From profit to revenue

Rethinking the definition of a social enterprise

Profit or non-profit? This is a major question for the entrepreneurs starting social enterprises these days. The viewpoints have become increasingly polarizing, with the “capitalists” on one hand and the “do-gooders” on the other.

To slightly over-simplify, the capitalist believe “the profit motive” allows companies to solve seemingly intractable development problems through scalable, cost-effective solutions that poor people value (and are thus willing to pay for). They often view non-profits as an endless sinkhole of money for paternalistic aid workers providing services poor people neither value nor need.

On the other side, the do-gooders believe that many basic, essential services cost more to provision than the extremely poor can afford, thus requiring aid and assistance in their delivery. For them, the capitalists are greedy conmen who exploit the poor in an effort to make a quick buck.

Which side is right? Let’s abandon the ideology and explore the merit of these claims. Let’s start with “the profit motive”. The explosion of for-profit social enterprises suggests that there are many who believe in this motive, especially impact investors that are putting millions of dollars into these companies.

While these impact investors claim to be motivated by the elusive double bottom line, early results suggest this money more closely resembles aid than investment. Other than a few notable microfinance successes, there have been few social enterprises thus far that have provided reasonable returns to investors. (See also: http://impactiq.org/acumen-funds-transparent-experiment/, Monitor Report “From Blueprint to Scale”)

In the world of international development, it’s pretty clear we aren’t going to find the next Apple or Google. This is not to say that social entrepreneurship has not been a boon to the development landscape. The focus on the consumer and the bottom line has allowed social enterprises to scale more rapidly than most non-profits. The feedback loop of a consumer-focused company has created a more business-like approach to development.

Therefore, it appears the value of “the profit motive” lies not in the expectation of riches, but rather the endless drive for efficiency and effectiveness in a business whose survival depends on creating value for its customers. 

Next, let’s look at the do-gooder claim that many essential services cost more to provision than the poor can afford. On its face, this is logical: how can those living on less than $2 a day afford to pay for health emergencies, children’s education, or productivity-enhancing inputs? (See: http://www.ssireview.org/blog/entry/financial_first_impact_investing)

Just because the services cost more than the poor can afford doesn’t mean the poor can’t afford to pay anything at all. In fact, research has shown that the poor are incredibly discerning consumers – choosing low-fee private education when free government education is bad etc. The One Acre fund is a prime example of this. Therefore, even in those areas in which profit may not be possible, revenue still is. 

I propose, instead of the traditional profit or non-profit dichotomy, we think about development in new terms: revenue-generating organizations versus purely fundraising-based organizations. For revenue-generating organizations, the business survival still depends on creating value for consumers in an efficient, scalable manner.

I am not saying there is no role for pure fundraising-based development. I am saying, however, that these organizations must be subject to a much more intense level of scrutiny. Why? Because they are not subject to a constant appraisal of the value they are providing since their customers are not paying them.

Instead of the false dichotomy between impact investing and grant-making organizations, what we need are more agnostic forms of financing that are examining the value of the service provided and the cost of providing it. The Omidyar Network is the paradigm of this investment strategy: they invest in both for-profit and non-profit entities as long as the business fundamentals and value creation is present.

If more grant-making organizations and investment funds followed suit, international development capital would start flowing more directly to the most effective organizations. So, let’s stop obsessing over profit and start focusing on revenue. Maybe then, our “do-gooders” and our “capitalists” will realize they’ve both been right all along.