Socks and Pencils

 

Source:  Petagadget.com

Investing in Social Solutions

     Imagine you have a fantastic idea for a business that will both earn a profit and help solve a social problem.  Let’s say you’ve decided to solve the problem of school children in Urzburgistad not having pencils to do their schoolwork.  In your research, you’ve discovered that the women of Urzburgistad are extremely talented at knitting socks, but because there are no sheep in Urzburgistad, importing wool is prohibitively expensive so they usually only knit socks needed for their own families.  You come up with a brilliant idea:  You can provide startup funds to get the women the wool and knitting needles they require, and help them build a business exporting their beautiful handmade socks for sale in luxury boutiques.  By setting a high enough price point, a portion of the profits can be used to buy pencils for the schoolchildren. 

     Sounds great, right?  But where do you get the initial startup funds to buy all that wool? 

     You might look for donations, but that’s a tough sell.  A bank loan is a possibility, but they’re going to want repayment fairly quickly and with interest.  Grants are great, but difficult to get and time consuming.  These kids need their pencils now! 

Impact Investment  

     There are companies out there whose sole mission is to invest money in startup businesses that focus on social impact.  Entrepreneurs present their idea and business plans to the company, along with projections about growth, profitability, and specific social problem impact.  If the company decides the proposal has solid potential, they will invest and get the business off the ground.  Impact investing is not charity.  It evolved to address the failure of charitable models to effectively solve social problems.  Charity based organizations rely on grants and donations, which are not sustainable long-term.  Impact investors discovered that by investing in local entrepreneurs who could address local problems using sustainable business models, their investments had a much greater impact on social problems than the charity or philanthropy model.  Investing in a social business whose social mission is directly tied to their core business is the goal of impact investment.  Impact investors require a return on their investment, which in turn motivates the social business to ensure a solid business model and profitability along with social interventions. 

     One company that sets a high standard for social entrepreneurs is Warby Parker.  In the early 2000s, four college students came up with the idea to start an internet-based business producing prescription eyeglasses at a lower cost than the brick and mortar suppliers were offering.  One of the students was frustrated at having to spend hundreds of dollars for a pair of glasses, when he knew the cost of producing them to be significantly lower.  The students were enraged at the price gouging in the eyewear industry, and the disadvantages caused to people who could not afford the prices.  They built an innovative, wildly successful business which now provides free eye exams and glasses to millions of people and sells stylish, high quality prescription eyewear both online and through “showrooms” at a significantly lower cost than previously established merchants.  Their business took off so quickly they found they needed additional capital to accommodate the rapid expansion and growth, so they sought out social investors to provide the necessary resources.  Warby Parker pioneered the “buy one, give one” concept of corporate social responsibility in the eyewear industry, providing one pair of glasses to people in need for each pair purchased.  Their rapid growth, innovation in a previously monopolized market, and solid business plan attracted social investors and they are now a highly successful and impactful entity.  While a pair of glasses won’t alleviate world poverty, it can make a difference to someone who is trying to gain employment or attend school, and allow them to succeed and become financially stable.

     Muhammad Yunus stated he would like poverty to only exist in museums.  While this is a wonderful sentiment, decades of charitable organizations and philanthropy have not made a dent in poverty.  Social investing is a step forward, but unless the entire business world engages in passionate social responsibility poverty will never be completely eliminated.  There are simply too many people in the world and too few resources.  Today, over 780 million people live in extreme poverty.  That figure is increasing constantly.  As the world’s population increases, resources such as water and farmland are more thinly stretched.  Employment and income opportunities cannot support the needs of the people, and poverty increases.  Yunus’ dream is a nice one, but without a sharp turnaround in how the global community functions poverty will continue to increase as population grows and resources diminish.

     So, about those socks and pencils?