Strategies: Mission Possible

(page 3 of 3)

But last year, she wanted to open a showroom in New York and add e-commerce to her Web site, and she wasn't sure she could find the capital to expand and still offer the same compensation to her 20 employees. Manning hired a production manager to find ways to manage raw materials costs, among other things. She changed the production process from an assembly line to having a single employee handle an entire piece. Costs fell 15% for the $2 million company. "If I couldn't grow without sacrificing my ideals, I'd walk away and do something else," says Manning.

You can also improve cash flow by selling goods that command a premium price. Nine years ago, John Sage, 46, and his friend Chris Dearnley, 47, founded Pura Vida in Seattle to sell Fair Trade coffee grown by farmers in underdeveloped countries, and to give a portion of revenues to charitable organizations serving the poor in Central America. They paid $2 a pound for beans, twice the normal price, and charged customers about 70% to 100% more than conventional java.

That sounded good, but profits still didn't pour in. Pura Vida's business took off only when the founders rejiggered their strategy. They originally sold to religious groups, but revenues stalled at $1.8 million. Then administrators from several colleges contacted them, and Sage and Dearnley realized they had found their niche. They began marketing to campuses, a move so effective that in 2005, students at American University staged a protest, demanding that the college choose Pura Vida as its coffee supplier. The 12-employee company's revenues reached $3.6 million in 2006.

FUNDING YOUR GROWTH

Most social entrepreneurs bootstrap the launch of their companies. But once you prove your business can work, you can find investors—provided you seek ones that understand your company will measure its progress against both financial and social yardsticks. A 2003 McKinsey study of the Investors' Circle found the socially responsible companies it funded had an annual return of 10% to 14% from 1992 to 2001, vs. 33% for all venture capitalists in those years. And 77% of the members said they would accept a "social discount" if the company met social and environmental goals.

If you do approach conventional investors, be prepared for skepticism. Pura Vida's Sage raised about $5 million in debt and equity in the last five years, mostly from angel investors. But he encountered considerable reluctance along the way. "People would tell me, 'It is neither fish nor fowl, and you'll end up doing a lousy job,'" says Sage. Furthermore, many socially minded entrepreneurs are loath to take money from conventional investors, fearing they'll make demands that will compromise the company's missions. "If your investors are looking to maximize every penny, there's going to be a problem," says Andrew Savitz, author of The Triple Bottom Line.

GAUGING YOUR PROGRESS

Every investor will want to hear about the progress your company is making, which leads to the vexing problem of how to measure a social enterprise's nonfinancial achievements. The typical approach is to tailor the metrics to the business, often somewhat informally. Better World Books looks at how much money it has raised for charity since starting six years ago: $2.3 million for their primary literacy partners and $1.2 million for 55 other charities. Riney measures the reduction in carbon emissions achieved by his fuel-efficient fleet. Customers can log onto PlanetTran's Web site to see, based on their usage, how much they've cut emissions, and corporate clients receive detailed monthly reports.

One approach, pioneered about 10 years ago by the Robert Enterprise Development Fund of San Francisco, evaluates companies according to what it calls a social return on investment (SROI), identifying the benefits of a business' social activities and calculating their economic value. Another method, from the Global Reporting Initiative in Amsterdam, assesses companies for their economic, social, and environmental performance. The organization recently published an online handbook to help small businesses use the guidelines. And Gilbert's B Lab rates social enterprises against criteria relating to the environment, employees, consumers, community, and leadership. Businesses complete a survey touching on such measures as the percentage of revenues from green products; respondents that score well are certified "B corporations." Companies must also amend their articles of incorporation to affirm that management will consider the interests of employees, the community, and other stakeholders.

As you juggle competing interests, you can find help from organizations such as the Columbia Business School Research Initiative on Social Entrepreneurship and Co-op America, a Washington (D.C.) group that links green businesses with one another. They won't make running a profit-making company with a social mission easy. But with issues such as global warming and sustainable agriculture now top of mind, this could be the best time to try it.

Back to BWSmallBiz December 2007/January 2008 Table of Contents