Social Ventures: Mixing Profit & Value

"A well-functioning NGO has ethical behavior and social consciousness as a core principle of its mission. It's value motive is comparable to a commercial enterprise's profit motive. In the same way that commercial entities cannot afford to sacrifice their profits lest the value of the enterprise suffer, so too nonprofits cannot sacrifice their values."   (MediaChannel, August 2000)

The Internet offers new paradigms for sustainability institutions engaged in socially responsible work because of the low entry costs involved in reaching vast populations. It provides extraordinary opportunity to scale projects up to benefit larger constituencies. Well-meaning entrepreneurs have a new vision of what the Internet can achieve for the social sector. Some assume the new paradigms require that nonprofit, non-governmental organizations (NGO's) act like businesses to better leverage opportunities and meet their mission. Some have argued that a for-profit enterprise can fulfill a social mission more efficiently than an NGO. New models are required to allow NGO's to leverage the Internet most effectively just as they have been developed for the commercial sector. However, one fundamental concept must never be forgotten in this discussion and that is that the two sectors operate on significantly different core dynamics and currencies. Commercial enterprise operates on the profit motive. NGO's operate on a value motive. These are fundamentally different principles and motivations and tend to conflict with each other if not managed appropriately.

In order to insure these two motivations do not conflict, There are two ways to insure both sustainability and socially impact. One is to create a sustainable mission-based, socially responsible enterprise that never compromises its value motive. The other is to forego the value motive as the primary principle and try to achieve commercial success with an idea that delivers social impact. Each model has application depending on the circumstance and will be discussed at the end of this article.

The Difficulty of Mixing Profit and Value Motives
Any NGO contemplating a revenue stream on or off the Internet certainly would benefit from an appropriate management structure, proper financial oversight, marketing savvy and a strategic organizational plan. Working in the social sector, one encounters projects that with a bit of business savvy could have achieved far better results. Commercial activity and its associated paradigms have arguably improved the living standards of a significant amount of people while at the same time facilitating significant innovation. However, as the head of the World Bank is fond of pointing out, four billion people, (two thirds of the world's population) still live in poverty making under two dollars a day. In the US, certainly the richest and most hospitable country to commercial enterprise, there are still many social problems that are not alleviated by it.

My point is that a profit-oriented motivation is by no means the panacea for curing the world's ills. Applying business models to socially responsible enterprise is a rather delicate exercise. Prospective social philanthropists with limited development experience would do well to recognize this early before a lot of money is spent badly. Partnerships must be formed with colleagues and institutions in the not-for-profit sector who understand the issues and are willing to deploy new and creative models, but not at the expense of the value motive.

What distinguishes the value motive as the primary objective in socially responsible enterprise? Commercial entities have a clear and single-minded objective - profit. Successful business is based on the understanding that all other motivations are subordinate to this principle including socially responsible behavior. If behaving in a socially conscious manner contributes positively to the bottom line, it is done, if it contributes negatively, than it generally is not. Government regulatory bodies and consumer's associations are living testaments to this reality. It's no accident that many corporations set up independent foundations to engage in socially responsible activities on their behalf because they are incongruent with the best business practices of the commercial entity. What I am describing is not a bad thing as long as it is done within the parameters of the law. Commercial enterprise owes its success to the simple and elegant principles that underlie the profit motive. It just so happens that these principles cannot be compromised if one wishes to maximize profit. Engaging in socially responsible behavior often represents such a compromise. That's why not-for-profits exist, they have proven themselves to be better vehicles of socially responsible behavior.

There is an assumption in some quarters that a commercial entity practicing 'enlightened self-interest' (e.g. doing something socially responsible because it benefits both the community and the bottom line) is the best vehicle for achieving a value-based social mission. After all, it has the funding, talent and focus. Enlightened self-interest can too easily become an oxymoron when self-interest overtakes enlightenment. NGO's and the constituencies they support cannot compromise their values if they wish to to carry out their mission. Here's why: They do not have the benefit of a single minded profit objective that commercial enterprises rely upon to guide their principles. Instead their value-based missions are much more subjective, for example fostering democracy or alleviating poverty, etc. a well-functioning NGO has ethical behavior and social consciousness as a core principle of its mission. It's value motive is comparable to a commercial enterprise's profit motive. In the same way that commercial entities cannot afford to sacrifice their profits lest the value of the enterprise suffer, so too nonprofits cannot sacrifice their values.

Defining the "Value" of a Value Motive
Corporations spend millions of dollars to build brand recognition and consumer loyalty in order to generate profitability. By contrast, NGO's rely on their value-based mission to create this same branding and consumer loyalty. One can represent part of an NGO's real financial value in terms of the amount of capital it does not have to spend building brand loyalty. NGO's do not use their funds to convince consumers of their credibility but instead engage in social missions that establish it. While commercial entities can afford to engage in ethically neutral behavior, and may at times even step over the line to meet their core profit motive, NGO's cannot compromise their value motive, even at the expense of profit. Otherwise the real worth of the institution suffers.

While a corporation can be excused for not engaging in socially responsible activities and still retain its client base, NGO's that compromise their mission lose credibility and constituents rather quickly. Because their credibility is inextricably tied to their work and not on advertising to convince people of their credibility, once they lose it is extremely difficult to regain. How many companies mired in controversy can you name that have permanently damaged their profitability to the point of extinction? The list exists, but is short. Just compare successful litigation against fortune 500 companies over the last 50 years over issues of death and widespread environmental destruction against current income statements.

One can argue that because the NGO missions are so broad and subject to interpretation that compromising them would be easier. Any mission compromise would itself be subject to interpretation. Most who have worked in the development world would agree that when it comes to sacrificing mission for profit the distinctions are quite clear. NGO's who make this compromise are generally not thought well of by their peers or constituents. Their motives are continuously under scrutiny and they tend to operate "off mission". Why do people rely upon not for-profits to deliver assistance in the first place? Precisely because they are value-based. Their constituents come to trust them without questioning ulterior motivations or feeling exploited. This relationship in turns strengthens the NGO's value and credibility as it develops trusted networks and gains a better understanding of the problems and potential solutions on the ground.

The trusted network an NGO builds around its mission forms the basis of a vast reserve of unique pro bono resources NGO's can muster. Most have significantly loyal constituencies that attach themselves to the mission and devote countless hours of time and resources to it. They would not do the same for a profit-based enterprise. That lost value would drastically impact the bottom line of any organization engaged on a commercial basis to do socially responsible work.

I worked for a student exchange organization that counted 150,000 volunteers in upwards of 60 countries in its ranks. While it's total real budget may have been thirty million dollars annually, that didn't come close to recognizing the contribution or financial value of these resources. By contrast, for-profit exchanges that competed with us had to pay their teachers and families, and thus had a much smaller support network. Our organization regularly handled emergency cases from other institutions who could not provide the coverage or support a volunteer force offering services at all hours of the day and night anywhere in the world. Hence our organization was looked upon far more favorably in achieving its objectives than most of our for profit competitors. Had it gone for-profit, this constituency would have evaporated unless it paid them, which would have been impossible because their value far exceeded the annual budget by a multiple of at least five. Social philanthropists should be not underestimate the value of these volunteer resources which exists because of an institutions nonprofit 'value' status.

If leveraged correctly on the Internet, not-for-profits have a significant advantage in the area of advertising and sector branding that emulate corporate spending on marketing. For a commercial enterprise to brand itself properly it must advertise and engage in corporate partnerships in order to link strategically to other sites and drive eyeballs its way. NGO's on the other hand, with insignificant advertising budgets do not compete in the traditional sense, and are much more likely to trade links or aggregate content between institutions. Admittedly this is not a widespread NGO behavior as yet, but there are examples. The practice will become prevalent as NGO's become more savvy on an increasingly crowded Internet.

The ACLU for example, does not advertise in the traditional sense. But it is a credible branded name with significant traffic and an easily found web address: Any like-minded organization with a link on the ACLU pages benefits from that branding which carries a value system with it. If Human Rights Watch, ACLU and Amnesty International all link to each other as well as to important search engines and list directories they may each benefit from the others traffic. Similarly, the smaller organizations that have reciprocal links to them also benefit from this cross traffic as well as sending new traffic to these organizations through their sites. It's in the best interest of most NGO's to trade links. It increases their constituent base around issues they base their existence on and actively engage people to support.

Socially responsible, sustainable NGO ventures attract interest and investment because they achieve their mission without ever sacrificing their values. People and institutions are always looking to support best practice examples that tackle social issues successfully. The prerequisite for profitability in these best practice examples always flow from meeting the value-based mission first. If one applied a conventional business analysis to these ventures at the outset they would never be implemented. That's because traditional business models are also based on profit and not value analysis. Most for-profit ventures would never engage in these activities from the start because the mission or constituencies served are not intrinsically profitable. From the business perspective, these ventures would only achieve profitability with a retooling significant enough to change either the value-based mission or the constituency served.

One the other hand, if one looks at these same ventures from the value perspective, the potential becomes more obvious as long as the social mission is achieved successfully first. A traditional business analysis without a value analysis is a completely useless exercise in determining success or failure of a value-based enterprise.

It stands to reason that an entity engaged in a socially responsible mission would share the same values as the mission it is engaged in. A commercial enterprise which does not count these principles in its core mission, or would compromise them for profit, by definition is not the best vehicle for fulfilling a value-based mission in the first place. It's actually easier for a successful not-for-profit organization to adapt a revenue generating model than it is for a commercial entity to combine a value and profit-based mission. A not-for-profit NGO can avoid compromising its principles simply by not engaging in revenue generating activities antithetical to its mission. On the other hand, for-profits with socially responsible missions have an inherent conflict. They may very well have to compromise their mission in some instances to stay solvent. Or they may go bankrupt trying to achieve their mission.

To summarize this section, both profit and value motives function best when neither is compromised by the other. The trick to sustainable, socially responsible development work is leveraging both to avoid that compromise. Below are two practical examples dedicated to achieving sustainable social impact.

Sustainability in a Value-based Enterprise
For this example, the following assumptions are made: The focus is on a full fledged strategy to create a sustainable not-for-profit enterprise, not an NGO simply collecting donations or generating limited revenue for a product or service on the Internet. We will also assume that a value-based organization by definition is designed to achieve social impact. The nuanced but important difference between achieving social impact in a commercial context and managing a value-based not-for-profit will be fully discussed in the next example.

The first model operates on the premise that it is better to leverage the strengths of a value based organization and create sustainability around its unique content and constituency base than to try and shoehorn NGO's into traditional business models and shove them up on the web. As .com entrepreneurs are well aware, the business model for the Internet involves first and foremost attracting eyeballs and generating user site loyalty and stickiness and then defining the revenue models for profitability around the communities and visitors that coalesces on the web site. Without issues of physical geography hampering access, a good web presence provides entre to a client base of a size unprecedented in human history. NGO's have a natural constituency base and unrivaled client loyalty as a result of their value based mission. This can be leveraged even further to increase eyeballs and engage in socially conscious and sustainable activities.

If an NGO must be structurally modified to engage in sustainable or profitable activities, than the most promise for socially responsible enterprise lies in a hybrid organization I refer to as a "Dot Corg". It's a combination of the best of both the Dot Org and Dot Com world. The unique information and services provided by the value-based entity form the foundation of its e-commerce and sustainability strategy. Yet these E-commerce related activities are engaged in separately from the value based work of the nonprofit entity. The objective of this enterprise is still value-based, with a supplemental income generating component. The supplemental, revenue generating portion of the entity is run on new economy business models, (and may even be invested in as such with many of the rules of venture capital applying).

By contrast, the socially responsible portion of the enterprise requires public funding for its start up in order to insure its mission is not compromised and it can deliver the appropriate information and services to its not-for-profit constituency. The revenue generating portion of the enterprise helps sustain the not-for-profit activity. Given the difficulty of receiving public funding for operational support, I would assume the first place this assistance would go is to satisfy operational expenses of the not-for-profit entity.

The organizational structure and operation I envision is based on the commercial media model. In this model the editorial mission, like the NGO mission, is sacrosanct and cannot be broken. In a media operation the operations and advertising end of the business run like a commercial enterprise but in theory do not compromise the editorial department. The entity functions as one organization however. In light of IRS rules, setting up a Dot Corg entity would most likely require two organizations, one for-profit and the other not-for-profit but with an appropriate legal interrelationship. I suspect the IRS will have it's hands full in the next five years writing new regulations for the hybrid organizations that will inevitably evolve.

Whatever level of sustainability the value-based entity ultimately achieves from the E-commerce activities of its profit-based entity, it should never be reliant on them as the sole means of support. It must always be able to rely on public subsidy even if it is just a fallback position in the event of an income shortfall or to extend its programs. This is not because the sustainability of such an enterprise is questionable. It's to insure the value motive of the core activity is never compromised by the profit motive. And the only way to do that is to insure it is independent of it even while being supported by it. I don't see this continued dependence on public funding as cheating. Its no different from the government subsidies or "corporate welfare" many industries are allowed to remain profitable. If a case can be made for this type of government subsidy to meet a profit motive, than it should certainly apply to public funding as a means of bolstering support for organizations with a socially responsible, value-based mission.

An alternative and easier model is an entity that transitions from a dot org to a dot com. Specifically, some organizations may wish to start off exclusively meeting a value-based mission and than become a for-profit entity once that mission is achieved. An example is an ISP that the Open Society Institute started in Romania to provide connectivity where it did not exist to the social sector. As competition entered the marketplace all prices for connectivity dropped to levels consumers could afford. When that happened we spun the project off as a pure commercial entity which still gave discounts to social sector clients that met certain criteria. I'd like to say we thought this all out beforehand, but we did not. We anticipated success of the not-for-profit meeting its mission, and when it did, new opportunities arose around it.

Social Impact in a Profit based Enterprise
This next example comes courtesy of Cathy Clark of Flatiron (Venture Capital) Partners who after some years in the foundation sector directed & developed their program to finance for-profit enterprise with a social impact. She is focused on companies who use social impact (the means) as a way to achieve a profit objective. Companies are evaluated first for their efficacy in achieving financial viability through social impact, with the social impact mission given extreme scrutiny. Once invested in they are evaluated on profitability criteria as are all startups. The organizations are not value based per say, but pursue social impact as the primary way of generating revenue.

This is a wonderful model to deploy in those cases where one can merge social impact as the means to achieving profitability. It's clear at the outset that social impact may be compromised in some cases to insure profitability, but since profit is the motivation, that's not an issue. In the case we discussed, a for-profit used the services of inner city kids to do web development work. Because profitability was the primary motive, when the company needed to employ non-inner city youth to fill certain support positions, it could compromise short term social impact and hire the appropriate personnel to insure long term viability. By contrast the value based Dot Corg model for this type of project articulated in our first example would not be the best model. If an nonprofit organization had as its core mission the value that it would only hire inner city youth for this type of activity under all circumstances, it might truly compromise its chances for success or long term viability in the fast paced environment of technological innovation.

Where this .com model falls short and one must rely on the Dot Corg model is when the mission is value based and can neither be compromised or developed in the first instance as a profitable enterprise. For example if the objective is inoculating kids or relieving hunger, it would probably be difficult to create a for-profit enterprise and a business plan around such an activity. You certainly wouldn't want to compromise on vaccinations and food to children to achieve profitability. As indicated above however, some entities create opportunities for sustainability after achieving their social goal. So starting a mission-based inoculation program as a Dot Corg or Dot Org might well lead to corporate underwriting or advertising revenue if it achieved its objectives and new paradigms from that success were developed.

Needless to say, there needs to be further discussion and development of appropriate models in the area of sustainable development in the digital age. As it has in so many other fields, the Internet has created an entirely new landscape in the field of social philanthropy. It has also created new areas of necessary collaboration. Both .com and .org will have to work together to develop these models.

- Jonathan Peizer -