What difference does the business model make?

Photo: Lego city, Sonny Abesamis

Photo: Lego city, Sonny Abesamis

There's a lot of talk about the need for new business models, for sustainable development. What might make one business inherently more sustainable than another?  What kind of businesses are embracing their special role in bringing about a sustainable society?  Or helping us transition?

We in the sustainability movement sometimes struggle to understand the concept of a business model at all.  What is a business model?  How do you distinguish between one model and another?

What I've learnt and who I've learnt it from

This post is a bit of an exploration of what I think I understand about business models, gleaned from listening to people like Stephanie Draper and David Bent from Forum for the Future as well as helping the Travel Foundation and the Branson Centre for Entrepreneurship straddle the fields of start-up businesses and sustainability.  I'm also drawing on what I've learnt from working with the inestimable Julie Brown and Growing Communities on their grass-roots bottom-up start-up programme, ably assisted by the entrepreneurial advisors at UnLtd.

Follow the money

It seems to me that there are two different ways of thinking about business models.  One is about the governance and questions around who benefits from the business. The other is considering who is paying whom to add what value at each stage.  Those both sound like pretty tricksy concepts which you might well see on bullsh*t bingo, so I'll expand on them a bit here.

Who invests, who owns, who benefits?

On one side, we have private companies where investors put up the money and expect to get a return:  which might be that their capital grows (I invest £500 in a business and when I sell my share of the business I get £1000 for it) or that they get a dividend (I invest £500 in a business and every year I get a share of the profits, say £75 a year).

The growth in the capital or the income depends on how well the business does.

Depending on how risky the business seems to be, I might only invest my £500 if it means that I own half the business.  This is the kind of negotiations you see on Dragons' Den, where the potential investors strike deals with the candidate businessmen and women, demanding a bigger slice of ownership than is initially on offer.

Another way of raising capital for private business is through loans, which get paid back at an agreed interest rate, which is negotiated with an eye on the risk of the business not being able to pay the loan back (defaulting). The loan may be secured with a mortgage, in effect making the investor a potential owner if there is a problem paying back the loan.

There are also businesses with a sort of hybrid relationship with their investors and shareholders: like community-owned renewable energy businesses which raise capital by issuing shares, but the rate of return is capped.  See for example those linked to Energy4All (this is not financial advice).  These companies are run for profit, but the return to shareholders is limited by the rules governing the company, and the remaining surplus is reinvested or donated.

And then there are completely not-for-profit businesses like Growing Communities, which funds its activities largely through trading (selling stuff).  Growing Communities is owned by its members (box scheme customers), and any surplus is reinvested in the business.  In the case of Growing Communities, reserves built up over a number of years have been used to part-fund activities like its start-up programme, which supports other communities to set up their own financially self-sufficient sustainable food schemes.  The original capital to set up Growing Communities came in two forms: sweat equity (free labour and in-kind contributions from the entrepreneurs who set it up) and advance payments from customers (members) who paid for vegetables before they were sown!  I know, I was one of those veg buyers.

Not forgetting co-operatives and other employee-owned organisations, where ownership is shared among the people who work in them (or have some other relationship to the organisation, like being a customer or a 'member'), either equally or in ways which mean that one person can own a bigger slice of the organisation than someone else.

You can see immediately that different kinds of people are going to be interested in being investors in, and owners of, these kinds of businesses.

And you'd expect to see the 'rules' or assumptions about what returns investors could get, to be written down quite clearly - in share offer documents, articles of association and so on.

Interestingly, one of the special aspects of being a certified B-Corp, is that while businesses can continue to be 'for profit', their governing documents need to incorporate sustainability, so that they are also 'for benefit'.  This is explained in detail here. The point is that the directors of a B-Corp will have a mandate to consider 'who benefits' in a wider way than implied by the questions 'who owns' and 'who invests'.

Who is paying whom, to do what?

The other way that people use the term 'business model', is understood when you follow the money: who gives money to whom, in exchange for what?

The what is 'added value'.

So in a really simple retail situation, I pay a stall-holder at the farmers market to receive some delicious vegetables.  Here's a service example: someone pays me to design and facilitate a workshop. 

A slightly more complicated example: I pay a monthly standing order to Freedom from Torture, who in turn provide medical and therapeutic services to victims of torture. There's no real exchange here (I get a newsletter, but I often can't bear to read it...).  The organisation has told me enough about its effectiveness in a field I care about, that I am in effect paying it to do something that I want to see done, but cannot do myself.  This particular charity also gets money from grant-making bodies, which is likely to be tied to the provision of specific services or achievement of specific outcomes, which don't directly benefit the bodies which are making the grants.  So this is a 'benefit at a distance' from the perspective of the people providing the money.

Once you start to look at organisations this way, all sorts of questions jump out:

  • How can Twitter and Facebook, and similar businesses, provide free services to individual users? Because advertising and data mining.
  • How do Uber and Airbnb make money? Taking a cut from the people who provide the actual driving or hosting.  So why do those people pay money to Uber / Airbnb? Because they receive a service: visibility to customers who want a convenient way of locating and paying for their services.
  • Who would be paying who to do what, in a circular economy? It will depend on the interplay of a few factors: the comparative costs of using 'waste' as a raw material versus using 'new' raw materials; the comparative costs of 'disposing' of the waste, as opposed to processing it and transporting it to the people who want to use it as a raw material; the particular regime of regulation and taxation surrounding these things.  You might see the organisation which is generating the waste, paying for it to be taken away and dealt with.  You might see the organisation which is making the new product, paying the recycling organisation to provide it with raw materials.
  • What about 'payment for ecosystem services'?  This is the idea that, for example, a farmer might be paid (by whom?) to enable more water to be stored on their land during very wet periods, to help reduce down-stream flooding.  The payment might represent income lost by, for example, not being able to harvest crops from a flood plain. Or it might represent costs incurred by planting trees on land which otherwise wouldn't absorb so much water.

My reflection is that it's not enough to understand how physical resources might flow through a system, or who/what might benefit from a different way of doing things: when faced with a novel business idea, it's important to understand who might pay whom to do what.

Is one business model better than another?

There is a lovely dissection of business models for social good, by David Floyd here (warning: contains llamas). 

At a very exciting but top secret (OK, Chatham House rules) workshop on the future of sustainable business that I ran recently (October 2017), the participants from a range of backgrounds, including multi-national consumer goods businesses, got quite close to recommending alternative ownership and governance structures as being fundamental to business being truly 'for good' - because of the 'patient capital' needed to underpin them, and the need for leaders to be able to consider wider benefits than the financial benefits to owners.