Like many entrepreneurs, David Griswold started his business with a big vision and a small line of credit. He wanted to help coffee growers learn sustainable farming and connect to buyers who’d pay them fairly, and he had a $300,000 business loan to make it happen. It took almost a decade, but Sustainable Harvest Coffee Importers’ sales of organic, fair-trade java hit $15 million, and orders were fast multiplying. Just as important to Griswold, the company had plowed its profits into training farmers, and his business model, based on transparency, seemed to be working.
But in 2006, the bank pulled the plug. The complaints were rational, from a banking perspective. With margins already tight, spending money training farmers left the company with a relatively flimsy balance sheet. Sorry, they told Griswold, you’ll have to show higher profits, or find financing somewhere else. “My back was really up against a wall,” Griswold said. “I had no idea it would be this hard. I thought, I have this great business model, it’s working, someone should be willing to finance it. But that’s not how banks work.”
As the financial meltdown has rocked the global economy, “how banks work” or fail to work, as the case may be, has become more relevant than ever. At its root, the current crisis is born of an inherently unsustainable business model: making loans to people who can’t pay them back. But when judgment is passed swiftly, using daily stock prices, monthly investment returns and quarterly earnings reports as yardsticks, showing a short-term profit takes on an outsized importance. To keep the fast money flowing, banks created complex financial instruments no longer anchored to tangible assets, such as a real person in a real house. “So much of the economy has become a virtual economy,” says Debi Barker, director of the U.S. office of Navdanya, an international organization that promotes sustainability. “It’s not tied into anything real. That’s an economy that creates havoc.”
That havoc is now upon us, and, optimists say, it’s an opportunity to change the short-term thinking that rules the financial world, and created this mess in the first place. For businesses that want to grow at a measured pace and judge their success in more than dollars, finding financing has been close to impossible. That’s changing rapidly, and it’s about time. Thanks in part to the financial crisis, efforts to build a new kind of economy have moved into the mainstream. The wreckage of an unsustainable financial system could turn out to be the best catalyst for a more sustainable alternative. “We need a fundamental reorganization of the general approach to the economic system,” says George Lowenstein, a professor of economics and psychology at Carnegie Mellon University in Pittsburgh, Pennsylvania.
That reorganization is already underway: Investors are increasingly interested in alternatives to traditional capital markets; climate change and volatile oil prices have highlighted the need for renewable energy; consumer activism is pressuring companies to reform unfair labor practices; countries and communities around the world have embraced new forms of currency to pay for crucial public services like education and health care. The time is right to change radically how businesses operate, how investors fund them, and how economies grow.
“To create a sustainable economy, we have to create social banks, social businesses,” says Peter Blom, founder and president of Triodos Bank in the Netherlands, one of the first banks established to finance socially responsible businesses. “And then people can make a conscious decision to deal with money in a different way.”
Of course, marrying social goals with for-profit models is tricky. A long-term view and a strong social mission don’t insulate a business or its investors from failure. Now, though, the difference is: big money is interested in for-profit social enterprise, from venture capitalists investing in microfinance to multinationals buying organic dairies, and with that comes the possibility to reform whole economies, this time without another high-stakes bubble.
“Government and the non-profit sector are limited to addressing social and environmental challenges at scale,” says Jay Coen Gilbert, a co-founder of B Lab, a non-profit developing standards for social entrepreneurs. “If you don’t figure out how businesses and financial institutions can create social value, then you’re just spitting in the wind.”
Griswold had every right to be frustrated when his bank balked. His business was a success on many fronts, they were training more farmers every year; his employees got raises and liked their jobs; the company was preparing to open offices in Tanzania and Peru. And by traditional measures, too, the business was thriving: Demand was so strong that he needed more financing, not less. And the company was profitable, just not profitable enough for traditional banks.
Owners of socially responsible businesses are emphatic on this point: making money is important. Companies need to be able to stay in business, pay their employees competitive wages, and grow, which can’t happen without a profitable business model. ‘Just because I have greater interests than the bottom line, that doesn’t mean I’m willing to sacrifice the bottom line,’ says Tim O’Shea, who runs CleanFish, a fish wholesaler in San Francisco. “We want to sell as much fish as possible.”
As a business makes money and grows, the non-financial benefits compound. That means more organic coffee farming, more sustainable fishing, better labor practices, and higher wages.
But those non-financial benefits often raise the financial costs. Training farmers costs money, and so does paying a living wage. For a company trying to turn a profit, that’s a challenge. As one option, they can absorb the higher costs and book smaller profits. Griswold’s annual coffee summit, where he convenes coffee growers, roasters and retailers for a three-day discussion of industry trends, can eat almost 80 percent of net profits. Or companies can pass higher costs to the consumer. Many people say that’s only fair, a $10 T-shirt can’t reflect a living wage on the factory floor. Products tout their sustainable bona fides—organic, local, fair trade, in part so customers understand why they’re paying more. But higher prices make such goods luxuries, nearly out of reach for all but the affluent.
Griswold does a bit of both, absorbing costs and passing them on, but it’s hard on the balance sheet. He needed financing from institutions that understood that. Shut out of the traditional channels, he borrowed from a so-called “green bank,” ShoreBank Pacific, and from a sustainable investment fund, RootCapital. Both are dedicated to the same principles as Sustainable Harvest: doing good and making money. In other words, that didn’t mean Griswold got a sweetheart deal; his interest rates are high. It just means he got a deal, period.
That’s the point of these mission-based banks and investment funds: to look at more than just the bottom line. “An entrepreneur needs a bank that understands his mission,” says Triodos’ Blom. “The values of the bank, the mission of the bank, has to support the mission of the company.” In return, depositors know their money’s being put to work in line with their priorities, and for that, they’re often willing to make small financial sacrifices of their own, like forgoing top returns for rates that are simply competitive.
Borrowing money isn’t the only option for growing sustainable businesses. There’s always the capital markets, selling shares of the company to outside investors. But that means giving up a measure of control, and that’s never easy for a company’s founder. And because investors inevitably want to see returns on their investments, social entrepreneurs worry they’ll have to sacrifice their commitment to people and planet in favor of profits. “Once you enter the traditional capital markets, you’re rewarded for growth, period,” says B Lab’s Coen Gilbert. “The more growth, the better, and all the incentives are to do that as rapidly as possible.”
Enter the mission-driven venture capitalists. These early-stage investors say they understand that a social entrepreneur’s growth might not look like that of a traditional small business. That means they might not want to go public, or to get bought by a bigger company, the traditional ways a venture fund cashes out. Mark Finser, founder of TBL Capital, a $50 million socially responsible venture fund, says he’ll never push for that. Other return streams, like a dividend, or growth by acquisition, might suit his fund as well.
That’s because, like the social enterprises in which they invest, mission-driven venture capital funds exist to make money. And they have to invest in companies that will, at some stage, turn a profit. At TBL, Finser told his investors to expect a positive rate of return, and while he wasn’t willing to “get nailed down on 20 percent, I do think it’s going to be quite good,” he says. To get there, he floats an idea that could sound like a mixed blessing to a small, socially responsible business owner: encouraging a partnership between a small manufacturer of solar panels and multinational telecoms like Verizon or Nokia.
Part 1 | Part 2
Photo courtesy of Ode Magazine