Why 'One-Pocket' Thinking Matters and How Startups Can Lead the Way
Entrepreneur is on the road with startup platform Rise of the Rest. Check out Startup Anywhere for stories from the October road trip as well as for insights from thought leaders and community leaders showing there’s an entrepreneurial world outside Silicon Valley.
One of the first investments I made was in a company called Kickboard. Founded by Jen Medbery, a Teach for America alum in New Orleans, Kickboard helps teachers manage data better to improve student performance.
As Kickboard started to grow, they were looking to raise more money. So I called a successful entrepreneur I knew who made a lot of startup investments and also gave heavily to Teach for America and KIPP charter schools (both of whom were Kickboard clients.) The entrepreneur said, “Ross, I have two pockets. I spend most of my time in my day job, making as much money as I can in one pocket. Once I’ve taken care of my family, I put the rest in my other pocket, and I give it all way. What pocket does this go in? If it goes in my business pocket, I don’t care about the education mission. If it goes in my philanthropy pocket, then why aren’t you asking me for a grant?” He ultimately didn’t back the company.
In Salt Lake City, we saw a different narrative—two pockets converging into one. As Steve Case highlights in his book The Third Wave, the Nobel Prize-winning economist Milton Friedman is the godfather of “two-pocket thinking.” Friedman’s thought: the social responsibility of business is to increase profits, and we take care of society with what’s left over.
The problem: two-pocket thinking is out of touch with reality. The value of all the public companies in the world adds up to about $200 trillion. The value of the endowments of all the charitable foundations in the world added up doesn’t even equal $1 trillion. And the insane thing: foundations only disburse 5 percent of their assets into charitable activities. Put it another way: if the “capital markets” pocket were the height of the Statue of Liberty, the “good for society” pocket would be the height of a grasshopper.
In Salt Lake City, however, we saw a different story, with three big themes:
1. Innovation isn’t only in products and services; it’s how you support them.
We started the day with a business leaders’ breakfast at Serving Time, a café next to a prison where one of the first pay-for-success investments was issued. Pay for success is a one-pocket approach to social services, where private investors absorb the risk of government doing something more effectively and realize return from the savings. In this case, recidivism (released prisoners returning to criminal behavior) is a huge cost to society. The pay-for-success initiative issued by the Sorenson Impact Center at the University of Utah paid an innovative firm to reduce recidivism -- private investors fronted the cost, and government will reimburse investors the cost savings if the outcomes are better than the status quo.
2. Recognize that most innovators face real barriers to having a seat at the table.
Mid-morning, we attended the Spice Market, a food incubator for refugee founders. Salt Lake City has one of the largest refugee populations, and on our Rise of the Rest tour, we met people from Syria to Sudan who couldn’t afford the average $30,000 cost of permitting, kitchen space and rent to start a business. Spice Market gives people basic assets to start a food business, helping people coming to Salt Lake County and build a better life.
3. Your values can also increase the value of your company.
We also visited Cotopaxi, one of the first B-corporations to raise venture dollars. B-corporations are in some respects a response to two-pocket thinking. They legally are allowed to take into account all long-term shareholder value, not just quarterly financial returns of shareholders. Cotopaxi is operating in the booming outdoors industry of Salt Lake, following in the footsteps of leading companies such as Patagonia, and recently closed $9 million≥÷ in investment from leading coastal venture capitalists such as Greycroft and NEA.
4. One-pocket thinking will be dominant within a generation.
We think that cities rise when they embrace what is unique locally, not just copy what others are doing nationally. Salt Lake City has a long history of embracing an integration of professional success and providing benefit to others. The microfinance revolution, which has brought over $30 billion in capital in tiny loans to small entrepreneurs in emerging markets, was accelerated by Unitus, a Salt Lake-founded organization, and today, the Sorenson Impact Center is leading the way in “impact investing,” a strategy that integrates impact and financial returns.
Broader societal trends show that one-pocket businesses will rule the next generation. Sixty-nine percent of millennials value the social impact of their investments over their financial returns. Ninety percent of millennials say it is important that their job has a purpose beyond just a paycheck.
We face pressing issues in the world -- refugees in crisis, climate and the environment, opportunity distributed in a highly unequal way --and from Brexit to water shortages to energy crises, when we think in “two pockets,” ultimately both pockets lose. Today was inspiring as we saw the Salt Lake community provide an example for the direction that two pockets are merging into one.