Profit and Purpose: How Social Innovation is Transforming Business for Good
224 pages, Wiley, 2014
Based on in-depth interviews with founders, Profit & Purpose profiles a number of the most successful pioneers in social entrepreneurship, telling the stories of thirteen social enterprises ranging from non-profits like Charity:Water and DonorsChoose.org, to for-profits, like Method and Burt’s Bees; from startups like Etsy and Warby Parker, to multinational corporations with market capitalizations in the hundreds of billions, like Coca-Cola, IBM and Nike. Kyle Westaway digs beneath the public stories of these organizations’ success to reveal how they have harnessed the power of purpose. Readers learn how these leading social enterprises progressed from concept to scale, how they overcame common pitfalls, and how they managed to find an optimal balance between their mission and their business mandates.
EMBRACE 2.0 - GOING HYBRID
Since the purpose of the Embrace Warmer was to reduce infant mortality in developing countries, the founders assumed that the nonprofit structure would be the best choice for the organization. They thought they wouldn’t be able to price for profit. But they still wanted to “operate as a business,” as so many social entrepreneurs do. They planned to sell products and make a profit margin that would be reinvested in the business for growth.
A key question in their decision making was the source of funding. They thought that structuring as a nonprofit would allow them access to philanthropic capital—grassroots donations as well as grants—which they thought was necessary because as Jane recalls, “Given the inherent risk associated with what we were attempting to do (an untested management team bringing to market an unprecedented medical device) and the uncertainty of the commercial viability of the product, and given the type of customers we wanted to serve, we decided the best option was to go down the nonprofit route and created a 501(c)3.”
They soon realized their naïveté on a number of levels. Jane says, “When I want a good laugh, I look at our first business plan. We projected that with two people and $100,000, we would be able to bring the product to market in one year.” The team had little understanding of how much time, effort, and capital it would take to bring Embrace from concept to market. They also had no clue how much of their time would be dedicated to chasing after donor money. Jane estimates that up to 40 percent of their time was dedicated to fundraising—that’s almost half of their time not spent on building a really great product, building out a distribution channel, or creating organizational infrastructure—but very inefficiently chasing down donors, which only resulted in a relatively low amount of money raised.
It’s a common pitfall to think that nonprofit funding is free. It seems free, you just set up a nonprofit and ask for money. But the energy spent writing grants, submitting lengthy incubator applications, hosting events, running online fundraising campaigns, and the like all comes at a cost—your limited time. These activities shift the focus away from actually building a game-changing product or service. In addition, funders can ask you to slightly tweak your focus in order to fall within the guidelines of their grants. Most foundations like to fund programs that are already having an impact, they generally don’t like funding research and design. Especially at the startup stages, an organization must trade impact for philanthropic money.
So, rather than continue in the nonprofit structure, they chose to take a bold structural move. Embrace spun out a for-profit in order to gain access to investment capital. So, Embrace was split into two separate, but related entities.
The nonprofit arm, Embrace, continued to hold the intellectual property it had already created during the concept and design phase, donate the product to the poorest communities through NGO partners, and build an ecosystem of services around baby health care. These activities would be funded by philanthropic capital and royalties from licensing the intellectual property.
The new for-profit entity, Embrace Innovations, licenses the intellectual property from the nonprofit under a revenue-sharing agreement, manufactures, conducts clinical testing and future R&D, and sets up the distribution and sales channels for the bottom of the pyramid market. This entity is funded by investment from social venture capitalists.
Jane describes the functional practicality of this set up. “This allows the for-profit entity to develop and focus its competencies to sell and distribute products, as well as to conduct research and development. At the same time, the nonprofit is able to focus on broader issues around newborn health, through training, education, and monitoring and evaluation. Early last year, we were able to close a Series-A round of financing from Khosla Impact Fund and Capricorn Investment Group, giving us a launch pad by which to try this new structure. Thus far, through this approach, Embrace and Embrace Innovations have helped more than 3,000 babies with our product. While our primary focus is in India, Embrace is doing pilot projects with NGO partners in 10 countries, and we hope to further scale this year.”
Embrace wanted investors who believed in profit and purpose, so rather than approaching the traditional venture capital community, they focused on more impact-driven investors. They spoke with Acumen and Omidyar—two leaders in the field of impact investing. But they ended up working with funds that were a bit more profit focused, but still cared about impact. Khosla and Capricorn were two such funds, and they invested.
“Khosla himself has run a business before. So, he really understands the nuts and bolts of operations and also believes in impact. In fact, the first time I sat down with him. He asked me at the end ‘If you had to choose one, what would it be? Making money or making impact.’ I told him that if I had just wanted to make money, I would’ve done something else, other than Embrace. It was very clear to me when I answered him, but I told him, impact. If I had to choose one thing, it would be impact. Although to me the two actually go hand in hand, because if we want to scale this like crazy, then it has to be profitable.”
Reprinted from Profit and Purpose by Kyle Westaway with permission from Kyle Westaway and John Wiley & Sons, Inc. Copyright © Wiley, 2014 and published by John Wiley & Sons, Inc. (www.wiley.com). All rights reserved.