Hybrid Companies and the Future of the Economy: An Interview with Criterion’s Andrew Greenblatt

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In the past, it was easy. Corporations made money. Nonprofits helped the world. If a corporation wanted to help the world, it would donate to a nonprofit, or set up its own foundation.

That model is changing. Social ventures, a new kind of for- and nonprofit hybrid, are easing their way into the business world. From Good Capital, a socially responsible investment firm, to Google.org, which dedicates resources to helping urgent world problems, social ventures are proliferating throughout the country.

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According to Andrew Greenblatt, NYU professor and Director of Products and Innovation at Criterion Ventures, the current generation of graduating college students will ensure that this trend becomes a fundamental part of our economy. To help today’s entrepreneurs navigate the confusing world of establishing a social enterprise, Greenblatt helps run Criterion’s Structure Labs, the country’s only one-day workshop on launching a social venture.

Business Pundit caught up with Greenblatt to discuss setting up hybrid ventures, where the movement is going, and how it will change the economy.

BP: Can you tell me more about the history behind Structure Labs? How did you guys come up with the idea?

AG: Criterion Ventures is a consultancy that launches social ventures, specifically with an eye towards things that have broader social impact. We also launch our own ideas. We identify some kind of need in society, find a sustainable way to address that need, and then launch a venture around it. We’re social entrepreneurs for hire.

Through this work, we’ve found out more about the problems faced by social entrepreneurs. Legal structures are an issue that came up over and over again. You’re either a for-profit, and your goal is to maximize profit. Or you’re a nonprofit charity, and your goal is to maximize making a better world.

Now we have all these blended, multiple bottom-line ventures coming together. Legal structures haven’t kept up. If you just want to maximize profit, there’s one structure. If you want to go out and have people give you money and use that money to do good in the world, there’s a different structure.

When you want to start blending your purposes, it becomes harder. So we created this 5-hour workshop that helps people understand what their options are, and what the advantages and disadvantages of all the options are. It’s fun and engaging. People can take their own projects to the workshop and work with their own real-life We got a grant from the Packard foundation, and that helped us create this, and now we are going around the country and offering the workshop, and that is really cool.

BP: What is a multiple bottom line?

AG: A single bottom line is profit. A second bottom line takes into account other stakeholders in the company. That could be the workers, so people could say that Costco cares about its workers, gives them health benefits, etc.

It could be their community, it could be their suppliers. For example, Ben and Jerry’s would hit cream crises (an oversupply of cream made prices collapse). When one of those cycles hit, and the price of cream went below the cost of maintaining the farms, then Ben & Jerry’s continued to pay the previous year’s to support the family famers.

The third bottom line is the environment. For example, is our carbon footprint growing or shrinking? Are we putting more toxic waste into the world, or less? That kind of stuff.

One beautiful thing about free-market capitalism is that there’s a really simple universal measure of success, and that’s profitability. When you start to add these other things–What does it mean to take good care of your workers? What does it mean to take good care of the environment and the community?–everything becomes squishier.

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BP: If I want to launch a social venture, what are three of the most important things I should know, from a legal structure perspective, before I start?

AG: It depends on the social structure. If you want to start a foundation, because your Aunt Tilly died and left you $20 million to give away to save the pelicans, those 3 things you’re worried about are very different than if you’re trying to sell bednets in Africa. So the casual phrase of “social ventures” makes it hard for me to answer that question.

I can give you a broader answer, however. There are probably the three pieces of advice I would give to anyone.

Most people think, so this is my mission, that’s my job, and it’s my lawyer’s job to think about the structure. There are two problems with that strategy. The first is that unfortunately, some lawyers are better than others. The second is that people limit their own vision before they ever meet with their lawyer, because of their false assumptions.

And they go meet with their lawyer with their now-limited vision, and the lawyer says “yeah, I can do that.” Now, if they had a broader vision, then the lawyer would still say “yeah, I can do that.” But they’ve already clipped their own wings (when they limit their vision).

The second thing is that the legal structures have ramifications through different phases of your organization’s life. What your legal structure is will matter when you raise money, so lots of people start there, deciding on a legal structure based on whether they want donations or venture capital.

Some people go a little further. They think of their revenue streams, they think “how am I going to sustain this?” That might influence whether they’re going to be a for- or nonprofit. That’s usually as far as people tend to think.

The next thing that’s going to matter is how are you going to grow? You can franchise your operation, you can license out your intellectual property, or you can just grow. What your legal structure is will impact what options are available to you.

Then, there are issues about how you interact with your market. Being a nonprofit sends a certain message to your customers and your vendors. Being a for-profit sends a different message and allows you to interact with them in different ways.

The last thing that people don’t think about–that we have as the second thing you need to think about in our workshop–is your exit strategy. Someday you will exit this venture. If it means that God comes and takes you to heaven, I assure you, someday you will leave this venture.

Thinking through how you want that exit to be is crucial to how you set up your venture. If you think look, if this is wildly successful, and can sell someday, and I want to capture some of that money and retire, ok…well if you start a nonprofit, you can’t sell it.

So if you’re thinking 20 years from now, you’re retiring and selling this baby off, and you’re starting a nonprofit, we have some talking to do. Things like that.

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BP: Let’s look at social ventures as an emerging economic movement. Where would you say we are right now on the timeline of that movement? Where are we going?

AG: Infancy. Elements of this have been around for a while. The idea that you can have sustainable ventures that encourage justice in the world is not new. You know, the YMCA’s been around for a long time. But as a movement, as people identifying it as a unique strategy and getting it moving, that’s pretty new.

It’s hard to choose a moment when this began. We didn’t have a Stonewall (Ed.: or any other major event to mark when this began). But it’s not more than 50 years ago that people started talking about being social entrepreneurs. It’s new.

When I was in law school, nobody knew about this. The fact that a few of us were graduating and wanted to go out and make a difference in the world was viewed as weird. This was 1990-3.

I went back to school to speak at Harvard about a year ago. Someone came from the business school to watch me speak, and we went out for drinks afterwards. He said that the largest student club at the Harvard business school today is the private equity club. The second largest club is the social venture club.

The world has changed rapidly, and it’s picking up speed. Students today are way ahead of where we were as students. That’s going to impact this world bigger, faster, stronger for a long while to come.

If you’re a recruiter for the mainstream economy, and you go to the business school today, you’ll be confronted with the fact that one of the biggest groups is the social entrepreneurs group. If you’re Rape and Pillage Inc., you’re going to have trouble recruiting talent.

I’ll give you one other example. There is a new corporate form out there. It’s called L3C, the low-profit limited liability company. It’s kind of an LLC, but also a new corporate form.

It was created in Vermont less than two years ago. It’s now available in 5-6 states. Just that there is a new corporate form says something, and the fact that it’s being picked up by other states so quickly is saying there’s a real hunger for this.

I think that this is a very young movement, and it is rapidly gaining speed. Economic forces will continue to push that. I think it will snowball faster and faster.

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BP: How do you see this movement of social ventures changing the economy?

AG: In response to this? That’s a really complicated question. I’ll give it a shot.

I think more and more of the entrepreneurial energy will move in this direction. Most entrepreneurs start in their twenties. They usually really hit their stride in their forties, but they start in their twenties. And entrepreneurs in their 20s are doing this.

So, 20 years from now, this is what entrepreneurship is going to be. Currently, venture money is moving in this direction. Later on, expansion money is going to have to follow. As so many ventures mature, buyout money will move in this direction, too.

That’s already happening with certain consumer brands. Odwalla was bought. Danone yogurt bought Stonyfield Farms because that’s the part of the yogurt market that’s growing. You can still by Dannon yogurt, but it’s the part of the company that’s shrinking. You’re already seeing it begin to happen. It will happen more and more.

The dominant view now is a shareholder ROI economy. Things that can make money for investors get done. If you look at the trillions of dollars of investments that happen in America every year, the majority are driven by ROI for the investor. They fuel the bottom line.

That’s going to shift slowly to the multiple bottom lines. Ultimately, it will be more profitable to do that. Companies that don’t give a crap about anyone else will become less profitable. People won’t want to work there, won’t want to shop there. It will hurt your bottom line to be that company.

Today that’s not true, but you could make the argument that we’re starting to see it. For example, you can look at Costco versus Wal-Mart, and their stock price over the last 10 years or so. The recession may have changed this, but over last 10 years or so, Costco’s perfomrance has continuously been better than Wal-Mart in terms of P/E ratios. That’s partially because people view Wal-Mart’s relentless strategy of single bottom line as a detriment to them. Costco, which treats their workers better, cares about other stakeholders, etc., is viewed as the smarter long-term play.

If you look at who’s graduating from the top business schools today, that’s the talent pool that’s going to answer that question. But I don’t really know what’s going to happen.

We’re still trying to figure all that out.

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BP: Anything else you’d like to share?

AG: Some people think that some of these ideas are good business, and they would have survived anyway, and that by painting it with some sort of social gloss is just decoration.

For example, Wal-Mart is way ahead of every other large retailer on the environmental front. They’re pushing their vendors, for example, to reduce packaging.

Pushing is the wrong word. They’re saying if you want to be on our shelves, you have to get rid of that excess packaging. It’s that simple. If you want to be in their stores—20% of the market or whatever—you’ve got to reduce packaging.

Some people are looking at that and thinking well, great, they’re protecting the environment. From Wal-Mart’s perspective, not doing it means more packaging in their trucks and less shelf space.

Yes, it’s good for the environment, but it’s good for the bottom line. They’re doing all kinds of cutting-edge energy management. They use very high-efficient lighting, and it’s off when it should be off, and all kinds of stuff. Again, why waste money?

Some people will say to the extent that any of this matters in business, only the stuff that goes to the first bottom line anyway gets picked up. So Costco will say we give good health benefits, train our workers better, and pay higher wages because it’s cheaper than having high turnover, and because our customers, when they ask where something is in the store, expect the right answer. Having someone who just started yesterday isn’t going to help that.

Some of that stuff that gets shed, is just stuff that costs money. It will help that first bottom line. That’s what some people will say who are watching all of this happen. Because clearly things are happening. You’re watching all this and can’t pretend that this is nothing. They’ll think that’s what’s happening.

I think they’re half right. The things that help the first bottom line are the things that will be picked up fastest and go quickest into the market.

But I think that the mindset of the public is changing generationally. That will have deeper impacts over time that we’re just starting to see. For example, if you want to hire the best and the brightest out of the best schools, you have to offer them more than just a high salary. There will be a generational shift that will go deeper than just “it makes sense to turn the lights out when nobody’s in the store.”

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Andrew Greenblatt is the Director of Products and Innovation at Criterion Ventures. He is an entrepreneur, lawyer, professor, and social venture expert. Find out more about Andrew and Criterion here.

Images: Steffen’s blog, Harvard Social Enterprise Club, Yarek Waszul