Social entrepreneurship has been a trend. I think it’s great to use capitalistic enterprises to solve problems. But, there are some troubling trends I am seeing within social entrepreneurship. I have written checks to companies that clearly perform social good based on any standard. Brilliant and Public Good are two examples.
As my friend who passed away last year Illinois Professor Paul Magelli used to say; “If you don’t create revenue and earn a profit, you’re doing a hobby or charity work. It’s not a business.” I disagree with anyone that uses “double bottom line accounting” to figure out profits and losses. That brings all kinds of judgments unrelated to operating a business into play that can’t be quantified across a spectrum. What’s good and fair to you might not be good and fair to me. Tax-wise, it’s better for investors to write a check to charity than invest in a startup that is masking as a charity.
If revenues are higher than expenses, the business can grow and sustain itself. If they aren’t, it can’t.
Even the types of businesses that are “impact investments” can be messy using double bottom line accounting. Investing in an oil company might look pretty good using double bottom line accounting. Here is an extreme example.
Because oil companies refine gasoline, they allow people to be more mobile than they would be on a bike, horse, or on foot. Oil companies efficiently allow people a means to get to work, and get other places in their lives. They help make connections between people. They speed commerce and increase standards of living. They create trillions of jobs outside of their companies. Double bottom line accounting all depends on how I personally value the benefits the oil company creates versus the negative externalities of the pollution it creates.
Social entrepreneurs should use GAAP accounting like everyone else. Investors should demand it. If and when it becomes time for the company to sell, the person on the other side of the table is going to use GAAP accounting and the principles of finance to value the company. Better to get with the program than muddy the water.
But, the troubling trends in social entrepreneurship are more than just using the wrong accounting system.
Some businesses are attacking problems that are unsolvable. World hunger would be an example. It’s too big. There might be investible businesses that solve problems related to it. However, solving the macro problem is impossible. Another problem, racism, is way too big and complex. There are too many permutations and interpretations of it. Social entrepreneurship isn’t going to solve that broad problem.
I have mentored some social entrepreneurs. I mentored at Impact Engine in Chicago. One year, during office hours I ran into three or four companies and they all became a part of the Impact Engine class.
Recently I have been seeing business plans that are clearly social entrepreneur type businesses. The trend I am seeing isn’t good. If I am honest, I am disappointed at what I have seen. The people behind them clearly are bright. I am not going to blog about the business ideas or where I even saw them. But, the business plans are missing the point.
Instead of coming up with a real business, they are just trying to surf on themes. The themes they are surfing on are hardly quantifiable or data driven. They are based on “feelings”. Feelings aren’t the same for all people. Feelings don’t scale. Pain points scale. It is lazy to surf on themes and entrepreneurship is anything but lazy.
If you are teaching entrepreneurs and focusing on social entrepreneurship, you need to focus on pain points. It’s hard because biases and themes are something you can latch onto easily. They are personal. They are distracting. Often the budding entrepreneurs want to solve a problem they have experience with. In social entrepreneurship especially, it’s really critical to focus on the exact problem you are solving. It’s easy to lose focus and get off track.
Here is an example of social entrepreneurship done right. I am not invested but I really love the team and I hope at the end of this you will be a customer or tell someone about them. An aside, they went through the Junto Institute and are better off for it.
I was a mentor for Guard Llama when they were in Impact Engine. Here is their Crunchbase profile. On April 14, they will be on ABC’s Shark Tank. Watch and you can see them pitch. If the sharks are smart, they will write a check.
Joe Parisi and Dominick Blando started the company based on their experiences as students at Northern Illinois University. They came up with the idea after an attack occurred on their campus — and the victim had her cell phone on her. Certainly, they felt feelings of fear, helplessness, and uncertainty. But, those feelings weren’t the pain point. They realized there was a need for a personal safety device that could solve the shortcomings of cellphone-based 911 help.
Aha! A true pain point! Sure. No one likes attacks, rapes, or any violent crime. Is Guard Llama solving gun violence or rape? No. But Guard Llama zeroed in on the pain point. It’s a personal safety system. The pain point is the lack of functionality on a cellphone, not the broad problem of violence. It turns out, other means of trying to alert first responders aren’t very good either. They found a pain point that scales.
They developed the product. It’s so good when you use it, first responders have your exact location within 9 feet and know what you look like. They can find you up to 3X faster than if you’d called 911 directly. Time is safety and can mean the difference between life and death. For less than $10/mo, you are covered. If you are a real estate agent, it’s a great security device to have. If you are a parent you can give one to your kids and sleep better.
Here is what they found with real estate agents.
They asked two questions:
- How many showings do you go to in a week?
- Can you quickly recall the address of all of them?
Most real estate agents couldn’t answer them accurately. Suppose there was a crime investigation and they were stressed. Do you think they’d be able to recall the answers accurately for any investigator?
Being a real estate agent places them in unique circumstances. Often they are:
- behind closed doors with people they don’t know.
- at a property they aren’t familiar with
In a recent survey conducted by the National Association of Realtors, 40% of respondents reported that they’d experienced a personal situation that made them fear for their safety or had a similar occurrence while on the job.
One real estate agency gave them a testimonial, “We are so much more comfortable showing houses with people we don’t know very well knowing we have Guard Llama. After having a presentation on safety from the police department, we are even happier that through the pairing of Guard Llama with our phones, law enforcement will be able to pinpoint our exact location if we get in trouble and need help.”
There is a large population of female real estate agents. Females are most vulnerable to violent attacks. If you were the owner of a real estate agency, wouldn’t you buy these for the people that worked for you? Don’t you think if agents are comfortable, they will do a better job selling properties? If you were the owner of a real estate agency, do you want to feel responsible if an agent is attacked?
Guard Llama is like any other startup though. They have all the same issues that go with building a business. They utilize GAAP accounting and when they pitch to investors, they highlight the same metrics that any startup would. However, they are still a social entrepreneurship company.
Social entrepreneurs need to reboot. They need to focus on pain points. Pain points scale and become sustainable businesses. They will do more good sustaining a business than they will by faking it and creating a charity.