Author Archives: agutterman

About agutterman

Founding Director of the Sustainable Entrepreneurship Project

Definitions and Conceptualizations of Sustainable Entrepreneurship

Bell and Stellingwerf compiled what they considered to be a representative list of definitions of “sustainable entrepreneurship” that were suggested from 2003 through 2011, all of which are presented below in chronological order[1]:

  • “Innovative behavior of single or organizations operating in the private business sector who are seeing environmental or social issues as a core objective and competitive advantage”.[2]
  • “The continuing commitment by business to behave ethically and contribute to economic development, while improving the quality of life of the workforce, their families, local communities, the society and the world at large, as well as future generations. Sustainable Entrepreneurs are for-profit entrepreneurs that commit business operations towards the objective goal of achieving sustainability”.[3]
  • “The process of discovering, evaluating, and exploiting economic opportunities that are present in market failures which detract from sustainability, including those that are environmentally relevant”.[4]
  • “The examination of how opportunities to bring into existence future goods and services are discovered, created, and exploited, by whom, and with what economic, psychological, social, and environmental consequences”.[5]
  • “Create profitable enterprises and achieve certain environmental and/or social objectives, pursue and achieve what is often referred to as the double bottom-line or triple bottom line”[6]
  • “The discovery and exploitation of economic opportunities through the generation of market disequilibria that initiate the transformation of a sector towards an environmentally and socially more sustainable state”.[7]
  • “An innovative, market-oriented and personality driven form of creating economic and societal value by means of break-through environmentally or socially beneficial market or institutional innovations”.[8]
  • “Sustainable Entrepreneurship is focused on the preservation of nature, life support, and community in the pursuit of perceived opportunities to bring into existence future products, processes, and services for gain, where gain is broadly construed to include economic and non-economic gains to individuals, the economy, and society”.[9]

From their perspective, Bell and Stellingwerf believed that the definitions collectively identified four defining attributes of sustainable entrepreneurship[10]:

  • Balancing environmental and social concerns: Bell and Stellingwerf observed that sustainable entrepreneurship was “a balancing act of strategically managing and orienting environmental and social objectives and considerations, with entity specific financial goals steering the business objective” and that sustainable entrepreneurship required finding the right balance with the disparate economic, social, cultural and ecological environments in which businesses must operate.  They also noted that in the course of their efforts to limit and minimize the environmental and social impact of their activities sustainable entrepreneurs focused on improving the quality of their processes.[11]
  • Economic gains: Entrepreneurship, sustainable or otherwise, has making a profit as an essential characteristic and objective and the concept of “gain” can be found throughout the definitions reproduced above.  However, sustainable entrepreneurship is a based on a broad construction of gain that includes economic and non-economic gains to individuals, the economy and society.  Profits are recognized as being essential to sustaining the livelihood of businesses and providing entrepreneurs with the resources that are need for reinvestment in the sustainable goals of their companies.  Bell and Stellingwerf argued that entrepreneurial activities can only be labelled sustainable, and therefore satisfy sustainable development, if there is an equal blending of, and equal consideration for, each of the 3 P’s of the triple bottom line described above.[12]
  • Market failures and disequilibria: Half of the definitions reproduced above explicitly mentioned recognition and exploitation of opportunities caused by environmental and/or social imperfections and identification of opportunities has been a long-standing tenant of disruptive entrepreneurship.  Cohen and Winn argued that there are four types of market imperfections (i.e., inefficient firms, externalities, flawed pricing mechanisms and information asymmetries) that contribute to environmental degradation and provide opportunities for sustainable entrepreneurs to create radical technologies and innovative business models that can achieve profitability while simultaneously improving local and global social and environmental conditions.[13]
  • Transforming sectors toward sustainability: A number of theorists have argued that startups launched by sustainable entrepreneurs can solve sustainability-related problems through the introduction of innovative products, process and services and that the commercial success of these solutions, and accompanying support of professional investors and other influential stakeholders, can and will eventually influence incumbents to adopt similar solutions and otherwise take steps that will lead to the transformation of the entire industry toward sustainability.[14]  Under these theories, sustainable entrepreneurs make their impact by targeting market niches defined by a particular sustainability-related problem, generally introducing the radical changes that are outside the comfort zone of incumbents that prefer change to be incremental; however, Bell and Stellingwerf cautioned that research “in the field” lacked support.[15]

From all of this, Bell and Stellingwerf proposed their own definition of sustainable entrepreneurship as “startups that introduce an innovation, with the aim to solve a sustainability-related market failure, which initiates the transformation of an industry toward sustainability”.[16]  The “innovation” could take the form of a product, process or service and the sustainability objectives behind these innovations were equally important as the economic objectives associated with them.  The use of the term “startups” is intentional and significant as it explicitly differentiates sustainable entrepreneurship from the activities of established organizations, such as corporations, to address sustainable development issues in their environment (i.e., corporate-sustainability/CSR initiatives).

Rey synthesized the results of his review of various definitions of sustainable entrepreneurship as follows: “conducting business which commits to ethical standards and behavior, contributing to economic development, all the while maintaining a progressive upkeep of the well-being of society—including the labor-force and their families, their communities and the world on a whole, for the present and future inhabitants”.[17]  According to Rey, a sustainable company is one that operates in accord with the philosophy of the Brundtland Report while recognizing and balancing the economic, social and environmental aspects and impacts of their businesses.[18] Rey noted that “sustainable entrepreneurship may seem odd as entrepreneurship is principally associated with accomplishing certain goals while maximizing profits in the most efficient way possible” and entrepreneurs who are focused on projecting a sustainable outlook for their business will likely stray from profit maximization due to the added costs of sustainable goods and practices that traditional entrepreneurs are able to avoid by simply going for the cheapest alternative.[19]

Rey noted that while CSR is often compared to sustainable entrepreneurship, he believed that there are significant differences between the two concepts.  Most importantly, according to Rey, CSR is primarily concerned with the actions of corporations that have been operating for a significant period of time and which have reached a certain size and determined that they have a responsibility, beyond the traditional profit-making objectives, to be more aware of their external environment and stakeholders and find ways to give back to their local communities beyond their mandatory legal obligations.  While these initiatives are generally welcomed, they typically lack certain core characteristics of sustainable entrepreneurship such as offering environmentally-friendly products and services and making changes to internal operations of the company to bring sustainability practices to personnel matters and production processes.[20]

Muñoz observed that the specific form of entrepreneurship engaged in by sustainability-driven enterprises is about simultaneously achieving three objectives (i.e., social, environmental and economic), while committing to securing the economic welfare and social well-being of future generations and ensuring a long-term sustainability of the environment.[21]  He then went on to propose that sustainable entrepreneurship should be defined and conceptualized as being “focused on pursuing business opportunities to bring into existence future products, processes and services, while contributing to sustain the development of society, the economy and the environment and consequently to enhance the well-being of future generations”.[22]  From this definition it is possible to identify certain central factors that sustainable entrepreneurs need to consider in developing and executing their business models: integrating environmental best practices and protection into all business activities; social justice; economic prosperity for investors, entrepreneurs and economies; improving the well-being of communities; and intra and intergenerational equity.[23]  Muñoz pointed out that his definition acknowledged and integrated constructs from both sustainable development and entrepreneurship literature, a path also taken by Shepherd and Patzelt’s opinion that the practice of sustainable entrepreneurship called for sustaining and developing three constructs informed by sustainable development literature (i.e., sustain nature, life support systems and communities) and three constructs informed by entrepreneurship literature (i.e., develop economic gains, non-economic gains to individuals and non-economic gains to society).[24]

Racelis used the term “authentic sustainable entrepreneurship” to describe the situation “when the economic, environmental, and social motives come together in the business action of the entrepreneur, along with the internalization of the fiduciary, stewardship, and moral responsibilities to future generations”.[25]  Racelis went on to suggest that the specific normative elements that should be found in the activities of the authentic sustainable entrepreneur should include “production of socially desirable products in a socially desirable manner, and advancement of the health and well-being of those affected by such, all within a values-driven framework”.[26]  Racelis pointed out that sustainable entrepreneurship is a model of entrepreneurship that enables founders to seize opportunities relating to environmental and social degradation which are created by market imperfections (e.g., inefficient firms, externalities, flawed pricing mechanisms, and information asymmetries) to obtain entrepreneurial rents while simultaneously improving social and environmental conditions both locally and globally.[27]  Racelis argued that the core motivation for sustainable entrepreneurs is to “contribute to solving societal and environmental problems through the realization of a successful business”, while their main goal “is to create sustainable development through entrepreneurial corporate activities”.[28]

Another important implicit condition for sustainable entrepreneurship is the capacity of the venture to survive, develop and grow.  Rey referred to this condition as “viability” and emphasized that a sustainable entrepreneurial company must, at a minimum, cover all costs, enjoy continuous growth in size and output, make a positive return on turnover and, fundamentally, “remain out of financial danger for years”.[29]  In other words, the company must seek and achieve long-term sustainability in order to successfully pursue and achieve its goals and purposes and provide prospective stakeholders, including employees, with security that their contributions to the enterprise will be product value over an extended period.

Build Lasting Visionary Companies—Habits of Sustainable Entrepreneurs

Writing in the early 1990s, a time when management books had become somewhat of a fad, Collins and Porras claimed that they were doing something different in their best-selling book Built to Last: Successful Habits of Visionary Companies.  They weren’t writing about charismatic visionary leaders, visionary product concepts or visionary market insights, and reminded readers that all leaders eventually die, all products become obsolete and all markets mature.  Instead, they believed that one of the most important economic challenges and issues was figuring out how to build enduring “visionary companies” that met the following criteria: a premier institution in their industry that was widely admired by knowledgeable businesspeople; a company that had made an indelible imprint on the world; and a company that had been in business for at least 50 years and gone through multiple generations of chief executives and multiple product (or service) life cycles. Collins and Porras tackled two fundamental and difficult questions: “What makes the truly exceptional companies different from the other companies?” and “Is it possible to discover the timeless management principles that have consistently distinguished outstanding companies and which apply over long stretches of time and across a wide range of industries?” Based on their extensive research, Collins and Porras argued that such timeless management principles did exist and can and should be applied by managers, CEOs and entrepreneurs all over the world to create their own visionary companies and effectively practice sustainability leadership.

In Built to Last and other articles regarding their research, Collins and Porras listed and described at least ten management principles they had identified from looking at both companies that they believed had achieved visionary status and at comparison companies which, while “born in the same era, with the same market opportunities, facing the same demographics, technology shifts, and socioeconomic trends”, had been less successful.  Of those principles the authors felt that four of them stood out—“be a clock builder—an architect—not a time teller; embrace the ‘Genius of the AND’; preserve the core/stimulate progress; and seek consistent alignment”—and most of the book was about explaining and illustrating each of these concepts.

For example, the authors explained that “[h]aving a great idea or being a charismatic visionary leader is ‘time telling’; building a company that can prosper far beyond the presence of any single leader and through multiple product life cycles is ‘clock building’”.  Embrace the “Genius of the And” meant that visionary companies had “the ability to embrace both extremes of a number of dimensions at the same time” such as having a purpose beyond profit while engaging in the pragmatic pursuit of profit.  Preserve the Core and Stimulate Progress meant that “[a] visionary company carefully preserves and protects its core ideology, yet all the specific manifestations of its core ideology must be open for change and evolution”.  Finally, visionary companies achieved alignment by making sure “that all the elements of a company work together in concert within the context of the company’s core ideology and the type of progress it aims to achieve”.  On a day-to-day basis, alignment met making sure companies didn’t adopt incentive systems that rewarded behaviors that were inconsistent with the company’s core values or policies and procedures that inhibited change and improvement.

As mentioned above, Collins and Porras identified and followed pairs of companies, 18 in all, over a long period of time in order to identify those capable of achieving enduring success and not get caught up celebrating a company that may have had just one or two moments of good fortune.  It was interesting that more often than not the comparison company had greater initial success during the entrepreneurial phase than the visionary company.  While all of the pairs were used to illustrate the four key concepts mentioned above, let’s look at just three examples starting with Hewlett-Packard (a visionary company founded in 1937) and Texas Instruments (the comparison company founded in 1930).  HP was consistently applauded by the researchers as an example of the clock-building orientation and the researchers noted that it was telling that when Dave Packard, one of the HP founders, was asked about which product decisions were most important to the growth of the company his response completely ignored specific products and focused on organizational decisions that are so much a part of clock-building: “developing an engineering team, a pay-as-you-go policy to impose fiscal discipline, a profit-sharing program, personnel and management policies [and] the ‘HP Way’ philosophy of management”.  The researchers also praised Packard as a strong example of understanding “Genius of the AND” in the way that he and his company simultaneously pursued “profit and purpose beyond profit”.  In order to illustrate their point the researchers provided a quote from a presentation that Packard made to HP personnel who would be responsible for management development training which included the following: “I want to discuss why a company exists in the first place.  In other words, why are we here?  I think many people assume, wrongly, that a company exists simply to make money.  While this is an important result of a company’s existence, we have to go deeper and find the real reasons for our being . . . The real reason for our existence is that we provide something which is unique [that makes a contribution].”  In contrast, the researchers “could find not one single statement that TI exists for reasons beyond making money”.  HP also received high marks with respect to the way it aligned its practices and policies with its “lofty values and aspirations” by finding ways to show respect for its employees, reinforce the importance of technological contribution, promote an entrepreneurial environment and “immerse employees in the tenets of what became known as the ‘HP Way’”.

A second pair of twins was Wal-Mart (a visionary company founded in 1945) and Ames (the comparison company founded in 1958).  The researchers complimented legendary Wal-Mart founder Sam Walton for implementing “concrete organizational mechanisms to stimulate change and improvement” and noted that he “concentrated on creating an organization that would evolve and change on its own”, each of which were consistent with clock building.  Walton also knew the importance of succession planning to make sure that the company philosophies survived.  In contrast, “Ames leaders dictated all change from above and detailed in a book the precise steps a store manager should take, leaving no room for initiative” and the researchers noted that Ames had no succession plan in place and eventually management control fell into the hands of outsiders with no ideas about the philosophies of the founders.

A third pair of twins was Walt Disney (a visionary company founded in 1923) and Columbia Pictures (the comparison company founded in 1920).  With respect to clock building the researchers judged Harry Cohn, one of the founders of Columbia to be a complete failure who “cared first and foremost about becoming a movie mogul and wielding immense personal power in Hollywood and cared little or not at all about the qualities and identify of the Columbia Pictures Company that might endure beyond his lifetime.”  On the other hand Walt Disney spent every moment from the day that he founded the company to the day that he died thinking about future ways that the company could make people happy.  Disney was also praised for its efforts to institutionalize its core technologies while simultaneously maintaining ongoing efforts to stimulate progress and the researchers took particular note of how Disney developed a cult-like culture through “intensive screening and indoctrination of employees”.  For its part, Columbia, like Ames, was criticized for its neglect of investments for long-term growth and failure to invest in employee recruiting, training and professional development.  Today Disney remains an important force in entertaining children and adults all around the world while Columbia, lacking a strong heritage or reasons to exist beyond its cash and assets, ceased to exist as an independent company.

As to how the research they conducted twenty years ago might relate to the future, such as today, Collins and Porras predicted that clock building would become even more important as ideas, products and markets became obsolete more quickly due to “accelerating rate of technological change, increasing global competition and dramatically shorter product life cycles”.  They also thought that preserving the core/stimulating progress would become more important as companies became “flatter, more decentralized, more geographically dispersed” and workers became more knowledgeable and seek more and more individual autonomy.  In other articles Collins talked about how the work done to write Built to Last might be helpful in understanding dramatic and seemingly sudden failures of high flying companies like we seen so often recently and mentioned the dangers of “hubris born of success” and undisciplined and reckless pursuit of more success—more money, larger size, more celebrity.  The stories collected, and lessons learning, in creating Built to Last should be useful for the current crop of celebrity companies such as Facebook, Google, Amazon and Apple that have been so successful in their start-up phase, but must now settle in for the long haul of decades of ups and downs before they are eligible for entering the visionary class.  The founders and other leaders of these companies have often spoken of their intent to achieve and sustain long-term greatness and impact.  Perhaps the trials and triumphs of the legendary sustainable entrepreneurs from the past, such as Packard, Walton and Disney, can be valuable teaching tools.

Sources: J. Collins and J. Porras, Built to Last: Successful Habits of Visionary Companies (New York: HarperBusiness, 1994); J. Collins, “Building Companies to Last”, INC. Special Issue—The State of Small Business (1995); and J. Collins, “How the Mighty Fall: A Primer on the Warning Signs”, Businessweek (May 2009). 

This post is part of the Sustainable Entrepreneurship Project’s extensive materials on Entrepreneurship and Sustainability and Entrepreneurship.

Notes

[1] J. Bell and J. Stellingwerf, Sustainable Entrepreneurship: The Motivations & Challenges of Sustainable Entrepreneurs in the Renewable Energy Industry (Jonkoping, Sweden: Jonkoping International Business School Master Thesis in Business Administration, 2012), 13-14.

[2] A. Gerlach, “Sustainable Entrepreneurship and Innovation”, in: University of Leeds: The 2003 Corporate Social Responsibility and Environmental Management Conference (Leeds, UK: University of Leeds, 2003), 101, 103.

[3] E. Crals and L. Vereeck, “The affordability of sustainable entrepreneurship certification for SMEs”, International Journal of Sustainable Development and World Ecology, 12 (2005), 173.

[4] T. Dean and J. McMullen, “Towards a theory of Sustainable Entrepreneurship: Reducing environmental degradation through entrepreneurial action”, Journal of Business Venturing, 22 (2007), 50, 58.

[5] B. Cohen and M. Winn, “Market imperfections, opportunity and Sustainable Entrepreneurship”, Journal of Business Venturing, 22(1) (2007), 29, 35.

[6] D. Choi and E. Gray, “The venture development process of “sustainable” entrepreneurs”, Management Research News, 31(8) (2008), 558, 559.

[7] K. Hockerts and R. Wüstenhagen, “Greening Goliaths versus emerging Davids – Theorizing about the role of incumbents and new entrants in Sustainable Entrepreneurship”, Journal of Business Venturing, 25 (2010), 481, 482.

[8] S. Schaltegger and M. Wagner, “Sustainable Entrepreneurship and Sustainability Innovation: Categories and Interactions”, Business Strategy and the Environment, 20 (2011), 222, 224.

[9] D. Shepherd and H. Patzelt, “The New Field of Sustainable Entrepreneurship: Studying Entrepreneurial Action Linking “What is to be Sustained” with “What is to be Developed””, Entrepreneurship Theory and Practice, 35(1) (2011), 137, 142.

[10] J. Bell and J. Stellingwerf, Sustainable Entrepreneurship: The Motivations & Challenges of Sustainable Entrepreneurs in the Renewable Energy Industry (Jonkoping, Sweden: Jonkoping International Business School Master Thesis in Business Administration, 2012), 14-17.

[11] D. Choi and E. Gray, “The venture development process of “sustainable” entrepreneurs”, Management Research News, 31(8) (2008), 558.

[12] J. Bell and J. Stellingwerf, Sustainable Entrepreneurship: The Motivations & Challenges of Sustainable Entrepreneurs in the Renewable Energy Industry (Jonkoping, Sweden: Jonkoping International Business School Master Thesis in Business Administration, 2012), 15.

[13] B. Cohen and M. Winn, “Market imperfections, opportunity and Sustainable Entrepreneurship”, Journal of Business Venturing, 22(1) (2007), 29.  See also T. Dean and J. McMullen, “Towards a theory of Sustainable Entrepreneurship: Reducing environmental degradation through entrepreneurial action”, Journal of Business Venturing, 22 (2007), 50, 58 (“Environmentally relevant market failures represent opportunities for simultaneously achieving profitability while reducing environmentally degrading economic behaviors.”).

[14] See, e.g., K. Hockerts and R. Wüstenhagen, “Greening Goliaths versus emerging Davids – Theorizing about the role of incumbents and new entrants in Sustainable Entrepreneurship”, Journal of Business Venturing, 25 (2010), 481, 482.

[15] J. Bell and J. Stellingwerf, Sustainable Entrepreneurship: The Motivations & Challenges of Sustainable Entrepreneurs in the Renewable Energy Industry (Jonkoping, Sweden: Jonkoping International Business School Master Thesis in Business Administration, 2012), 17.

[16] Id.

[17] L. Rey, Sustainable Entrepreneurship and its Viability (Rotterdam: Master Thesis for MS in Entrepreneurship, Strategy and Organizations Economics from Erasmus School of Economics, December 2011), 12.

[18] Id.

[19] Id. at 9.

[20] Id.

[21] P. Muñoz, “The Distinctive Importance of Sustainable Entrepreneurship”, Creativity, Innovation and Entrepreneurship, 2(1) (November 2013) (citing W. Young and F. Tilley, “Can businesses move beyond efficiency? The shift towards effectiveness and equity in the corporate sustainability debate”, Business Strategy and the Environment, 15(6) (2006), 402).

[22] Id.

[23] Id. (citing S. Dresner, The Principles of Sustainability (2nd Edition), (London: Earthscan, 2008); and W. Beckerman, “Sustainable Development and Our Obligations to Future Generations”, in A. Dobson (Ed.) Fairness and Futurity: Essays on Environmental Sustainability and Social Justice (Oxford: Oxford University Press, 1999), 71.

[24] D. Shepherd and H. Patzelt, “The new field of sustainable entrepreneurship: studying entrepreneurial action linking ‘what is to be sustained’ with ‘what is to be developed’”, Entrepreneurship Theory and Practice, 35(1) (2011), 137.

[25] A. Racelis, “Sustainable Entrepreneurship in Asia: A Proposed Theoretical Framework Based on Literature Review”, Journal of Management for Global Sustainability, 2 (2014), 4.

[26] Id. (citing S. Hodgkin, Business social entrepreneurs: working towards sustainable communities through socially responsible business practices (Master’s thesis, University of Calgary, Calgary, Alberta, Canada, 2002)).

[27] Id. (citing T. Dean and J. McMullen, “Toward a theory of sustainable entrepreneurship: reducing environmental degradation through entrepreneurial action”, Journal of Business Venturing, 22 (2007), 50).

[28] Id.

[29] L. Rey, Sustainable Entrepreneurship and its Viability (Rotterdam: Master Thesis for MS in Entrepreneurship, Strategy and Organizations Economics from Erasmus School of Economics, December 2011), 14.

Business and Sustainable Development

The International Institute for Sustainable Development (IISD) was established in 1990 as an independent non-profit organization dedicated to promoting human development and environmental sustainability through innovative research, communication and partnerships.  The strategic plan for the IISD includes the following programs and core strategic goals:

  • Economic Law and Policy: Reform economic policies to advance sustainable and equitable development.
  • Energy: Shift energy systems and policies to support universal access to clean, low-carbon energy.
  • Water: Advance science-based solutions for universal access to water and healthy ecosystems.
  • Resilience: Strengthen capacities to manage climate- and conflict-related risks.
  • Knowledge: Transform data and information into knowledge that supports sustainable development.
  • Reporting Services: Provide accurate, neutral, high-quality analysis that informs decision making about multilateral environmental negotiations.

Content available on the IISD website includes materials on Business and Sustainable Development collected and presented on their own site which includes six sections covering the following:

  • Key Issues: Briefings on specific sustainable development topics from a business perspective including corporate social responsibility, corporate reporting, integrated product policy, climate change and trade.
  • Strategies and Tools:How to incorporate the principle of sustainability into everyday business activities, illustrated by real-life examples
  • Markets:Business opportunities arising from sustainable development
  • Banking and Investment:Spotlight on how sustainable development is being approached by the financial services industry
  • Working with NGOs:How businesses are forging working partnerships with lobby groups
  • Training Opportunities:How universities and professional training providers can help industry leaders incorporate sustainability into their business strategies

Among the strategies and tools are guiding principles (i.e., the CERES principles, the International Chamber of Commerce Business Charter, the GoodCorporation accreditation scheme, IISD’s checklist of sustainable business practices, “factor four” and the “triple bottom line”); business tools (i.e., by-product synergy and industrial ecology, cleaner production, design for environment, eco-efficiency, energy efficiency, environmentally-conscious manufacturing, the “four R’s”, green procurement, performance contracting, pollution prevention and zero-emission processes); and systems and standards (i.e., environmental management systems, ISO 14001, EMAS, EH&S programs, SA 8000, life-cycle assessment, reporting, total cost assessment and total quality environment).

The IISD, in collaboration with Deloitte & Touche and the World Business Council for Sustainable Development, published “Business Strategy for Sustainable Development: Leadership and Accountability for the 90s” in 1992, and that publication included a number of steps for managing an enterprise according to sustainable development principles:

  • Perform a stakeholder analysis to identify all the parties that are directly or indirectly affected by the enterprise’s operations and set out the issues, concerns and information needs of the stakeholders with respect to the organization’s sustainable development activities.
  • Assess the current position to determine the degree to which the company’s activities line up with sustainable development principles, a process that requires evaluating the company’s overall strategy, the performance of specific operations, and the effect of particular activities. This process should compare the company’s current performance with the expectations of the stakeholders, review management philosophies and systems, analyze the scope of public disclosures on sustainability topics, and evaluate the ability of current information systems to produce the required data should be evaluated.
  • Set sustainable development policies and objectives including articulating the basic values that the enterprise expects its employees to follow with respect to sustainable development, incorporating sustainable development objectives as an additional dimension of business strategy, setting targets for operating performance and establishing an effective external monitoring system that gathers information on new and proposed legislation; industry practices and standards, competitors’ strategies, community and special interest group policies and activities. trade union concerns and technical developments (e.g., new process technologies).
  • Establish a social responsibility committee of the board of directors with responsibility for setting corporate policies on sustainable development and monitoring their implementation and for dealing with issues such as health and safety, personnel policies, environmental protection, and codes of business conduct.
  • Decide on a strategy taking into account the performance of other comparable organizations and with a focus on narrowing the gap between the current state of the corporation’s performance and its objectives for the future. The strategy should be supported by a plan that describes how and when management expects to achieve the stated goals and the various milestones that must be reached along the way.  Once the strategy and the general plan have been approved, detailed plans should be prepared indicating how the new strategy will affect operations, management systems, information systems and reporting.  Plans should be reviewed and approved by senior management following consultation with employees throughout the organization.
  • Design and execute an implementation plan for the management system changes that are needed in order to achieve sustainable development objectives, a process that normally includes changing the corporate culture and employee attitudes, defining responsibilities and accountability, and establishing organizational structures, information reporting systems and operational practices.
  • Develop a supportive corporate culture to ensure that the organization and its people give their backing to the sustainable development policies. In most cases, managers will need to be retrained to change attitudes that have traditionally emphasized wealth management for the owners of the enterprise.  An effort should also be made to develop a culture that emphasizes employee participation, continuous learning and improvement.
  • Develop appropriate measures and standards of performance taking into account the company’s sustainable development objectives and standards that have been established by government and other public agencies.
  • Develop meaningful reports for internal management and stakeholders, outlining the enterprise’s sustainable development objectives and comparing performance against them. Directors and senior executives use internal reports to measure performance, make decisions and monitor the implementation of their policies and strategies. Shareholders, creditors, employees and customers, as well as the public at large, use external corporate reports to evaluate the performance of a corporation, and to hold the directors and senior executives accountable for achieving financial, social and environmental objectives.
  • Enhance internal monitoring processes to help directors and senior managers ensure that the sustainable development policies are being implemented. Monitoring can take many forms, such as reviewing reports submitted by middle managers, touring operating sites and observing employees performing their duties, holding regular meetings with subordinates to review reports and to seek input on how the procedures and reporting systems might be improved, and implementing an environmental auditing program.

Other resources and references relating to sustainable business are available from the Sustainable Business and Entrepreneurship Platform, which is a research group from the International Business School and the Centre of Applied Research of Economics and Management at the Amsterdam University of Applied Science.  The Platform was developed as a resource for professionals, primarily in the fashion, apparel and textile industries, to learn more about sustainability in practice and includes case studies and tools that can be used for assessment of sustainability and development and implementation of strategies for achieving sustainability change.

This post is part of the Sustainable Entrepreneurship Project’s extensive materials on Sustainability and Entrepreneurship.

Differentiating Between Commercial and Social Entrepreneurship

Austin et al. surveyed various definitions of social entrepreneurship and observed that they ranged from broad to narrow.[1]  Among the broader definitions are those see social entrepreneurship as an “innovative activity with a social objective in either the for-profit sector, such as in social-purpose commercial ventures[2] or in corporate social entrepreneurship[3]; or in the nonprofit sector, or across sectors, such as hybrid structural forms which mix for-profit and nonprofit approaches[4]”.  A much narrower definition focuses on “applying business expertise and market-based skills in the nonprofit sector such as when nonprofit organizations develop innovative approaches to earn income”.[5]  Austin et al. noted that the common factor across all the definitions of social entrepreneurship appears to an underlying drive “to create social value, rather than personal and shareholder wealth”[6], and that the activities of the social entrepreneur could be characterized as innovative (i.e., the creation of something new rather than simply the replication of existing enterprises or practices).  For themselves, Austin et al. defined social entrepreneurship as “innovative, social value creating activity that can occur within or across the nonprofit, business, or government sectors”.[7]

As noted above, Austin et al., as well as others, acknowledge that social entrepreneurship can be practiced in multiple sectors using different organizational forms and the decision as to form depends, among other things, on the objective of the activity and the optimal strategy for mobilizing the required resources.  Austin et al. focused their interest on the nonprofit and business sectors and on differentiating between “commercial entrepreneurs” and “social entrepreneurs” through the examination of four fundamental theoretical propositions: 

  • Market failure: Market failure creates different opportunities for commercial and social entrepreneurs. For example, commercial entrepreneurship may not be a viable option when commercial market forces do not meet a social need (e.g., public goods or situations where the customers needing a product or service are not able to pay).  In these situations, social entrepreneurs may see an opportunity where commercial entrepreneurs only see problems in achieving their economic objectives.
  • Mission. Differences in mission are a fundamental distinguishing factor: “the fundamental purpose of social entrepreneurship is creating social value for the public good, whereas commercial entrepreneurship aims at creating profitable operations resulting in private gain”. This is not to say that social entrepreneurs do not seek, or cannot obtain, profits, nor does it mean that products and services created by commercial entrepreneurs do not have some social value.  The key point is that differences in mission will likely manifest itself in multiple areas of enterprise management and personnel motivation.
  • Resource mobilization. Commercial and social entrepreneurs face different challenges with respect to financial and human resource mobilization that causes them to take fundamentally different approaches to managing their financial and human resources. For example, social entrepreneurs are largely restricted in their ability to tap into the same capital markets as commercial entrepreneurs due to the non-distributive restriction on surpluses generated by nonprofit organizations and the social purposes that are deeply embedded in social enterprises.  Social entrepreneurs may also find that their inability to compensate staff as competitively as in commercial markets makes it more difficult to recruit the talent needed in order for the venture to be successful and they must often rely on nonpecuniary compensation that is valued by people interested in working on social causes.
  • Performance measurement. Difficulties in measuring a social entrepreneur’s performance with respect to social impact are a distinguishing factor from commercial entrepreneurship and create complications for social entrepreneurs with respect to accountability and relations with stakeholders. Commercial entrepreneurs, and the stakeholders of such entrepreneurs interested in measuring their performance, have been able to rely on relatively tangible and quantifiable measures of performance such as financial indicators, market share, customer satisfaction, and quality. However, there is far from any consensus on measuring social change due to non-quantifiability, multi-causality, temporal dimensions, and perceptive differences of the social impact created.  Moreover, social entrepreneurs have a higher number and wider range of stakeholder relationships, thus increasing the time and effort that must be invested in managing those relationships.[8]

Austin et al. cautioned that the propositions were presently primarily to facilitate comparisons and that in reality one can find many social purpose enterprises that are quite similar to their commercial counterparts, particularly when the social purpose enterprise is engaged in operational activities that include development and sale of products and services that both meet a social need and generate revenues needed in order for the enterprise to remain viable and sustainable and attract financial and human resources.  In turn, many commercial enterprises have recognized that there are opportunities for enhancing their economic value by incorporate social purpose into their products, services and business practices, even if they have not wholly embraced “triple-bottom-line” accounting and reporting.

In order to test their propositions, Austin et al. compared commercial and social entrepreneurship using the “PCDO” analytical framework proposed by Sahlman based on four interrelated elements that are crucial for the management of entrepreneurial activity[9]:

  • People: This element  is defined as those who activity participate in the venture or who bring resources to the venture and includes both those within the organization and those outside the organization who must be involved in order for the venture to be successful.
  • Context: This element includes relevant factors that are generally outside of the control of the entrepreneur but which be expected to have an impact on his or her activities (e.g., the general economy, taxes and other regulations and the socio-political institutions in the areas in which the entrepreneur intends to operate).
  • Deal: The term “deal” to refer to the substance of the bargaining among participants in the venture that defines who among the participants in a venture gives what, who among the participants in the venture gets what, and how and when those deliveries and receipts will take place.
  • Opportunity: Austin et al. defined the term “opportunity” as “any activity requiring the investment of scarce resources in hopes of a future return”.[10]  The entrepreneur must have a vision of a future that is better for him or her and must also be able to develop and implement a credible path to change the current situation to that desired future state.

People and financial resources

Austin et al. observed that, in many ways, the human and financial capital inputs essential to the entrepreneurial venture are quite comparable between social and commercial entrepreneurship.[11] The “people” element of the PCDO model includes those actively participate in the venture or who bring resources to the venture and includes both those within the organization and those outside the organization who must be involved in order for the venture to be successful. This element includes not only the personal characteristics of the entrepreneur such as his or her skills, attitudes, contacts, goals and values, but also the cumulative skills, attitudes, knowledge, contacts, goals and values of all participants that provide the mix of resources that contribute to the success of the venture.  According to Austin et al., “both commercial and social entrepreneurs must consider the managers, employees, funders, and other organizations critical to their success, and how to capture this human talent for their ventures”.[12]  For social ventures there will be a need for board members, managers and staff who believe in the mission and who have the unique skills and talents to help the entrepreneur bring the mission alive.  To attract these human resources, social entrepreneurs must have a strong reputation that engenders trust among those who might be willing to work with them, a factor that is all the more important given that the social entrepreneur is asking contributor to invest their time in a cause rather than a commercial business that can be assessed using objective performance measures.

While social entrepreneurs have needs with respect to human resources that are similar to those of commercial entrepreneurs, social entrepreneurs are often unable to offer market rates to potential key hires and are generally not able to offer other incentives such as stock options unless they have elected to organize and operate their ventures using a for-profit organizational form.[13]  Because of these limitations, social entrepreneurs must develop different tools for motivating potential participants in the venture.  Social entrepreneurs also rely heavily on volunteers to serve in key positions, such as serving on the board of directors, and to carry out important activities such as fundraising, and working with volunteers creates special management issues that need to be understood and addressed by social entrepreneurs.  Issues relating to limited financial resources extend outside the organization also and many social entrepreneurs depend on the willingness of professional service providers such as lawyers and accountants to provide their service for free or at heavily reduced rates.

Austin et al. noted that while commercial entrepreneurs, once they have achieved a minimum level of economic success, will generally have access to capital from a range of investors and financial institutions offering a wide array of financing instruments and terms, social entrepreneurs have fewer channels for accessing unrestricted sources of capital and must also rely heavily on a range of funding sources such as individual contributions, foundation grants, member dues, user fees, and government payments.  Other unique issues that social entrepreneurs must confront is the need to be continuously engaged in some sort of fundraising activity given that revenues from operations rarely cover all of the costs associated with carrying out the organization mission and the lack of flexibility to shift the organization’s products or services quickly, as commercial entrepreneurs often do, to take advantage of new funding opportunities since such a transition will typically face opposition from participants who have become emotionally and psychologically invested in focusing on the current need or problem using the existing products and services.

Austin et al. concluded that while commercial and social entrepreneurs have similar needs with respect to human and financial resources, “social entrepreneurs are often faced with more constraints: limited access to the best talent; fewer financial institutions, instruments, and resources; and scarce unrestricted funding and inherent strategic rigidities, which hinder their ability to mobilize and deploy resources to achieve the organization’s ambitious goals”.[14]  While social entrepreneurship can be pursued using for-profit organizational forms, such a path creates challenges for social entrepreneurs with respect to maintaining a focus on the social mission while meeting the expectations of investors for economic returns.  Austin et al. advised that the constraints on their actions made it imperative for social entrepreneurs “to develop a large network of strong supporters, and an ability to communicate the impact of the venture’s work to leverage resources outside organizational boundaries that can enable them to achieve their goals”.[15]

Austin et al. also highlighted a specific managerial challenge for social entrepreneurs, namely the need to be able to manage “a wider diversity of relationships with funders, managers, and staff from a range of backgrounds, volunteers, board members, and other partners, with fewer management levers, as financial incentives are less readily available, and management authority over supporters, volunteer staff, and trustees is rather limited”.[16] In addition, social entrepreneurs must become adept at working collaboratively with other social entrepreneurs, for-profit businesses and governmental units to gain access to critical resources that the social entrepreneur cannot build and maintain on his or her own.  For example, social entrepreneurs will need to be able to work with outside for-profit vendors to develop information systems for communicating with members, volunteers and funders, and will need to have skills required to forge and maintain successful strategic alliances with corporate and governmental partners.[17]  Finally, Austin et al. suggested that it was important for social entrepreneurs to proactively participate in professional and sector-wide knowledge sharing networks in order to broaden their own skills and remained connected to ideas and talent available through other sector participants.

Austin et al. argued that social entrepreneurs needed to develop and remain intensely focused on their specific social value principal derived from scanning the context for opportunities and the availability of the human and financial resources necessary to achieve the greatest social impact.[18]  They cautioned social entrepreneurs about the dangers of becoming too obsessed on organizational aspects of their mission.  Austin et al. noted that it social entrepreneurs will naturally assume that the bigger the organization becomes, and the more resources it has at its disposal, the more effective it will be at creating social impact; however, many social entrepreneurs veer off track when furthering the organization becomes an end in and of itself.  Similar problems arise when social entrepreneurs are tempted to expand their mission beyond available resources.  Austin et al. pointed out that societal demand for social-value creation is enormous and social entrepreneurs will have more opportunities than they can possible handle.  As such, they need to pay careful attention to the scope of the opportunity that they can pursue effectively given the constraints on human and financial resources applicable to them.  Austin et al. also admonished social entrepreneurs to be open to working with complementary organizations outside of their own venture’s organizational boundaries to create social value and engage in networking activities with stakeholders in the relevant context to identify methods for collaborating with others in order to leverage resources that are outside of the social entrepreneur’s own organizational boundaries.

Context

The external context for entrepreneurship includes factors that are relevant to the conduct and outcome of the entrepreneurial activities but which are generally outside of the control of the entrepreneur.  Examples include the general economy, taxes and other regulations and the socio-political institutions in the areas in which the entrepreneur intends to operate. Specific contextual factors identified by Austin et al. included economic environment, tax policies, employment levels, technological advances, and social movements such as those involving labor, religion and politics.  All of these factors are important to both commercial and social entrepreneurs and all of them need to understand that context frames the opportunities and risks for every new venture and that they need to determine which factors must be consciously addressed from a strategic perspective and which are best left to play out as they will since the entrepreneur has limited time and ability to attend to everything that might have an impact on the venture.

A substantial amount of research has been conducted on the relationship between context and entrepreneurship generally and context and social entrepreneurship specifically.  For example, Meek et al. and Kerlin have argued that the incidence of environmental and social entrepreneurship in a given region or country is influenced by the broader institutional context (i.e., social norms and government incentives) and dominant socio-economic factors.[19]  Schick et al. contend that the most crucial factors relating to the success of ecopreneurial start-ups are the entrepreneur and the local culture.[20]  In their model for sustainability entrepreneurship, O’Neill et al. argued that various contextual factors materially influence the sustainability entrepreneurship process including regulatory, socio-cultural, place, macroeconomic, political, demographics, tax and environment[21].

Austin et al. explained the particular influence of various contextual factors on social entrepreneurs.[22]  For example, the philanthropic market that provides capital to social entrepreneurs is highly affected by economic activity: the philanthropic activities of for-profit organizations depend on the commercial success of their products and services, many non-profit endowment funds are invested in stock markets and the peaks and valleys of those market impact the amounts that funds are comfortable donating to social entrepreneurs and charitable contributions by individuals depend on their feelings about their level of discretionary income.  As for laws and regulations, Austin et al. stressed that social entrepreneurship will be impacted by laws regulating the tax-exempt status or operations of non-profits, tax policies that influence the amount of giving to the sector in which the social entrepreneur is operating, and specific political and social policies that affect the needs or resources available for certain types of issues most commonly addressed by social entrepreneurs (i.e., education, environment, health, and housing).  In addition, social entrepreneurs must be able to compete with other organizations in their own “industry” contexts for scarce resources needed in order to their ventures to be viable (e.g., philanthropic dollars, government grants and contracts, managerial talent, volunteers, community mindshare, political attention and clients or customers).

Austin et al. argued that while the critical contextual factors are analogous in many ways, the impact of the context on a social entrepreneur differs from that of a commercial entrepreneur because of the way the interaction of a social venture’s mission and performance measurement systems influences entrepreneurial behavior.  One difference cited by Austin et al. was the social entrepreneurs can, in many instances, achieve some degree of success with respect to their primary goal of social impact even in circumstances where the context would otherwise be inhospitable for commercial entrepreneurs.  For example, an economic downturn will generally make it difficult for commercial entrepreneurs to accumulate resources and identify viable economic markets; however, tough economic times intensify social needs and create opportunities for social entrepreneurs to take steps to meet those needs.  Social entrepreneurs can also make an impact with relatively small constituencies initially and then build on those successes to change the overall context by raising awareness and attention to a social issue and messaging about how they have been able to develop solutions that can be scaled with greater participation from others willing to join the movement.  Another factor mentioned by Austin et al. was that while the social marketplace does not reward entrepreneurs for superior performance as readily as commercial entrepreneurs are recognized in their marketplace, the marketplace for social entrepreneurship is more patient and is slow to punish inferior performance, perhaps because supporters of social entrepreneurs are most focused on their social mission and not as interested in emphasizing the same level of accountability and performance that is rigorously measured for commercial ventures.[23]

Austin et al. cautioned, however, that while the impact of contextual factors on social entrepreneurship is often ambiguous, perhaps causing social entrepreneurs to pay less attention to their operating context, they nonetheless should be doing appropriate monitoring of their context for opportunities and threats in order to develop an adaptive strategy that takes into account various contingencies.[24]   One obvious illustration of how monitoring can be important to a social entrepreneur is when it provide information about changes in direction and focus of philanthropic capital markets that can be used to identify useful new programs, fundraising strategies and potential alliances.

“Deal”

Austin et al. used the term “deal” to refer to the substance of the bargain that define who among the participants in a venture gives what, who among the participants in the venture gets what, and how and when those deliveries and receipts will take place.[25]  The deal emerges from a bargaining process that normally addresses topics such as economic benefits, social recognition, autonomy and decisions rights, satisfaction of deep personal needs, social interactions, fulfillment of generative and legacy desires, and delivery on altruistic goals.[26] Both commercial and social entrepreneurs need to engage in negotiations to create mutually beneficial contractual relationships (i.e., “deals”) with investors to gain access to financial resources and with potential participants with the skills and talent required in order for the venture to achieve its goals, whether economic or social.  However, according to Austin et al. the terms of these deals are fundamentally different for commercial and social entrepreneurs due to the way in which resources must be mobilized and because of the ambiguities associated with performance measurement.  Austin et al. explained specific differences with respect to so-called “value transactions” in the following areas[27]: 

  • Given the relative dearth of financial awards and incentives available to social entrepreneurs, they must rely more heavily on creative strategies that emphasize non-financial incentives in order to recruit, retain, and motivate staff, volunteers, members, and funders.
  • While commercial entrepreneurs are used to dealing with consumers with bargaining power, including the ability to switch their buying activities to competitors of the entrepreneur, social entrepreneurs are generally working with consumer with little or no economic capability and few alternatives for obtaining and consuming the products and services available from the social entrepreneur. While this certainly impacts the nature of the “deal” with consumers for social entrepreneurs, it does not mean that they operate without a market since they often must bargain with third-party payers and other sources of subsidy working on behalf of the ultimate consumers.
  • While commercial entrepreneurs have a wider range of financial deals to consider and generally can strike bargains with investors and other sources of financing that provide them with more flexibility and time to put the funds to good use, social entrepreneurs work with investors that provide capital that covers only a small portion of the needs of the venture and which will typically be exhausted with a short period of time.[28] As a result, according to Austin et al., “social entrepreneurs are thus required to spend a significant portion of their time, on an ongoing basis, cobbling together numerous grants, many of which come with spending restrictions and varied expectations of accountability, just to meet day-to-day operating costs”.
  • Striking a bargain with investors is complicated by the absence of an objective measure of performance similar to the economic returns and valuation metrics used in structuring deals for commercial ventures. Since the goal of social entrepreneurship is to have social impact, and the quantification or precise measurement of social impact is complicated, Austin et al. counseled social entrepreneurs to focus on, and be able to explain, their mission, theory of change and the process by which their social innovations will eventually have a social impact and generate superior social returns.

Austin et al. commented that social entrepreneurs face different challenge from their counterparts in the commercial sector when negotiating the terms of the deal with social investors and other looking to participate in the mission of the social entrepreneur.  Philanthropic funders and volunteers are less interested in the economic returns and incentives offered by commercial entrepreneurs and instead bring a different set of personal motivations and requirements that must be acknowledged and satisfied by social entrepreneurs.  For example, a donor may want a position on the board of directors, impose restriction on the use of the funds provided by the donor and/or require that the social entrepreneur provide reports on the use of the funds and the progress of the organization toward achieving the projected social impact.  The goals and requirements of various donors may sometimes be conflicting, add obligations to an already full agenda for the social entrepreneur and limit the social entrepreneur’s flexibility in allocating resources to reach organizational goals.  All this led Austin et al. to observe that “negotiating deals between the social entrepreneur and various resource providers that create alignment between goals and incentives is considerably more complex and challenging in social than in commercial entrepreneurship”.[29]

Opportunity

An entrepreneur sees an opportunity as a desired future state that is different from the present and which he or she believes is possible to achieve.  In order to exploit an opportunity in either the commercial or social sector, there must be an investment of scarce resources in hopes of a future return.  In general, both commercial and social entrepreneurs are concerned about customers, suppliers, entry barriers, substitutes, rivalry, and the economics of the venture; however, Austin et al. emphasized that a key difference between them is that commercial entrepreneurship focuses on economic returns while social entrepreneurship focuses on social returns.[30]  Austin et al. observed that “change” is generally difficult and it is challenging for both commercial and social entrepreneurs to bring followers together to agree on a common definition of opportunity and change that can be shared and used as motivation for joint action by the multiple constituencies that must work together in order to create change.  For example, change usually impacts power relationships, economic interests, personal networks, and even the self-image of participants.

In addition, the opportunities pursued by the two types of entrepreneurs vary due to fundamental difference in missions and response to market failure.  According to Austin et al., commercial entrepreneurship tends to focus on breakthroughs and new needs, whereas social entrepreneurship often focuses on serving basic, long-standing needs more effectively through innovative approaches, often when there has been some type of market failure that has caused commercial entrepreneurs to abandon attempts to service the need.  Austin et al. explained that commercial entrepreneurs are only interested in opportunities that involve a large, or growing total market size and the industry must be structurally attractive; however, social entrepreneurs are less concerned about market size so long as there is a recognized social need, demand or market failure.

Austin et al. observed that while commercial entrepreneurs often find it challenging to identify and capture opportunities that are unexploited, profitable and high-growth, social entrepreneurs usually have little problem finding unmet social needs or demands, particularly since they can either finance their activities through revenues generated from operations or, if necessary, turn to donors to provide capital in the event that the activity is not financial sustainable on its own (e.g., if the ultimate consumers are not able to cover enough of the costs of the goods or services for the social entrepreneur to “break even”).  While have so many opportunities would seem to be an advantage for a social entrepreneur, Austin et al. cautioned that the breadth and intensity of the needs among the consumers often propels social entrepreneurs into unexpected and rapid growth caused by pressures from funders, demand for their products or services, and the social entrepreneurs’ own conviction that growth is necessary in order for the organization to achieve the desired social impact.[31]

While growth due to acceptance in the marketplace fulfills the personal needs of social entrepreneurs and builds upon their values, such situations may lead to a crisis for the social entrepreneur if expansion comes before he or she has had a change to make plans on how to manage the pace of growth.  Austin et al. advised that social entrepreneurs need to realize that they have great latitude in the paths that they can choose to pursue their chosen opportunities and that there may be times when growth is not the best approach to take in order to achieve the goals of the organization or have greatest social impact.  Lack of financial resources is obviously one reason for not pursuing rapid growth; however, social entrepreneurs must also make a candid assessment of their organizational capacities with respect to human resources and the impact that growth might have on the quality of products and services the organization offers.

If growth is the preferred approach, the social entrepreneur must plan for a long-term growth strategy and avoid actions that needlessly squander the limited resources of the organization.  Social entrepreneurs also need to recognize that while they might be intrigued by scaling the organization directly, the more prudent approach is often partnering with other organizations to work together to disseminate social innovation.  While commercial entrepreneurs do partner with others in alliances to tap into needed resources, they are often reluctant to do so out of concern for losing control over their innovations and/or diluting their profits and market share.  These concerns are not relevant to social entrepreneurs who should be primarily interested in bring their innovations to the largest consumer group possible.  For example, a social entrepreneur may consciously limit the scope of products and services that his or her organization offers directly while partnering with other organizations that offer complimentary products and services and working with those partners to make it easy for the ultimate consumers to have all of their needs addressed seamlessly and efficiently.

This post is part of the Sustainable Entrepreneurship Project’s extensive materials on  Entrepreneurship and Sustainability and Entrepreneurship.

Notes

[1] J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1.

[2] J. Dees and B. Anderson, “For-profit social ventures”, International Journal of Entrepreneurship Education (special issue on social entrepreneurship), 2 (2003), 1; and. J. Emerson and F. Twersky (Eds), New social entrepreneurs: The success, challenge and lessons of non-profit enterprise creation (San Francisco: Roberts Foundation, Homeless Economic Development Fund, 1996).

[3] J. Austin, H. Leonard, E. Reficco and J. Wei-Skillern, Corporate social entrepreneurship: A new vision of CSR. Harvard Business School Working Paper No. 05-021 (Boston: Harvard Business School, 2004).

[4] J. Dees, “The meaning of “social entrepreneurship”, Comments and suggestions contributed from the Social Entrepreneurship Founders Working Group. Durham, NC: Center for the Advancement of Social Entrepreneurship, Fuqua School of Business, Duke University (1998).

[5] T. Reis, Unleashing the new resources and entrepreneurship for the common good: A scan, synthesis and scenario for action (Battle Creek, MI: W.K. Kellogg Foundation, 1999); and J. Thompson, “The world of the social entrepreneur”, International Journal of Public Sector Management, 15(5) (2002), 412.

[6] S. Zadek and S. Thake, “Send in the social entrepreneurs”, New Statesman, 26 (1997), 31.

[7] J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1.

[8] See also R. Kanter and D. Summers, “Doing well while doing good: Dilemmas of performance measurement in nonprofit organizations and the need for a multiple-constituency approach” in W. Powell (Ed.), The nonprofit sector: A research handbook (New Haven: Yale University Press, 1997), 154.

[9] Adapted from J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1 (citing W. Sahlman, “Some thoughts on business plans”, in W. Sahlman, H. Stevenson, M. Roberts and A. Bhide (Eds), The entrepreneurial venture (Boston: Harvard Business School Press, 1996), 138); and P. van Eijck, Sustainable Entrepreneurship: Institutional profile and cross-country comparison Denmark & US and its Viability (Rotterdam: Bachelor Thesis in Entrepreneurship, Strategy and Organizations Economics from Erasmus School of Economics, January 2012).  For further discussion of the “PCDO” analytical framework, see “Research on Entrepreneurship” in “Entrepreneurship: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (www.seproject.org).

[10] J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1,5 (citing W. Sahlman, “Some thoughts on business plans”, in W. Sahlman, H. Stevenson, M. Roberts and A. Bhide (Eds), The entrepreneurial venture (Boston: Harvard Business School Press, 1996), 138, 140).

[11] Adapted from J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1.

[12] Id.

[13] S. Oster, Strategic management for nonprofit organizations: Theory and cases (New York: Oxford University Press, 1995).

[14] J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1.

[15] Id.

[16] Id.

[17] J. Austin, The collaboration challenge: How nonprofits and business succeed through strategic alliances (San Francisco: Jossey-Bass Publishers, 2000).

[18] Id.

[19] W. Meek, D. Pacheco and J. York, “The impact of social norms on entrepreneurial action: Evidence from the environmental entrepreneurship context”, Journal of Business Venturing [e-journal] 25(5) (2010), 493; and J. Kerlin, “A comparative analysis of the global emergence of social enterprise”, VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations [e-journal], 21(2) (2010), 162.

[20] H. Schick, S. Marxen and J. Freimann, “Sustainability issues for start-up entrepreneurs”, Greener Management International [e-journal] (38) (2002), 56.

[21] G. O’Neill, J. Hershauer and J. Golden, “The Cultural Context of Sustainability Entrepreneurship”, Greener Management International [e-journal] 55 (2009), 33.

[22] Adapted from J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1.

[23] C. Letts, A. Grossman and W. Ryan, High performance nonprofit organizations: Managing upstream for greater impact (New York: Wiley, 1999).

[24] J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1.

[25] Adapted from J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1.

[26] R Martin and S. Osberg, “Social entrepreneurship: The case for definition.” Stanford Social Innovation Review, Spring 2007, 28.

[27] Adapted from J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1.

[28] C. Letts, A. Grossman and W. Ryan, High performance nonprofit organizations: Managing upstream for greater impact (New York: Wiley, 1999).

[29] J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1.

[30] Adapted from J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1.

[31] Id. (citing J. Bradach, “Going to scale”, Stanford Social Innovation Review, 1 (2003), 18; S. Colby, N. Stone and P. Carttar, “Zeroing in on impact”, Stanford Social Innovation Review, 2 (2004), 24; and J. Dees, B. Anderson and J. Wei-Skillern, “Scaling social impact”, Stanford Social Innovation Review, 1 (2004), 24).

Reasons Why Businesses Aren’t More Sustainable

Laughland and Bansal described “business sustainability” as follows:

”Business sustainability is often defined as managing the triple bottom line – a process by which firms manage their financial, social, and environmental risks, obligations and opportunities. We extend this definition to capture more than just accounting for environmental and social impacts. Sustainable businesses are resilient, and they create economic value, healthy ecosystems and strong communities. These businesses survive external shocks because they are intimately connected to healthy economic, social and environmental systems.”

They went on to argue that while they firms that invested in sustainability were no worse off financially than those that chose not to, many companies remained hesitant about joining the sustainability bandwagon.  Building on questionnaires from, and interviews with, 15 Canadian organizations that were on the leading edge of sustainability as of 2011, Laughland and Bansal identified and explained the following 10 top reasons why Canadian firms were reluctant to take action on social and environmental issues:

  • There are too many metrics that claim to measure sustainability—and they’re too confusing. Many suites of metrics and measurement systems—such as the Global Reporting Initiative, ecological footprint, and life-cycle assessment—currently exist to help managers measure their sustainability; however, the range of options often seems to create more problems than solutions.  Some metrics are relevant to particular sectors, such as manufacturing, while others focus on specific issues, products or organizations.  Businesses need more guidance on which metrics will help them benchmark, identify areas for improvement and signal their commitment to sustainability.
  • Government policies need to incent outcomes and be more clearly connected to sustainability.  Governments have several tools at their disposal, such as taxes, regulations, and markets, to encourage businesses to steward environmental resources; however, they are often applied in piecemeal fashion, poorly measured, or used ineffectively.  Businesses need to be more involved in the process so that governmental policies are effective, efficient and consistent.
  • Consumers do not consistently factor sustainability into their purchase decisions.  Clearly many decisions that consumers make—from what food to buy to how much energy to use—involve explicit or implicit sustainability-related tradeoffs.  In order for businesses to develop and implement smart strategies for sustainability while achieving their economic objectives, they need to understand how consumers value sustainability in the context of other product attributes.
  • Companies do not know how best to motivate employees to undertake sustainability initiatives. While surveys indicate that employees prefer working for sustainable firms, even foregoing higher salaries, companies need to have a better understanding of which employee incentive plans are most valued, and so likely to be effective.  Employees that buy-in to sustainability can assist companies in building the capacities necessary for pursuing sustainability goals of a long-term time horizon including recruiting other talented candidates to join the company.
  • Sustainability still does not fit neatly into the business case. Sustainability managers are often called upon to explain and defend sustainability activities, particularly since traditional methods of financial decision-making do not fully capture the value of sustainability-related investments that are often based on long-term and intangible rewards.  Sustainability managers need better tools for measuring and explaining returns on sustainability investments and demonstrating the value of sustainability within the decision-making language and framework of finance executives.
  • Companies have difficulty discriminating between the most important opportunities and threats on the horizon. Sustainability encompasses a wide range of threats and risks for businesses—financial crises, climate change, local land issues and health pandemics—and companies need help with deciding which risks warrant their attention and how to prioritize them for disclosure purposes and strategic planning.
  • Organizations have trouble communicating their good deeds credibly, and avoid being perceived as “greenwashing”. Claims made by some businesses and NGOs regarding sustainability are perceived to be credible, whereas others are met with skepticism or disbelief. The different reactions are likely related to attributes of the organization making the claims—its size, its structure, its actions, or its motivations—and sustainability managers need to have a better understanding of who best to communicate their message credibly and in a way in which the integrity of their efforts is clear.
  • Better guidelines are needed for engaging key stakeholders, such as aboriginal communities. For the Canadian companies included in the survey relations with aboriginal communities are an important consideration.  The experience of businesses have been both positive and negative and all businesses can benefit from developing a more robust understanding of the aboriginal perspective on sustainability in order to build a relationship between businesses and aboriginal community that is based on mutual respect and trust and leads to positive engagement.
  • There is no common set of rules for sourcing sustainably. While businesses want to purchase products and services that are environmentally and socially responsible, the process of identifying sustainable suppliers is not always straightforward and the means for comparing products is not always obvious. Sustainable sourcing decisions may also require industry-specific knowledge and practices, or data that just may not be available.  Organizations need a set of best practices for sustainable sourcing which provide organizations with targets for benchmarking as well as guidance on managing their supply chains.
  • Those companies that try leading the sustainability frontier often end up losing. While leadership in the sustainability field can be quite rewarding for organizations—new customers and loyalty from employees and community stakeholders—taking the steps needed for sustainability leadership can also be risky.  Organizations need to do their homework before introducing new sustainability targets and investing in technologies and ideas that may never yield the expected results and may be appropriated by a second-mover who builds on the leader’s ideas to leapfrog into the lead.  Leadership and innovation with respect to sustainability also carries the risk that early failures will cause internal stakeholders to become disenchanted and shift their priorities elsewhere.

Source: P. Laughland and T. Bansal, “The Top Ten Reasons Why Businesses Aren’t More Sustainable”, Ivey Business Journal (January/February 2011), http://iveybusinessjournal.com/publication/the-top-ten-reasons-why-businesses-arent-more-sustainable/ [accessed July 30, 2017].  The organizations included BC Hydro, Canadian Pacific, Environment Canada, Holcim Canada Ltd., the International Institute for Sustainable Development, Industry Canada, The Pembina Institute, Research In Motion Limited, SAP Canada Inc., Suncor Energy Inc., TD Bank Group, Teck, Telus, Tembec, and Unilever Canada Inc.

This post is part of the Sustainable Entrepreneurship Project’s extensive materials on Sustainability and Entrepreneurship.

Sustainable Businesses Need to Encourage Long-Term Environmental Policies

While a sustainable entrepreneur may have great ideas for products and services, it may not be enough to be successful unless the business is operated in a supportive environment.  While many companies are launched in small spaces and often change locations multiple times, sustainability demands that a business eventually find a place where it can settle into the community and develop ensuring relationships with community members and a strong story to tell to prospective employees and customers that draws them to the place that the company calls home.  Great communities for sustainable entrepreneurship do not develop on their own, they are the product of strategic and courageous decisions by community leaders from the public and private sector to make important, sometimes risky, long-term investments, and the discussion below addresses how businesses can contribute to building sustainable communities and the reasons why they should.

An Op-Ed piece appearing in The New York Times in November 2018 highlighted one of the reasons why sustainable entrepreneurs and their companies need to engage in debates among lawmakers, regulators, community groups and neighboring businesses regarding the focus and direction of land use policies in the areas in which the company operates and their employees and customers live and go about their daily routines.  The author sought to make the point that “environmentalism is a long-term investment” that should not be ignored or rejected and argued that if Chicago had not been forced by the public sector to clean up the Chicago River in the 1970s and 1980s and create and maintain open around it, large swathes of the downtown area would have remained an eyesore and the city and businesses operating there would have been deprived of billions of dollars of economic value.  His view was that explicit policy decisions and related regulations to preserve and clean public lands can and often do unlock private-sector wealth and, as such, should be supported by businesses seeking to act in a sustainable manner:

“Closing a national monument to allow oil drilling—or terminating the Land and Water Conservation Fund—might help a company make more profit in the short run.  But a vast array of benefits will also be destroyed. … Accessible public lands and vibrant wildlife bring people to small towns and rural areas.  They attract tourists and give residents a reason to stay, and give an enormous boost to the private sector . . .”.

Assuming there is some truth to this proposition, acting in an environmentally and socially responsible manner requires that companies engage in the political and regulatory process to design and support appropriate initiatives to address market failures that end up giving too much weight to short-term profitability at the expense of long-term sustainability.  It is certainly true that compliance with the clean-up regulations in the early years involved additional expense for companies operating near the Chicago River, including higher taxes to pay for public sector investments, and that many of those companies had to implement material changes to the way in which they operated; however, the health and safety risks to employees, visitors to the facilities and community members were clear.  As time went by, the companies began to see the economic value from the early investments as the risks subsided and the area began to attract new businesses that brought in more customers.  In addition, the development efforts generally include improvements to public transportation and housing that make it easier for potential employees to access the area, usually resulting in a significant improvement in the size and quality of the talent pool for local companies.

While the Chicago story played out in a large urban area in a major city, the same lessons and opportunities apply in small towns and rural areas, literally anywhere that a sustainable entrepreneur might choose to launch his or her business.  As noted in the quote above, rural towns that make a concerted effort, with the support of local businesses, to protect and maintain their public lands can continue to thrive through tourism and by becoming a “great place to live and work” that attracts new companies that want to be able to offer something special to their employees.  By encouraging policymakers in their local communities to invest in maintaining and improving environmental conditions, sustainable entrepreneurs can participation in the creation of a network that improves access to the services needed for their businesses to be successful.

Businesses can also contribute through their support of specific initiatives and events that can help transform conditions in their communities and the day-to-day lives of community members.  For example, companies should develop relationships with local community development organizations, perhaps assuming leadership roles, in order to keep abreast of ideas and identify and seize on opportunities associated with future community investments.  Companies should monitor plans for creating more public lands for development and making under-utilized public lands available for private sector development.  Companies, large and small, can also contribute cash and human capital to support events that showcase local merchants.  Finally, companies can work with local governments, other businesses in the area and nonprofit community development organizations to make the area more attractive for prospective employees, shoppers and other visitors by supporting new playgrounds and recreational areas, development of an entertainment district and establishment of satellite campuses of local universities so that people who live and work in the community can have access to courses that will improve their skills and capacity to contribute to community businesses.  To learn more, see J. Karras, 12 Strategies That Will Transform Your City’s Downtown (February 5, 2014).

Some Sustainability Myths

New Zealand Trade and Enterprise identified and explained some of the more myths about integrating sustainability with business:

Sustainability is about being an environmental activist or about philanthropy and I can’t afford to give away all the profit of my business.  While philanthropy can be an important and effective component of the sustainability puzzle, it is just one piece and focusing too much on philanthropy can lead to ineffective business programs that fail to achieve very dramatic benefits for the community or the company.

The sustainable option is going to be more expensive than the alternatives.  It is true that certain environmental policies, such as investing in renewable energy, can be expensive, many responsible business decisions and activities actually cost little or nothing and even larger investments will ultimately pay for themselves through substantial and ongoing cost savings.  Focusing on employee engagement and satisfaction, customer service and community involvement are all examples of sustainability programs that usually require surprisingly small amounts of cash and other resources.  In addition, simple programs aimed at reducing overall consumption of energy and other natural resources (e.g., green commuting options and recycling) can generate savings without impairing productivity.

Sustainability is about re-cycling materials, therefore other than installing recycling bins into our offices, sustainability doesn’t affect my business.  Recycling is part of the sustainability puzzle; however, all companies, including those not engaged in manufacturing of products which can be recycled or which do not use recyclable materials in their operations, can find other areas to implement sustainability: employee engagement; suppliers and supply chain management; operational efficiency; resource consumption and waste; packaging and facility design; volunteerism; governance; ethics and customer service.

If we use green-colored packaging and the words ‘eco’ or ‘organic’ in our product, then we can sell our product as being ‘green’.  Many companies have appeared to underestimate their customers’ critical thinking skills and ability to smell “Greenwash”.  They understand that just because products come in recycled packaging or are marketed with the latest buzzwords does not make those products, or the company itself, any more environmentally or socially responsible. 

We are already doing as much as we can in our company, but it is not making a difference to sales.  Customers have a limited amount of time and resources to research and understand sustainability initiatives can companies need to proactively market and thoughtfully explain their legitimate initiatives so that customers and other stakeholders understand how the business and products of the company are adding value. 

Sustainability seems so complex and hard to measure, how can we hope to manage it?  In order to manage anything, including sustainability, you need to measure it; however, many managers have complained that it is just too difficult and costly to measure environmental and social impact.  Fortunately, a number of tools have been developed to help even the smallest businesses measure sustainability, often by applying relatively simple processes and habits.  It will remain difficult to compare the value of one type of sustainability impact, such as reducing pollution, with another, such as providing educational opportunities to members of the local community; however, improvements in specifically identified dimensions can be tracked.

This post is part of the Sustainable Entrepreneurship Project’s extensive materials on Sustainability and Entrepreneurship.

Source: Sustainable Business: A Handbook for Starting a Business (New Zealand Trade and Enterprise).

Founders’ Dilemmas

Even when armed with the most promising business idea, founders inevitably face a number of challenges from the moment they begin to consider whether or not to form a new company. Wasserman argued that founders must confront a number of “founders’ dilemmas” (see table below) that require difficult decisions with respect to relationships, roles and rewards and must also honestly assess their own goals and motivations for launching the company and make sure that the choices they make along the way remain aligned with those goals.[1]  Based on extensive research into decisions made by founders at the earliest stages of their new ventures Wasserman came up with the following observations and recommendations to guide founders through the process of deciding whether to launch a startup, forming a founding group, allocating duties and responsibilities, establishing reward systems and bringing on the human resources and investors necessary to stabilize and grow the business:

  • The first question for a prospective founder is whether or not it’s the right time in his or her career to launch a startup. The founder needs to be sure that he or she has the necessary passion and experience and that the market is ready to be receptive to the proposed product or service.
  • In addition to passion the founder needs to critically evaluate whether he or she has the requisite human, social and financial capital to successfully launch the business without the help of others. In order to “go it alone” a founder must be confident that he or she has expertise in multiple business and technical areas, sufficient capital to get through the start-up stage and strong connections in the relevant marketplace.  If any of these elements are lacking it may be necessary to seek out co-founders who can fill in the gaps.
  • When looking for additional founders make a conscious effort to achieve diversity in terms of background, age, experience and network connections. This not only broadens the collective skills set of the founding group it reduces the risk that the founders will run into conflicts when setting their roles and responsibilities.  Wasserman cautioned against turning to family and close friends, even if they have the right skills and share the same passion for the ideas and business model, and noted that research confirmed that mixing business with family and friendship too often led to conflict, tension and bad outcomes for both the company and the relationships.
  • Make sure that each of the members of the founding team are clear about expectations with regard to their roles, responsibilities and contributions and make sure there is an “exit plan” in place that clearly lays out the process for the departure of any of the founders before a problems arises. It is difficult to talk about “breaking up” before a relationship has really begun; however, the founders need to do it, preferably with input from experienced and independent outside advisors who can raise all the questions that the founders may be reluctant to ask.
  • Once the founding team has been formed the next step is to assign roles and responsibilities. While the founders may have roughly equivalent equity stakes in the new company and share similar passions about the projected products and services one of them will need to take on the role of chief executive officer, or “CEO”.  Wasserman recommended that the best candidate is the founder who is most invested in the start-up and notes that this may not necessarily be the founder who came up with the original idea upon which the start-up is based.
  • An effort should be made to create a clear division of labor among the members of the founding group so that all required activities are managed and overlap is reduced. Proper and clear differentiation of tasks facilitates accountability; however, Wasserman warned about inflexibility in assigning and changing roles and counseled that the founders need to strike the proper balance between division of labor on the one hand and tapping into the creativity that comes from collective work and collaboration.  Wasserman also cautioned about handing out titles among members of the founding group and it is important for all titles to be accompanied by a clear statement of duties and authority and expectations about how the holder of that title will interact and collaborate with the holders of other titles.
  • Selecting a CEO and assigning each of the founders one or more primary areas of responsibility are part of a larger process of developing a decision-making process among the founding team and the founders need to decide which issues will require debate among all of the founders and how those debates will ultimately be resolved. Wasserman noted that founding teams take a variety of approaches: some choose egalitarian systems in which each of the founders has an equal say and a unanimous vote is required and others prefer a more hierarchical approach.  Regardless of which method is used it is important for everyone to understand it in advance and to make sure that managers and employees outside of the founding group are aware of how the founders make their decisions.  Even if egalitarianism is not the rule the founders are well advised to communicate closely about decisions, seek inputs from all of the founders and make sure that all of the founders are aware of the substance of important decisions.
  • Even though a decision-making process is in place the founders need to anticipate the possibility of conflicts which if not addressed may ultimately threaten the viability of the entire venture. For example, even though the founders have agreed that all of them will be heard on every key issue one of the founders may begin to feel frustrated and alienated if decisions continue to go against him or her.  Similarly, a founder given a title that implies primacy in a particular functional area, such as marketing, may feel that the other founders are encroaching into his or her domain.  The founders need to have a plan for settling these fundamental disputes, often seeking support and guidance on substance and process from trusted outside advisors who are independent of the founders, and should also continuously assess responsibilities in key areas such as product development, sales, marketing and finance.
  • Wasserman recommended that the founders should address the touchy subject of rewards, including the allocation of equity, after they have thoroughly discussed the various issues described above with regard to relationships and roles and everyone has a better idea of how committed each founder will be to the venture and the relative value of each founder’s projected contribution to the new business. Wasserman noted that one of the most common problems among founder teams is an initial allocation of equal equity shares among all the members only to find out later that one or more of the founders is unable or unwilling to carry his or her weight or that his or her contribution is simply not as valuable as what is being provided by the other founders.
  • Founders have different appetites and expectations regarding the rewards associated with their involvement with a start-up and those need to be considered. Some founders are more interested in money and seeing the value of their equity stake increased as quickly as possible while others are more concerned about retaining control over the direction of the business and making sure that their voices are heard when decisions are being made.  All of this should be taken into account when allocating equity and assigning rights to the equity interests.
  • Founders were encouraged to include vesting provisions in the agreements covering the allocation of equity interests and Wasserman noted that vesting should not be construed as an indication of mistrust but simply as a convenient and realistic tool for making sure that expectations are met and that the founders have an objective means for dealing with unanticipated events such as an egregious failure to perform, a good faith dispute among the founders, the unexpected departure of one of the founders due to illness or death or the demands of outside investors for changes in the leadership group.
  • When establishing the reward systems and equity allocations among the founders consideration also needs to be given to what may be needed in the future to fill in gaps in skills of the members of the founding team and build out the business. If the founders know that large blocks of stock will be needed to bring in a more experienced CEO and/or build out a product development team this should be taken into account from the very beginning.  In addition, the founders should anticipate dilution by equity that will be sold to outside investors.

The observations and recommendations above pertain mostly to the pre-founding stage and the process of building and organizing a founding team; however, Wasserman noted that founders need to consider the steps that will have to be taken to find and attract skills and resources that the founding group does not have and which will be needed to grow the business.  The first set of dilemmas beyond the founding group were referred to as “hiring dilemmas” and included questions about what types of people should be recruited and hired to assist the founders and how those persons should be managed during the challenging and turbulent immediately following the launch of a new business.  Specific issues include establishing the duties and responsibilities of new hires and selecting the most effective way to compensate them in light of the risks involved.  A second set of dilemmas will become relevant when the founders need to approach investors to provide capital beyond the financial resources that the founders are themselves able and willing to contribute to the new venture.  Different types of investors will be available at various stages of the development of the company and each of them will have their own demands regarding their equity stake in the company and their ability to exert control over the actions of the founders.

Wasserman argued that it is extremely important for each founder to come to grips with what motivates him or her in taking on the rigors of starting up a new business and investing all the time and effort that will be needed in order to make it successful.  According to Wasserman, the two main types of motivation for founders are “control” and “wealth”.  Founders who are primarily motivated by control can be expected to proceed more slowly and cautiously in allowing outsiders to become involved with the company as co-founders, investors or employees and will seek to guard their ability to maintain control at each stage of the process of developing new products and services, expanding human resources and tapping into outside capital.  On the other hand, wealth-motivated founders are more open to any reasonable strategy for increasing the value of their ownership stake in the company and thus are more likely to aggressively pursue venture capital even at the risk of losing control of the board of directors and support bringing on experienced talent from outside of the original founder group who can accelerate the growth of the company even if that means that the founder’s own equity stake will be diluted.

Wasserman’s Founder’s Dilemmas

·         At what point in my career should I consider launching a startup?

·         Do I have requisite passion for my idea and the necessary career experience to effectively launch and guide a new business?

·         Are there any issues with my personal situation that may prevent me from fearlessly pursuing the new opportunity such as a lack of support from family or insufficient personal financing resources?

·         Is the market ready for and receptive to my business idea?

·         Should I launch the new business on my own or should I recruit co-founders?

·         If co-founders are needed how can I go about identifying appropriate candidates (e.g., friends, family, acquaintances, current or former co-workers, former classmates or strangers)?

·         What positions and responsibilities should each of the co-founders assumes with the start-up?

·         How should decisions be made among the members of the founding group (i.e., what decisions can be made along by one of the founders and which require consultation and how should the consultation and voting be conducted)?

·         How should equity and other financial rewards be allocated among the members of the founding group and what provisions should be made for vesting and repurchase of equity upon departure?

·         What types of human resources will be required at different stages of the company’s growth?

·         What special challenges will need to be taken into account for early hires and should they be treated differently than managers and employees hired later in the development of the company?

·         What types of investors should be approached at different stages in the development of the company and what challenges will be created for the founder group by introducing outside investors?

·         If I am to be the CEO of the company how do I feel about the possibility of being replaced as CEO by a “professional CEO” at some point in the future if required by investors or other stakeholders?

Note:  The questions above are adapted from N. Wasserman, The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup (Princeton, NJ: Princeton University Press, 2012), 8.

This post is part of the Sustainable Entrepreneurship Project’s extensive materials on  Entrepreneurship.

[1] The discussion of Wasserman’s observations and recommendations in this section is based on material appearing in N. Wasserman, The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup (Princeton, NJ: Princeton University Press, 2012).