Social Venture: The Business Model Solving Social Problems

a building made out of blocks

The business community has, in recent decades, extended its understanding of the role of business to include helping to solve social problems. Many companies now engage in corporate social responsibility activities like corporate volunteering initiatives, cash contributions to charitable organizations, and diversity, equity, and inclusion efforts.

But what if working to solve a social issue is your primary business goal? That’s the case for social ventures. This group of social entrepreneurs uses the skills and habits of entrepreneurship to address some of the world’s most pressing social problems. 

What is a social venture?

The primary goal of Social ventures (also known as social enterprises) is to find solutions to  societal problems through an entrepreneurial or business framework. This is what differentiates a social venture from a traditional business, whose main goal is to earn profits.

Traditional companies may be involved in socially beneficially activities, but that doesn’t mean they’re social ventures. A company that makes bicycles may donate 20% of its profits to a reforestation organization and have a robust environmental, social, and governance (ESG) strategy. But if its primary goal is to make and sell bikes, it’s a traditional business—not a social venture.

Now imagine a business that pursues the primary goal of reducing carbon emissions and protecting the environment, and sells bicycles as a means to that end. In this case, the business would be a social venture.

3 types of social ventures

  1. For-profit social ventures
  2. Nonprofit social ventures
  3. Hybrid social ventures

A social venture isn’t a hobby or a volunteering commitment—many earn a profit. They can be structured as a nonprofit or a for-profit, or use a hybrid business model.

1. For-profit social ventures

A for-profit social venture exists primarily to solve a social problem and intends to make a profit that is distributed to its owners. For-profit social ventures that sell equity are responsible for protecting shareholder value and paying dividends to investors. For-profit classification allows social entrepreneurs to raise money from investors and provides flexibility in profit allocation.

Let’s say there’s an organization that works to increase access to educational opportunity for women and girls, and makes and distributes low-cost menstrual products to further that goal. If they turn a profit on sales and distribute those funds to owners or investors, the business is a for-profit social venture.

2. Nonprofit social ventures

The key difference between nonprofit and for-profit social ventures is the legal and financial structure. Unlike for-profit social ventures, a nonprofit social venture has no obligation to provide a return on investment (ROI) to investors, and can’t raise money by selling equity or distributing profits to individuals. Although nonprofit social ventures can’t distribute profits to an individual, they typically pay social entrepreneurs and employees a salary for their work.

Just like for-profit businesses, nonprofit social ventures must make or raise enough money to fund continued operations. They can do this through the sale of goods or services, or raise money through charitable donations. Nonprofit social ventures must use profits to further their missions, and may also benefit from federal, state, and local tax exemptions.

3. Hybrid social ventures

Organizations that leverage aspects of both for-profit and nonprofit structures are known as hybrid social ventures. Hybrid social ventures consist of at least two distinct legal entities—one for-profit and one nonprofit—which can either be linked through a parent-subsidiary relationship or operate independently. For example, a nonprofit committed to reducing food waste might own and operate a for-profit business that diverts overstocked goods to consumers—this is an example of a parent-subsidiary relationship.

Although setting up a hybrid social venture is more complicated than setting up only a nonprofit or for-profit organization, once established, this structure can allow social entrepreneurs to take advantage of the benefits of both entity types.

4 benefits of starting a social venture

  1. Making an impact
  2. Earning money through work that matters
  3. Building community
  4. Raising awareness

Social entrepreneurship offers many of the same benefits as traditional entrepreneurship. Both offer an entrepreneur independence, earning potential, and the satisfaction of building an organization from the ground up. However, social entrepreneurship offers additional benefits from its compassion-centered business model.

1. Making an impact

Starting a social venture allows entrepreneurs to make an impact on the social issues that matter to them. Consider Merit, a for-profit apparel company with the core mission of increasing educational access and opportunity for young people in Detroit.

Merit donates 20% of each apparel sale to a college tuition fund for Detroit youth, and the company’s key performance indicator (KPI) is the number of students they help to successfully graduate from college. Supporting youth is a passion for Merit founder David Merritt, and he has also launched an associated nonprofit, FATE, which raises money for youth programming in Detroit schools.

2. Earning money through work that matters

Because social ventures use a business framework to address social problems, they are inherently oriented toward long-term financial sustainability. Some social entrepreneurs also find that socially responsible business practices support revenue generation. These practices can provide reputational benefits that increase sales and drive investor interest, encourage environmentally friendly operations choices that reduce long-term energy costs, and reduce the risks associated with engaging in unsustainable or harmful sourcing or labor practices.

Eric Dales, co-founder of sustainable clothing brand TAMGA Designs, has shared what profit with a purpose means to him, saying, “It’s important for businesses to understand that investing in sustainability, if done correctly, is a good investment in their business as a whole.”

3. Building community

Social ventures allow entrepreneurs to connect many different people around a shared commitment.

International Sanctuary is a nonprofit organization dedicated to supporting survivors of human trafficking. The organization’s social venture, PURPOSE Jewelry, coordinates an international network of more than 500 volunteers to provide survivors with employment opportunities, health care, and education. During the early days of the COVID-19 pandemic, PURPOSE Jewelry created a sense of community by mobilizing its network to share messages of hope on social media through its Spark of Hope campaign and checking in on its volunteers.

4. Raising awareness

The impact of a social enterprise can extend beyond the amount of dollars raised or houses built: Social ventures can also raise awareness of a social issue and inspire further action.

The North Lawndale Employment Network is a nonprofit organization serving residents of its small Westside Chicago community. Its social venture, Sweet Beginnings, sells raw honey and skin care products and provides employment opportunities to formerly incarcerated individuals.

While Daphne Williams was chief growth officer, she spoke about the growth and purpose of a social enterprise. She said Sweet Beginnings’s ecommerce store has been “instrumental for us to reach people with our message and our work, and continue to communicate with them around the impact of the work that we’re doing here in this particular community.” The company’s ecommerce presence has helped them to develop a following in Washington, DC, Los Angeles, New York, and the San Francisco Bay area.

Social venture FAQ

What are some of the common challenges faced by social ventures?

One of the main challenges of operating a social venture is managing two sets of metrics: impact-related key performance indicators, or KPIs (like scholarships funded or trees planted), and financial KPIs (like gross profit and revenue per employee). Social entrepreneurs can also face political challenges from groups or individuals who oppose their missions, and for-profit social ventures might experience skepticism from advocacy groups and the general public regarding their revenue-generating activities.

Can social ventures be profitable while still having a positive impact on society?

Yes. Many successful social ventures are structured as for-profit or nonprofit entities that sell products or services and make a profit. Nonprofits just have to funnel their profits back into the mission. For-profits can sell products and services, as well as raise funds through the sale of equity, and pay dividends to investors.

How can one measure the impact of a social venture?

Much like traditional businesses, social ventures set KPIs to measure their impact. A social venture might measure pounds of waste diverted from a landfill, trees planted, dollars raised, families housed, or kittens placed in loving homes.

What role does government play in social ventures?

Although many social ventures target societal problems that some government agencies also address, social enterprises are not government organizations. This means that government involvement in them is limited. Social ventures, just like traditional businesses, must pay taxes and abide by state and federal law—and nonprofit social ventures must comply with additional nonprofit regulations.