Social Enterprises Can Raise Serious Funding, If the Product Is Great A headphones company with a cause shows that dedicating a portion of profits to charity is only part of the process.

By Adam Callinan

Opinions expressed by Entrepreneur contributors are their own.

LSTN Headphones

More and more social impact companies that aim to do "good" while attempting to generate some version of a profit are coming into the world. The overwhelming idea is that they'll give something back for each purchase or transaction, whether it's a percentage of the net, the gross or some equivalent product -- such as the Tom's Shoes model.

There are two inherent questions that can be derived from this type of startup: How do you launch a company built around the importance of a social outcome, and is it possible to raise traditional funding in such an enterprise that's giving away a portion of the revenue?

Related: You Can Do Good by Doing Well, If You Pick the Right Social Enterprise Model

Although I have been involved in a number of startups, I haven't yet taken the plunge into full-blown social enterprise, so I wouldn't exactly call myself an authority on the subject -- far from it. But you know who is? Bridget Hilton, co-founder and creative director of LSTN Headphones, the social enterprise she and her partner have built that gives back to those affected by hearing issues all over the world via a partnership with the Starkey Hearing Foundation.

Reverse engineer the solution.

The genesis of a typical startup is pretty straightforward -- you have a problem, you solve the problem, you assume other people have the same problem, prove that they do and then you start a company and launch a product or service to sell your new solution to those people. In a social enterprise, there is another major step to this standard process in that you have to align your company and brand with the social solution you're working to solve. In effect, you have to solve two big problems.

Which do you solve first, the product or the social issue?

"LSTN started by identifying the social problem we wanted to help out with, which was the enormous need for global hearing solutions," Hilton says. "Only after that did we identify the means in which we were going to attack the problem from a revenue-generation standpoint."

Great! You're only half way there.

So LSTN identified its issue but needed to solve another problem based on the fact that there are dozens and dozens of high-quality headphone companies out there. What market is being underserved?

Related: 4 Ways Your Company Benefits From Giving Back

"We found that there was a need for a reasonably priced, high-quality headphone with incredible sound that also had a strong fashion statement so they wouldn't go out of style," Hilton says.

Clearly, you can't just produce an average product and expect it to sell because of its social cause. The product needs to stand completely on its own.

The first iteration of LSTN Headphones, called Troubadours, are made from reclaimed wood, which helps to create the incredible sound quality, and come in a number of different options. Since having great success with its first product iteration, the company has since then launched into a number of additional sizes and shapes as well.

Good luck raising money, right?

From an investor standpoint, placing investment capital into a company that is giving up a rather sizable percentage of their gross revenue to a social cause (which is how LSTN operates) can be a bit tough to swallow. In response to this natural reaction, LSTN had to create a business model that was extremely efficient. The company also didn't go out to raise a significant amount of capital until it had proven its concept and were very revenue positive -- something that few startups do, but more should.

Then when the time came, LSTN had to find the right investors.

"It was hard to find the right kinds of investors at first," Hilton says. "LSTN is not a traditional company, a direction many VCs skew toward by avoiding anything they think might have an expiration date or is just a "fad.' I think we resonated more with younger investors who are seeing social enterprise as an opportunity to make change, while also making profits with an incredible product."

LSTN did indeed recently close a sizable seven-figure funding round and have, since inception, provided more than 20,000 hearing aids to people in six countries. It aims to continue to give back exponentially as it grows and innovates and will be launching some new products in 2015 that are sure to excite -- including a few partnerships with major retailers such as Nordstrom. Its goal is to become the "go to" company when people think about music and charity -- which if you ask me, is already well under way.

Related: Corporate Social Responsibility Done Right: 5 Ways to Help Your Company Shine

Wavy Line
Adam Callinan

Entrepreneur and Venture Investor

Adam Callinan is a founder at BottleKeeper, the fast-paced and sarcasm-infused solution to the warm beer and broken bottle epidemics that have plagued the world for centuries. Callinan is also a founding partner at Beachwood Ventures, a Los Angeles-based early-stage and non-traditional venture-capital firm at the intersection of technology and entertainment. As an entrepreneur, Callinan has spent over a decade building small businesses in and around technology, medical devices and consumer products, which most recently includes an exit in 2013. Callinan lives in Manhattan Beach with his wife Katie.

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