Framework 1: Start-ups that create impact through innovative methods of service delivery or product development.
Welcome to the second edition of the Impact Central blog. In the first post, we presented three frameworks for how businesses can create a positive impact. In this post, we go into more detail on Framework 1: Start-ups that create impact through innovative methods of service delivery or product development.
Innovation is the cornerstone of this framework and the driving force behind how businesses that focus on innovation create a positive impact.
Before we go deeper, it’s important to clarify what we mean by innovation. Despite all the headlines about our future being defined by digital tech-led disruptive innovation, this is only one type of innovation.
Innovation is about the invention of new ideas and the application of new methods. It doesn’t have to involve inventing something brand new. Just as excitingly, innovation can be about finding better ways of creating things we already know and love.
In Peter Drucker’s seminal Innovation and Entrepreneurship, the original innovation guru makes the case for the importance of the transfer of knowledge to new areas. This could be as simple as applying management approaches from one sector to another. One example is taking ideas from commercial businesses and applying them to organisations delivering healthcare or social services.
What does this mean for start-ups? Mark Zuckerberg famously said that disruptive entrepreneurs must “move fast and break things.” This may have been positive for Facebook’s rapid growth, but the costs to society have led to large advertisers boycotting Facebook. Other disruptive firms with a ‘break stuff’ mentality–Uber for example–are under the spotlight too.
Our focus is on start-ups creating positive impact and the innovations we are interested in are more about “moving fast and fixing things”. To catalyse a transition towards a more regenerative economy, we need to find solutions to many of the challenges that the world faces.
The innovations we are looking for could involve brand new ideas or could focus on stitching together existing ideas from business, social sector and environmental organisations to create viable, impactful, sustainable solutions.
So many of the problems we face are because business models are designed to create financial profit, without sufficient consideration of the cost of breaking the things needed for a functioning society and planet. These models rely on innovation to create a surplus of value that gives an organisation advantages over its competitors. When a company achieves an innovation advantage, there are three pathways it can follow to realise the additional value created:
1. The additional value is kept for the business or paid out to shareholders.
2. The additional value is passed on to the consumer.
3. The additional value is shared beyond the shareholders and consumers; creating an opportunity for impact.
Often there is overlap, especially between the first two pathways. Thinking about Amazon, for example, which has used digital innovation to build the world’s largest online marketplace. It’s often cheaper and takes less effort to buy something on Amazon than elsewhere because of the technological innovation it has developed. With Amazon, innovation creates a surplus that goes to the consumer – lower priced, more accessible goods – and to the company – today Amazon is valued at over $1.5 trillion.
The third pathway, where the value created by innovation is used for impact, is the least common and the one we are interested in developing. As seen in the Amazon example, value received in one pathway does not have to come at the cost of another pathway. Improvements in order efficiency benefit the consumer and reduce costs for the company. Similarly, companies can share value through impact and benefit customers and their shareholders. The sweet spot we are looking for is where businesses deploy innovation that is used to increase impact and commercial value at the same time (this is the box highlighted below).
Blending commercial and impact success used to be seen as incompatible. Now, however, research shows businesses with a purpose beyond profit are seen to outperform pure profit businesses. They have the competitive advantage. Sustainable products are ever more popular and the best employees – especially among millennials – want to work for companies that create a positive change.
Much public debate is centred around the bottom right (numbered 2) and the upper left (numbered 3) quadrants of the matrix. For number 2, the profit maximizing argument is that a more financially secure society can pay to repair any damage caused as a result of an innovation that creates negative impact. This may be true for some in society, but the unequal disbursement of the profits leave many suffering the costs of the damage without means to fix it. (In this case, consider how climate change caused by pollution from richer countries will cause disproportionately negative effects in developing countries.) In contrast, the impact argument (number 2) directs resources to solve our problems with little emphasis on the means for generating these resources. Over time, without incentives to generate more resources there will gradually be fewer resources to direct toward resolving these problems.
Our emphasis is on developing start-ups that create innovation that offers commercial success and impact through the sharing of value. For those with positive impact creation at the core of their business model, greater commercial success leads directly to greater impact. More closely understanding and measuring these positive impacts is an important element to calculating the total value these start-ups create.
In a later post we will explore some examples of start-ups using this framework and how they measure their impact success.