I spoke on investing in early-stage social enterprises at the recent Triple Bottom Line Investing (TBLI) conference (29-30 May 2008). The talk starts off with elements from William Easterly’s new book - The White Man’s Burden. I would recommend it strongly to anyone intending to join donor agencies, foundations and international development agencies. I think it’s possibly the biggest mistake anyone can make in development - joining these traditional agencies.

Easterly contrasts the 2 archetypes typically found in the development sphere - Planners and Searcher. Planners represent most traditional development actors. These groups tend to have a very top-down approach to development; proposing mainly ineffective big plans that require a lot of resources.

Searchers, on the other hand, are ready to admit they’re clueless about the solution and are more interested in getting to know the needs of the bottom of the pyramid and devising solutions to meet these needs. The creation of microfinance is a clear example of an entrepreneur like Muhammad Yunus spending time with the poor and actually developing an innovative, sustainable and scalable solution. In essence, Searchers are social entrepreneurs.

In order for more innovative “searcher”-like solutions to be implemented, appropriate financing mechanisms have to be created. Some of the biggest problems with traditional development financing include:

1) donor agencies base their performance on the amount of money doled out as opposed to the impact created on the ground

2) social impact is difficult to measure and quantify; and cannot be universally applied nor can they be scaled

3) projects that receive grant funding shape themselves as grant recipients - they operate to receive grants and provide the necessary reporting to the donors; no thought is put into the long-term financial sustainability of the project; as a result, these projects become too grant-dependent, are unable to develop or stay afloat in markets

4) donor funding is in the wrong areas or maturity stages of the markets

5) lack of feedback and accountability - as a result, there’s no incentive to make the right solutions work

when in reality, the landscape should look like this:

1) donor agencies should collaboratively develop or come to a consensus on outcome indicators and relevant data to ease the process to measuring and benchmarking impact; impact should not be measured by the amount of money spent but by the quality of work it is spent on

2) donor funding should act as pre-investment instead of investments. it should be directed to most risky investments or underdeveloped markets

3) innovative social investments (loans, equity, jobs contracts etc) should be paired with maturing social projects; this will help these projects make the transition from grant-based projects to sustainable social enterprises

As a result, there is a crucial need to bridge the gap between pure grants financing and financing mechanisms designed for social enterprises.

The gist of my presentation can be found here:

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I haven’t written for sometime and I find my aptitude for it deteriorating. All through April and mid-May I was quite tied up with the preparations for our regional business planning workshop for young/ early-stage social entrepreneurs. Bringing together 19 young social entrepreneurs (ages ranging 23 - 33) in Kuala Lumpur (in conjunction with WCIT), Rahul, Simon, Sunit and I got to working with each of the entrepreneurs’ business plans.

We went through everything an entrepreneur needs to think about and plan for during venture implementation - vision, mission, business model, social impact assessment etc. Through my work, I find that there are usually 2 types of social entrepreneurs:

- socially-tipped

A socially-tipped entrepreneur has a very strong social mission but has little or no idea of his/ her business model. Typically, this type of entrepreneur ends up relying on grant support to run the venture. We all know purely grant-based ventures end being chronically undercapitalised and are unable to expand the coverage of their services or products. My passion lies in helping socially-tipped entrepreneurs build their business models which is in essence diversifying their income streams from grant funding. This could include nominal fees, in-kind support, micro-credit packages etc.

- business-strong

These type of entrepreneurs run commercial businesses with strong CSR programs (CSR from traditional perspective). Our interest is to help their ventures optimise the creation of social and/or environmental value without sacrificing the creation of economic value (profits). The goal here is to truly create sustainable/ blended value entities.

Update: Andy Savitz commented on my article on my previous blog:

Click here to access my article which was published in the Bangkok Post (4th Nov 2007), or simply continue reading below:

In The Corporation, what is now a monumental documentary, Ray Anderson, founder of carpet tile company Interface, confesses to his plundering past, “One day early in this journey it dawned on me that the way I’d been running Interface is the way of the plunderer; plundering something that’s not mine, something that belongs to every creature on earth. And I said to myself, my goodness, the day must come when this is illegal, when plundering is not allowed. It must come. So, I said to myself, my goodness, some day people like me will end up in jail”. Ray’s ‘confession’ marks a tipping point in the world of business and economics.

For a long time, we have taken for granted that business can rape and pillage the planet in search of profits while handing out small amounts of philanthropy to non-profits to clean up the mess that is left behind. Capitalism, as practiced today, might be financially profitable, but it is definitely unsustainable for human development. We have failed to attach values to our largest and fast depleting stocks of capital - natural resources, living systems and the environment. We extract raw materials at really low costs, use labour and technologies to transform these resources into products which are ultimately sold for profits, and then somehow discard the waste created somewhere.

At the same time, we have ingrained ourselves in a mindset that has long become obsolete. We continue to delineate for-profit entities as creators of economic value and non-profit organizations as creators of social value. There are many inherent problems with this mindset. We can clearly see that the creation of value in either the for-profit or non-profit sector is not created in isolation. Businesses do create a great deal of social value as well as economic value. By creating jobs, paying taxes and providing products and services to people, they are intrinsically creating social value. Non-profits also create economic as well as social value; in many countries, NGOs represent a significant part of the national GDP.

The other problem with this mindset is that it sanctions companies to engage in social programs (corporate social responsibility) which are external and at most irrelevant to the core of it’s business model. It also advocates many non-profits to rely on the ‘chump change’ in terms of charity or grants from companies. Although it does sound charming for a car company to engage an NGO to raise awareness on saving turtles, it doesn’t help it become ‘sustainable’ in the long-run. Such practices have become public relations exercises aimed at creating the illusion that corporations are concerned citizens like the rest of us.

Over the past few years, a small, but growing group of business leaders is beginning to acknowledge the need for traditional business thinking and practices to be reformulated to accommodate a more sustainable model that creates and maximizes not only on economic value but also social and environmental values at the same time. This new philosophy is based on emerging evidence that business performance correlates highly with social and environmental conditions. Like a plant, it’s growth will be stunted if it isn’t in an ecosystem that provides access to supportive elements such as sunlight, water, fertile soil, and proper care. In short, it has become profitable to be sustainable.

The debate whether business should become more accountable to society and the environment can be traced back to era of Milton Friedman. He was a strong advocate of laissez-faire capitalism. In his book, Capitalism and Freedom, Friedman, wrote, “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits…” To burden business with wider goals, he argued, was “pure and unadulterated socialism”.

The opposing views of Ray Anderson and Milton Friedman show us how polarized the world is. On one side we have traditional business leaders and intellectuals who believe that the current form of capitalism is a social good by itself and that markets should not be burdened with responsibilities outside the core of business. And on the opposing side are the new business and nonprofit leaders and intellectuals who believe business is accountable for more than the creation of pure economic value because decisions made in the business sphere do create social and environmental repercussions, and vice versa.

The signs that we’re living in a post Friedmanesque world are fast emerging. You wouldn’t have to look far to see how radically the climate is fluctuating, the widening gap between the rich and the poor in a period of tremendous wealth, and the sharply declining supplies of our most basic commodities such as clean air, potable water, arable land, fossil fuels, as well as vital industrial commodities such as aluminum, steel and silicon. If business doesn’t change its ways soon, we’re screwed.

In their book, The Triple Bottom Line, Andrew Savitz and Karl Weber claim that “… the truly sustainable company would have no need to write checks to charity or ‘give back’ to the local community, because the company’s daily operations wouldn’t deprive the community, but would enrich it”. They continue to add that “sustainable companies find areas of mutual interest and ways to make ‘doing good’ and ‘doing well’ synonymous, thus avoiding the implied conflict between society and shareholders”. In other words, a sustainable company is one that creates profit for its shareholders while protecting the environment and improving the lives of those with whom it interacts.

Companies should think of sustainability as more of an opportunity than a challenge that drives them away from their core. Opportunity in this sense can present itself in many ways such as, an entry into new markets through the development of new products and services, reduced energy costs, improved customer relationships and a happier workforce. Ultimately, companies that embrace sustainability can actually help drive innovation and boost profits.

Traditionally, carpet tile manufacturers like Interface are responsible for using immense amounts of energy and creating lots of waste during its production processes. It’s more distressing to know that once the carpets have worn out, they’re simply discarded into landfills and remain there for thousands of years. Today, under the leadership of Ray Anderson, Interface intends to become one of the most sustainable companies by 2020.

The company is experimenting with a new business model where, instead of selling carpets to its customers, it has begun leasing floor-covering services to them. At a small monthly fee, Interface will maintain and replace the carpets whenever necessary. This has helped reduce overall manufacturing, energy usage and waste created. It has also helped create more jobs that cater to the maintenance of the carpets. Additionally, the company’s customers are happy that a once capital investment can now be treated as a lease expense. All in all, Interface has been able to strengthen its relationships with its customers.

Addressing climate change presents a huge opportunity for many existing and emerging companies. In 2005 General Electric (GE) launched a new initiative called Ecomagination which aims to develop clean technology to help its customers reduce their environmental impact. Suzlon Energy, a new kid on the block, is reported to be one of the world’s top players in alternative energy, with a global market share of six percent. Located in India and headed by Tulsi Tanti, this eight billion dollar venture not only manufactures wind turbines for global demand, but also develops and manages wind farms. Tanti first became interested in wind-power when he was trying to look for ways to lower energy costs of his original business, a textile mill.

The shift towards sustainability as an opportunity is undoubtedly emerging in Thailand too. A local silk-fabric manufacturing plant, Green Ville Trading, is clearly reaping the benefits of using cleaner manufacturing technology and alternative energy sources. Led by Pilan Dhammonkol, the plant has developed an innovative fabric dying technique that uses fewer environmentally dangerous chemicals and is less energy intensive. This new technique has cut the production process from previously four hours to just three minutes and has reduced the plant’s energy consumption by about eighty percent. Recently, the plant received the EU Flower environmental certification, making it the world’s first silk-fabric maker that is able to fulfill the European Union’s environmental preservation standards.

Opportunity is not just limited to the realm of energy and climate change. Thailand-based Swift addresses both health foods and poverty reduction at the same time. Located in Kampaengsen, it is one of the country’s leading suppliers of organic fruits and vegetables. The company’s most popular produce include organic asparagus, corn, mango and mangosteen, which it exports mainly to markets in Japan and Europe. With sales of up to one billion baht annually, Swift contracts more than ten thousand family farms in the region while helping the farmers attain fairer prices for their produce and meet the food safety standards set by the countries it supplies to.

Even the way we design and manufacture products is subtly changing. In today’s industrial model, almost all of the products we manufacture are simply discarded in landfills once they are of no value to us. This ‘cradle to grave’ model is clearly wasteful and unsustainable. The ‘cradle to cradle’ design concept, developed and popularized by Michael Braungart and William McDonough, calls for the creation of sustainable products through the adoption of ecologically friendly design. The idea is simply to create products in a waste-free manufacturing process, using only reusable, biodegradable, or consumable materials.

These are interesting times to be living in. We’re witnessing the slow collapse of the old structures of business and economics and the inevitable transformation to a more sustainable form of capitalism. It cannot be highlighted enough that the adoption of sustainability holds more opportunities than challenges ahead. So the question remains, how do we move forward from here?

If you’re looking for a one-size-fits-all solution for business to become more sustainable, there just isn’t one, at least as of yet. Instead, a good starting point for companies to get onto the path towards sustainability, is to measure their performance not just in terms of the traditional financial bottom line, but also by their impact on the environment and the community in which they operate. The triple bottom line approach, originally proposed by John Elkington, is meant to help companies measure, document and report on all three of its bottom lines - economic, social and environmental.

In fact, companies that measure their performance on the sustainability yardstick would be able to unlock more opportunities. They can develop tailor-made strategies and solutions that can open up further opportunities beyond economic values, a more holistic approach that can include the social and environmental components as well. It is hoped that in the new model capitalism, companies that aim to do well financially, would only be able to do so by taking into account how its business affects the community and environment too. The day may soon arrive when a company can claim to be profitable only when it reports positive returns on all three of its bottom lines.

S. Dev Appanah runs a social venture program that supports young social entrepreneurs in the region. Visit his blog at www.deviantsadvantage.com