Could lack of purpose be the underlying reason for startup failure?
New businesses emerge and fail every day. When it comes to startups, the failure rate is as high as 90%. The top reasons why startups fail are lack of market demand (42%) and running out of cash (29%). However, there may be some deeper, underlying reasons for such discouraging statistics.
According to recent studies, consumers and workers are more likely to support and work for impact-driven companies. Millennials in particular say that they are more likely to make a purchase to support a worthy cause. Over half of them would pay extra for environmentally-friendly products. When it comes to Gen Z, as much as 94% of them believe that companies should help resolve critical social issues. It is clear that companies need to be heading in a more socially responsible direction.
It is important to understand that sustainability also refers to the sustainability of the business itself. The more funding and profit a business has, the longer they will be around, and thus maximize their social impact.
Programs that support startups and social responsibility, like Emerging Humanity's Global Impact Accelerator, can help founders strike the right balance between impact and profit.
If we look up the definition of business on Investopedia, we will find that it is an organization or entity engaged in commercial, industrial, or professional activities. We will also learn the distinction between for-profit entities (that focus on profit) and non-profit ones (that focus on fulfilling a charitable mission or furthering a social cause).
The distinction between for-profit and non-profit companies has been around for a long time and has led to a culture of profit maximization for businesses. But nowadays this is changing. An increasing number of people expect that businesses, in addition to pursuing profit, also create value for society and protect the environment. In this way, social impact and responsibility are becoming necessary components of for-profit companies.
In terms of social impact, we can distinguish three major types of companies:
For-profit companies have been dominating the marketplace ever since capitalism changed our understanding of business. Professor Henrietta Onwuegbuzie of Lagos Business School has emphasized that business was initially created to meet societal needs. Today, it is a common belief that a business is set up mainly to make money.
In the pursuit of money, many companies have lost touch with purpose and impact. This is why highly profitable companies often have devastating effects on communities, the environment, and even their own employees.
Such companies do the bare legal minimum to stay in business and avoid fines. Many of their policies are merely a piece of paper, and ethics can easily be forgotten when money comes to play. Their employees are often disengaged from the company and its mission, and from their managers and co-workers.
As times are changing, some of these companies are starting to realize that lack of social responsibility and disregard for impact could derail profits or even sink the company. With these realizations come the Corporate Social Responsibility (CSR) programs that are a small first step in the right direction.
Corporate Social Responsibility (CSR) is usually practiced by businesses that are profit-driven but are mindful of the impact of their activities. They may follow responsible practices or redirect part of their profits to social causes. In this way, these causes are indirectly supported by the business activity.
We are also seeing many companies increasing their positive impact through donations, environmentally-friendly policies, and by developing programs to better communities.
Unfortunately, these efforts could also mask the company's otherwise negative and unsustainable actions. The reason is that CSR practices don't change the direct impact of the core business activities.
Suppose a company has been called out on unethical business practices, product safety, discrimination, pollution, depletion of natural resources, or other issues. Continuing business as usual will weigh on the company's reputation. The public may speculate whether the management's motive is to really give back or to simply generate positive publicity and draw attention away from the negative stories.
Companies that nurture and emphasize social impact as a core value are called social impact companies. These types of organizations consciously, systematically, and sustainably serve or solve the needs of local or global communities. Many times the business activity aligns with the United Nations Sustainable Development Goals (SDG). In recent years, the number of these businesses has been on the rise following increased global awareness and the corresponding trend in consumer demands.
Social impact companies take on problems such as education, access to clean water, conservation of natural resources, healthcare in underserved populations, and many others. They carefully screen their suppliers, taking sustainability into account. These businesses also treat workers with respect, provide sufficient wages, and steer away from negative social policies.
Unfortunately, building a business focusing only on the social good aspect, may prove unsustainable. The biggest reasons these types of organizations fail are lack of financial support, lack of networking and marketing, and inadequate organizational structure.
Social impact businesses still have to follow modern business practices. Profit, marketing, strong teams, strategy, and expertise in multiple areas are a must for the business to stay afloat.
It is important to keep in mind that businesses can drive social change and be profitable at the same time. Social impact does not exclude structure or profit. For instance, Microsoft's mission is "to empower every person and every organization on the planet to achieve more". By making computers accessible and easy to use, Bill Gates transformed the world and became one of the world's wealthiest people.
A Cone/Porter Novelli Purpose study conducted in 2018 found that 78% of American consumers believe businesses must positively impact society.
Additional insights from the study show that:
Presenting these stats might suggest that impact is more important than profit. However, if we look more closely, we can see that social impact actually drives profit, customer engagement, and loyalty.
Professor Onwuegbuzie also agrees that "Being purpose-driven helps companies grow faster and make more money". In other words, purpose and profit are not mutually exclusive but have a symbiotic relationship. In order to set a strong foundation for a business, entrepreneurs should pursue both.
Without profitability, purpose-driven businesses would not be able to pursue their mission. It would be difficult to engage investors, conscientious suppliers, and motivated workers. There would not be enough cash for payroll, business expenses, equipment, outreach campaigns, and change initiatives. The business would fail and thus become unable to fulfill its purpose.
Without social responsibility, companies would eventually alienate their customers. This would lead to decreased revenue and profit, hurting the company's bottom line and chances of survival.
Companies of the future need to be built for both social impact and profit. Profit will fuel the organization to stay in business and achieve their social mission. The latter will support the company's reputation and ability to maintain a healthy customer base.
We have examined profit-driven companies and social impact companies and concluded that modern businesses need to combine both profit and social impact in order to ensure success and longevity. Emerging Humanity's Startup Success Guide provides strategies, resources and action steps that help founders advance their business goals based on their current startup stage.
But can businesses successfully pursue both of these equally important goals? It is certainly possible (and in many cases necessary) but can be difficult. It seems like a strategic paradox that poses challenges to entrepreneurs, leaders, and managers. If not implemented carefully and consistently, the strategy can easily backfire.
If a mission statement is only there for appearances and the company is not working on advancing its mission, customers and employees will eventually lose trust. On the other hand, if profits are neglected, the business will struggle to remain operational.
Part of the challenge stems from the common tendency (and expectation on behalf of investors) to prioritize profit. This creates pressure for management to abandon impact goals, especially during "tough times". In addition, circumstances may not always favor both profit and impact at the same time. It may be necessary to sacrifice or delay social impact goals to make a profit, or vice versa.
Maintaining and tending to both principles is vital to the sustainability of a business. To achieve this, companies need strong and experienced leaders who are able to make the right short-term decisions, preserve the long-term vision, and resist pressure from the top. Programs that focus on impact and social responsibility like Emerging Humanity's Global Impact Accelerator can help founders strike the right balance between impact and profit.
On its own, each model can prove unsustainable, but striking a balance between both is the path to financial, environmental, and social sustainability. More and more companies today are responding to global challenges in response to increased public awareness. When policy-making and economic practices become more efficient and responsive, we can expect business failure rates to drop as well.
To create positive social change, companies and individuals do not have to go forgo profit. Below are examples of companies that are making a powerful impact while remaining profitable.
Established in 2013, LSTN's goal is to connect people through sound. They have established a relationship with Starkey Hearing Foundation to help restore hearing to one person in need for every pair of headphones they sell. The founders Bridget Hilton and Joe Huff have already touched the lives of over 30,000 people on three continents through their business.
French company Schneider Electric has committed to making a complete transition to renewable energy sources by 2030. They have pivoted to create a more customer-focused environment and improve the efficiency of their processes.
Digital Divide Data is an international social enterprise that delivers digital content, data, and research services. They started out training and hiring underprivileged workers for IT work. As they were heavily focused on their mission, the company faced financial issues. Thanks to their board that included decisive, business-savvy members, DDD managed to pivot and turn profitable. Today, they are the biggest tech-related employer in Cambodia and Laos and the winner of Kenya's Vision 2030 Award for the Best BPO.
Rareform repurposes billboard vinyl into durable bags, thus minimizing pollution. Their customers enjoy versatile products made from recycled materials, and the company is also donating 1% of annual profits to 1% for the Planet. They have also supported numerous charitable organizations for suicide prevention, environmental education, and the Equal Justice Initiative.
Founders and entrepreneurs looking to start profitable businesses that also contribute to society are embarking on a journey of personal development and empowerment. And it all begins with finding what you are truly passionate about.
To determine what issue you want to address with your business, you can start by answering the following questions:
You may already know, or it may take you some time to figure out the path you want to take. Generally speaking, the problem you want to address and the impact you want to see will go into defining your mission, vision, and values. Your background and strengths can help determine your approach to solving the problem.
Educational programs such as Emerging Humanity's bootcamps & courses can help you improve your entrepreneurial skills & knowledge, make the right decisions, and build your startup on solid foundation.
Think of your vision as your overarching goal and the reason for being in business. The vision paints a picture of the future you want to create. Your vision should be auspicious and seem almost impossible to achieve. It is more of an ideal you strive towards than an easily attainable goal.
Your mission defines who you are now and how you will operate in order to advance your vision. It states what you want to achieve and why and your approach to reaching those objectives. Your mission statement should describe what you offer and for whom, but should not list all the things you do. Make sure your statement is neither too technical nor too dreamy.
Your vision and mission are the tools for communicating your values and purpose to stakeholders. They are also used as part of the strategy to drive all business-related decisions.
Emerging Humanity offers useful Startup Tools & Templates that help entrepreneurs make the most of their resources and maximize their chances of success. If you are just starting out, the Value Proposition Canvas and Product Vision Board will be particularly useful in deciding on your product (or service) offerings.
There can be many approaches to solving a problem and many products or services that can be built for each approach. This means there are many ways to serve a vision and deliver social impact. The key is to choose one that leads to a thriving company!
Say you want to help people live healthier lives by providing resources to fight obesity. These are some of the possible approaches and product solutions to fulfill your purpose and make an impact:
Do a brainstorming session and then select the best option for your company by considering your interests, abilities, and expertise.
Once you have an idea of what you want to achieve and how, you need to validate that there is interest in the market. If your product/solution doesn't resonate with enough people or if there are solid alternatives, you may want to take a step back and reassess. Remember that lack of market demand is the primary reason most businesses fail.
It is important not to be attached to a specific product or solution. Remain loyal to and passionate about your vision and the impact you want to bring. Then choose the product that provides the biggest business potential.
A business has many moving pieces, and founders need to account for all of them. This often requires dealing with things outside of your core skillset or passion. Having just an idea, a piece of technology, or a certain skill does not equate to having a business.
Take a look at these basic elements required for a business to have a chance of being profitable:
Covering the four main pillars (Product, Market, Operations, Resources) is essential to building a sustainable business.
Founders need to use strategic planning and strong leadership to become fundable and remain profitable so they can create a positive social impact.
Leveraging the experience of a "startup veteran" is a great way to avoid common pitfalls and start off on the right track. Emerging Humanity offers coaching services that can help you reach your impact & profit goals faster.
Businesses exist to serve people, so founders need to find ways to engage with customers, partners, employees and investors, and to nurture these relationships.
Having a worthy cause and a quality product or service is not enough if people do not know about it!
When it comes to finding and engaging the right people, there are many places you can look:
Founders and businesses can also expand their networks and benefit in many other ways from engaging a startup business coach, as explained in this article.
When it comes to leadership and engagement, founders and upper management need to implement strong policies and lead by example.
By taking steps to provide a safe and prosperous environment for working towards social impact goals, businesses can build up trust and a solid reputation, which will, in turn, drive more profit.
Commitment to both social impact and profit is an increasing demand for businesses in all industries and across the world.
Companies that emphasize social impact are more appealing to both customers and job seekers. However, simply giving back a portion of the profits to a cause is not enough to build and maintain a good business reputation. Social impact efforts need to be driven by internal values and implemented systematically.
Having a positive impact and a solid business case will, in turn, drive more profits for the company and make it sustainable in the long run. To learn more about building a sustainable business, explore Emerging Humanity's Lean Startup Methodology for strategies and tactics for early-stage startups.
For-profit organizations can and should also be impact oriented. After all, over a half of Millennials and Gen Z consumers say they are willing to pay more to support companies that are addressing pressing social issues. In an extreme case, spending more on social impact could end up increasing a company's profitability!
In the end, whatever business model you choose to pursue, transparency and authenticity need to be your standard practices.
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