2015/05/23

Social Impact 101: Building Companies That Make a Difference



Joey Hundert — social entrepreneur, start-up consultant and founder of the “Sustainival,” the world’s first green carnival — has been working for a decade and a half to promote ventures that both make money and make the world a better place. And, when he can, he spends some time at Wharton as the School’s social entrepreneur in residence.
In a recent interview, Wharton management professor Tyler Wry talked with Hundert about his experience as an entrepreneur, the social enterprise energy among students, and what it takes to succeed in a business that has dual social and financial aspirations.
An edited transcript of the conversation appears below.
Tyler Wry: Let’s start with some background. Tell us a bit about how you got into social enterprise, and what brought you to Wharton.
Joey Hundert: I came here about four years ago, to guest lecture in one of your classes…. [Since then,] I’ve become sort of the social entrepreneur in residence. And while I’m here, I get to learn what they’re doing at the Social Impact Initiative. I’m always amazed at how they’re developing each year. These are super-ambitious people, developing something really unique to help nurture social enterprise. The intent was for me to come and lecture initially, on not just social enterprise and social entrepreneurship, but also entrepreneurship in general, from a deeply experiential point of view.… A lot of students want to get into start-ups, and into venture, only they’re coming at it from a very theoretical, academic basis — lacking experience. And so, some professors, such as yourself, will have students try to create start-up ideas and work on start-ups in class, which is getting them this much-needed experiential component.
I drop into the system to try to work with them, and to give them a heads-up about the experience of entrepreneurship and what they’re missing … and to help them refine their ideas.
“Any social enterprise with a blended mandate, blended return to society, is inevitably going to be more complex to operate.”
Wry: We talk about social enterprise, and we talk about social entrepreneurship. But when you start to really dig into them, people can be having really different conversations about what those two components mean together. How do you define this stuff, and what do you see in terms of the students who are working on it?
Hundert: I define social entrepreneurship, or social venture, as a company or venture, nonprofit or otherwise, that has a social impact baked right into the product, or right into the value they seek to offer society. Not like, “Hey, on occasion, with 1% of our profits, we do this thing for helping people out.” To me, that’s too minor. More so, it’s, “Well, every time you buy this, we give the exact same value to another community.” Or, “By virtue of you buying this product, people are getting educated.”
To me, social enterprise is when the [whole operation is imbued with a] social impact — education, helping lift people out of poverty, helping provide access to food or drinking water, helping to level the quality of life around the world. These sorts of things — lifting people out of poverty, creating education, inspiration. That [impact] has to be worked right into the product Twitter . [It can’t be a matter of], “Hey, once a year we go volunteer.” That’s not it. To me, an actual larger percentage of costs of goods sold, or a larger percentage of gross revenues, is put to this purpose. And it’s continually reinvested in.
Not only that, but the values of the founders [must be] commensurate with this creating impact. It can be that the founders have figured out that this is a market advantage. It gives them a leg up on their competitors. I don’t really care if that’s the driver. [What’s more important is] that the impact is consistent, it’s measurable, and it’s doing something great in society.
Wry: What you’re talking about is a real hybrid organization: one that’s pursuing some sort of revenue stream at the same time as it’s addressing a big social problem.
Hundert: Totally.
Wry: So, what sort of problems do these organizations run into? I mean, so, there’s got to be challenges that are baked in. And also, what are the benefits?
Hundert: In my own case, I started the world’s first green carnival [the “Sustainival”] in 2011. All of our rides run on waste vegetable oil, wind and solar power. And we created the carnival specifically to educate people on sustainable technologies. And even more, to inspire people about why to be hopeful about the future– why tomorrow could be better than today.
Now, if you look at our cost structure, us versus a typical carnival: We have to generate our own energy, collect the feed stocks to make our own energy, create a totally compelling and engaging educational layer on top of everything, engage students, nonprofits, foundations, government. We have 1,000 times more relationships baked into our show to make it happen than the carnival that rolls into a shopping [mall] parking lot to set up for three days.
Then, let’s look at revenues: 100% of their revenues are coming through tickets, or people playing games or buying food. For us, our revenues are ticket revenues — people playing games and buying food — but much more so from [other sources]: corporate sponsorship, government grants, contributions, donations, the whole mix. And if you look at the cost structure, our show costs about 90% more than their show costs. So, we have this huge risk of having a wildly more expensive show than they do, because we’re serving so many more mandates, and we need so much more resources to make it happen.
At the same time, it opens us up to all those other revenue streams. There’s no company out there that really wants to sponsor a dingy carnival, with questionable operators and safety. [In contrast], you have the world’s first green carnival, which is engaging people and blowing minds, and doing something beautiful in society. We’re a sponsorable asset.
So with that, we have a diversified revenue base that a traditional carnival does not have. At the same time, it’s way more complex to run. We need a totally different [level of] acumen [among our] operators and executives to make that all work.
“You can’t simulate the pressure cooker of that terrible moment of creative destruction, where the product, as it is, is not going to live past that moment as it was.”
There are definitely pluses and minuses to social enterprise. And I think that any social enterprise with a blended mandate, blended return to society, is inevitably going to be more complex to operate. At the same time, it’s going to get benefits for that — like diversifying revenue streams, and lasting through economic recessions, because they’re seen as a [having] greater value than just a cash value.
Wry: So, is there any risk with that of abandoning the social mission when the going gets tough on the financial side? What you’re talking about is a cost structure complexity that’s an order of magnitude higher than your competitors. Sure, it opens you up to additional revenue streams and additional opportunities. But there still has to be this tension. You know, what happens when you have these moments where it’s just not clear? “We need to keep the lights on.” “We have the social mission.” What happens when these things butt into each other? What do you do?
Hundert: I think that the answer to the question you just asked is going to change for each entrepreneur that you ask. Each of us exists on a continuum, on the spectrum from “I’m driven by social mandate” to “I’m driven by profit motive.” I am towards the social-mandate side, and I’ve learned to make better and better decisions as it relates to making money, so that the organization can survive.
But here comes my answer, which is going to be a direct relation to who I am and the way I feel. When the going gets tough for sustainable, there’s nothing in my mind that says if we hollow out the education side, that things will be better for us. That never occurs. Instead, I use that stressful moment to find new ways to make the whole thing work.
Here’s an example. We’re really good with big machines. We’ve got giant, giant generators on site, and we run them on waste vegetable oil. I was approached by a company, and they have giant machines, wood grinders. They grind up waste wood, like pallets and construction waste. And they turned to me, and they said, “Can you run our grinders on your waste vegetable oil?” I said, “We sure can.” And then I said, “Not only that, we can run it on waste vegetable oil, and because you’ll be the only green wood grinding company in Canada, let’s form a partnership. And I can go get bigger contracts, because we’re doing something special and unique. Our name will rise to the top of the pile.”
So, the going got tough. We sourced another new partnership of wood recycling, and it became a revenue center that has grown, independent of how well the show is doing. That’s just an example. I structurally cannot abandon the impact side, because my brain doesn’t even go there.
Wry: Would it be fair to say, then, that when there’s a tension between sustaining profitability and building a sustainable venture with a social impact, that tension helps generate more creativity for you?
Hundert: Totally. I thrive in that tension. And I encourage entrepreneurs to get there. That’s the part that you can’t simulate for new, young people who have not yet created a venture. You can’t simulate the pressure cooker of that terrible moment of creative destruction, where the product, as it is, is not going to live past that moment as it was. How are you going to change it, in order to bring in more revenue, make it safer, diminish costs — whatever you have to do to make it survive?
But if the values are really baked into the entrepreneur, the inclusion of the social impact is going to be organic, and happen naturally, so that the solutions that are uncovered contain the room for that impact to continue.
Wry: This is probably a good point to pivot and start talking a little bit about the students here at Wharton. What are you seeing, in terms of the energy around social enterprise with what they’re doing? Do you see the potential of the people who can mix the two?
“What I’m hearing from [students] is that there’s this deep desire to do good in the world.”
Hundert: I’ve been coming here for four years, and what I’m hearing from the student body is that there’s this deep desire to do good in the world. And I think if you look at the millennial set and the younger set, their need to see the world improve is really powerful. If you think about what’s happened in their youth, they’ve seen a terrible recession, a lingering recession. They’ve seen a lot of new data on climate and ecosystems, and terrible weather. This is constantly on their consciousness.
So, the cool thing is, you’ve got these students that are just brilliant at finance, and they want to create a huge impact in the world. You put that together, and it’s a very productive intersection.
Now, they’re also super high achievers, which is actually a bit of a downside, because they can’t stand failure. And entrepreneurship is just one failure after another — and what you do with those failures. The difference between a failure and a pivot is that, at the moment of failure, an entrepreneur [could] put their tail between their legs, pack up and go home – that’s a failure. Or, the entrepreneur who smacks into reality, and their product breaks — they remake the product to more naturally suit that reality, so they can now progress. That’s a pivot. So, while I’m seeing lots of desire to create something awesome in the world, and use these unique skills and financial acumen, there’s also a bit of a mismatch between people’s appetite for failure here, and what’s coming for them in venture, should they get into it.
That’s part of our work: getting the student body ready to get hit on the head, and repeat, repeat, repeat. You know?
Wry: I agree. It doesn’t seem to matter how many times I hit them on the head in class. They don’t like it any more.
Hundert: Right?
Wry: If you were going to leave students with one piece of advice from all of your experience, one crystalizing moment that they could take forward with them as entrepreneurs, specifically in social venture, what would that be?
Hundert: Start now, start small. Start now, because no amount of thinking about it and philosophizing about venture is going to help you understand whether or not you’re fit for it, or if you like it. You know, there’s so much obsession about start-ups. It’d be as ridiculous as there being a huge obsession about ballet, and everybody wanting to be a ballerina. It doesn’t work that way. The same percentage of society, likely, is going to be fit for entrepreneurship and actually like it, and thrive within the constant unknown, and the huge pressures.
The only way to find that out is to get into it. But you don’t want to get into it at massive stakes for your first kick at the can, because what if you don’t like it? So, I tell students to start a sub-$1,000 start-up of some kind, to address some sort of social need if they want. It could be social impact, it could be real estate. It doesn’t really matter. [Just] start that sub-$1,000 venture, so that the stakes are super low. But you put yourself in the pressure cooker, to understand if you like it.
Lastly, because there is no great success — there’s no billion-dollar company, there’s no selling to Facebook for $20 billion — without small successes that lead to medium successes. Like, the lineage of success that leads to the mega-success that everybody reads about in Fortune — it’s a long tail. So get started. And build that momentum. And, should students discover that in that first $1,000 venture that they hate this, then stop. Go take that awesome job at Goldman. Or for the U.N., or FAO, or in Washington. I mean, people can access amazing things from this place. Don’t cut off all the other opportunities because there’s an obsession with start-ups.