Successful business model

There is a growing interest in a new kind of business that is now being referred to as a "social business" or "social enterprise" (I am going to use the former terminology.) I'd like to explain and unpackage this idea a bit and contrast different definitions/perspectives. The key difference between a social business and a traditional business is that a social business explicitly sets expectations with investors (usually in its bylaws) that it will simultaneously pursue two objectives -- (1) specific positive social impacts/"returns"; and (2) financial returns. Generally, social businesses "warn" investors that the financial returns may be negatively impacted by the social objectives and therefore they seek investors who understand and support these dual objectives when they make their investment. By definition a business must be ultimately self-sustaining ... that is, generate a profit/surplus which can allow the organization to continue without indefinite infusions of investor capital. I say "ultimately" because many businesses have periods of operating losses as they startup or pursue periods of forward investing with the goal of being more sustainable long-term. So far so good. Then the definitions of social businesses by different people start to diverge.

Non-Profits and Earned Income. There are a few people which consider non-profit organizations which have income generating activities to qualify as social businesses, but most agree that while these may be good activities they are not in themselves social businesses as they continue to rely on donor income to be sustained. I think it is increasingly important for the viability of most non-profits to have a diversity of income sources which include earned income.Self-Sustaining Non-Profits. There are a number of institutions which have explicit missions to "do good" and have sufficient resources/income to be self-sustaining. These include private foundations, endowments (e.g. universities) and, more recently, operating businesses organized in a trust-type format. An example of the latter are a number of successful microfinance banks which generate profits, often are subject to tax, but are run by trustees (as there are no shareholders) who by law cannot have a personal benefit from the organization. Generally, the foundations and endowments are not considered social businesses even though some of them do have some operational components. For true operating businesses run inside non-share capital structures, these are increasingly viewed as social businesses even though they may face future limitations due to their inability to accept investor equity capital.

Investor expectations do matter. If you select investors who are incompatible with your objectives (e.g. they don't value your social impacts), you're going to have a challenge keeping focused on your social objectives. But, this is true for any business ... you need to find the right investors and set expectations very clearly. Investors take a portfolio approach. Almost all investors seek to have some diversity in their investment portfolio in order to mitigate risk. If I want to be a social business investor, I'm going to want to invest in multiple social businesses realizing that returns/results will vary.

So, if I invest in 10 social businesses and 5 fail (no return, not unusual), 3 have modest returns and 2 have strong returns, I have less risk. I also potentially receive my capital back plus a return (both financial and social.) This means that the successful social businesses are overcompensating me in return (financial and social) and the unsuccessful social businesses are undercompensating me. If I agreed to only received my invested capital back with no financial upside, then I would be losing 50% of my invested capital in this scenario and this should be structured a charitable donation. Social entrepreneurs may serially fail. As noted above, it is not uncommon for 50% of businesses (any type of business) to fail. Let's say we have a very eager social entrepreneurs who starts 5 social business which fail and it's only her 6th social business which succeeds. Let's say that she creates huge personal indebtedness in starting the all of these businesses. Why shouldn't she be able to have a reasonable financial return on the 6th business in order to compensate her for the risk and expense she took in developing all of these businesses? Aren't we going to dissuade social entrepreneurs from the necessary risk-taking if they have no financial upside from their personal investment?