6 inherent competitive advantages that help social purpose start-ups thrive
At Burda Principal Investments, we have invested in and spoken to many “social purpose native” start-ups, where “the societal benefit […] (they) offer is so deeply entwined with the product or service that it’s hard to see the brands’ surviving intact without it”, as described by the Harvard Business Review.
This societal benefit can be both environmental and social, and some examples are:
a) Championing a societal change (eg. female empowerment)
b) Driving environmental change (eg. dramatically re-organising supply chains for ecological benefit, selling organic products, solving environmental problems through innovation)
c) Adding a sharing component (eg. buy one, give one)
Much research has been done on how shifting a social purpose to the company’s core follows consumer preferences. In a global study, market research company Latana has found that 66% of consumers say sustainability is important when buying products. The global pandemic has even accelerated this, with 61% of consumers expecting sustainability to play a more crucial role after the pandemic – propelled by first-hand experiences of positive effects on the environment around people during the shutdown (e.g. seeing the stars again, clean bays in Venice). And 50% of consumers say they are more likely to buy from brands that stand up for societal and cultural issues they believe in (Accenture, 2018).
As investors, we are excited about this trend, as the importance of linking purpose and business is something we deeply care about. And while the positive contribution to society provides a value in itself, we are also excited about what many of these young social purpose companies have in common: they excel on multiple dimensions beyond their purpose, and oftentimes grow faster and more resource-efficiently than their peers.
But what else apart from “customer love” drives the performance of social purpose start-ups? From our work with purpose-led start-up teams, we have made some observations where social purpose provides them with distinctive competitive advantages:
1. Turning customers into (vocal) champions and propelling a community
Many recently successful start-ups have successfully built substantial communities around their business. This can range from a very active following with high engagement on Instagram, to very active Facebook Groups, to great traction on TikTok. Building a community around a business is a powerful tool to enable constant dialogue with your customers. And in a world where paid performance marketing becomes ever more expensive, building community around the brand makes reaching your customers cheaper and more intimate. Customers who unite behind a purpose of a company are more likely to share its posts and stories and make their cause their own, which in turn helps enlarge the community.
2. Triggering significant earned media reach
The combination of business with a good cause provides for a well-rounded picture that is more interesting to write about. Getting significant media coverage just on a simple product launch is difficult – providing interesting stories on how your company changes the world to the better is what get’s readers’ and hence journalists’ attention. We have seen firms get significant global media attention and correspondingly very high brand awareness values – e.g. our social network for neighbours nebenan.de has an impressive 40% aided brand awareness without any of the large brand marketing spend other companies would need to afford to get to similar levels.
3. Accelerating recruiting in the war for talent
While this sounds obvious, we are impressed by how much of a difference it makes for the companies we have been close to. Companies with a clear social purpose beyond profit score highly especially with Gen Z and Millenial workers. And it makes them stay longer: Millennials are 5.3X more likely to stay when they have a strong connection to their employer’s purpose (PwC, 2016). A clear social purpose also helps attract seasoned managers who will be willing to trade high cash salaries for a sense of doing something purposeful (and this oftentimes without the need for a costly head-hunter…).
4. Serving as sharp differentiator versus large brands and incumbents
Large companies are often no “purpose natives”, but “purpose immigrants”, who try to enrich their existing brand image with a purpose. Oftentimes, these efforts are either limited to a corporate level (eg large-scale social impact and sustainability campaigns via internal CSR departments), or time limited. The purpose of start-ups is part of the core brand message and not time-bound, so oftentimes perceived as more credible. Also, start-ups can afford to be more aggressive and direct in their messaging approach as they typically don’t have legacy that may make their efforts backfire (as for example this recent Shell poll did).
5. Providing additional revenue streams via brand licensing or brand collaborations
Other companies will pay for being associated with a genuinely purpose driven brand, that may halo on to their own image. This can become a valuable additional revenue stream as companies begin to scale.
6. Benefitting from inspirational founder and management teams
This observation may be the most important one. Social purpose-led companies tend to have highly committed and driven founder and management teams. These founders are often inspirational to many others, serving as talent magnets through the dedication with which they pursue their purpose. Also, they find fulfillment in what they do, making them typically very resilient.
These are a few things that we observed first-hand, and there are others which become more relevant as the start-ups grow older and bigger, such as access to cheaper capital in the long-term, as some banks have shifted to rewarding purposeful companies with cheaper capital, or cost-reduction on travel, energy or office expenses driven by sustainability-focused company policies.
Much of what we have written above is equally true for B2B customers. With the consumerisation of B2B sales, engraining a social purpose into your sales pitch can be very powerful.
Of course, there are some draw-backs – for example if there may be a temporal conflict of interest between the impact and the financial health of the company.
But overall, we are extremely excited to witness the manifold tailwinds enabling social purpose start-ups continue to grow faster and faster!
Thank you to Ann-Sophie Claus (The Female Company), Ina Remmers (nebenan.de), and Nico Jaspers (Dalia Research) for your very valuable inputs for this piece! Also, thank you to the countless other purpose-led teams we have spoken to over time for your inspiration. We look forward to continuing the dialogue.
By Benita Krahforst, Principal