After listening to Andrew Kassoy's talk about B-Lab's and the emergence of B-Corp, I started to think about how useful this would be to venture capital funds or other investment vehicles that are focused on socially orientated or mission-driven businesses. When Fran Seegull came in last week, she seemed to relate that they measured businesses by both the traditional ROI and how the business had accomplished their "other" bottom line, their social mission. What struck me then however was the lack of clear objective measures to calibrate this success. for example, they invested in a beverage company that promoted "health and wellness" but how do you measure this to see if they are hitting their mission?
If Funk Ventures could implement some of the B-Lab guidance and be able to rate various companies, it would give them a level of objectivity in rating their investments. In addition, it would provide additional clarity and transparency for their investors to see just exactly what kind of social impact their money is providing.
Think it would be interesting for Mr. Kassoy and B-Lab to start persuading influential VC's and investment funds to start adopting these standards for their social ventures as this would force a lot of companies to start getting certified and create a groundswell movement.
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Seeing the B-lab ratings for some of these startups would add more objectivity to the "goodness." My thinking is that there is little value to the companies at this point since B-labs' rating system is not well known, is currently targeted at upstream institutional procurement rather than consumers, and the startups are too small for it to matter to their revenues.
ReplyDeleteOverall, more objectivity behind the marketing campaigns of being "green" or "socially responsible" for VCs and companies would be useful way to distinguish between those who preach it and those practice it.
Yep, this gets back to the idea of greenwashing that we talked about in the first or second class. Without governmental regulation or relatively objective standards that are widespread and publicized throughout an industry (or the economy as a whole), it's much more difficult to distinguish.
ReplyDeleteFrom what Andrew Kassoy said, it sounds like some of the companies which have received B-Corp's approval do tout their ratings status to consumers. Is it worth it to B-Corp to drive the consumer awareness of the ratings as well, or are they better off leaving that to the companies' downstream marketing?
It seems to me that B-Corp ratings would theoretically be incredibly useful to Funk Ventures and other triple bottom line venture funds. I imagine, however, that startups might struggle to pay for membership ($75K, right?) and would likely hesitate at providing some of the metrics that B-Labs needs. Startups have lofty goals but, as a result of being so early stage, often have little by way of tangible results. Entrepreneurs may feel that they're underrepresenting their venture by reporting what it's achieved rather than what it's capable of achieving.
ReplyDeletePE firms and other later-stage investors would surely be interested, however, and those interests were well represented in Andrew's presentation.
I apologize beforehand if my candid opinion here hurts anyone.
ReplyDeleteI was not at all impressed with the mission of funk ventures - supporting the ventures who provide equivalent profit margins but also have social cause attached. I believe (and with almost all the readings pointing to this belief - including this week's good to great) that everything comes at a cost. If you want to get down to helping people, it would need resources, including finances and it will accordingly hit the profit margins. So a company almost entirely have very clear quantitative "output" analysis in terms of finances and very very unclear "output" analysis in terms of social good does not seem great (it may be good though!)
On ratings of companies, I feel that there are a lot of rating systems now starting to come in place - driven primarily by the new need in the market and hence the race to being the first most credible one. However, it seems very complicated to define an overarching set of principles guiding all the sectors. It has to be a mix of sector specific principles and some overarching ones that should lead to a good rating system. B-corp and other ratings seem like just a small step towards building those common set of principles but this domain certainly seems like heading towards the "tipping point". And, as we go forward, we need to address the problem that whole foods case discussed - can you be too large (and in this case large encompassing all the sectors) and still be very true to your real objective?
Amarjeet, I am not at all offended by your opinion, and in general, I agree with you. However, I'd like to bring a counterexample to light. When the *customer* is willing to bear the cost of increased sustainability, then a *company* can operate with high profits and with high levels of responsibility. Whole Foods may be such an example (disclaimer: I haven't finished the case yet.) They offered more responsible food than traditional grocery stores did, and as a result, they stole market share from the incumbent firms. There was a market demand for a differentiated product that offered higher levels of quality - in this case, environmental responsibility through organic farming etc. - in exchange for a price premium. In short, by passing the costs on to willing customers, Whole Foods generated higher than normal returns and did so in a way that was more responsible than the industry norms. This is a case where profits and responsibility were not a trade-off.
ReplyDeleteSo, let's look at Funk Ventures. They have a water-less car washing product. If customers were indifferent to whether they used water or not in washing their cars, then in all likelihood this would be a failed investment. However, Fran et al probably believe that there is a set of customers who are willing to pay extra, either in the sticker price or in their own time and effort, to avoid doing damage to the environment. These customers will convert to the waterless car wash product, and thus the investment will yield higher than normal returns (I assume, it would be a better investment than buying a traditional car wash station) and provide an environmental good. It all depends on tapping into a customer demand for a more responsible product.
Adam, i agree with your point of creating a responsible product for which customers are willing to pay more. But what i feel is that the responsible product also comes at an additional cost to the company and hence even if the product is priced higher, the profit margins may not be too high. In case of whole foods, they did make 3% profit (compared to industry standard of 2% profit) but their commitment to their cause would mean that they donated large amount of money for different programs. I have not done the calculation as to how much of that would have reduced their profit margins but that is the additional cost they paid for in order to be truly committed to their cause. Now would an investment firm like funk ventures would let their funded ventures do donations and take a hit on the profit returns? I am not sure.
ReplyDeleteMy point is that when you get into funding a venture with a very clear financial objective and not so clear socially responsible objective and when that socially responsible objective seems like just a by-product, can you be truly committed to the cause?
Amarjeet, I agree with you that it is probably hard for companies to stay committed to the cause with the pressures of financing. Looking at Funk Ventures’ portfolio, they also seem to acknowledge the trade-off between social and financial returns (supporting a surf park seems a bit of a stretch to me). However, why are we requiring companies/products/VCs/etc to be and do everything? I am not suggesting a Wal-Mart approach is appropriate but a net positive impact view, such that B-Corp promotes should be enough. I think the pressure placed upon companies is too great and undermines a lot of attempts to become pro-social or environmental. There will always be something more that can be done and thus always criticism. Instead, why not applaud the by-products and acknowledge the significant contribution of their collective efforts?
ReplyDeleteVery well said - there will always be something more that can be done and thus always a scope of criticism. I, however, really feel that the direction in which we are moving is correct with companies trying to look into ways in which they can contribute - and primarily as Hollender puts it appropriately because for profits to survive the engines that create them have to be fundamentally involved in global problems. So i do acknowledge and applaud their efforts.
ReplyDeleteOn another note, i also have a reason for why we require companies/products/VCs etc to do their part - it is the problem created in part by them. Pre-industrial era has most of the things done in sustainable ways and the nature used to take care of its own replenishment. With the advent of industrial revolution, things have moved much much faster than the rate at which they can be naturally sustained. I acknowledge that the standards of living have also improved proportionately in general but it has also created the economic divide where the poor still live in almost the same living conditions and face the brunt of the ill-effects caused by the industrial era without taking advantage of its benefits. I attribute a lot of changes related to sustainability that have happened in the recent years to the fact that even the rich have come to realize that if nothing is done now, the deteriorating environment will effect them as well (part of the reason why people are willing to pay more for the organic products).
So, i feel that in addition to applauding the contributions they are making, we need to also still demand more - because the problem is too big to be solved just as a by-product. And it does require all the stakeholders - non-profit, for-profit and government to come together.
I agree with Amarjeet that companies that created the problem should required by law, consumers and society to pay for them. If big corporations continue to externalize the negative externalities they impose on the society then social enterprise that choose to internalize the costs will have not space to become successful or mainstream. Big corporation internalize the benefit of positive externalities i.e. jobs, they create in form of tax credits, subsidies, etc. So they should required to pay for the negative costs they impose.
ReplyDeleteI was also not too impressed with Funk investment strategy and its decision not to take cost of social/environment mission into consideration when calculating returns on investment. The first four weeks reading point to the reality that social enterprise cannot generate same profit as a private corporation because of their capacity, small niche and additional cost to carry about the social/environment mission. If Funk’s mission is to support social enterprises then it should calculate social/environment benefits ($) with the returns on investment so its investors and consumers will know the savings the social enterprise brought to the society. This is great way to generate information for everyone: consumers, producers, investors and politicians so same types of saving are demanded or required of other social enterprise and for-profit corporations.
Its true that Whole Foods makes profit by passing cost on to consumers, however, is this the model for social enterprise that we should be promoting. In order to make profit for natural, organic and healthy that should be affordable to everyone, Whole Foods high prices excludes large population that lacks the means/ability to pay the added-value of organic products. Funk Ventures seems to be doing this too, in order to make profit, it is only working with the most successful for-profit social enterprises. This means social enterprise will not be serving majority of the population, majority of the population will not be benefiting from these social enterprise and the struggling social enterprise that do not want to pass cost of social mission on to consumers will fail or be unprofitable. This just does not sound right.
I am also bit skeptical of the B-Corp legislation because if the legislation sets lower standards then corporation will argue that social/environment movements should stop pushing for additional changes and will argue that enough has already been done. Also, companies can fulfill the minimum requirement to receive the B-corp certification and lack incentive to make additional social/environment improvement because every companies receives same B-Corp certification irrespective of how they scored. No consumer has time to read reports on how well the company scores on various components. The counter-argument could be that at least the company is doing something to address environment issues. But do we really want to set minimum standards and take the companies off the hook until the standards are changed or modified.
B-corp's legislative position is interesting, but seems like a hard sell. I don't see California being in the economic position to take a tax revenue cut in order to promote hybrid nonprofit-corporations anytime soon.
ReplyDeleteSpeaking to the issue of B-corp's use for Funk, I think the B-corp rating is too simplistic for serious investors. Intuitively I'd think investors would want to support specific issues using a rating system like this: http://socialinvest.org/resources/mfpc/screening.cfm rather than investing in a random portfolio of generally good businesses.