For-Profit Social Ventures

Article from Greenrising:

September 28th, 2006
For-Profit Social Ventures


Wicked Googlie! I’ve thought about the benefits of for-proft social entrepreneurship for some time and I’m glad to see a company with serious money (Google) is putting some serious dollars ($1,000,000,000) towards it.

I’m an MBA student and my school holds an annual Social Entrepreneurship and Innovation Competition. The problem with the competition is that only non-profit organizations, or ideas for non-profit organizations, are eligible to compete. (Don’t get me wrong, the competition is a great event and I hope it’s successful for years to come.) But, I even took a Social Entrepreneurship class in which I was forced to create a non-profit organization that could support itself by providing a product or service but whose residual income would be filtered not to shareholders, but back to the organization.

What is everyone’s fear about for-profit social ventures? Why can’t people make a buck and do good at the same time? Do for-profit social ventures bring people who want to make money and people who want to help others dangerously close to each other? Hell, if the merger worked if would change the landscape of capitalism. There would be no “pro-business” Republicans versus “pro-employee” Democrats. We’d all get along and business would be good because it would always be helping the less fortunate, who are sometimes, intentionally or unintentionally, the very people hurt by the business’s operations. We know we can’t stop commerce altogether but we also know we need to be more conscious of our behavior and contribute to the social and environmental arenas in which we operate. For-profit social ventures are the answer. They can and (hopefully) will transform the landscape of global business.

Luckily, Google has realized this. “The ambitious founders of Google, the popular search engine company, have set up a philanthropy, giving it seed money of about $1 billion and a mandate to tackle poverty, disease and global warming. But unlike most charities, this one will be for-profit, allowing it to fund startup companies, form partnerships with venture capitalists and even lobby Congress. It will also pay taxes.” Booya. The best part of this is that Google is already getting started. “But Google’s philanthropic work is coming early in the company’s lifetime. Microsoft was 25 years old before Bill Gates set up his foundation, which is a tax-exempt organization and separate from Microsoft.”

The whole point is that companies can insert a new priority into their cash flow cascade, before paying dividends or recording profits. There’s two way this could work. First, companies could dedicate a priority portion of its profits to a non-profit. Second, they could invest in social ventures, like Google is doing. There isn’t enough of a market for option two so I’m hoping option one catches on. The idea, much simplified, goes like this:

Traditional company operations

$ 100 (revenues from selling widgets)
- 70 (all expenses related to doing business)
30 (net operating income)
- 10 (reinvested into operations, research and development)
20 (retained earnings, dividends)

Now say the company commits to giving 10% of its profit to the Sierra Club every year. The Sierra Club, like most non-profits, does not have the ability to earn enough money through operations to sustain itself. That’s why it calls for donations from people interested in the environment. Here’s what the simplified financial picture would looks like:

Progressive company operations

$ 100 (revenues from selling widgets)
- 70 (all expenses related to doing business)
30 (net operating income)
- 10 (reinvested into operations, research and development)
20 (profits from which donation is made)
- 2 (donation to Sierra Club)
18 (retained earnings, dividends)

From a purely mathematical sense this makes the company less competitive, especially if it’s public. BUT, in this case $2 out of every $100 earned ended up in the hands of a non-profit which shares values with the company. Taxes (on many levels) were saved on the $2 not paid out in dividends or retained. PLUS, there’s the social benefit of operating a business in the manner outlined in the second example. Goodwill is earned with community and there’s a long-term effect of good that the Sierra Club will be able to do with the money, which is still not entirely quantifiable. Capitalist purists will say that it takes away from the bottom line, plain and simple. These are the same idiots driving record corporate profits at the expense of the American worker. No wonder the drive towards large-scale and innovative philanthropy is being driven by Bill Gates and the founders of Google. The older generation of business people doesn’t get it (except perhaps for George Soros, Warren Buffet and Richard Branson).

Surely the Progressive company operations example is not competitive in the capital markets. But imagine the example becoming the norm. That’s the day the world will truly become a better place. And for those companies who don’t want to donate - innovate the way Google is.

Source: http://www.greenrising.com/index.php/2006/09/28/for-profit-social-ventures/