For most early stage companies, every penny counts. But several L.A. startups are giving away a percentage of their revenue to worthy causes.
Studio City daily deal website WinWin Living and Westwood online marketplace KarmaGoat are among the local companies that promise to donate a portion of sales to a charity of the customer’s choosing. They are part of a growing number of companies that are integrating philanthropy into their business models.
“It’s a booming trend right now,” said Brent Freeman, chief executive of Roozt, a website that sells products from socially conscious brands. “I think in the next 12 months you’ll see an explosion of companies doing cause integration.”
The reason is that more customers want it. According to a study conducted last year by Boston marketing firm Cone LLC, 41 percent of Americans said they bought a product because it was associated with a cause or issue in the last year. That’s more than double the 20 percent response in 1993.
Younger customers are more interested, too. The study said 53 percent of millennials (those born in the 1980s and ’90s) said they bought a product because it was associated with a cause or issue in the last year. That’s 12 percentage points higher than the average cited above.
So it’s little wonder that companies aimed at younger adults are more prone to integrate causes into their business model. But how they do it varies.
KarmaGoat is a classified ad website comparable to Craigslist where people can buy used items. An owner of a television, for example, lists it for $50 and picks a charity to support. KarmaGoat takes 15 percent of the money from the sale and gives the other 85 percent to the organization that the seller designated.
WinWin Living gives 10 percent of its revenue from each sale of a Groupon-like daily deal to a charity that the buyer selects.
Among other local companies that automatically donate to non-profits is GiveBackMail, a Westwood e-mail service that gives 25 percent of its ad revenue whenever an e-mail is read or sent.
But giving away too much revenue could hurt such companies if entrepreneurs aren’t careful, said Ryan Scott, chief executive of Causecast, a Culver City company that helps businesses organize charity incentives for employees and customers.
“If you’re taking a huge chunk of your profit which would generally be reinvested in growing a business, you’re constraining your ability to grow in relation to your competitors,” Scott said. “It sounds like a recipe for disaster.”
KarmaGoat’s website lists more than 900 non-profits that people can choose from, including the American Red Cross and United Way of Greater Los Angeles.
So far, the donations have been small. Since launching in May, the startup has given away more than $2,000, said Jonathan Lehmann, chief executive of KarmaGoat who co-founded the company while a graduate student at UCLA.
Heifer International, a group that gifts livestock to impoverished families in developing countries, has received nearly $750 from KarmaGoat, the most of any of the charities listed. But some charities, including American Red Cross, have received no donations, according to the KarmaGoat website. No one has chosen the organization.
Lehmann said he hopes to raise more money for good causes.
“We think that whenever we raise some money for charity, we have an impact,” he said. “That being said, of course we’re looking to have a much greater impact than just a few hundred dollars.”
WinWin Living, which launched in January, uses its philanthropy to build business. It asks non-profit partners to advertise the deals to their members. If the non-profits help drive sales for WinWin Living, they can earn up to 50 percent of revenue from the deals.
For example, if WinWin Living gets $20 from each sale of a discounted restaurant package, it normally would give 10 percent – or $2 – to a charity. But if the charity itself asks its patrons and members to go to the website and buy, for example, the restaurant package, then the charity would get $10 from each sale.
As a result, WinWin Living, which reaches more than 300,000 people in Los Angeles and 50,000 in Santa Barbara, has generated a few thousand dollars a month for some charities, said William Maurer, the company’s co-founder and director of operations.
“The checks vary depending on the level of engagement from the non-profit,” Maurer said. “A lot of members have made a lot of money through our program, but it’s relative, for some of them, to the promotion.”
Roozt has tried a number of different models for giving back. The company initially donated 1 percent of revenue to a charity of the customer’s choice. Then it switched to promoting one charity a month by adding a 20 cent surcharge to each purchase and matching that money.
When Roozt relaunches its website in the next month, it will integrate its donations and involvement in educational programs into its cost of goods sold, Freeman said.
“That’s really what I believe is the most sustainable way to grow these businesses,” he said. “The (charitable) impact is attached and integrated with the business and scales concurrently.”
But giving away profit can put a strain on a young business. When WinWin Living was first pitching its business model to investors, many financiers balked at the idea of giving away 10 percent of their revenue, Maurer said.
KarmaGoat, too, is feeling the effects of giving away most of its revenue. The co-founders do not pay themselves salaries, and the four team members work from their apartments.
Lehmann said the goal is to grow the business to where it can operate with the 15 percent. Although he wants to help non-profit causes, he also wants his business to survive.
“It would be disingenuous to say we only want to do good,” he said. “The business is supposed to do good and do well. The revenue split is to make it clear that we shouldn’t be doing well if we’re not doing good.”
Incorporating charitable donations is becoming increasingly popular among startups and established companies. The trend has been spurred by increased social awareness among younger generations and the dismal economic climate, said Scott Garell, chief executive of San Francisco-based GoodSearch, a search engine that has raised nearly $8 million for various non-profits in the last six years by donating a penny for every search.
“Everybody is passionate about some charity or some cause,” Garell said. “With the economy being a little more difficult right now, the model becomes even more compelling.”
Incorporating donations into the business model can also be a valuable marketing tool. WinWin Living, for example, is one of hundreds of daily deal websites that compete with giants such as Chicago’s Groupon and Washington, D.C.’s LivingSocial that have gobbled up venture capital funding. Adding the charity element has helped WinWin Living differentiate itself, Maurer said.
“We didn’t want to use the non-profit model as a marketing tool,” he said. “But in order to compete against companies with that kind of money, what we had to do was create a brand.”