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Social Return on Investment

December 8, 2010

So the twitter universe has spoken to us, and given us some advice to look into. First there is the L3C, a type of low profit LLC whos main focus must be on social activism. This sounds like a great fit for ChangeMachine because it allows us to have a profit-marketable product and investors which is very important as angel investing and donations to nonprofits are down in this tumultuous economic period. L3C’s have been used primarily for social entrepeneurship (that’s us!), but have garnered some skepticism. This article, The L3C: Innovation or Gimmick from the blog State of the Art reviews this problem fairly well.

The skepticism runs deep because an L3C blurs the line between for-profit and NFP. This is a problem because of one major reason

Investors expect to be paid back! An investment is not a donation.

This seems obvious, but from a nonprofit point of view it is a foreign concept. It means that your company cannot simply do social good, it needs to actually turn some money to return with interest and hopefully some profit to investors. Obviously the classical picture of a nonprofit which simply rakes in donations and distributes them either directly or indirectly to a community does not fall into this.

However, ChangeMachine might. There is obvious profit potential (ads, local businesses and a few methods we still have wrapped up from the public, stay tuned for updates), but is it enough to get investors interested. These wouldn’t be classical investors just looking to turn a buck, it takes a special kind of investor to invest in an intentionally low profit business (as this article explains).

And finally there is the title of the post, social return on investment. SROI may sound like hocus pocus, trying to attribute monetary value to things which aren’t obviously just cash equivalents, but there really might be something there. How can a startup business take SROI into account when it is structuring it’s business model, and how does it relate to being an L3C?

There is a great article introducing SROI here from the Harvard Business school, if you have any ideas please feel free to leave a comment!

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