How Social-Purpose Entities are Stepping Up where Governments are Falling Short
This article is the latest installment in our series about Social Purpose Entities like low-profit limited liability companies (“L3C’s”) and Benefit Corporations. Before Covid-19 shut down the United States, we intended our next articles in the series to focus on the financing of social-purpose ventures, including through impact investment by private firms and program-related investments (“PRI’s”) that nonprofit foundations are increasingly using relative to traditional grantmaking.
In just a few short weeks, our content schedule has been turned on its head. Widespread economic uncertainty has put the brakes on many investment projects. This slowdown particularly affects social ventures that usually expect lower profit margins, as discussed by Marc J. Lane in Forbes recent article entitled “Coronavirus, Economic Meltdown and the World of Impact.” Mr. Lane is a pioneer of the L3C who contributed to our prior article introducing social-purpose entities, available here.
Despite these difficulties, many organizations like foundations and B Corps. are stepping up to the crisis to fill many shortcomings left by governments and traditional private-sector companies. A prime example of these shortcomings is the persistent delays in producing sufficient ventilators and masks. General Motors and Ford recently had to be forced by the Trump Administration to ramp up production of these products through the Defense Production Act. In the meantime, many companies are finding innovative ways to meet the current healthcare demands, as well as the demands of a global supply chain that is working overtime while trying to ensure the safety of its participants like truck drivers. Below, we discuss some important efforts being made by socially conscious entrepreneurs and organizations to address the pandemic and resulting economic fallout.
The Social Enterprises Standing up to Covid-19
Nonprofit organizations like foundations and 501(3)(c) companies have been addressing public-health problems for years before “Coronavirus” became a household word. Because many of these problems have been historically limited to developing countries with weak institutions, private companies like pharmaceuticals have lacked a financial incentive to produce drugs like anti-malaria and HIV medication for epidemics in Africa. Thanks to global efforts by a coalition of governments and organizations like the Bill & Melinda Gates Foundation, the death rate by malaria has fallen by 60% from 2000 to 2015. The Foundation is making similar efforts to develop Covid-19 treatments as part of a $125 million “Covid-19 Therapeutics Accelerator.”
The Gates Foundation is making increased use of program-related investments (“PRI’s”) to address the world’s biggest health problems. As we discussed in our introductory article, foundations are required to distribute at least 5% of the amount of their prior year’s assets to further their charitable mission. These distributions are usually grants, but are increasingly PRI’s, which could include equity investments, loans, loan guarantees, and other credit facilities. The Gates Foundation is making PRI’s in biotech companies, including U.K.-based Kymab. In exchange for Gates’ equity investment in Kymab, the company was required to sign a “Global Access” agreement that required it to allocate a set amount of investment towards treatments for developing countries. These types of investments are crucial because biotech companies requiring significant research-and-development costs tend to focus on producing medications for wealthy nations like the United States and lack an incentive to address the needs of the developing world.
Many PRI’s are flowing to new hybrid entities like L3C’s and Benefit Corporations, both of which may pursue profit for shareholders but must place the interests of other stakeholders like their employees or the environment at the forefront.
Many companies chartered as Benefit Corporations under state law also have a “B Corp.” Certification from B Lab, a nonprofit company that certifies and rates companies based on their commitment to a variety of metrics including their committment to sustainability and employee welfare. B Lab recently published an article highlighting the following B Corps. that are helping address the current health and economic crisis:
The Body Shop’s decision to donate 30,000 units of hand soap and body bar soap to local shelters. In Austin, Texas, store manager Tamara Cossey selected Hope Alliance, a women’s shelter, as the recipient of 100 donated items.
To help students who are home from school, New England-based B Corp ReVision Energy is offering free online webinars aimed at grade-schoolers once a week that include lessons on renewable energy and sustainability.
B Corp Luke’s Lobster, a sustainable seafood company, is donating food to the Broward Outreach Center in Florida, Project FIND in New York City, and a series of hospitals in Portland, Maine, and New York City, and the B Corp launched a program in its still-open markets to donate food to front-line hospital workers.
Like Luke’s Lobster, the restaurant industry as a whole has taken a huge hit that will not be fully addressed by the recent stimulus package. Organizations like the Southern Smoke Foundation are helping their own and not waiting for a bailout. Begun by Houston-based Chef Chris Shepherd in 2015, Southern Smoke shifted its focus in 2017 to provide assistance to people in the food and beverage industry affected by Hurricane Harvey and donated $501,000 to 139 people in need. So far, Southern Smoke has donated at least $176,000 to individuals in the industry affected by Covid-19.
Southern Smoke is a good example of the type of private safety net many people and industries will have to develop as we recover from the current crisis. There will no doubt be other similar crises in our lifetime, and many are unfortunately learning that they cannot count on a government bailout. Industry-focused nonprofits, B Corps., and similar organizations may be good ways to prepare for the future and protect your industry and employees.
How Covid-19 Could Permanently Transform Industries
Even after the dust settles from Covid-19 and its economic repercussions, this crisis will have a lasting impact on the way many companies do business. For instance, Zoom’s scramble to meet demand for remote work could help lay the groundwork for an infrastructure that allows for more efficient and permanent remote work if warranted.
Global supply chains will also experience lasting changes. As we discussed in a prior article about the future of the new North American trade deal, a possible silver lining from this crisis is that global supply chains may become more regional, with less reliance on countries like China and more reliance on closer partners like Mexico, resulting in higher wages for these partners and more sustainable supply chains.
The transportation industry is already adapting to the current challenges, specifically by greater use of automation that can reduce contact and keep truckers safe. “When a truck driver makes a delivery, he often gets out of his cab and goes into a room to talk to the individual responsible for that unloading facility,” explains Jeff McCaig, owner of Trimac Transportation, the third largest tanker and dry bulk trucking company in North America. “We’re saying don’t do that, do it through the window, do it through your phone but avoid the contact.”
Trucking tech continues to grow hotter with recent rounds for companies like Convoy, Flock, Emerge, CloudTrucks and Ike, along with hundreds of new startups working on everything from autonomous trucks to digital carriers.
As FreightWaves discussed in a recent article, a transportation tech company taking the lead is Vector. Founded in 2018, the San Francisco-based company helps carriers streamline their operations by replacing paperwork with electronic forms. It landed $10 million in a Series A funding round last year.
As Vector CEO and founder Will Chu explains, the paper-based system for bills of lading is slow and inefficient, with drivers often forced to pull in at truck stops to fax paperwork or send it via overnight mail. Vector’s mobile scanning tool allows drivers to scan and digitize freight documents. Drivers can use a mobile app to scan paperwork, and the receiver can be at home on a web browser, allowing companies to continue billing and invoicing without interruption.
Vector’s technology was already hot before the pandemic, but it is now in overdrive as it tries to meet the high demand for safe and streamlined transportation. “Carriers don’t want drivers going into truck stops; they don’t want them licking envelopes,” Chu said.
Although Vector is not a B Corp. or foundation like the organizations discussed above, its innovative product follows the trend of increasingly sustainable and efficient business practices that are likely to grow in the coming years. This trend will only continue when the impact-investment market exceeding $500 Billion bounces back from this economic downturn.
Conclusion
Camino Aztlán will continue to monitor how social-purpose entities are helping the world adapt to changes and challenges that seem to be moving at light-speed. We are hopeful that many of the organizations summarized in this article can serve as a template for a new generation of entrepreneurs and businesses committed to a safer, kinder, and more sustainble world that can withstand future crises.
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