(FORTUNE Small Business) – Yoel Benesh had just shuttered his failing Israeli food factory when he got a phone call that changed his life. The caller was Daniel Lubetzky, a young American entrepreneur. Lubetzky had recently sampled Benesh's product, a sun-dried-tomato spread sold in nondescript glass jars. He loved the spread and was disappointed to learn, when he went back to the store for more, that Benesh had gone out of business.

That was in 1993, and the two men soon met at Benesh's silent factory north of Tel Aviv. Benesh explained that he had been driven out of business, in part, because his Palestinian employees frequently could not get to work from their homes on the West Bank and in the Gaza Strip. Although the first suicide bombing was still years away, the Palestinian territories were often racked by clashes between Palestinians and Israeli settlers. During each outbreak of violence, the Israeli government would close the border. And each time the border closed, Benesh's factory closed too.

Lubetzky, then around 25 and just out of Stanford Law School, saw an opportunity to make some money and a small contribution to peace. He was impressed that Benesh hired mainly Palestinian workers and that he relied on Palestinian suppliers for certain ingredients. He suggested that Benesh allow him to market the product in the U.S. under a brand name, Moshe & Ali, that would highlight the Israeli manufacturer's cooperative relations with his Palestinian partners. The label would feature two cheery cartoon characters, an Israeli chef named Moshe and an Arab magician named Ali, over the slogan "Cooperation never tasted so good!"

Perhaps because he had nothing to lose, Benesh decided to work with Lubetzky, who had no experience in the food industry. Benesh agreed to seek more Palestinian suppliers, while Lubetzky helped Benesh find cheaper replacements for the imported glass bottles and sun-dried tomatoes that had driven his production costs through the roof.

Armed with the exclusive right to distribute Benesh's spreads under the Moshe & Ali label, Lubetzky went back to New York City and took a leave from his job at a law firm. He prowled the streets with a briefcase full of Moshe & Ali samples, pitching the product to food retailers all over Manhattan.

Within a year Lubetzky had signed up hundreds of stores. The young entrepreneur's charm and persistence won over Scott Goldshine, general manager of the gourmet food emporium Zabar's. "I can be nasty and abrasive, and he didn't run away," says Goldshine, recalling that he made Lubetzky come back three times before talking with him. "Very few people are as passionate about their business and products as he is."

Lubetzky also incorporated a for-profit company called PeaceWorks, dedicated to importing foods from similar partnerships in troubled regions around the world. In short, he planned to do well by doing good.

Fast-forward to 2004. has Lubetzky been successful? In conventional terms, yes. Moshe & Ali spreads and a newer line of Meditalia pestos now sell in about 5,000 stores in the U.S., allowing Benesh to turn a profit on $10 million in annual sales. PeaceWorks is also doing well. This year, sales at the profitable company should be in the neighborhood of $5 million, owing in part to the success of a new line of Indonesian packaged foods called Bali Spice.

Not surprisingly, Lubetzky, who owns 90% of the company, has long since left his law career behind. "The guy is really smart, really dedicated, high energy—and clearly his business has stood the test of time," says Ben & Jerry's co-founder Ben Cohen, 53, who sits on PeaceWorks' volunteer advisory board.

It's more difficult to judge the success of Lubetzky's social mission. Benesh was forced to lay off all his Palestinian workers in 2000 because Israeli government checkpoints prevented them from getting to the factory. "Their situation is really bad," says Benesh, a 48-year-old father of three who grew up on a kibbutz. "I would never want to be in their position."

But Benesh still buys produce from Palestinian farmers, and he continues to market Israeli-Palestinian cooperation on his product labels. "Buying, selling, and interacting—this is one way of encouraging the two sides to make peace," said Benesh's 65-year-old olive supplier, Abdullah Ghanim, reached by phone during a break from working his fields on the West Bank.

Ghanim estimates that 15% to 20% of his business comes from Benesh's factory. This is a tangible contribution to the Palestinian economy that justifies PeaceWorks' marketing claims. But the Israeli government is currently building a wall between Israel and the West Bank that it hopes will prevent Palestinian suicide bombers from infiltrating Israeli territory. The wall might prevent growers such as Ghanim from getting their produce to the factory. In that case, PeaceWorks will have to rethink Moshe & Ali's mission.

Particularly since the collapse of the Internet bubble and the 9/11 attacks, U.S. entrepreneurs have been launching not-only-for-profit ventures at a rapid clip. The Social Venture Network, an organization for CEOs, investors, and nonprofit leaders, now has more than 400 organizations—up from 72 when it was founded in 1987. At Harvard Business School, the social enterprise club is now the largest student organization on the graduate school's campus. Yet it's clear that while making money and changing society are not entirely incompatible, they are often uneasy bedfellows.

For one thing, nobody can agree on how a not-only-for-profit company is supposed to measure success (see box, "Beyond the Bottom Line"). And in order for any company to stay in business, it must sell a product or service that people want to buy. "Nobody buys a product just for its mission," says Lubetzky. "Even if they tell you they do, they don't. It has to stand on its own."

Finding the right product is tough in any business. But success becomes immeasurably more difficult if, like Lubetzky, you try to source your products from partnerships between ethnic groups that have spent generations in conflict. How companies such as PeaceWorks resolve such issues will ultimately determine whether social venturing is a fad or a phenomenon that will change the business world in a significant way.

Around two years after Lubetzky started the partnership with Benesh, he tried to launch a venture in the turbulent Chiapas region of Mexico. Lubetzky lived in Mexico City as a child until his Latvian-born father, a Holocaust survivor, moved the family to San Antonio. Discrimination against the impoverished Chiapas Indians was so great in their native region in those days, Lubetzky says, that a Mexican of Indian descent had to cross the street if someone of European parentage strolled down the sidewalk.

Lubetzky planned to help Indian farmers manufacture salsa using ingredients that they grew. He would then distribute the sauce in the U.S., using the salsa's production history to attract American consumers.

Unfortunately, insurers would not cover product shipments because of endemic hijacking along the roads between Chiapas and the U.S. So Lubetzky manufactured the salsa in San Antonio using ingredients imported from Chiapas. Honest to a fault, he chose not to mention this limited social benefit on the product label. As a result, customers had no way to distinguish PeaceWorks' products from other salsas on the market. And he assumed, incorrectly, that American consumers would embrace weird salsa flavors such as Raging Raspberry Chipotle. "I thought they were delicious, but the market wasn't ready," says Lubetzky. "They died a horrible death on the shelves."

In 2001, Lubetzky started importing La Bici pasta chips from a Durban factory owned jointly by black and white South Africans. He was impressed that the factory offered job training to previously disenfranchised black workers. But in his zeal to support change in post-apartheid South Africa, Lubetzky overlooked key business details. The Atkins diet was catching on in the U.S., making it unlikely that the starchy snacks would fly off the shelves. And it was very costly to ship the chips to the U.S. because they were so bulky. Lubetzky scrapped the product two years ago.

PeaceWorks hasn't given up on trying to foster business partnerships between groups in conflict. Last summer Lubetzky traveled to South Korea and China in search of his next social venture. But Lubetzky now channels 5% of his profits into a separate nonprofit called the PeaceWorks Foundation. The foundation holds forums that encourage Israelis and Palestinians to resolve their long conflict. With endorsement help from Hollywood stars such as Jason Alexander, Rhea Perlman, and Danny DeVito, these efforts have generated global publicity.

To keep the foundation strong, Lubetzky has had to focus on distributing commercially viable brands. Bali Spice, the Indonesian food line that's taking off among the affluent foodies who shop at Whole Foods and other high-end markets, is a spinoff of Bali Kitchen, a line of curry seasonings and other products that are sold in 20 countries in the Middle East and Europe. When Bali Spice started marketing in the U.S. last December, Lubetzky projected $500,000 in sales for 2004. Sales reached that point in the first quarter and have continued to climb.

Bali Spice product labels highlight the peaceful relations among the Buddhists, Christians, and Muslims who work together on the factory floor near Jakarta. But this is more an accident than a deliberate effort by the Indonesian family that runs the factory. "For us it is normal to have mixed races and religions," says business development manager Tjhie Lie Ming. "But if they want to highlight that on the packaging, that's okay too."

Particularly since the Bali nightclub bombing, the work of Muslim extremists, that killed 202 people in October 2002, Americans have tended to associate Indonesia with religious conflict. Lubetzky hopes that his reminders about religious harmony in places such as the Bali Spice factory will help change that stereotype. "The case is that an overwhelming majority in each population are happy to work together and get on with their lives," he says.

Meanwhile he is using the brand name, which PeaceWorks owns, to market coconut milk from a Sri Lankan factory where members of the Sinhalese majority work harmoniously with minority Tamils despite the country's long history of ethnic strife.

Lubetzky has also started distributing two new brands, Kind Foods and Be Natural. Neither brand comes out of a partnership between groups in conflict. Both are successful products that help Lubetzky raise money for the PeaceWorks Foundation. "We can have a lot of impact by coming up with a great product and donating a portion of the profits," he says. "The foundation may be our most important contribution to society."

Lubetzky started with a plan to change the world by changing the way business works. Yet PeaceWorks is now a profit-driven company that derives a marketing benefit from donating part of its earnings to charity. Of course, the same is true for any small business that sponsors a Little League baseball team for underprivileged kids. For all their revolutionary zeal, Lubetzky and his comrades in the social venture movement may simply be reinventing an old wheel called business philanthropy.