Should Startups Be Charitable? Four Strategies to Decide

Even the biggest grouch has to feel a little optimistic about today’s social entrepreneurs. They’re like 60’s hippies high on quinoa and VC cash, instead of weed and Dylan records. Surely, one is bound to save the world. So when Entrepreneur Magazine asked me if charitable startups can be good businesses, I felt like the guy handing kids grapefruit on Halloween. Those precious, disappointed faces…

There have been some successes like Warby Parker, which donates a pair of glasses for each one sold. But often, “charitable startup” is like a liver smoothie – packed with nutrients, but only consumable by the cast of Jackass. Some of the best known even harm their cause. Or, they act as a leaky prophylactic against first-world guilt – as long as customers never think too hard if anyone’s really being helped.

So here’s the brutally honest advice (and strategy matrix) I’ve given to aspiring social entrepreneurs.

The Charitable Startup Strategy Matrix

Here’s how I look at charitable startups:

Let’s first define the criteria:

• (X) How profitable is the industry? Over 90% of startups fail, so every dollar counts. If existing competitors barely scrape by, there won’t be much money left for causes beyond one – survival.
• (Y) Is the customer the direct beneficiary? If your customer is the direct beneficiary of your product or service, your goals are aligned. If the business is raising money for a third party, all signs scream charity…or something incredibly evil.

Four Categories of Charitable Startups:

1) Charity in Disguise – Competitive businesses like food, retail, office supplies or any commodity rarely generate enough margin to fund anything peripheral. Now add the pressure of using precious margins to meaningfully fund a cause. Not to be a drama queen, but that business is doomed. DOOOOMMMED!!! The office supplies startups I discussed in Entrepreneur fall into this category. Recommended strategy: become a charity to help the cause or become an efficient business. Doing both is a liver smoothie with onion puree.

2) Efficient or Die – Low margin businesses whose cause directly helps its customers can be much more sustainable – if they’re efficient. That means compromise. Chipotle is a good example. The company attempts to source locally and organically, but doesn’t guarantee it. Ultimately, thousands of jobs are at stake if organic sourcing caused every burrito to be sold at a loss. The ex-president of Trader Joe’s, who is opening a chain called Daily Table selling safe expired food, will need to have a similar approach (and possibly a doctor on staff). Recommended strategy: Decide if you can live with the compromises. Then, be ruthlessly efficient…but not efficiently ruthless.

3) Disruptors? – Notice the question mark. When direct customers are the beneficiaries and there’s margin to play with, a world of possibilities opens up. I’d put green energy, clean water, and education businesses in this category. I’m particularly a fan of some of the ingenious, simple innovations thriving in the third world, like these startups from India. Here, Khan Academy is a good example. It empowers a handful of great teacher to reach millions of students online. EvenGeneral Assembly’s Opportunity Fund is an interesting blend of business and charity. Recommended strategy: Keep margins fair but healthy, run a great business, and never forget your mission. Customer first, always.

4) Feel-Good Niche – This category ranges from interesting to enigma to fraud. It’s dominated by fair trade and buy-one-give-one programs that mainly support non-customers. Luxury categories like eyeglasses, fashion, coffee, and chocolate are examples. The reason fair trade mainly works for coffee is luxurious margins for the finished product. (Yes, the rumors are true – water doesn’t need to be filtered through coffee beans to sustain human life.)

One of the better examples in this category is Warby Parker. Luxottica, the eyeglasses monopoly that controls most of the glasses industry, has been so successful at inflating margins that Warby Parker can comfortably charge $99-150 for glasses and still donate a (cheaper) pair to charity. The company kicks it up a notch by helping develop self-sustaining eyeglass businesses in emerging markets. That’s the exact opposite of Toms Shoes, whose flimsy premise dumped thousands of unwanted shoes in poor countries. Local shoe merchants couldn’t compete with free dumping, no matter how well-meaning.

Unless the entrepreneur is willing to create sustainable (“teach a man to fish”) type of change, this category often descends into a ghetto of feel-good BS. So many companies tastelessly hide behind charity to get ahead. And customers willingly pretend their pornographic overconsumption is saving the world. I won’t name names, but you know who they are.

Recommended strategy: Repent. Be honest with yourself and your customers. Are you in it to help people or using charity as a ploy? Show us the numbers. If they don’t add up, the market will eventually snuff you out. There’s nothing wrong with seeking profit; it’s the lies we can’t stand…even if it’s also to ourselves.

Charity or Ethics

On an airplane, they say to put your mask on first before helping your own child (or one you borrowed for the flight). Above all else, even a social enterprise must first succeed to make any impact on the world. But take heart. As it turns out, commerce itself is a force for good. Over a billion people have been lifted out of poverty in the last 20 years. Not because we’ve dropped rice and Toms Shoes on the poor, but because people have been integrated into the global economy. Consider Haiti and the Dominican Republic. Both occupy the same exact land mass. One is a thriving tourist and agricultural economy. The other remains poor and broken despite 40+ years of Toms-style aide and good intentions.

So the very act of making something people need serves society. Good work creates purpose. And those new salaries nourish families, communities and charities. But a “good” business can’t stop there. I’d argue that a truly “good business” isn’t about charity at all. It’s about values and ethics. Young companies should:

• Have a purpose: always know what problem you’re solving for customers
• Provide excellent service
• Maintain high quality at fair prices
• Pay employees and suppliers fairly
• Minimize adverse effects on environmental or health
• Own your mistakes and fix them quickly