Scaling Social Ventures

Pepsi – selling chips and soda

You can travel to almost any part of the world and you’ll find products made by PepsiCo. You’ll find Lay’s potato chips in India and Argentina, in France and Israel; you’ll find Pepsi drinks in Egypt, Germany, Canada and Brazil. In the third quarter of 2010, PepsiCo made $1.92 billion in profit.

Let’s look at that number again: in 90 days, during a global economic turn-down, PepsiCo sold soda and chips around the planet to earn two billion dollars in profit.

The performance of PepsiCo is a testament to the power of business. How does this happen? Clearly there’s a lot of complexity to running a global marketing and manufacturing operation. But we can still boil PepsiCo’s worldwide scale down to a few key elements:

1. It creates something that lots of people want.
2. It sells its products for a lot more than it costs to make them.
3. It has access to a vast amount of capital that finances its growth around the world.

It’s #2 – the big profit margin – that makes possible #3 – access to capital. Investors put lots of money into PepsiCo, because they know those profit margins are going to produce dividends and create a high return on investment.

Esperanza – lifting communities from poverty

Let’s look now at Esperanza International, a microfinance institution in the Dominican Republic. Esperanza makes a profit – but not much. Its goal is not to make a lot of money for investors; it is to help women come out of poverty permanently, transforming families and communities.

Unlike PepsiCo, Esperanza provides its service for the lowest possible cost at the expense of large profits. Why? Because its revenues come from the poor, and Esperanza believes it is important to leave as much money as possible in the hands of the poor that it serves. Its mission is to eliminate poverty, not to enrich investors.

Unfortunately, that decision also means Esperanza doesn’t get access to capital as PepsiCo does. Investors will not give Esperanza large and continuous infusions of capital to scale its operations, even though it is profitable – because they can make a lot more money investing their funds in PepsiCo. This is why PepsiCo is on every corner of the planet and Esperanza is not.

Notice that the social good performed by an organization doesn’t figure into the financial equation. It doesn’t matter that PepsiCo sells chips and Esperanza provides a path from poverty. All that matters is the return on investment.

Social Ventures Solve Important Problems

There are thousands of small-scale low-profit social enterprises around the world. They are working to solve urgent problems for society and for the poor. They provide medical services, housing solutions, sustainable energy solutions, clean water operations, anti-poverty programs, educational offerings – all the things we need desperately in our world. But even when these operations are capable of solving problems worldwide, they will never scale fast enough to address these problems on a global basis. They operate like Esperanza, filling an important need but earning only a small profit. There aren’t enough philanthropists in the world to put the needed capital into them. The vast sums of money that are available to finance growth for ExxonMobil, Google, PepsiCo, Bank of America, Microsoft – companies that generate substantial profits and thus high returns for investors – are not available to these important social ventures, and so the problems that they could solve worldwide remain unaddressed.

How To Finance Social Ventures

It’s always a better idea to work with existing forces rather than trying to change them. Asking investors to take a lower return in exchange for improving social conditions is an idealistic – and unrealistic – dream. Lobbying governments to provide capital is the same. That’s why we have invented the Good Returns model. This model works with existing market forces to drive capital into social ventures. It supports the desire of investors to make high returns, of entrepreneurs to create wealth for themselves, and of consumers to get the products they want at the lowest price.

Good Returns is simple. Any small business can do it: when it’s normally time to pay a dividend, instead 100% of the dividend is loaned to a sustainable social venture for one year, interest-free. After that one year, the social venture repays the capital and the investor receives his dividend.

Example: at the end of each year, my company Soap Hope calculates its profits and pays its taxes, then reserves some of its cash for the next year’s capital needs. Every remaining dollar goes to microfinance institutions so they can make more loans to more women. After a year, these institutions repay Soap Hope, and Soap Hope then distributes that money to its investors.

Why is this not philanthropy? Because the investor’s return is much higher in a Good Returns company than in a “normal” company. Because Soap Hope operates under the Good Returns model, we are able to inspire our customers to levels of loyalty and viral marketing that a traditional business never could. “100% of profits are invested for women in poverty” – it’s a powerful draw for customers. They can change the world just by choosing Soap Hope over a competitor. Soap Hope receives hundreds of messages each month from customers who are thrilled by our social mission. A traditional company would need a large marketing budget to achieve the same goal. Soap Hope has thousands of customers working to spread the word.

Is a one year loan of any use to a social venture? Definitely. If you think about the flow of money, the Good Returns model creates a semi-permanent capital pool. Each year we are repaid the prior year’s loan so investors can take their share – but we replace the capital with the new year’s profit distribution. When thousands of small companies operate together this way a very large pool of capital will be created to power social ventures.

Good Returns is organizing to provide services to entrepreneurs and social ventures around the globe. Some of those key services:

  • A program to teach entrepreneurs how to implement Good Returns in their business
  • A Good Returns seal to tell consumers their purchases are helping to solve the world’s biggest challenges
  • An insurance bond that guarantees investors will receive their dividend after its year of service
  • Education for nonprofits to teach them how to transition from a fundraising model to a sustainable low-profit social venture model

Social ventures have already figured out how to solve pressing world problems. They just need capital to scale their operations. Good Returns will generate billions of dollars for social ventures – all financed by consumers who choose companies that are working for good in the world.

Please share the Soap Hope mission – empowering institutions that help women in poverty around the world – with friends,  family, and the media. Buy from Soap Hope and help change the world.

6 thoughts on “Scaling Social Ventures

    • koralaz, we believe we will show that the impact to the investor’s return in waiting one extra year to receive dividends is more than offset by the financial benefits of customer loyalty, person-to-person marketing, and employee passion. We won’t be able to prove this until we have more companies participating and more data, but we believe it’s a reasonable assumption and one worth testing with experiments like Soap Hope.

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    • Hi pittor, the possibility of a “down” year is a real one, so it’s very important for us to plan with our nonprofit partners along the way and keep them informed of our performance and plans during the year. Because our partners are all sustainable, as long as we do not make up too large a portion of their capital portfolio, a down year is not necessarily a problem. Of course it’s always nice when we can invest more each year, as has been the case so far. And for the foreseeable future, since we are managing a growing pool of companies joining us in the Good Returns model, a down year for a small percentage of member companies is easily offset by the performance of the other companies in the growing pool.

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