Tuesday, March 2, 2010

Issues, Trends, and Opportunities

Friday’s social entrepreneurship panel at the Stanford Graduate School of Business 2010 Conference on Entrepreneurship included our own Peter Frykman along with Revolution Foods founder and CEO Kristin Groos Richmond, and investors Russ Hall of Legacy Venture and Jed Smith of Catamount Ventures. Moderated by Gina Jorasch, Stanford GSB’s Director of its Public Management Program, the panelists explored the unique position of social enterprises balanced between socially driven non-profit organizations and traditional profit maximizing corporations.

The session focused on the perpetual tension between social mission and profit that serves as a backdrop for the day to day operations of these hybrid businesses. Moderator Jorasch led the discussions to address some basic questions:

How does a social entrepreneur acquire funding?

A pilot study can demonstrate the validity of an idea to potential investors
, Frykman and Richmond agreed. The Revolution Foods pilot program provided an invaluable way for its investors to connect with the students it serves and the meals the company supplies. Demonstrating the business’s impact with real children and their neighborhood school brought the concept to life. Taking a slightly different approach, Frykman found that piloting Driptech in India generated the sales that provided the impetus for his first round of angel funding.

Both philanthropy and investment are good sources of capital.
The philosophical differentiation between the two is no longer as sharp as it once was. According to Smith, there are plenty of great investors who are more mission driven. Frykman confirmed that all of Driptech’s investors are interested in financial as well as social returns. Hall emphasized that foundations specifically fund mission and program related investments. No matter what the source, it is important to connect with funders who are intrinsically aligned with the direction of the business.

Foundations, venture capital, and angel investors can all play a role.
Smith prefers the professionalism of venture capital funds. Frykman needed institutions that could move quickly as well as go the distance. Individual angel investors have proven to be the more appropriate choice for Driptech in its early stages. Hall added that foundations tend to be conservative, hands off, and dispassionate. VCs are more willing to offer experience and wisdom. Richmond strongly supported including investors with operating experience.

Commercial debt for early stage companies is difficult to find
and always has been. The debt market for these ventures is completely cyclical, Smith warned. Loans can kill a company, so an entrepreneur needs to be extremely thoughtful as to when to take them on. Lenders need to be thoughtful, too, he added.

Always have your business hat on
, Hall advised. Whether or not the returns of a social enterprise are at the market rate, funders want to know that you have a trustworthy management team, that you can reach scale, and that you have a business plan. Smith added his emphasis on focused objectives together with a culture of innovation and experimentation.

• How does a for-profit social venture protect its social mission?

Authenticity is key
, according to investors Smith and Hall. It is the first requirement for considering social impact across every aspect of a company’s value chain.

Build the social mission into the product offerings
, both Frykman and Richmond advised. This approach by Driptech and Revolution Foods has proven to be an effective means of minimizing potential incongruities between the dual bottom lines.

Establish a mission-driven company culture
with absolute alignment of the interests of the whole team, including investors, and a strong brand. Panelists unanimously confirmed this to be essential.

• How does a company measure social return?

Early stage companies measure activity
, said Hall. Accordingly, Frykman monitors the number of customers Driptech serves. Since customers purchase drip systems themselves, their financial commitment to the product testifies to the value they receive from it. Likewise, for Revolution Foods impact is a matter of scale. Having served seven million meals meeting rigorous nutritional standards, Richmond trusts the in depth testimonials of school staff to verify her company’s success.

Later metrics target efficiency or productivity
, Hall continued.

Measuring effectiveness is most important
, Smith and Hall agreed. Because these measurements are difficult and require more scientific methods, they tend to happen last.

Hall and Smith believe social entrepreneurship is still a young and emerging approach to doing business. In the past, the delivery of social value was considered to be the exclusive domain of non-profits. Now social entrepreneurs like Frykman and Richmond are revolutionizing that thinking, proving that social value can be provided across a broad spectrum of business models. Consequently, Smith and Hall see a major opportunity to fill the needs of the poor and operate at a profit. “It’s a unique time in history where you can do both exceedingly well,” said Smith. He sees the business powerhouses of the future arising from the likes of Driptech and Revolution Foods. That’s great news for investors as well as society.

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