Social and environmental impact businesses x repetitive and scalable businesses

Published on May 02, 2019 and updated on November 17, 2021.

The concepts of company and startups aren’t new, although the exact definition of a startup is still something debatable. What looks new, though, is the doubt on the existential purpose of many of these organizations, who grow making their owners richer without sharing part of the profit with the community which helps them grow. As more organizations are trying to break this logic, we’re witnessing the birth of organizations with business models centered on the idea of growing together with the community from which they belong, promoting what is called conscious capitalism. In this post, I’ll differentiate traditional business models from those that generate positive social impact, highlight the characteristics of Brazilian social and environmental business and answer the question: business models built driven by social and environmental impact will redefine the way companies and startups do business and deliver value?

Companies and startups

To start, let’s differentiate the terms organization, business and company:

• A organization is a set of one or more individuals that get together driven by a cause;
• A business is a medium in which value is exchanged for compensation;
• A company is a legal representation of an organization and its business models.

And what is a startup? Steve Blank and Eric Ries, known figures in the world of entrepreneurship, define these organizations differently. Eric Ries states that startups are organizations that produce and deliver products and services on environments of extreme uncertainty, while Steve Blank says that startups are organizations that search for repetitive and scalable business models. A combined definition is also used: a startup is an organization that search for repetitive and scalable business models on environments of extreme uncertainty. Startups are time limited organizations. Although the organizational culture last for the most part, the organizational structure is meant to find business models with certain reach and growth potential. Once this business model is found and operates legally, a startup becomes a company.

What are social and environmental impact businesses?

The idea of impact business was created by Muhammad Yunus, founder at the first micro credit bank in the world. He defines this type of business as being one driven by a social cause. In Brazil there is a more specific definition, written in the letter with principles for impact businesses in Brazil. According to the letter, social and environmental impact businesses are enterprises which have the explicit mission to generate social and environmental impact and produce positive financial results sustainably at the same time.

To separate what is and what isn’t considered as a social and environmental impact business, Yunus created seven principles that should driven such companies:

• The business objective is to eradicate poverty or other issues that threat populations (like the lack of access to education, health, technology and the environment) and not maximize profits;
• It should be economically and financially viable;
• Investors get back only what they’ve invested. There are no dividends;
• When investments return, profits stay with the company for future reinvestment and expansion;
• It should respect gender diversity and the environment;
• Employees are compensated according to business practices and have good working conditions;
• It should be done with pleasure.

And the letter with principles for impact businesses in Brazil stats four principles:

• Commitment with the social mission and the environment;
• Commitment with social impact and the environment monitored;
• Commitment with the economic logic;
• Commitment with effective governance.

There are three common principles on both definitions: commitment with social and environmental impact creation, financial independence and governance commitment to keep the continuity of positive impact that companies create for the world.

Startups aren’t born having social goals in mind?

Watch a single class or read one article about creating startups and you will learn, probably during the introduction, that you should find a problem to be solved. It should be a real problem that plagues a considerable amount of living beings. You should find a solution that either minimize or solve it. This solution is a product or service and the way it should be delivered is through a business.

What makes a startup a startup is this prosperous environment for creating businesses. By definition, startup business models should be repetitive and scalable, both of these words define the existential purpose of this type of organization. Being repetitive means that the business model can be replicated with no big financial or labor effort. Being scalable means that the business model can grow more and more with no big financial or labor effort. Startups are associated with technology companies – although this isn’t always the case – given that repetition and scalability are only possible with automation, what in turn requires technology.

Important metrics for startups are related to its ability to grow. These metrics aren’t always related with social and environment impact. Numbers like profit and estimated return on investment are more important than the impact that they generate because startups are usually sponsored with external resources to fuel its growth. Who makes investments on startups, on the other hand, is looking to invest on organizations with proven growth potential and to receive dividends. Growth potential is also a currency to attract talented people, who see an opportunity to grow with the company while having his or her own share of its profits.

If a startups is born with social goals, these are reevaluated as the organization finds new ways to grow and profit more and more, compensating its owners and shareholders.

And how organizations with social and environmental impact are born?

Commitment with positive impact – this is, acting to build and revitalize the community from which it is a part of – isn’t only what these businesses are all about, but it is the starting point from which entrepreneurs work. Just like startups, social and environmental impact businesses are born to solve previously identified problems and proposed solutions also stimulate business opportunities. The similarities end there. Social and environmental impact businesses necessarily deal with problems that are identified on the 17 Objectives of Sustainable Development promoted by ONU, indicating that these organizations create business opportunities that improve the lives of people that may not have access to services such as potable water, sanitation, electric energy or adequate living.

The premise of generating positive impact define the way this organization see itself in the world and how external agents see it, including investors. The way investors approach social and environmental impact businesses coined the term Venture Philanthropy, a way to invest on social and environmental impact businesses with more than money, but time to support business development and create means to measure the scale of positive social and environmental impact.

Although social and environmental impact businesses are focused on generating positive impact, they aren’t classified as being from the third sector, which comprise non-profit organizations, because they run profitable business models in order to have revenue streams other than donations. These businesses also aren’t on the second sector, given that the community that is impacted by the company also participate from administrative counsels and management. Tiago Mattos, founder of Perestroika, a school for creative methodologies who authored the book Vai Lá e faz (Go and Do it), defend the idea that social and environmental businesses – or value shared businesses, as he defines – are businesses from a sector 2.5.

The differences between social and environmental impact businesses and traditional businesses can also be perceived throughout the organizational life cycle. I distinct both types of businesses on three stages:

• Birth: traditional business models provide solutions for those who pay more and social and environmental impact businesses include marginalized populations on their business practices;
• Scale: the growth of traditional business models is given by return on investment and the growth of social and environmental impact businesses is given by the positive impact it generates for the community they serve;
• Mature: traditional business models close themselves on a bubble with three actors: the organization, employees and consumers. Social and environmental impact businesses, on the other hand, include members from the community which they serve. They have seats on the counsel and management.

Social and environmental impact businesses landscape in Brazil

Since 2017 Pipe Social, an organization that map social and environmental businesses in Brazil, is the leading author of the Map of Social Impact Businesses, a report that map the state of social business activity in Brazil. The report is at its second edition by the time this post was published and it is updated every two years. I’ll use the findings of this report to quantify social impact businesses in Brazil.

I’ll highlight some topics from the report focusing on generation of positive social impact, financial independence and governance commitment with generating positive social impact.

Business commitment to generate positive social impact

Adding organizations that have no metrics of impact and those that have but don’t measure, 80% of a sample from 1002 businesses that participated on the research still do not evaluate with objective criteria if what they produce generates positive social and environmental impact. It is reasonable to assume that the same metrics used to evaluate traditional businesses are also used by social and environmental impact businesses in Brazil.

Governance commitment to generate positive social impact

Making the commitment to generate positive social impact public, traceable and verifiable is a way to measure the impact. Only 2% of the sample hired an audit firm for evaluating its commitment with social impact. Another metric is the amount of businesses that have representatives from the community on administrative counsels and management. 18% of respondents alleged that the community participate from businesses decisions somehow and 53% say that the community is consulted, although having no seat on the counsel or administrative management. It seems that there is a long way to go in order for corporate leaders to commit to create social impact businesses.

Financial independence

It draws the attention the fact that almost half of all respondents have no source of revenue. The study shows that 21% of respondents are in the stage of organizing their business models. There is a total of 67% of organizations that still haven’t figured out how to solve a social problem in a way that’s economically viable. The main source of revenue is self funding.

Based on this sample it is reasonable to conclude that the idea behind social and environmental impact businesses needs more visibility in Brazil, given the fact that many organizations can’t even measure what they deliver in terms of positive impact. Financial independence is a barrier for social and environmental impact organizations, just like for startups. They resort to the same resources known to companies and startups that seek fund-raising and the study is showing, since its first edition, that there aren’t many funding options designed for social and environmental businesses that are in the beginning of their lives.

Social and environmental businesses community in Brazil

Another thing that was studied is the presence and the size of the community revolving around social and environmental businesses in Brazil.

Something to highlight is that impact business accelerators, incubators and mentors are located all around Brazil, beyond just south and southeast and found on suburbs and universities. This is different from the idea of startup centers like São Paulo, Belo Horizonte, Florianópolis or Recife.

Brazilian government already recognized that there is a separate category for social and environmental businesses. In 2017 was created ENIMPACTO (Nacional Strategy to Invest on Impact Businesses), an organization that connects public administration, private sector and society to ease the development and investment on social and environmental impact businesses. Since this group was organized, the government was able to develop a specific investment fund for social and environmental impact businesses and have amplified existing acceleration and incubation programs, as well as creating specific rules for these companies to negotiate with the government (B2G).

Conscious capitalism

Muhammad Yunus, in his book Building Social Business, doesn’t think that traditional businesses should be extincted. He supports the idea that both business types can coexist and that organizations with tradicional business models can, together with social and environmental impact businesses, create solutions that impact more people than each one could do alone. Tiago Mattos argues that every organization should have clear what is its role in the world. He writes that “it makes no sense for you to have an organization that doesn’t make the world a better place”. According to the author, social and environmental impact businesses are being founded by entrepreneurs that are reshaping capitalism. Yunus follow the same logical line when he says that traditional capitalism creates poverty, but it is possible to reshape capitalism to include those that aren’t part of the system.

Social and traditional businesses can walk together holding hands, as long as social businesses keep alive their commitment of generating positive social impact and traditional businesses have a higher purpose of being, other than profiting. These are important demands not only for organizations, but for 21st century customers, as I wrote before.

Organizations that have a long history can also support the birth and development of social and environmental impact businesses not only with financial resources, but with all the knowledge that they have on repetitive and scalable growth. The study from Pipe Social show us that social and environmental impact businesses in Brazil are at its infancy and there is much to learn. Helping social and environmental impact businesses to grow can make traditional companies and startups rethink their roles in this world and how to balance profit with positive social impact. At the end of the day, all society win.

Further reading

• I recommend reading the second edition of the Map of Social Impact Businesses for a complete idea on how social and environmental impact organizations are developing in Brazil;
• I recommend the books Vai Lá e Faz, from Tiago Mattos, and Building Social Business, from Muhammad Yunus;
• I recommend the letter with principles for social impact business in Brazil;
• I recommend reading the 17 Objectives of Sustainable Development by ONU;
• I also recommend reading about Brazilian government initiative ENIMPACTO.

Let’s do good!