Learning From Failure

Growing numbers of entrepreneurs are creating successful social enterprises that use the tools of business to further a social mission. Take, for example, Change.org, a business that we wrote about in “From Petitions to Decisions” in the fall 2014 issue of Stanford Social Innovation Review. With 85 million registered users in 196 countries, Change.org has become the go-to place for people and organizations around the world to wage public interest campaigns. Ben Rattray and his team have not only succeeded in furthering their social mission, but they have also succeeded in creating a thriving business. In December they raised an additional $25 million to help fund their eight-year-old organization’s continuing growth.

Not all social enterprises do as well as Change.org. In fact, roughly half of all new businesses are gone after five years. I don’t know of any studies of the failure rate of social enterprises specifically, but it’s likely to be similar. Capitalism is an amazingly creative system for providing goods and services, but it can also be cold-hearted, weeding out enterprises that aren’t efficient users of capital, ideas, and labor, in favor of those that are, regardless of a company’s social mission.

In this issue of Stanford Social Innovation Review we take a look at two social enterprises that have had trouble being efficient, one that failed, and another that has recently gone through tough times and may not survive. Although there is much to be learned (and inspired by) from success stories like Change.org, there is an equal amount to be learned (and cautioned by) from failures.

The company that failed is Cause, a restaurant and bar in Washington, D.C., whose social mission was to dedicate all of its profits to nonprofit organizations. (See “Cause for Reflection.”) It’s an approach that might have worked if the “philanthropub” had been profitable, but sadly it never broke into the black. Cause did succeed in attracting some customers because of its social mission, but it wasn’t enough to compensate for the company’s confused marketing efforts, founders who were never fully committed to the enterprise, and the host of usual problems that most new restaurants and bars confront. Cause closed after just 14 months in operation.

The second social enterprise we examine in this issue is Liberty & Justice, an apparel manufacturer in Liberia founded by Chid Liberty that is struggling to survive amidst the West African Ebola crisis. (See “Entrepreneurship and Ebola.”) If Chid Liberty were simply trying to build an apparel manufacturing business it is unlikely that he would have located in Liberia. He did so because a central part of his social mission is to help rebuild the Liberian economy. It was tough enough to try to build a business in war-torn Liberia, but doubly tough to do so after Ebola struck. Last year, just when the business was getting off the ground, Liberty had to shut his factory down. Liberty & Justice is still technically in business (in part because of the good graces of its impact investors), but the company’s prospects are uncertain.

The lesson? Having a social mission does not insulate a business from the forces of capitalism. In fact, it can sometimes place an added burden on the company that makes it even more difficult to survive, let alone thrive.

Read more stories by Eric Nee.