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A collection of posts relevant to agricultural and environmental matters such as farming, agribusiness, water, sanitation, natural resource management, and sustainability.

Tuesday, June 07, 2011

When the Shoe Doesn't Fit: An Investor's Take on One-for-One Models

By Mark Hand

Within the field of social enterprise exists an ever-expanding array of business models. There are revenue-generating non-profits and for-profits with a social mission; financial-first and impact-first companies; businesses that try to benefit producers and others that focus on consumers; mom-and-pop shops and those with high-growth ambitions.

Working for an investor in early-stage social enterprises, I have the opportunity to see all of these models. Although we fund a very specific subset of these (high-growth, financial-first, consumer-focused for-profits), it's easy to recognize that each of these other business models has its place and can benefit the poor in a material way. In India, for example, the producer-focused for-profit Lijjat Papad generates $100 million a year and provides jobs to 45,000 women. The consumer-focused nonprofit VisionSpring, meanwhile, has sold over half a million eyeglasses at the base of the pyramid.

There is one model out there that has grabbed significantly more mainstream attention than the rest, however: the one-for-one. TOMS Shoes, the best-known example, gives shoes to the shoeless when you buy a pair for yourself. Every April, celebrity and non-celebrity supporters participate in its "One Day Without Shoes" campaign to spark conversation about the developing world's lack of shoes. Inspired by TOM's media and monetary success, a raft of companies have followed suit, including OneWorld Futbol, Two Degrees Food, and L. International. TOMS itself has distributed over a million shoes. Great stuff, right?

Bad Aid?

Not quite. In April, bloggers at Good Intentions are Not Enough hosted a counter-campaign called A Day Without Dignity, accusing TOMS Shoes of just about everything except stealing the authors' own five-fingered Vibrams. At the risk of repetition, here are three of my favorite critiques of TOM's and of one-for-one models generally:

  • The toxic, disempowering effect of giving things away. When individuals receive donations, they begin to see themselves as passive recipients of aid rather than active participants in making decisions about their own communities.
  • The distortion of local markets. When products are given away (be they shoes or English classes), local businesses that sell those products wither.
  • Poor allocation of donor dollars. Shoes, no surprise, are not often on the priority lists of the poor. When outsiders choose what gets donated, they often overlook other (more pressing) needs.

None of these, of course, are unique to one-for-one models. The best nonprofit and aid organizations have wrestled mightily with the same issues for decades; the worst have simply ignored them. The introduction of profit, however, sharpens the attack. Not only do one-for-one models do aid poorly, say their detractors; they enrich themselves in the process at the expense of the communities they are designed to serve.

Bad Business?

As a former NGO worker, I have long been sympathetic to the aforementioned critiques of one-for-one models and NGOs, seeing the effects of bad aid first-hand. Now, as an investor, I have a new set of concerns about whether and how one-for-one models can become sustainable, scalable organizations. My top three:

Donations are a drag. Starting a company is hard work, whether it's a donut shop or a water purification company. Young companies need every spare dollar and every spare hour to grow their business. Unless giving away precious dollars on marketing, brand, or training drives revenue, that cash should be plowed back into business-building. Setting up a precedent for donating may come back to haunt an entrepreneur later on, as well. For-profit Investors, even those focused on impact, will be loathe to see their potential returns siphoned off a company's balance sheet, making fundraising difficult.

Serving two masters isn't easy. When social enterprises sell goods and services that directly benefit the poor, they align their social and financial missions. Rent-to-Own, for example, finances the purchase of agricultural tools by rural Zambian farmers. The more plows Rent-to-Own finances, the faster it grows and the more families it reaches. Profit maximization also maximizes impact, and the sale of services directly to farmers creates a feedback loop that prevents Rent-to-Own from providing shoddy product. The financial and social missions of one-for-one models, however, are diametrically opposed: every dollar spent on ensuring the social impact of a donation is one less dollar of profit, and every dollar spent on driving sales is one less that can be spent benefiting the poor. This tension may be healthy and creative at first, but it is a long-term time bomb.

Good will and fashion fads are equally ephemeral. In the 1980s, James P. Grant led UNICEF to raise millions of dollars by selling greeting cards in the US, stabilizing UNICEF's financial footing. By the late 1990s, however, other successful campaigns from groups like Save the Children had sidelined the greeting card effort. Much like retail customers, donors have a limited attention span.

Interestingly, TOMS has been able to capture both sorts of attention: its shoes are wickedly trendy and it is one of the sexiest ways for young, shallow-pocketed, over-advertised consumers to feel good about their dollars' ultimate destination. But competition will be stiff on all fronts:: this year's hot shoes are last year's business school case study, an increasingly crowded list of one-for-one models will compete for attention, and other organizations will create new, hip ways for people to give away stuff and money. TOMS challenge will be constantly to find this sort of convergence between fashion and do-goodery, innovating on multiple fronts in order to replicate its current look-cool-feel-good miracle. All this means built-in uncertainty about the thing that matters most for for-profit businesses: profit.

When the Shoe Does Fit

Despite all this, there are times when one-for-one models are appropriate. If you're considering starting, investing in, or working for a one-for-one model, here are four positive tests to apply:

Will it be a nonprofit or L3c? By removing profit motive from the equation, one-for-one organizations can realign incentives within their organization, focusing on the social impact they seek. They can also preclude the accusation of exploiting the poor for their own gain.

Will it operate in its own community, narrowly defined? It is easy to make decisions about others' communities when you don't have to live with the  often-unintended consequences of that decision. This is as true for one-for-one models as it is for tax structures, charities, and for-profit companies. If a one-for-one model distributes dollars in the same community from which it raises them, however, it makes moot many of the concerns raised by aid critics.

Will locals drive the decision-making process? If a one-for-one model does not operate in the community where it works, does it have a way to ensure that locals have a say in what is given away in their community – and, if necessary, a mechanism to request that it stop? Working with local organizations and elected officials is one way to do that, as long as those organizations give voice to an entire community. Purchasing donated items from local businesses can add a layer of accountability, assuming that it does not significantly alter existing balances of power within that community.

Will it build up, rather than destroy, local markets? Typically, one-for-one models have a rather straightforward pitch: you buy a widget, and they give away a second widget to a another (usually poor) person. As mentioned, this carries the risk of shuttering local businesses and eroding economies. This doesn't have to be the case. L. International, for example, gives condoms to existing community groups that then train local women to sell those condoms, providing jobs and building local markets. One-for-one models can also be dollar-for-dollar, in which your purchase of a bottle of fancy water goes to support an organization like water.org that rigorously monitors the long-term impact of its work.

In an environment where organizations are looking for ways to generate both revenue and social impact, the example laid out by TOMS is a compelling one. Hopefully, its example will continue to spur businesses and nonprofits to think creatively about how to build new kinds of organizations. Would-be entrepreneurs should approach one-for-one models with caution, however, in order to protect their mission and their bottom line.

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