Fairphone’s Crowdfunded Model & Social Impact

Note from Joe, Community Manager: Some people from the community ask, What’s your crowdfunding model? Do you have lots of investors? Here, I did a quick Q&A with Bas, head honcho, to get his take on Fairphone’s choice in using a crowdfunded model. He talks of his vision to stay independent, and what it means to be a social enterprise.

1. Fairphone is a social enterprise. What does that mean? How does it structure the company and the decisions you make as a profit-making organization?

Fairphone started three years ago as a campaign aimed at creating more awareness around the abuses in the supply chain of electronics. In general, by re-imagining and re-building the alienated relationship we have with our devices. Since then, we have decided to create our own phone in order to expose every step in the production with an emphasis on the mining situation in DR Congo. Our goal was to understand the system and see if things could be done differently if you produced a phone putting social values at the base of your mission. That made Fairphone both a storytelling artifact (our campaign), but also a real product that could function as a catalyst to change the way products are made and eventually positively influence an economic system based mainly on profit maximization.

Initially, we decided to set up our formal organizational structure as an NGO (non-governmental organization). We soon realized however that, despite share values of creating social impact, the NGO structure was not a perfect model to choose. Around the same time, we had been in talks with operators, who were willing to support us on both our mission and the sales and there were an increasing amount of people asking us when the phone would hit the market, so they could buy it. “Wow!”, we thought, but also “mmm, what now”. So far, we had been funded mainly by Waag Society with some support from the Dutch government and social funds like Stichting DOEN, but what would it mean to actually create our own revenue?

We realized that this could be a very real possibility and given we were going to sell an actual product, being a company would be a more appropriate funding model. It would make it easier to market our product and generate money to reinvest in our long-term mission. So, that’s when we decided to set up a company. Being embedded in Waag Society gave us the structure to find seed money from an investor who understands our mission, and consequently set up our company as a social enterprise. And after all, if we were going to be part of the economic system and a “real” company made more sense.

There is a difference between seed money to get you going and cash flow investments to do the sourcing. We denied cash flow investments. We got seed capital from a known investor, whom we had a longstanding relationship with at the Waag incubator, from which we spun off. So that made us a social enterprise, applying commercial strategies to maximize social impact. Our goal has never been and never will be to maximize profits for external shareholders.

2. You need 5,000 phones to be pre-ordered in order to go into production. Why did you choose this model?

Well, first of all: we are a social enterprise with a delicate mission in a very competitive market. Independence is what makes Fairphone credible. It is part of our core philosophy to be independent from any of the big players of the ‘old’ economy in which the practice is that profit drives operations. This difference, and our way of doing it, is important, as we want to do things differently. The “danger” in working with too many capital investors at this point (several have shown serious interest already) is that we create an imbalance between our mission and our company objectives (the profits). We haven’t got revenue yet, which makes us vulnerable.

We think crowdfunding the investment necessary to go into production fits our independance philosophy very well. This way our buyers not only buy the phone, but actually make Fairphone possible.

3. What are the next steps for Fairphone on the level of a social enterprise? Where do you see FP in 1, 5, and 10 years?

Fairphone believes in a step-by-step model and that also applies to growth. Proportional growth in the case of a social venture is vital to keeping a good balance between economic growth and maintaining your vision.

Our goal is to offer the Fairphone as an alternative to anyone in the world. That is our growth model. Our mission is to create as much impact (improvement throughout the full supply chain) as possible. Growth in terms of volume isn’t necessarily the way to create this impact. We believe in finding a balance between our size and our mission. Becoming an anonymous big public company would probably not help our mission. Though, if we want to inspire the stakeholders in the supply chain to do things differently, we also need to get to a certain production volume to create the leverage.

4. Do you see a problem in managing growth, for instance, a large demand for conflict-free materials but not enough initiatives (or resources coming out of these initiatives) to meet your phone production load?

Yes, not so much the resources that are available, but managing the supply chain. Our biggest advantage over the big brands at this moment is our size. We have a very straightforward supply chain compared to the multinationals. With our size we can establish a direct and open relationship with the factories and the mines we get our minerals from.

Another problematic consequence of fast growth with a lot of companies relates to sourcing practice. A sudden higher demand for production volumes, product lead time, and new product ramp-up processes can lead to – if executed poorly – poor working conditions on the factory floor and subcontracting to unknown factories.

5. So what’s your problem with investors? Don’t you think at some point you’re gonna have to accept money, you hippie dreamer?!

Our strategy is to make this happen on our own, together with the people who buy the first batch of Fairphones. This will establish a solid base for the company with which we can take the next steps. Once we have proven to be able to produce and market the phone we are open for investments. Not just the average venture capital investor of course, but what I’d call social impact investors. We would look for social impact investors who are ready to invest into social enterprises like ours. To be able to grow into new markets we need investors to be able to pay for the production of the phones. We won’t build up enough capital to pre-finance a next batch of phones through the sales of the first batch. If we make any profit, it will be invested in supply chain improvements.

With the company up and running, we are sure that we make an interesting investment for a lot of socially-conscious investors. This gives us a choice and the leverage to keep our independence and grow in a natural way.