(Image by Tumisu from Pixabay )
This essay was originally published via ImpactPHL Perspectives, a multi-part series which explores the many facets of the impact economy in Greater Philadelphia from the perspectives of its doers, movers, shakers and agents of change. This version has been edited for style only.
The social impact space has come a long way since its founding.
Academics and practitioners alike have fought for position on the for-profit -to- nonprofit spectrum, and distinction within the charitable -to- concessionary-returns -to- market-rate-returns spectrum. We’ve seen an evolution of its popularity as distinctions between doing well and doing good have dissolved.
However, to gain mainstream adoption, credibility, and recognition, we must address its fundamental flaw:
Social Impact lacks economic orientation. It is commonly known to refer to entities that benefit the world — i.e., people and planet — in a way that is not purely financial. The thing is, we live in a global economy that doesn’t value these benefits. In one of the foundational and most often cited academic papers to define impact, Greg Dees, writing for the Kauffman Foundation, explained, “Markets do not … do a good job of valuing social improvements, public goods and harms, and benefits for people who cannot afford to pay. These elements are often essential to social entrepreneurship. That is what makes it social entrepreneurship. As a result, it is much harder to determine whether a social entrepreneur is creating sufficient social value to justify the resources used in creating that value. The survival or growth of a social enterprise is not proof of its efficiency or effectiveness in improving social conditions. It is only a weak indicator, at best.”
Social impact — as currently understood — gets falsely relegated to the sidelines of the global economy, setting it up for illegitimacy and optional buy-in.
It’s time to evolve our response.
Social impact is an entity’s unmonetized external value. It is the uncaptured value of all of its outcomes — absent any moral judgment — on the world it interacts with via the products and services it delivers. Let me expand.
Social entrepreneurs, by definition, have developed solutions to extraordinarily large and complex problems. They’ve determined a way to capture and store CO2, dissolve the plastics in our landfills with bugs, streamline access to, and management of food stamp benefits.
Fundamentally, these innovations unlock tremendous value that transcends a binary for-profit/non-profit distinction. It is only when we design and apply a business model to this value that we divide between (a) the part you capture and monetize, i.e., “revenue” and (b) the part you don’t (or choose not to) capture.
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With a few exceptions, “Impact markets” are those in which it’s hard to envision or implement a viable revenue model. Companies that serve markets that can’t pay — or perhaps shouldn’t pay for reasons of social justice — need to get creative when designing their monetization strategy. So, measuring only revenue grossly understates their value creation. As an economic measure, and as a matter of personal conviction for many social entrepreneurs, revenues are merely a means to an end, that is, delivering social impact.
Think of Beyond Meat. It has developed a way to satisfy meat-eaters with a non-meat alternative. Buyers pay $7.99 at Target for a pound of plant-based ground beef. When they do, they are contributing to 90% less greenhouse gas emissions, 46% energy savings, 99% less impact on water scarcity, and 93% less impact on land use than a quarter pound of U.S. beef. This has value, especially when you consider that climate change is expected to cost the US 10.5% of GDP by 2100.
This is social impact: Unmonetized external value, both positive and negative. If we want to leverage markets to ameliorate social and environmental challenges — and this does remain an open question — we need to capture, value, and analyze this unmonetized external value as a standard practice in pitch decks, LP reports, and stakeholder meetings. We need to concentrate resources on those market-based solutions that are designed to maximize value — both captured value and uncaptured value, or revenue and impact, respectively. And we need a common denominator — i.e., economic value — to evaluate both.
It’s tempting to join the boosterism bandwagon and rally behind innovations with the greatest curb appeal rather than those with a measurable approach to real outcomes. I have reservations, though, about the utility (and incentive structure) of rewarding raw concepts and noble intentions. Most start-ups have both in abundance, and it’s evident that neither is sufficient to beat the dismal odds of reaching scale. Companies that claim to address the world’s most pressing challenges need to be able to articulate how and when and by how much.
Current systems for measuring social impact aren’t oriented to evaluate social impact this way. B Analytics evaluates a company’s operational footprint. IRIS+ provides a standard set of core metrics. Acumen’s new 60 Decibels facilitates a user data feedback loop to replace surveys. These are significant evolutions for the space.
Allow me to propose a streamlined model for capturing the unmonetized external value and relating it to a company’s unit economics, thereby shedding light not only on the relationship between revenue growth and impact growth but also on the efficacy of the business model as a lever for impact.
We call it Social Impact Projection (SIP), and this is how it works:
Any company that intends to create social impact first needs to make distinct, measurable claims about the impact outcomes its products and services create; ones that align with global standards like the SDGs and IRIS+.
Then we tie these claims of social output to the company’s expectations of economic output. How much CO2 is abated for each car sold? How much plastic is diverted from landfills? How many people will eat a healthy meal for every widget sold? These claims can be derived from primary data for companies that have traction, or from third-party research for companies that are still pre-revenue. Once the relationship between revenue and individual impact claims is clear, we can model impact creation off of revenue growth estimates.
Note that making claims like this is not unusual. Pre-revenue companies are not exempt from projecting their financials. They shouldn’t be exempt from projecting their impact either. Entrepreneurs and early-stage investors are accustomed to making assumptions and testing them. This approach presses them to apply their vision beyond the purely financial realm.
During the third and final step, we assign a dollar value to this impact. Sometimes this value is derived from the market value of subsidized products or services. This value often references academic, governmental and non-governmental research on, for example, the economic cost of a ton of CO2 emitted, the societal costs of every inmate who returns to prison within one year post release, or the health costs of hunger that are prevented by providing a healthy meal to someone who lives with food insecurity. These numbers are knowable and are incorporated here into a company’s unit economics. Even where companies are still too early to have confidence here, a rough estimate backed by third-party research can frame the analysis.
This step also allows us to account for differences in geographic and demographic impact. The incremental value of providing a college education to an underprivileged student differs from that of providing it to an upper-middle-class student. Providing a livable wage or low-interest loan to someone in Africa has a different economic value than doing so in San Francisco or New York. Our approach sheds light on these differences and allows its users to decide.
Ultimately, this approach produces an aggregate dollar figure for the external value a company will create and clear unit outcomes that drive it. At the risk of being reductive, this dollar value allows founders and investors alike to glean valuable insight into things like revenue-to-impact and capital-to-impact leverage. This will enable us to finally compare companies from different impact verticals in ways that are not currently possible.
Combined, this data provides a framework to evaluate business model design such that we can optimize for both revenue and impact and examine trade-offs between the two. These insights are critical for investors to support companies with the greatest capital-to-impact leverage. We manage what we measure or, as management strategist Peter Drucker put it, “If you can’t measure it, you can’t improve it.” With Beyond Meat’s recent IPO and $502 billion in assets under management among impact investors, the social impact space is poised for primetime. It’s time to refine and streamline our approach.
Good Company Ventures in Philadelphia developed the SIP model.-30-
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