What is a mission-driven business?

The recent USA Today article on carbon offsets reminded me how many people are still unfamiliar with the concept of a mission-driven business. We’re proud of our business model at TerraPass, and it occurs to me that our audience has grown so much recently that it’s a good time to reintroduce ourselves and let people know what we stand for.

First some background and definitions.

A mission-driven business is an organization for which the pursuit of growth and revenue naturally produces mission-related benefits. In the case of TerraPass, the relationship is easy to see. The more people we are able to reach and engage, the more awareness of climate change we can build. The more TerraPasses we sell, the more carbon we are able to reduce. The more partnerships we develop, the better we are able to introduce our positive environmental message to large corporations and their customers.

Mission-driven businesses are a subset of social enterprises, an idea that has been around for about 20 years in academic and non-profit circles, and is now capturing the interest of a more mainstream audience. Muhammad Yunus’ Grameen Bank earned a Nobel Peace Prize last year. The bank, which has distributed almost 7 million micro-loans to poor women in the developing world, has been profitable for 27 of the past 30 years.

All social enterprises generate funding from the delivery of a product or service in exchange for money. In contrast to traditional non-profit structures dependent on yearly grants, social enterprises attempt to sustain themselves by delivering goods and services and supporting themselves with the revenue.

For example, after a 100 years of futile attempts to bring Western water engineering tools to Africa, social entrepreneurs created a product that successfully brought new thinking to water: a simple and affordable roundabout-powered pump that irrigates crops and doubles a farmer’s income. The farmer pays for these pumps, not a grant maker.

For many social entrepreneurs selling in the developing world, success requires using unconventional thinking to break through price barriers. The Grameen Bank issues $2 loans that use social rather than legal enforcement to ensure repayment. Others have sold simple spreadsheet-based optimization software for grain mills.

For U.S.-based social entrepreneurs, the challenge may be convincing customers to see the value in fair trade goods, or to put up their own money for micro-loans, or to purchase carbon offsets that they don’t have to.

Carbon offsets and Consumer Packaged Good

Mission-driven businesses must solve a real customer need. In some cases, the benefits are fairly easy to communicate. People who buy fair-trade coffee are already in the market for a cup of coffee. The slight premium for the fair-trade version is small compared to the total price being paid, and some consumers are happy to take the opportunity to promote social equity.

For TerraPass, the challenge is the intangibility of carbon offsets. We’ve attempted to solve this by turning our offsets into a product that you can see, feel, and measure. Everything we sell comes with something tangible that helps you say, “I’m doing my bit.” Every TerraPass is marked with a verified quanity of CO2 reductions. TerraPass is not a donation. Rather, it is a measured quantity of CO2 reductions. The physical product helps communicate that to the purchaser.

By turning these positive social benefits into tangible products, both TerraPass and fair trade vendors (such as the folks at World of Good) can sell a product that pleases the customer and pushes forward a social mission.

Why overhead ratios are overrated

One of the traditional metrics used to evaluate non-profit organizations is the overhead ratio. There are different ways of calculating the overhead ratio, but conceptually it is meant to indicate the percent of a organization’s funds that are applied to the organization’s goals. It is in some sense a measure of the efficiency with which a non-profit organization fulfills its mission.

Unfortunately, the overhead ratio is a pretty poor way of measuring efficiency. The reason donors focus on overhead ratios is that such ratios are often the only available proxy for what donors would really like to measure: the amount of good being performed by an organization.

But measuring good requires an objective standard of performance, which is often hard to come by in the non-profit world, through no fault of the organizations themselves. How would you measure the good performed by such outstanding organizations as Doctors Without Borders?

So people look to measures like overhead ratios, which might tell you how good an organization is at spending money, but not what it actually achieves with its funds. Even as a measure of efficiency, the overhead ratio isn’t all that revealing, because often the only thing excluded from the core mission allocation is the salary of the fundraising team. Such a number simply doesn’t mean all that much. (GuideStar.org provides a very helpful primer on the uses and limitations of ratios.)

Computing an overhead ratio becomes even more difficult for a mission-driven business. Fortunately, such ratios are usually not necessary for social enterprises, because it is fairly straightforward for consumers to compare the value of different services. Consider this thought experiment. Two carbon offset providers offer equivalent services, one at $20 per ton with 20% overhead and the other at $15 per ton with 40% overhead. Which one should you choose? Other things being equal, what do you really care about, the value of the service or the provider’s overhead?

Thinking beyond tax status

Mission-driven businesses are also profit-driven businesses. And being profit-driven brings a whole set of advantages that we took into consideration when we started TerraPass. In fact, we consulted with many nonprofit leaders who advised that we set up in a for-profit structure. Profit aligns us with our customers rather than with grant makers. Our focus is on delivering a great product, which means building trust, credibility, and quality. Profit allows us to hire and motivate great employees. Profit pushes us to keep our costs down. Profit allows us to attract investors and lenders, so that we can grow our business and — most importantly — fulfill our mission.

But there’s a subtle point here that is easy to miss. A social enterprise could easily be “non-profit” or “for-profit” in the technical sense. These categories are tax designations that matter to the IRS, but are otherwise not necessarily indicative of an organization’s structure or mission.

In the carbon offset industry, there are for-profit players and non-profit players, and all behave in pretty much the same way. Which makes sense — organizational behavior is determined by industry forces, not by tax status. You’ll see most members of our industry engaging in similar marketing practices, building similar web-based calculators, and pursuing similar corporate partnerships.

Which isn’t to say that we’re all identical. I still feel that TerraPass offers the best value in the industry, and of course, I should feel that way. If I didn’t, I would be working hard to increase the value we offer.

Ultimately, both you, the consumer, and the environment benefit from this dynamic. And that’s what mission-driven business is all about.

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