Impact entrepreneurship: Start-ups for societal good
26 Aug 2024
Should entrepreneurial success be measured by profit alone? No, says Ali Gümüşay: A company can do both – make money and make the world a bit better. From the research magazine EINSICHTEN
A legendary creature looms large in the start-up world. In this milieu, the status of unicorn – young, successful, and worth over a billion US dollars – is viewed as the ne plus ultra. But another creature is currently shaking up the scene: the zebra. This is the name for companies that do not only pursue profits, but also want to have a positive impact on society. At LMU’s Innovation & Entrepreneurship Center (IEC), management and organizational scientist Ali Aslan Gümüşay studies what zebras need to be successful – and how success should be defined in the first place when companies are pursuing more than money.
The road to success can also look different
"I believe we should get away from a metric that is only interested in profit optimization and driving down prices," says organizational scientist Ali Gümüşay.
Prof. Gümüşay, wouldn’t every company like to be a unicorn?
Gümüşay: There’s certainly something magical about unicorns, and not just in the fantasy realm. But many people who start companies don’t just want to get very rich. As studies have shown: Yes, we want financial success, but at some point there seems to be a threshold beyond which happiness does not increase. What we actually aspire to is a fulfilled life.
Some entrepreneurs are driven by a desire to serve others, while others believe in serving certain ideals or organizations – guided by their moral compass. Again others are driven by a spiritual dimension, for instance inspired by their faith. What they have in common is their motivation for an external social and internal personal impact. They want to address grand challenges facing society and have inner growth. To this extent, I don’t believe that every company wants to be a unicorn.
So what exactly distinguishes the zebras from the unicorns?
Like unicorns, zebras want to stand on their own two – or four – feet, make a profit, and thus be economically sustainable. Beyond that, however, added value to society is the primary target. A zebra doesn’t need to have a market value of over a billion like the unicorn. The equation is: make a profit greater than zero while exercising a significant positive impact on society. This impact can be ecological or social – or both.
How to measure the value of public benefit
When people talk about companies that are socially engaged, various terms tend to crop up: the common good, social entrepreneurship, impact entrepreneurship. What do they mean?
By definition, a zebra serves the common good – which means having a positive impact on society. Concepts have pros and cons. We could challenge the term ‘social entrepreneurship’ for its linguistic foregrounding of the social aspect. A company that pursues environmental or sustainability goals might not find itself being included in this expression. I prefer to speak of impact entrepreneurship, as I think this term is quite inclusive. In essence, however, all the expressions describe a way of doing business that does not focus on profit alone.
There’s certainly something magical about unicorns, and not just in the fantasy realm. But many people who start companies don’t just want to get very rich.
Ali Gümüşay
How is this positive influence measured and valued?
Not easily at all. It depends on what societal contribution we attribute greater value to. Is it the company that saves 1,000 human lives through its work, or the one that plants a million trees? But what we can say is that the aspiration and attainment of such a large impact makes a for-profit company a zebra. A well-known example is the manufacturer of outdoor apparel Patagonia, which is highly sustainable in its production and sales practices and committed itself back in the 1980s to donate at least one percent of its annual sales to grassroots environmental organizations.
Almost every company today has a green veneer. How do we tell whether a business is a zebra or is just greenwashing?
Well, certainly, that’s not always easy for an individual to do. Consumers can check, for example, whether companies have voluntarily signed up for external certification as a socially and environmentally sustainable organization – say, as part of the B Corp movement. You can also find companies that set themselves strict standards through other networks; keywords like “purpose” or “steward ownership” help to locate them. The “purpose” model refers to companies that pursue a superordinate mission for society or the environment. This superordinate purpose is also at the heart of “steward ownership” and is enshrined in its legal form in contradistinction to short-term profit seeking.
How do you measure the positive influence of impact enterprises?
It's not that easy, says Ali Gümüşay, because "it depends on what societal contribution we attribute greater value to."
So we should check whether companies have the right certification? What complicates matters is that there are companies which don’t have the resources to communicate or certify their social or environmental engagement, even though they are, in fact, very sustainable. To make the situation clearer, it would be good to have more transparency across the board. A label that clearly indicates to which standards a company has pledged itself is helpful. However, people must also decide for themselves according to which values they want to consume.
What do you mean by that?
Somebody who values regional products highly is less likely to find them at a discount store. They might have to get a vegetable box delivered from a farm nearby. Others might face the question as to what’s more important to them: organic or fair trade products. Each individual must find the answers to these questions for him- or herself.
How do you view the topic yourself?
I used to live in Oxford with my family, where we were part of an agricultural community built on principles of solidarity, an experience that made a lasting impression. To give just one small example: When we were allowed to name a new born calf, it had no monetary value for us, but it gave us something valuable nonetheless. I believe we should get away from a metric that is only interested in profit optimization and driving down prices. Instead, we should build a relationship with what we eat, drink, and otherwise consume. That creates added value of a different kind.
Many family-owned companies, in particular, place their own family values above profits.
Ali Gümüşay
When unicorns turn into zebras
Are there companies that are not founded with the intention of being a zebra, but which end up creating societal added value in the course of time?
Yes, sometimes companies change. In technical terms, this is called pivoting, a shift. People who have achieved a lot financially sometimes ask themselves what and how they can give back to society. In this way, a unicorn can turn into a zebra.
Is that easy to pull off?
No. When a listed company is beholden to its shareholders, it cannot easily depart from the pursuit of profit maximization. Unless, that is, certain values are already so deeply rooted in the company that executives, managers, employees, and shareholders all agree: It would damage the company to depart from these values.
Do such companies actually exist?
Yes, you can encounter such zebras in the German Mittelstand, for instance. Many family-owned companies, in particular, place their own family values above profits. What that means in practice was illustrated during the pandemic, when these companies didn’t cut jobs despite all the difficulties, but demonstrated endurance.
Subsequent impact
People who have achieved a lot financially sometimes ask themselves what and how they can give back to society, says Ali Gümüşay: "In this way, a unicorn can turn into a zebra."
How does a zebra get the necessary capital from investors in order to grow?
Here we have to distinguish between two types: The zebras that are after high profits in any case and also want to effect some societal change have just the same chances of attracting venture capital as other companies. But when societal impact reduces profit, start-ups have a harder job of convincing conventional investors. However, there are more and more financiers out there who have their own evaluation criteria and alternative expectations of young businesses.
We need better institutional parameters for social enterprises and a clear legal framework that better suits their objectives and activities.
Ali Gümüşay
EINSICHTEN – The research magazine: Continue reading now!
The German government adopted a National Strategy for Social Innovation and Social Enterprises last year. How do you rate this initiative?
As important and right. We need better institutional parameters for social enterprises and a clear legal framework that better suits their objectives and activities. Better support is also important. Lastly, we need a solid ecosystem – including effective exchange between these companies and us academics. The law provides a good framework for all these aspects. However, this framework remains to be filled. Let’s see how many social innovations are actually supported over the years to come.
Is it even possible for a zebra to hold its own against the unicorns?
This question implies that zebras and unicorns operate on the same playing field. But in fairness, this is only the case if we expand our assessment criteria beyond revenues and profits alone. What value is there when a zebra turns a profit and makes thousands of people healthier, but makes less money in the process than another company that only focuses on profit? In my eyes, that’s highly competitive!
Prof. Dr. Ali Aslan Gümüşay describes himself as an organizational scientist. He completed his doctorate at Oxford, followed by positions at WU Vienna, the University of Cambridge and the University of Hamburg. He has been researching at the Innovation & Entrepreneurship Center (IEC) at LMU since 2023. His professorship is based at the LMU Munich School of Management. At the same time, he heads a research group at the Humboldt Institute for Internet and Society in Berlin.