A deeper dive into the Better World Wooks business model.
By Kevin Jones, Co-founder & Convener, Social Capital Markets
The way to build a business that has the lowest costs and highest margins is to have your customers give you things that make you money. That's the story of Better World Books (BWB) from an institutional investor’s viewpoint.
Being immersed in social capital to the point that you are floating within a low-friction philanthropic supply chain – a bucket brigade of willing volunteers and donors – will give you higher margins than your competitor who is merely an old style corporation.
Moving social responsibility from public affairs or marketing and into the supply chain (with core revenue and profit goals attached) is a better way to run a company. Companies that are welcomed by the people who are both their customers and their suppliers into the warm flow of giving and sharing will win, long term.
Gaining Trust from your Supply Chain and Customers
But, how do you get to that place where people trust you, rather than skeptically peering under the hood of your latest product or service to see what you are trying to get them to do that makes your corporation more money but at their expense?
If your customers think you are deceiving them, you will never get there.
It may be an impossible journey to move from being a good company that does some good, and less harm than most, to getting your customers on your side to the point that they trust you and are actually willing to source you with the raw materials from which you build your profitable, fast-growing business.
Am I describing some kind of utopian fantasy where what business wants and what people want are not in conflict, where your customers occupy your supply chain to help you make money?
Can we truly make a collective shift into a new paradigm of caring for each other and the common good? Am I dreaming?
Better World Books:A Philanthropic Supply Chain
I am actually describing a real business in which I am an institutional investor. Our Good Capital Social Enterprise Expansion Fund (SEEF) put $2 million to work inside a company that lives immersed within just such a philanthropic supply chain.
We invested (at a valuation of $22 million) in Better World Books, an online bookseller that is now approaching $60 million in revenues with healthy profits and a compound annual growth rate of 35 percent. It’s donated more than $11 million to nonprofit groups helping to give the gift of literacy.
Like many social enterprises, it was built to do good and then make a profit, and not the other way around. The social mission is baked in to BWB, so it does not give a miserly small percentage of its profits at the end of the year.
Instead it gives, at its current revenue, $5.07 a minute, every minute of every day to literacy. That’s $50,000 a week, $200,000 a month, or more than $2.5 million a year donated to literacy on sales of around $60 million; more than $11 million given to literacy since it started half a dozen years ago.
That seems an extraordinary rate of donation, as a percentage of revenues, if you look at it alone. But giving at that rate drives profit and sales growth. The good it does is intrinsic to the design of its supply chain.
When Doing Good is Intrinsic in Business Design
BWB takes donated used books that have a marketable value when priced accurately and resold online. It is not perfect, but it has positioned itself within a philanthropic supply chain where it rides on a growing wave of good will.
At Better World Books, the company’s giving is the key to why its cost of goods is so low and its margins higher. You could call the company’s giving a cost of doing business; an essential element required to preserve its low-cost advantage that leads to higher margins.
That means the company can focus on a real bottom line: one that lowers costs, increases profit, and accomplishes a great mission in the world.
When Mission Drives the Margin
Social enterprises where the mission drives the margin can grow faster than those that have to focus on two bottom lines, where the cost of doing good has a negative impact on profit margins.
Having the mission linked to key success metrics that show up on the profit and loss statement every month prevents the management distraction that is common at many social enterprises, as they try to weigh social impact against real business goals.
Thinking of running an enterprise where the good you are trying to do in the world runs counter to what it takes to make a profit calls up the image for me of young Anakin Skywalker in Star Wars: The Phantom Menace (now out in 3D) flying twin pod engines that were not linked to a single drive shaft. It takes a Jedi in whom the force is strong to even get around the track without crashing.
I want to invest in businesses where the model works, and where you can transition beyond the visionary founder into something that grows much bigger than the founder could have imagined. I don’t want to depend on the extreme focus of a young Jedi longer than I have to.
From One Impossible Business Model to Another
I want the young genius to go on and do the next nearly impossible thing, as key founder of Better World Books Xavier Helgeson has done; leaving to become a Skoll Fellow at Oxford and then raising $500,000 for an intriguing renewable energy company in Tanzania.
This energy company, like BWB, has found a key symbiotic position within a complicated supply chain where Xavier is taking “donations” of excess power from cellphone tower generators and using them as a low cost way to give the gift of light to a whole family, and remove kerosene lanterns that kill hundreds of thousands of people a year from indoor air pollution.
He’s done it successfully once.
The system that Xavier Helgeson and his BWB co-founder Kreece Fuchs (who is still with the company) created at Better World Books achieves the twin goals of fusing managing toward a social mission, as well as rapid, scalable growth at increasingly lower cost, and higher margin. For the company, the mission and the margin are within the same management dashboard.
When the company’s steady flow of corporate giving depends on being immersed in a philanthropic supply chain of customers giving you your products, and when that philanthropic supply chain drives growth and margin, achieving the mythic double bottom line is relatively easy.
Buying into Mission before Buying the Product
Or at least it’s easier than when you have to get a premium for your products, as the subject of my last column – Alter Eco, which sells fair trade chocolate bars, quinoa, and rice – is doing. Alter Eco is succeeding as people look more deeply into the company, and buy into its mission as they buy the products.
It’s not enough for a fair trade company to just work on social justice issues around paying workers a fair wage. They also have to show they have a positive impact on the planet at every point in their supply chain, and even that they have a positive impact on the commons and on ecosystem services in the places where the products are produced.
A promising tool to tell the story of the deep value of this kind of holistic company is being produced by fair trade pioneer Indigenous Designs. If they succeed in rolling it out, I think the tool can help create the connections that have been missing in order to create a philanthropic supply chain for companies like Alter Eco where the mission requires the customer to pay a premium to make a purchase.
Impact Investment: Exit Strategy
As Good Capital begins to think about exiting from our investment in Better World Books, because of the time limit within which a venture fund operates, where does that leave us?
Our $2 million investment in BWB, at this point, looks good. And, if things continue as they are, it will have been good for our investors.
It’s been fun to be part of such a good company: to be deeply engaged with them around founder transition; helping design their yield management system; finding the right coaches for the executive team and for young, promising female employees; and bringing in the right experts around analytics, search engine optimization, marketing, media, and etc. who have been glad to work for a “meaning discount” to their typical rates.
I learned my first key lesson of being an institutional investor, rather than a CEO, through BWB. Here’s how it happened:
A couple of weeks after we first invested in the spring of 2008, a young marketing employee asked me if I could connect him to some A-list bloggers – deeply influential tech world entrepreneurs, investors, and commentators – in order to tell the company’s online, e-commerce story.
I asked him to describe the company and its market, first. I told him to narrow his approach and focus it on three key market segments, describe the iconic customer in each segment, and the two or three key messages he felt certain they would respond to and why – based on their observed behavior.
When he did not deliver his analysis within my time frame, I called the CEO to help me figure it out. He told me a very simple truth. “Kevin,” he said, “nobody reports to you.”
Suddenly I realized, though you have much more power as a venture investor by injecting risk capital inside a company than a lender does, you still have no direct authority; only influential power. They have to want you inside their business in order for you to make a difference. It’s a lesson I’ve had to relearn multiple times, as I changed my mindset from being a company leader to an influencer.
I like the influencer role, when I remember to not stretch myself too thin. You can only be a startup’s CEO for so long before it starts getting old or you reach your founder’s sell-by date: when you start disrupting what you’ve built because you want to create something new. But you can be an influencer for a much longer time.
As I start thinking about raising a second impact investment fund, since our first one seems to have done surprisingly well, I am on the lookout for more companies immersed in the philanthropic supply chain. More companies who have picked their systemic intervention to place their business within that sweet, symbiotic place, where everyone has a vested stake in your success and willingly gives you the raw materials to build your business because they trust you.
I like it when social and environmental mission drives higher profit margin within a system that can grow bigger at increasingly low cost.