Profit > Purpose: Why awesome ventures don't get funded and what to do about it
Rule Breaker is the newsletter for people who care about their business being profitable and good for society and helps you do both.
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Hi hi Rule Breakers,
Today we’re diving into how we evaluate company performance and what it would take for profit to be trumped by some other measure of success.
This matters because new ventures (or internal projects) gets funded based on how we evaluate performance and right now profits always outweigh purpose.
Opening Spiel
Last month I started a new role as Venture Partner at StandUp Ventures. It’s an awesome shop. First and foremost the team is just delightful: they care about each other's opinions, are kind and are wicked smart. They also invest in women-led businesses - a massively underrepresented segment of the venture world and something I want to change.
Besides filling my heart with goodness, this new role got me thinking even more than I already do about how we evaluate businesses. Which do we say are good and worth investing in? Which do we say are meh and take a pass on?
This train of thought led me to an internal struggle:
How is purpose and profit balanced in the assessment of the business?
For those pushing purpose driven efforts, does the outcome of what they are doing even matter?
My realization - many mission-driven founders won't get funded but it doesn't have to be that way.
Let me explain why I landed here and what can be done about it.
Mission-driven entrepreneurs are in it for the impact they have on the world
As a mission-driven entrepreneur, I’m fully and completely motivated by the goodness I can bring to this world. I see the injustice, the inequality, the underserved and I want to use my time and skills to make things just a bit better.
Most other entrepreneurs I talk with in this realm feel the same.
We’ve read the words of Mariana Mazzucato and agree that it is the outcome of our efforts that matters and that profit is a means to an end.
But at the end of the day, investors care about profits
An investor may take a meeting because they really care about racial inequality or environmental preservation or wealth redistribution.
But they will only hand over money if you have a profitable business.
You see, it’s how the world decided to measure business performance.
In our progressive society with all the insights of injustices, inequalities and damage we’re causing, how we measure company performance still comes down to the Benjamins.
P/E ratio, dividends, earnings per share, breakeven, rate of return, growth, market share. These are the prime measurements of company performance and they all boil down to profit: how much money the company keeps for itself and can invest back in for future growth.
Even when McKinsey or the like puts out a new report on the benefits of inclusive whatever - whether it be hiring more women or diversifying the supply chain - they always support their claim by saying doing good for people is good for business. The first image of the latest McKinsey D&I report shows us a 36% higher chance for financial outperformance for companies with ethnic diversity.
Even if individual investors cared about social outcomes, it’s gonna be a while to change universal standards
Company performance measures are all just human constructs. At one point in time, profit or EBITDA didn’t exist. Then, overtime they became something we all agreed mattered and formalized it with standards and laws.
While there are standards for how to report income and, if miscalculated, it can get you booted off a public stock exchange and in deep trouble with the government, the same can’t be said for social and environmental business outcomes.
There is no broadly enforced - let alone accepted - way to measure wage gap, carbon emissions, gender participation, and the like.
There is one guy that spends a lot of time on this topic. Robert G. Eccles of Saïd Business School, University of Oxford is the author of a number of books on integrated reporting, sustainability and the role of business in society. On the issue of universal reporting for sustainable business he said:
Imagine a world in which there were no standards for financial accounting and reporting—which was the case in the U.S. before the formation of the Securities and Exchange Commission in 1934. At that time companies had great flexibility to determine things like revenue recognition and didn’t have to report it if they didn’t want to, even if they were listed. The Wild West, right? The same is now the case for sustainability reporting. Because of the strong relationship between financial performance and sustainability performance, investors need relevant, reliable, and comparable information for both.
How these big, global institutional orgs say to measure businesses matters because it trickles down to how a VC or bank or individual angel investor or manager decides where to put their money.
New, more holistic measures are taking shape
There are some good signs of upcoming change meaning that Jess-fantasyland might just become reality.
The organization that develops global accounting standards (called the International Financial Reporting Standards Foundation (IFRS)) is proposing to set up a sister organization that will set sustainability standards.
This new organization would be called the International Sustainability Standards Board (ISSB) and would set the methods that companies calculate and report on their environmental and social impacts. (Side note, Canada is vying to host that new standards body. Kinda cool.)
Just as the IFRS has shaped the enforceable ways we measure company performance today, so too could the ISSB.
One of the reasons this might move forward is that the Business Rule Makers (aka the top CEOs and business elite) are thinking about this. The World Economic Forum published a white paper in 2020 on metrics and reporting standards for what they called “sustainable value creation”. The lead of the endeavour is someone with some sway: the Chairman and CEO of Bank of America.
WEF and the other powers-that-be suggest standard reporting on principles of governance, planet, people and prosperity. While I have some beefs with the framework (e.g., they only consider physical work-related injuries and not mental health issues that impact knowledge workers), this is a great step forward and a usable framework that could inspire what is included in the ISSB’s work and future investment decisions.
Till things change, promote the profits
To win at the game you have to play by the rules. Right now the rules are that profit trumps purpose. Purpose is still important but never more important than profit.
So, to get funding as an entrepreneur, the priority has to be profits. The bonus is that if you figure out the profit bit, this gives you more gas to do the purpose bit.
The same rules apply to anyone internally pushing a new initiative or project. Even in mission-driven companies the bottom-line matters more. Best to know this in advance and play the game so you get the efforts you believe matter to move forward.
Parting Words
There isn’t a perfect system yet for measuring all the social impacts of a company’s actions.
And, once we have one, it will take time for capital to start flowing towards the companies that use their profits to deliver goodness to society.
Till then, keep playing the game because what you’re doing is worth it. 💕
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If you want to dive further into this topic, check out this fantastic article in the Financial Times Moral Money Forum on the growing call for common ESG metrics and the challenge we face in pulling together a final framework.
Then, set aside time to read Tariq Fancy’s three part essay The Secret Diary of a ‘Sustainable Investor’ in which he provides great insight into how disconnected financial and environment outcomes are.
If you got here and you though, “huh, this is interesting”, please share it. I appreciate it.
Till next time
🏔
Jess
🔥💖