David Brodwin is a cofounder and board member of American Sustainable Business Council. Follow him on Twitter at @davidbrodwin.
A new crop of businesses loosely called "for-benefit" is bridging the gap between for-profit corporations and non-profits that promote social welfare. They pursue a blend of financial, social and environmental goals. Together, they comprise a new and emerging sector called the "Impact Economy."
For-benefit businesses have the potential to change the world – if they can grow and scale up quickly enough. In this week's column, we'll look at what it takes to create a successful strategy for the Impact Economy. Next week, we'll look at how regional clusters of for-benefit businesses can magnify the impact of this emerging sector.
Madcap Coffee Company exemplifies the new for-benefit company. A purveyor of high quality specialty coffees, both wholesale and retail, Madcap has committed itself to socially responsible business practices. Instead of buying beans indirectly, Madcap established direct relationships with growers in Columbia, El Salvador and elsewhere. Madcap works closely with farmers to improve its crop, and can offer the farmers a better price since the farmers are providing a higher quality product.
"Our role is to incentivize the farmers to pursue quality and experimentation through offering higher prices and commitments to buy their product," says Trevor Corlett, CEO and co-founder of Madcap. "Then in some cases [we] work side by side on the growing, harvesting and processing to continually try to achieve superior results." Both the farmers and Madcap benefit from this arrangement.
Madcap's commitment to socially responsible business practices extends to its local community in Grand Rapids, Michigan, as well. Madcap pays above-average wages, and commits itself to zero waste through an aggressive composting and recycling program.
Madcap's connection to its local community is a major reason for its success, says Elissa Hillary, executive director of Local First. Local First is one of a new kind of trade organization, which represents Main Street businesses that are committed to nurturing vibrant local economies as part of their business strategy. (Local First is in turn part of the BALLE network – the Business Alliance for Local Living Economies – which supports local for-benefit businesses nationwide.)
According to Hillary, "Communities that have higher proportions of local [business] ownership are physically healthier. They are more walkable, and have more diversified wealth." In return for the business supporting the community, the community supports the business. Grand Rapids residents appreciate the value of local business, and many prefer to patronize independently owned and operated business rather than national chains. And Madcap's customers appreciate the partnership Madcap has with farmers in the developing world. They want to do business with a company that shares their values.
Madcap Coffee illustrates the strategic principles that allow many companies to do well while doing good. First, these companies develop an innovative supply chain or product that has positive social impact. Madcap's social impact extends to the developing world – but in many cases, it centers on the local community. This same innovation that provides social impact also leads to higher and more consistent quality in the company's core product or service.
Second, these companies have learned how to market their values to their customers just as they market the product or service itself. This translates into greater customer loyalty, greater differentiation in the market, and often the ability to capture and maintain a premium price.
For successful for-benefit companies, doing good has a positive economic return rather than a negative one. It is not charity. Done right, it need not dilute returns to shareholders – although it may delay returns during the early stages of the business. For-benefit companies challenge conventional business wisdom, which holds that anything done to benefit workers or suppliers just drives up costs and reduces competitive advantage.
Scaling up the Impact Economy
For-benefit businesses use the power of business to solve important social problems while making a profit: They create jobs, reduce environmental damage, and bring needed goods and services to underserved populations. If they can grow more quickly, the benefits to the economy and society can be substantial.
Unfortunately, it's not easy to launch a for-benefit business, or to convert an existing business over to a for-benefit model. Many things must be done differently:
- Different legal structures are needed, for example the Benefit Corporation (B-Corp) model. In many cases a hybrid structure with both a for-profit and a non-profit entity is necessary to keep both parts of the business on track.
- Different sources of capital are needed, because the different parts of a for-benefit business may attract different kinds of capital with different time horizons and tax considerations.
- Different marketing methods are needed, because it's just as important to market the company's mission as it is to market the company's goods and services
- Different approaches to community and stakeholder engagement are needed, because many for-benefit businesses require close and ongoing community involvement in order to cultivate customers and other stakeholders.
Last week, Harvard University convened an invitation-only summit called Growing the Impact Economy to explore what it takes to support the formation and growth of for-benefit businesses and magnify their impact on the economy. Participants came from leading corporations, including Deutsche Bank and Booz Allen Hamilton, that hope to profit from being at the forefront of this trend. Also prominent at the conference were associations that facilitate the Impact Economy, notably the Business Alliance for Local Living Economies and Fourth Sector Network. The summit explored the power of regional economic development based on creating clusters of for benefit businesses. In part two of this column, next week, we'll explore the power of regional clusters to promote the Impact Economy.
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