The Non-Paradox Of Highly Successful Profit-From-Purpose Businesses

 The best for-large-profit-from-purposes find that the purpose is what generates the sustaining financial returns. [Illustration: Jolygon/iStock]

The best for-large-profit-from-purposes find that the purpose is what generates the sustaining financial returns. [Illustration: Jolygon/iStock]

Written by TED RHEINGOLD

Despite the recent success of companies like Tesla, Etsy, 7th Generation, and Crowdrise, I still hear from VCs that they’re not interested in funding purpose-driven companies. After networking with Silicon Valley VCs for a decade during the Web 2.0 years when I ran a large social networking site, I felt a lot of push-back when I told them I intended to work exclusively on for-large-profit businesses that also generated a direct social benefit. The response was mostly that they’re novelties or not good VC bets.

But study them closely and you’ll find a very different story. Successful profit from purpose companies are almost always strategic deployments based on first principles, concluding that enough customers reliably prefer quality product at a fair price if it also reflects their personal values. Yet the traditional response by venture capitalists–and one I still often hear today–is they don’t want their profit de-maximized by a second bottom line. Conversely, impact entrepreneurs are often concerned that their impact will be de-maximized by servicing financial returns first. But the best for-large-profit-from-purposes find that the purpose is what generates the sustaining financial returns, and it is that profit which throws off lasting impact. For these businesses, the profit and purpose are interlocked and the way to maximize profits is consistently providing the purpose.

Why don’t you want to build highly profitable business that can provide impact more reliably than your future donations?

When I speak with traditional-minded VCs or impact founders here’s what I hear, followed by my counterpoint.

Traditional-minded VCs:

“I don’t like it when the greed part of my brain gets mixed up with the do-good part?”

I’m sorry you don’t understand that purpose is marketing spend for the new generation.

“Why don’t you just earn your wealth first, and then donate it afterward?”

Why don’t you want to build highly profitable business that can provide impact more reliably than your future donations?

“We don’t invest in charities?”

Charities don’t provide financial returns. I’m talking about for-large-profit businesses.

“Building a successful business is hard enough, why do you want to make it harder?”

Very few businesses are easy. Most require executing on a high level-of-difficulty. Why not make purpose the competitive advantage instead of fighting it out in a battle royale?

If your grown baby can’t protect itself from market forces, you didn’t raise it right.

Impact founders have similar thoughts about VC money:

“I won’t IPO and put my company at the mercy of public markets.”

But you will accept the risk of having to raise money at hard times if there are a bad couple years?

“I will never sell. It would be like selling my baby.”

If your grown baby can’t protect itself from market forces, you didn’t raise it right.

FOR-LARGE-PROFIT-FROM-PURPOSE BUSINESSES ARE NOT A PARADOX

Their purpose is what drives profit and the ability to outcompete in their market. And their profit is what allows them to outlast foundations and government programs trying to provide the same purpose. Furthermore interlocked profit-from-purpose businesses can take significant market share in even crowded sectors.

They can unlock large markets that existing mercenary businesses didn’t even see in front of them. Then, once established, profit-from-purposes intrinsically create highly defensible moats around themselves. Competitors can’t simply knock them off by matching product, price, and convenience, they have to also match brand message, good governance, customer experience and satisfaction, supply chain excellence, and company values. It’s also important to understand income isn’t lost on purpose spend: it’s usually a wash thanks to reduced marketing budgets and higher employee and customer retention.

PROFIT-FROM-PURPOSES CAN ALSO INTRINSICALLY LAST LONGER THAN THE AVERAGE S&P 500 COMPANY

These businesses employ non-extractive models and their constant commitment to their customers’ values naturally evolves them in lockstep with their revenue base. Most companies that find a good product milk it for as long as they can with endless marketing spend. A profit-from-purpose must constantly improve their offering to stay meaningful to their customers, forcing them to innovate to stay with the times.

In the old day, Ben & Jerry’s never wanted to sell because they never trusted the acquirer would uphold their ethics. In the end, they went with a high-ethics buyer, but what they didn’t realize was that customers prefer Ben & Jerry’s because of the purpose as much as they do the flavor. If the purpose went away after an acquisition, so would the customers. Now even mercenary investors and acquirers know they have to maintain the company’s purpose to keep driving profit growth. Bain & Co. bought 50% of TOMS Shoes and Campbell bought Plum Organics, yet a customer would never know there was any leadership change.

SOURCE: Fast Company