is the value business can provide. People have jobs, they have food on their plate, and the American consumer has a product that adds value to individuals and communities rather than takes it away.

In the past decade, while banks created instruments they didn’t even understand to lure money away from hard-working Americans, and the stock market crashed, the term “for-profit business” has been dragged through the mud. Sometimes rightly so. But there’s nothing wrong with business done right: a business offers a product, it is made in an economically equitable and environmentally friendly manner, and it has a good price people are able to pay. People can afford the product because they earn a decent wage.

Every sector’s purpose is about giving people the opportunity to make their own economic decisions. We lose our way when we focus on charity. Unfortunately many social entrepreneurs have focused on giving something away, not empowerment. While charity is nice, it doesn’t provide systemic solutions, and it’s merits are debatable when it comes to actually changing the world for the better.

And as Sarah Mckinney writes, the term "social entrepreneurship" is also confusing to people not engaged in social enterprise circles, which is 99% of the population. If you are a nonprofit, your revenue generation measures can often distract from the mission, and if you are a for-profit, you lose focus on building a product people will pay for. Anytime you aren’t focusing 100% on financial sustainability, you won’t end up having any economic and social impact. So many social entrepreneurs end up shutting down because, in the end, customers don’t want their product. As more people fall through the cracks in America and abroad, everyone is being asked to do more with less. Many new businesses want to compensate for growing inequality, but social entrepreneurship isn’t how we do it. Why create new terms like social entrepreneurship? Be simply an entrepreneur.

Due to the success of Tom’s Shoes, dozens of buy one give one models have been created, while a few new marketplaces have sprouted up to highlight them. Many of these businesses will fail because they think their story will carry their business rather than focusing on creating value for customers at a price that makes them competitive in a marketplace that is price sensitive. Many social businesses get into trouble doing market research because everyone tells them it’s a good idea and the charity component will mean something, both to investors and customers. Unfortunately, once the product goes to market, they find out nobody is willing to pay for it.

Two conversations I had recently cemented this idea for me: one was with a newer clothing company, who, when I asked if they make their products in the USA, said, "No, we make them in China because we give away too much in Africa." Their rational: Don’t pay people a living wage in one continent so we can donate a few dollars in another. Why not just pay people a living wage to make the product that adds value right here in your community?

Project Repat
Nathan Rothstein looking over production plans in Fall River, MA

Then I spoke with the founders of Prosperity Candle, who have created a very meaningful "social impact" organization giving women entrepreneurs in conflict zones the opportunity to earn a living making candles. They tell an incredible story, but their candles cost 5-15% more than your average stock candle. When they went to some of the most elite women’s colleges in the country seeking a customer for company gifts, they weren’t interested because they were 100% price sensitive. Again, what’s wrong with just creating a product or service that does well, grows exponentially, and provides a lot of new jobs in the community, adding value to the world?

Cone Inc. did a study few years ago about how much more consumers were willing to spend if the product was making a social impact, it came to over 80%. But I have not seen evidence to back this up. Think about asking someone, would you make the better choice as a consumer if you had the opportunity? Of course we all think we'll make the right (or best-for-the-world) choice, but in most cases, we do what is most convenient for us.  

Let’s stop pretending we can solve systemic problems by giving someone in a third world country a pair of shoes or glasses, and realize that we are all important actors in oiling the economic engine. If the engine works well, fewer people suffer, and we have more social and economic equity. Business should stop focusing on a overly simplistic view of "doing good" (the one for one idea, or a percentage of profits going to charity) and instead be laser-focused on creating products that add value that people will buy. It’s still vital for companies to think of their economic impact, but they should be equally focused on building supply chains that pay workers a living wage. Let’s get rid of the term "social entrepreneurship", and focus again on growing businesses that make a positive impact here at home and in the world.  

Was this post... Click all that apply
HELPFUL INTERESTING INSPIRING ACCURATE
17 people say YES
31 people say YES
21 people say YES
16 people say YES
Related Posts
6 Comments | Post a Comment
Mark Donovan September 24, 2013
2 People AGREE with this comment

Great insights Nathan.  I couldn't agree more.  Healthy, strong, focused businesses that deliver real value (to both internal and external "customers") will do more than anything else to address problems like those set forth in the Millenium Development Goals. The model of generating huge amounts of cash, later to be directed to a foundation and ultimately into the not-for-profit sector seems at best inefficient.  I believe that if we lived in a world where lean was the strategy many of the problems that the not-for-profit/philantropic world is working so hard to fix would simply disappear.



Reply »

Ted, Prosperity Candle September 25, 2013
7 People AGREE with this comment
Is social enteprise dead?  Not quite.  But the points you make are spot on.  There is confusion about what is - and insn't - a social enterprise.  A fuzzy term and huge umbrella.  First and foremost, any enterprise must be sustainable to have impact, which means a strong revenue stream.  So it needs to be a solid business model, as you emphasize.  The idea that people will pay a premium for social impact is nice, but not grounded in market reality, no matter what the surveys say.  I'm a huge supporter of businesses doing right by their employees and the environment, providing a service and value to customers, and creating jobs - like your Chobani example.  Love it. But if your mission is a broader social impact, or helping people in another country like Haiti, your recipe falls short.  As a social enterprise, Prosperity Candle has traveled a similar path as Project Repat - particularly when it comes to investors in traditional capital markets.  The challenges abound.  But there are real impact investors out there, consumers who actually do care about who made a product under what conditions, and a new generation of social entrepeneurs aiming to move the ball forward.  Scaling up is difficult, but don't sound the death knell yet.  And, for the record, Prosperity Candles are a bargain - we should be pricing our products higher. If you take a closer look, you'll discover exceptional quality, distinctiveness and value... with social impact as a bonus, not a premium.

Reply »

Kristin Leutz September 25, 2013
3 People AGREE with this comment

As someone who supports the social enterprise and nonprofit ecosystem, I see some of the same challenges that Nathan points out.  Rather than pronouncing one model dead, we should use its deficiencies to incite a vigorous debate about the best, most effective ways to push change forward.  There is growing evidence from a psychological/sociological standpoint that we are hard wired as a species to "do good" and be socially minded as we go about all our interactions in life.  So, knowing we can't stop the impluse to do good, let's worry more about  finding and lifting up the models that are proven to work, and I believe they are out there. 



Reply »

Nathan Rothstein September 26, 2013
1 Person AGREES with this reply

Yes, I'm hoping for a more realistic debate. This concept of 1% for the world or BOGO models has major problems, and we unfortunately live in a country that has as much income inequality as the 1920s, which we should all be ashamed of. This concept of charity, cause marketing, social good is deeply flawed-since what we are trying to create with it is more equality. We saw in a very real way that a product that was 'socially' better, and just as good or better than what was given out was rejected by the same people who preach 'social good' because it was a $1-$2 more expensive. It would be great to have more debates on this!



Reply »

Siiri Morley September 26, 2013
5 People AGREE with this comment

While it's true that the one for one model is limited in its ability to seek systemic transformation around the world, as one of the Founding Partners of Prosperity Candle, I'd like to point out the diverse ways that a business can be built. Our story here is told in a tiny fragment, with just a few anecdotes that do not accurately capture the reality of our business. We never believed that our social mission alone would be what would sell our products. What brings our customers back, again and again, is the high quality of the product, the unique designs, and the value that it offers to the purchaser as a meaningful gift. Our candles are experiences rather than candles. We do not compete with stock candles at Wal-Mart and never expected to. But we do compete with the candles sold at a place like Whole Foods.


Our complex value proposition, not our social mission alone, enables us to charge a premium price. This premium price enables us to work in places like Haiti and Iraq and help women build and grow their own enterprises.


Many brands have proven that price is not the only factor - by focusing on exceptional customer service (Zappos), unique product experiences (Apple), or a perception of luxury (kate spade) businesses have been able to break the mold by not needing to solely compete on price.

 

There are many definitions of social entrepreneurship and there is a lot of grey area and nuances between a buy one give one arena and a Chobani model. I agree we should keep discussing this and engaging in dialogue, but making generalizations about other social enterprise models is not the best way to do it. Repat and Prosperity Candle have very different target markets - what works for one company doesn't mean it will work for the other. 

 

I'm not saying what we do is easy or that we have found the right combination of all the magic ingredients, but we are engaged in the process and are actively learning lessons along the way. There are a lot of challenges for businesses like ours, but price is not the only one. And it's important to emphasize that Prosperity Candle is neither a buy one give one model nor are we a company ignoring our customer's needs due to our social mission. 



Reply »

Nathan Rothstein September 27, 2013
1 Person AGREES with this reply

I was using it more as an example, and probably could have been articulated better, of what happens when you try to sell something to places that supposedly care about 'social impact' but in the end are more concerned with price. We went through this too with Repat- where Kristin Buth Leutz and I tried to get universities to buy our recycled tote bags as reunion gifts but all the elite schools in New England were used to prices for bags that were made in the developing world where people, as you know, are mostly making a dollar a day. I have a lot of respect for the role you guys are playing, I just wish buyers, and our economy would be more open to understanding the true cost of doing business when you actually pay people. My hope is that future entrepreneurs will focus on creating a supply chain with a mission, like your business, but not think the story alone will carry their business.



Reply »