Dale Partridge and Aaron Chavez had a risky idea: to sell more t-shirts for charity, make each shirt a one-week-only offer. (More)

Risky Politics, Part I: Risk-Takers

This week Morning Feature looks at how we talk about risk. Today we ask who are the real risk-takers in business. Tomorrow we’ll see who are the risk-shifters and onto whom risks are shifted. Saturday we’ll conclude with why Democrats encourage risk-taking by shifting risks more wisely.

Sevenly – One Design, One Week, One Cause

Partridge and Chavez based their business on a bizarre idea: choose a new charity each week, design a t-shirt for sale that week only, and donate $7 from each shirt sold to that week’s charity. Any business management student could tell you why Sevenly would fail. To reduce the per-unit cost of an item, you produce a limited number of items and make a lot of each. The econ-speak phrase is economies of scale, and it’s a core concept in economics and business classes around the world. Sevenly turns economies of scale on their head, creating a new design each week and selling that design for only a single week.

To be honest, Dale Partridge and Aaron Chavez didn’t expect to succeed. When they launched their idea last June, they thought they might sell about 20 shirts to friends and family. Instead they sold 300 in the first 24 hours and 860 that first week, and raising $6000 for the International Justice Mission, a human rights organization. Since last June, Sevenly has raised over $260,000 for various charities: one design and one charity per week.

It’s not easy. Over 50 charities per week apply, and they have to make difficult choices. They look for charities that address at least one of their seven core causes: human trafficking, drinking water safety, hunger relief, poverty relief, medical relief, disaster relief, and a general aid category for programs like suicide prevention and assisting the homeless. And they don’t cut corners:

The shirt design can make or break a campaign, so Sevenly’s designers, called the “Type Team,” are a critical part of the process. “If we have a really powerful design and a less emotional cause, the shirt would do better than if we had a great emotional cause and a poor design,” Partridge says. Sevenly uses premium fabrics and water-based inks to capture fine artistic detail; the shirts are manufactured in Worldwide Responsible Accredited Production-certified child-labor-free facilities in Nicaragua, Peru and China.

Personal Risk

Partridge and Chavez decided to focus on market urgency rather than economies of scale. If you like a design and know it’s available for one week only, you must buy it now. Knowing that $7 of each sale goes to charity cushions the guilt of an impulse purchase. The resulting sale helps that week’s charity, pays the owners, designers, and shirt-makers at Sevenly, adds business for the shippers, and brings the buyer a warm feeling … and a cool t-shirt.

But that business model is a big risk. Maybe there’s a limited pool of people who will buy a $25 t-shirt to donate $7 to charity, no matter how brilliant the design and how compelling the charity. Maybe at some point each person in that market will have closets full of t-shirts and decide they don’t need any more. How far can the Sevenly model go? Partridge and Chavez aren’t sure. They’re looking for venture capital and hoping to expand. They’ve already branched out into hooded sweatshirts, and have considered selling each week’s design as a print. They’re also working on training programs, books, and videos to market their social media expertise to charities.

The odds are against them. One-third of business start-ups fail in the first two years, and over half fail within the first four years. If Sevenly doesn’t make it, Partridge and Chavez will probably have lost some money. Even if they broke even, they and their employees would have committed over a year of their lives to a project that didn’t pan out … time they could have invested into something else, time they can never get back.

Portfolio Risks

Compare the personal risks faced by Partridge, Chavez, and their employees, with the portfolio risks faced by Edward Conard of Bain Capital. Conard and Bain invest their clients’ money in lots of businesses. Some are start-ups, new ideas like Staples or Sevenly. Others are struggling firms looking for a new business model. Some will succeed. Others will fail.

In a portfolio like Bain’s, if the profits from the successes exceed the losses from the failures, Bain makes money. Indeed Bain’s investments often included a consulting contract with a guaranteed fee, to offset their risk. Bain even made money on some deals where the business failed. All told, Bain made lots of money, and Conard says that’s how it should be:

It’s not like the current payoff is motivating everybody to take risks. We need twice as many people. When I look around, I see a world of unrealized opportunities for improvements, an abundance of talented people able to take the risks necessary to make improvements but a shortage of people and investors willing to take those risks. That doesn’t indicate to me that risk takers, as a whole, are overpaid. Quite the opposite.

The Real Risk-Takers

Conard is correct that our society needs more people willing to take innovative risks. But are the real risk-takers the incredibly well-paid CEOs, bankers, and investors like Conard trading on portfolio risks … or the struggling entrepreneurs like Partridge and Chavez? Former Labor Secretary Robert Reich answered that question succinctly at Salon:

Wait a minute. Who do they think are bearing the risks? Their blather about free enterprise risk-taking has it upside down. The higher you go in the economy, the easier it is to make money without taking any personal financial risk at all. The lower you go, the bigger the risks.

Wall Street has become the center of riskless free enterprise. Bankers risk other peoples’ money. If deals turn bad, they collect their fees in any event. The entire hedge-fund industry is designed to hedge bets so big investors can make money whether the price of assets they bet on rises or falls. And if the worst happens, the biggest bankers and investors now know they’ll be bailed out by taxpayers because they’re too big to fail.

In his New York Times interview, Conard boasted of having worked with the company that makes a machine to taper the top of aluminum drink cans:

It saves a fraction of a penny on every can. There are a lot of soda cans in the world. That means the economy can produce more cans with the same amount of resources. It makes every American who buys a soda can a little bit richer because their paycheck buys more.

That’s a great idea, but what about the person who came up with it, and the machinists at the factory? They took the real risks, committing time and resources they could not recover if that idea didn’t work out. Conard says we encourage that inventor and those machinists to take those risks by making sure Conard and others at the top of the ladder – who face no real risk at all – get even richer.

Color me … skeptical. I’m sure Dale Partridge and Aaron Chavez could come up with a cool design for that….

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Happy Thursday!