Profit Is Good, Right?

One of the most attractive aspects of social enterprise is that its practitioners are able to generate profits while delivering services traditionally reserved for non-profits and public programs. Economic theory suggests that the market is the most accurate judge of efficacy, and indeed social enterprises are often able to deliver these services more efficiently and to greater effect.

Yet as social enterprises become more common, some, too, are becoming very financially successful. While the concept of doing well by doing good is appealing, some social entrepreneurs are doing significantly better than the people their businesses are aiming to help.

SKS Microfinance's initial public offering (I.P.O.) on the National Stock Exchange of India in August raised over $350 million for the company. The company's founder, Vikram Akula, was rich, and private equity investors with shares in the company now stand to make millions.

This kind of prosperity stands in stark contrast to the poor Indians to whom the company makes microloans, and it has made many observers uneasy. Sure, making a living by helping people is great, but becoming filthy rich by making $20 loans to cowherds and basket-weavers is another story.

That being said, the success of SKS's I.P.O. should be met with cautious optimism because it suggests that social enterprises may be able to address social and environmental issues to an even greater extent. Hope Consulting reports that there is a $120 billion untapped market in the U.S. alone for individual investors looking to make a positive social and environmental impact with their money.

This is an enormous opportunity for social enterprises, but to unlock this opportunity, social enterprises must be able to attract investment. The financial successes of SKS and Banco Compartamos, which gained an I.P.O. in Mexico, should help drive investment in social enterprises.

According to a recent article, one of the biggest challenges for social enterprises seeking to obtain impact investments is that they rarely offer investors exit opportunities. As the article puts it, "While many companies that receive impact investment are cash flow positive and generate profits, impact investors only have substantial return when a company achieves a commercial exit - for example, through an initial public offer… or acquisition by a larger company." The article points out that while this has happened for microfinance companies, no similar financial windfalls have happened for investors of other types of social enterprises.

It is likely, then, that a social enterprise that managed to achieve a commercial exit would increase the chances of greater investments.

Having increased investor interest is a good thing, as it will help social enterprises to achieve scale and deliver even greater impacts. A concern, however, is that acquisitions and I.P.O.s are problematic because it will force social enterprises to compromise or even abandon their social missions.

Indeed, the Seattle-based group Unitus, which holds a stake in SKS worth millions after the I.P.O., announced it would lay off the organization's entire 40-person staff and would no longer be involved in microfinance activities. While the reason is unclear, some have suggested that Unitus was uncomfortable with the huge profits.

What do you think? Should social enterprises seek enormous profits in order to reach scale and deliver greater social impacts? Will this cause social enterprises to compromise their missions? Let me know in the comments!