The Buy-it-Forward Business Case

Most thoughtful people embrace the notion that when you give, it comes back—sometimes financially, often in other important ways. This concept makes even more sense for a company than for an individual. First, a company's generosity can more easily come back on itself when people respond by buying its products or services. Secondly, while some believe personal giving should be done in private, a company can broadcast its giving, making it more likely that it actually will "come back," financially.

"Buy-it-Forward" embeds this principle permanently into the charter of a company. The case for making such a commitment is compelling. Not only does it help support worthy causes, the "ROI" will almost certainly be positive. Here is why:

• Do good things and good things happen. The only obvious reason is the one mentioned above—people seeing generosity in others generally respond positively. When those who share a cause support each other's undertakings, both do better.

You'll still have to work hard and deliver excellence at a fair price. Making Buy-it-Forward commitment is not like turning on a faucet of business, but it can help generate sales by (a) opening doors that might otherwise be closed, and (b) acting as a tie-breaker in your favor in parity selling situations. Anyone who has sold in the trenches knows this covers a lot of ground.

• Sense of purpose. People are more engaged when they have an elevated sense of purpose. This is human behavior 101. We all want to be part of something special — something to commit to that is more important than ourselves, the next paycheck, or promotion. Mission statements are a start, but apple pie credos that all look alike hardly inspire. But when you embed an important humanitarian responsibility dimension into the DNA of a company though, you credibly set it apart. Your mission statement can take on a unique and genuine tone that adds meaning to the work lives of the people on your team and elevates accountability and standards throughout.

It also gives the leader a deep confidence that the forces of good will are allied in the endeavor. There is no better time than during the stressful days of a startup to tap into the deep belief that good deeds are likely to be rewarded.

• Up front. Most entrepreneurs think, "I'll make my money first and then decide how much to give away." Yet counter-intuitively it may be easier to give at the starting gate when the value is more abstract. If you don't believe this, go create a company worth $100 million and then try to give 10% of the value to a charity. Maybe the "first fruits" idea makes sense for businesses too!

Let's look at the economics of this decision.

• What is your breakeven? If you give away 10% of profits, you'll need a 10% increase in the value of what you create to break even. But the average American gives about 3% to charitable causes, and successful entrepreneurs and early-stage investors give much more. Let's say for simplicity that when you become successful you'll give away 10% of the value you created. (The most successful entrepreneurs like Carnegie, Gates, and Buffet give closer to 100% than 10%.) In this case, the value-add needed to break even is zero. You're not giving away any more than you would anyway. But doing it up front — embedding it into your company — enables others to respond and thus leverage the value of what was given, maybe by a lot. Why would you not do this? Even if the value increase is only 5%, the net return is positive. You will have made a rational economic decision, and the assistance to charities you supported is gravy.

Next, consider the "expected value" of your gift. Let's say for simplicity that an entrepreneur has a 50/50 chance of success. The expected value of his ten percent commitment is an amount that equates to 5% of profits, not 10%. Compare these two scenarios: (a) you give an expected value of 5% and gain my so-called "worst case" of 5%, and (b) you wait until your success materializes and then give 10%. In scenario (a), you have both given a smaller expected value, and gained more than in scenario (b). The "expected value" consideration makes the economic case even more irrefutable. Do your own numbers.

• New paradigm. Some economists have argued against corporate philanthropy on the basis that it amounts to management choosing charitable causes for the shareholders. More appropriately, they assert, management should maximize returns and leave donation decisions to shareholders. Milton Friedman famously argued that it is irresponsible for managers to use shareholder money to make donations. But the Buy-it-Forward model reverses the paradigm. Founding shareholders do make the decision to donate — up front, as part of the company's charter. Thus the potential for conflict between corporate and shareholder objectives is removed. Goal congruence is in fact strengthened.

• Lastly, and perhaps most importantly, (a) the financial scale of serious poverty around the world is minuscule compared with the value created in corporations each year, and (b) every business without exception was once a new venture. Over the long-run, ever increasing corporate involvement in philanthropy through Buy-it-Forward commitments has the potential to substantially diminish the problems of poverty and hunger. This is an idea worthy of support. Actually, this is the idea of the tithe, updated to today's world of commerce.

• Case Summary — A "No Brainer." Giving 10% of a company's value to one or more worthy causes is in a different class from most corporate donations or "cause-marketing" programs. It is less about something you are doing, and more about who you are — part of the root structure of the tree you are growing, not a grafted-on branch. The model is indeed noteworthy for entrepreneurs wishing to help support the less fortunate while also pursuing business success.

No rational entrepreneur or investor who fully understands this case would fail to consider it. That doesn"t mean it is easy. It takes faith and courage, but as is the case with all such steps, you"ll be glad you did.

More about Buy-it-Forward

Non-profit vs. for-profit. Another interesting aspect of Buy-it-Forward is that it creates a hybrid — an organization somewhere between non-profit and purely for-profit, as illustrated in the continuum shown here.

Buy It Forward Illustration

This is yet another way "Buy-it-Forward" creates an appropriate balance with some significant advantages:

1. It gives job-seekers deciding between the worlds of non-profit and for-profit, a third option.

2. There are many great models that integrate business and philanthropy. Each has its pros and cons. For example, Newman's Own is essentially a non-profit competing in a traditionally for-profit industry. The company has given significant sums to good causes, but in some industries (or if your name isn't "Paul Newman") it is difficult to raise capital when 100% of the profits are being given away. Ten percent is more reasonable.

Success to significance? Many people are deciding at mid-life these days, after a success career, to transition to non-profit or faith-related activities.

Success to Significance

Buy-it-Forward, again, gives those considering this move an additional option. Success is of course not guaranteed, as with any new venture, but the opportunity to pursue both at once is perhaps the highest calling in business.

• MECHANICS. It is suggested that multiple non-profit recipients be chosen and that they be in the same general category of assistance to the needy. This enables singularity of message in communications about your giving while also allowing the flexibility to shift the proportion of benefits between organizations, over time, if they prove to be more or less effective relative to each other.

• PARTNERSHIP BENEFITS. The alliance of a non-profit and a commercial enterprise can enable mutually supportive activities not possible for either organization alone, including knowledge and point-of-view exchange, scale, and brand enhancement. Sometimes a cross-sector partner can more credibly speak about the other than when promotion is purely in self-interest.

The "Tithe," or tenth. The tithe was set forth as a simple but wise mechanism for supporting the poor and the clergy in a former time when most workers were involved in agrarian activities. Since most of us no longer grow crops and livestock, the commonly adopted modern-day translation is that of giving 10% of one"s income. This is of course good in itself, but for an entrepreneur, an up-front profit pledge is a worthy commitment because in addition to helping worthy causes, it also makes your organization better and increases the likelihood of success (see above).