12/27/2011 12:08 pm ET Updated Feb 26, 2012

The Social Entrepreneur's Dilemma

So you have an idea that's going to save the world or at the very least alter a small portion of it in a positive way. Congratulations, the trends seem to be in your favor.

Be it environmental, educational, or philanthropic, the rise in "social" entrepreneurship in the past decade has been astounding. In addition, most large-scale corporations have embedded the notion of doing good into their bottom line and most MBA programs now have core classes dedicated to the topic.

Yet, in order to make a potentially game-changing idea a long-standing reality, it is highly recommended that social entrepreneurs look at their business model and ask a very simple question: Could my company be a profitable one?

Bizarrely enough, the notion of creating a for-profit social enterprise is still considered unwise, unlikely and for some, just unethical. The mission should supersede all and thus, the bottom line is subject to it. Granted, there are hundreds of wonderful and awe-inspiring non-profits out there which change the world we live on a daily basis. There is certainly nothing but the utmost respect for these entities. But before going down that road, all potential social entrepreneurs should wrestle with and fully explore the possibility of creating a for-profit company.

I first encountered this dilemma while founding my first company, Recyclebank, in 2003. As my co-founder was deeply passionate about the environment, he correctly posited that Recyclebank's goal of rewarding and incentivizing green actions would do wonders in the newly burgeoning social enterprise scene.

Yet, it took some wrestling to convince him and others that the message would reach more people and frankly, more of the less environmentally inclined, if it was a for-profit. While Recyclebank's for-profit business model engendered a few double takes in the early days (I vividly recall being told by a prominent environmental agency that it wouldn't be "fair" to other environmental entities), certainly the company's venture capital investors and more than three million members have created a sustainable business model in more ways than one. Looking at the car-sharing world further proves the point. Long before Zipcar went public earlier this year, there were a handful of analogous companies nationwide whose purpose was clear: reduce pollution through car sharing. The majority of these startups were non-profit and many achieved great successes initially. Yet, while these competitors were busy lobbying for government grants or looking for corporate donations to fuel their expansion, Zipcar's access to the capital markets allowed them to spread more rapidly, market their message more broadly, and partner more effectively with customers. The environmental goal remained the same, but Zipcar's dominance over the market and recent IPO can, in many ways, be traced back to its dedication to financial returns. Similarly, the global reach of Terracycle, whose purpose is to eliminate waste by repackaging it into consumer goods, has shown that the investment community is eager to back financially sound but mission-based startups. With operations in 18 countries, a decade of growth behind it, and millions of tons of waste diverted from landfills, it's fair to say that Terracycle's for-profit model has served the world at large well. Recent startups like ElectNext, Pledge4Good, and Malo Traders are tackling the political, charitable, and African hunger arenas, respectively, with like minded for-profit attitudes. Ultimately, before launching a social mission-based startup, be sure to ask these three questions (the above companies likely did):
  1. Is it absolutely imperative that we be a non-profit? Just because your industry may historically produce non-profits or is chock full of them, does not automatically mean you should paint your company with the same brush.
  2. Does my customer care whether we are non or for-profit? In the case of car-sharing, the answer was clearly no. Customers cared about reducing their car ownership in a convenience and cost effective way.
  3. Can it be profitable? Without question, this is every startup's crystal ball equation. Yet, if the social enterprise can be a significant and realistic revenue generator over a sustained period of time, then make it so. Keep in mind to underplay the potential for advertising revenue, though. If it's not core to the business, this will be a hard sell to potential investors.
The world needs many more social entrepreneurs for sure, and while it may seem counter-intuitive, it never hurts to ask these questions. After all, it is actually possible to serve two masters: the mission and the bottom line.