Can startups afford to be socially responsible?

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Startups can often barely afford proper office space, marketing budgets or, according to Mark Zuckerberg, even the time to write a business plan. In an always-be-shipping environment, it’s challenging enough to manage the traditional bottom line of profits, let alone the “triple bottom line” of social and environmental impacts.

But increasingly, tech startups and investors are supporting business models that make companies accountable to not just their shareholders, but also their customers, workforce, environment and greater community.

Last week, Etsy announced that it had joined the ranks of more than 500 companies nationwide as a Certified B Corporation. Like a LEED certification for buildings or a FairTrade certification for coffee, the designation is conferred by a third-party for meeting a minimum standard of social and environmental performance.

Green products makers Seventh Generation and Method were among the first companies to become B Corp certified when Philadelphia-based B Labs started the process in 2007. National retailer Patagonia is also a Certified B Corporation. More recently, the tech community has taken a greater interest in B Corp status. In the past few months, eye-glasses startup Warby Parker and venture-backed travel community CouchSurfing have become B Corporations. Fred Wilson, managing partner of Union Square Ventures, an Etsy investor, said he thinks other companies in his portfolio are also good candidates for the certification.

For some businesses, the community is the value

“When you think about these large Internet-based businesses… it’s the activity of the people on the platform that creates the value,” he said.  “The goodwill of the community, in large measure, [contributes to] the success of the company.”

In addition to the third-party certified B Corp status, seven states, including New York and California, have passed legislation that allows companies to incorporate as a Benefit Corporation (instead of a C Corp, S Corp or LLC, for example), giving them legal protection to pursue social and environmental solutions. It lets companies potentially sacrifice short-term financial gain in the interest of building long-term value for its community or other public stakeholders — without getting sued by investors. According to B Labs, the B Corp status gives consumers an easy way to spot genuinely socially responsible businesses and gives companies a vehicle for differentiating themselves.

But with all the corporate social responsibility hype in the marketplace, it’s hard not to be cynical about another “do good by doing good business” initiative. Measuring social and environmental impact isn’t easily quantified and, even if it were, it’s not so hard to fool an outside auditor. Beyond that, do you really need to be a certified socially conscious company to take socially conscious actions? In the end, what your business actually does is more important than what it says it believes in.

Startups might not have the resources to go through what can be a months-long process and pay for the fee-based B Corporation certification. To become B Corp certified, companies must achieve 80 out of 200 possible points on a social and environmental assessment, and Etsy, for example, said they started the process five months ago. None of the B Corp certified companies have lost their status because they were unable to maintain their standard of performance, the organization said, but 18 percent have lost their certification because they went out of business or for financial reasons.

Entrepreneurs might also worry that they’ll alienate potential investors with a corporate status that essentially tells them outright that, on occasion, they’re going to put shareholder interests below those of the (not easily defined) greater community. In a recent piece on the “promise of B-Corps” (prompted by an article on Patagonia’s pro-B Corp CEO), Reuters’ Felix Salmon said he expects that IPO-bound B corps would draw lower valuations than a conventional company.

But he added that once a company goes public there’s no reason why it shouldn’t grow as fast as any other company and generate comparable or higher shareholder returns. Unlike most public firms that are forced to report quarterly growth and maximize shareholder value at all costs, legally protected Benefit Corporations could escape the curse of the public company with an obligation to consider nonfinancial goals.

Which startups are good candidates

For now, the publicly traded B Corp is just a hypothetical — currently all B Corp companies are privately owned. But B corp designations could provide similar protections to tech companies in much earlier phases of growth.

Natalia Oberti Noguera, founder and CEO of the Pipeline Fellowship, which trains women philanthropists to become angel investors, said that in an industry that sees a lot of consolidation and shareholder transition, the B corp option means a founding mission remains in place even as ownership changes hands. And, as opposed to turning away potential investors, the B Corp status could actually help socially conscious startups attract like-minded investors, such as those with Investors Circle, the Pipeline Fellowship and others.

It’s not the right path for every startup, but for those with a stated social purpose — say professional women’s networks Daily Muse or Levo League or skill-sharing startups Skillshare and Catchafire — it could be a way to take their commitment to the next level.

Another thing to remember: A company doesn’t need B Corp status in order to be a social responsible business. While the B Corp program is a sign of progress, what really matters are the company’s actions, not the external designation, says A. Lauren Abele, COO of the Pipeline Fellowship.

“It’s important to remember that this is a tool,” said Abele. “The social integrity of a business lies at its core, in its decision-making process and commitment to its mission.”

A previous version of this story incorrectly said Patagonia was a founding Certified B Corporation, but it was not actually certified until 2012.

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