About the Inter-American Development Bank’s Social Entrepreneurship Program (SEP)

The Inter-American Development Bank began supporting income generating nonprofit organizations and cooperatives in 1978 through its Small Projects Fund long before there was a field dubbed social enterprises. In 1998, the Social Entrepreneurship Program (SEP), which replaced the Small Projects Fund, was created to promote social equity and the economic development of poor and marginal groups. The Social Entrepreneurship Program promotes business operations that generate social benefits and help community organizations encourage microenterprise development. Thus, in its 25-year history, the Bank has supported numerous projects that fall under the rubric of social enterprise through this program.

The SEP grants low interest loans of up to US$1 million; in addition, it offers technical assistance grants of up to US$250,000, which are allocated to the development and strengthening of innovative institutions. SEP uses its resources strategically and funds a limited number of representative projects; such operations must be capable of promoting learning between countries or of being emulated in other parts of the region.

IBD Social Entrepreneurship Program (SEP) Support to Social Enterprise

• Invests US$10 million annually to develop and strengthen innovative institutions.
• Provides low interest loans of up to US$1 million and grants of up to US$250,000 for technical cooperation.
• Supports financial services and business development projects with a special emphasis on poor and marginalized groups.
• Provides average long-term loans of US$500,000.

SEP is a highly competitive program, providing US$10 million annually to finance projects in 26 Latin American and Caribbean countries. Government agencies, bilateral funds, and multilateral donors have joined forces with IDB and the Social Entrepreneurship Program to strengthen that assistance. Several trust funds, such as the European Union Special Fund for the Financing of Small Projects in Latin America, the European Union Special Fund for Financing Microenterprise in Latin America, the Swedish Trust Fund for the Financing of Small projects, the Norwegian Fund for Small Projects, the Norwegian Fund for Microenterprise Development, the Japan Special Fund, the Swiss Technical Cooperation and Small Project Fund, and more recently the Italian Trust Fund have contributed, channeling support to rural and minority groups, and providing technical assistance to strengthen nonprofit organizations. The IDB Group is committed to contributing to the success of this new type of social enterprise and supporting projects that offer financial and business development services as well as social and community services in a sound, efficient, and sustainable way to benefit low-income people, indigenous groups, women, youth, and other marginalized groups.

Cooperatives

Perhaps the roots of entrepreneurial activities in the social sector context can be drawn to cooperatives which have functioned as a means to fund socioeconomic agendas as early as the mid-1800s. Robert Owen (1771-1858) fathered the cooperative movement. A Welshman who made his fortune in the cotton trade, Owen believed in putting his workers in a good environment with access to education for themselves and their children. These ideas were put into effect successfully in the cotton mills of New Lanark, Scotland. It was here that the first cooperative store was opened. Spurred on by the success of this, he had the idea of forming "villages of cooperation" where workers would help themselves out of poverty by growing their own food, making their own clothes and ultimately becoming self-governing.1

Cooperative is defined by the International Cooperative Alliance (ICA) as "an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise".2 They "are based on the values of self-help, self-responsibility, democracy, equality, equity and solidarity. In the tradition of their founders, cooperative members believe in the ethical values of honesty, openness, social responsibility and caring for others".3 Noticeably, the cooperative definition and characteristics are those embraced by social entrepreneurship.

Since their inception over one hundred years ago, cooperatives have become widespread throughout the world, and continue to play an important function in promoting international economic development and social justice for the poor. Cooperatives are a common form of social enterprise found in developing countries. Examples include agricultural marketing cooperatives, which market and distribute its members' products, while agricultural supply cooperatives, provide inputs into the agricultural process; both are examples of social enterprises promoted in value chain development and Making Markets Work for the Poor (M4M). Self-Help Groups (SHGs) comprised of low income-women, and popular in South Asia, are frequently organized into cooperatives to support a variety of their members' interests related to commerce, health and education. Credit Unions are another example of a cooperative found tied to economic development micro-financial service programs, particularly across West Africa, Latin America, and countries of the former Yugoslavia. In the UK a slight variation on the cooperative, called mutual organizations or "societies" are commonly associated with social enterprise. Unlike a true cooperative, mutual members usually do not contribute to the capital of the social enterprise company by direct investment, instead mutuals are frequently funded by philanthropic sources or the government.

• 1. Wikipedia website http://en.wikipedia.org/wiki/Cooperatives
• 2. Co-operative Alliance website (www.ica.coop/coop/principles.html)
• 3. Ibid.

Fair Trade

Fair Trade is another predecessor to the contemporary social entrepreneurship field. Early attempts to commercialize fair trade goods in Northern markets were initiated in the 1940s and 1950s by religious groups and various politically oriented NGOs. Mennonite Central Committee (MCC) and SERRV International were the first, in 1946 and 1949 respectively, to develop fair trade supply chains in developing countries.1 The products, almost exclusively handicrafts, were mostly sold in retail outlet called "Worldshops." MCC's historic Worldshop, Ten Thousand Villages, is well-known today and has numerous locations throughout the US. Ten Thousand Villages operates as nonprofit subsidiary social enterprise of MCC.

The current fair trade movement was shaped in Europe in the 1960s. Fair trade during that period was often seen as a political gesture against neo-imperialism: radical student movements began targeting multinational corporations and concerns that traditional business models were fundamentally flawed started to emerge. The slogan at the time, "Trade not Aid", gained international recognition in 1968 when it was adopted by the United Nations Conference on Trade and Development to put the emphasis on the establishment of fair trade relations with the developing world.2 Nineteen sixty-five saw the creation of the first Alternative Trading Organization (ATO) and that same year, British Oxfam launched "Helping-by-Selling", a program which sold imported handicrafts in Oxfam stores in the UK and from mail-order catalogues.3 Worldshops for fair trade goods spread to the Netherlands in 1969 and expanding throughout Europe in the 1970s. In the early 1980s, to offset a decline market for handicrafts, Alternative Trading Organizations began broadening the scope of fair trade from handicrafts to include agricultural products, particularly commodities, whose spiraling prices had a dire impact on poor producers.

In 1988 Fair Trade labeling initiative was launched to promote fair trade commodities and agricultural products, followed by International Fair Trade Certification Mark in 2002. There are now Fair Trade Certification Marks on dozens of different products, based on Fairtrade Labeling Organization's (FLO) certification for coffee, tea, rice, bananas, mangoes, cocoa, cotton, sugar, honey, fruit juices, nuts, fresh fruit, quinoa, spices, wince and footballs. In 2005 these sales amounted to approximately €1.1 billion worldwide, a 37 % year-to-year increase.4 As per October 2006, 586 producer organizations in 58 developing countries were FLO-CERT Fairtrade certified and over 150 were International Fair Trade Associations were registered.5

• 1. International Fair Trade Association, Where did it Begin. 2005.
• 2. Ibid.
• 3. Hockerts, K. (2005). The Fair Trade Story INSEAD
• 4. Fairtrade Labelling Organizations International (2005). FLO Annual Report 2005.
• 5. Fairtrade Labelling Organizations International (2006). FLO October 2006 News Bulletin.

Community Development Corporations

In the United States, Community Development Corporations (CDCs) made their appearance catalyzing economic growth by investing in job creation, business development, real estate and affordable housing in target communities. Prior to the 1970s, banks "redlined" against minority neighborhoods, even to credit-worthy residents. In 1973, ShoreBank founders, Ron Grzywinski, Mary Houghton, James Fletcher, and Milton Davis, with backgrounds in banking, social service and community activism, decided to buy a bank in a disinvested neighborhood, and create complementary affiliates, focusing all of the resources on one neighborhood.1

Today, Shorebank has several branches around the US including its "Environment Bank" in the Pacific Northwest that invests in sustainable development as well it has opened a myriad of nonprofit subsidiaries that provide support technical and financial services to complement Shorkbank's private sector efforts. For example, Shorebank International Ltd., supports international economic development activities by offering a broad range of advisory and financial services in its core market segments of small business finance, microfinance and housing finance. ShoreCap Exchange is a nonprofit capacity building company supporting financial institutions in the development finance field. It provides one-on-one capacity building to microfinance institutions and small business banks in Asia, Africa and Eastern Europe. 2

Today, CDCs and Community Development Finance Institutions (CDFIs) are prevalent business models found among economic development practitioners of social entrepreneurship in many Western countries, and are increasingly active in Eastern Europe and other emerging economies in an effort to build the global CDC/CDFI industry. 3

• 1. Shorebank website
• 2. Ibid.
• 3. International Practitioners Working Group on Community Economic Development (PWG); Coastal Enterprises CDC (www.ceimaine.org)

Social Firms or Affirmative Businesses

In the 1960s to 1970s American and European nonprofits began experimenting with enterprises to employ disadvantaged populations. In the mid-1960s, John Durand, started working with 7 mentally retarded people and by 2005 Minnesota Diversified Industries had revenues of $40,000,000 and employed over a 1,000 physically and mentally disabled people.1 Similarly, in 1971 with $1,000 loan from a moneylender Mimi Sibert began a program for former felons and substance abusers. Since, Delancey Street has successfully mainstreamed 14,000 former clients entirely on self-generated resources through its 20 social enterprises run entirely by clients. 2

The first social firm (aka "affirmative business") model was created to employ people with psychiatric disabilities and is credited to the Italians. The social firm model was founded on, and continues to adhere to, the following principles: over a third of employees are people with a disability or labor market disadvantage, every worker is paid a fair-market wage, and the business operates without subsidy, and has gained prominence throughout North America, Japan and Europe. The growth of the social firm movement has been aided by legislation that supports the businesses, policies that favor employment of people with disabilities, and support entities that facilitate technology transfer.3 Such regulations as advantageous tax laws, preferential contracting terms, and government subsidies have created an enabling environment under which social firms have flourished.

In the mid 1990s, REDF (formerly The Roberts Enterprise Development Fund) popularized this notion of social firms by experimenting with business types, operating models and target populations. REDF merged social welfare and vocational rehab creating new enterprises to employ people with barriers to employment (including disabled, homeless, ex-offenders, youth at risk, etc.). REDF also began applying the tenets of venture capitalism to philanthropy ("venture philanthropy") to architect its funding and technical support approaches, as well as to begin measuring investor rates of return on social impact (social return on investment).

In doing so, REDF created a venture portfolio of 10 employment development social enterprises4 and published widely on tools and lessons drawn from its work with portfolio organizations. Indeed, REDF's contributions to social enterprise literature are the closest claim the social entrepreneurship field has to any one given methodology for social enterprise. The employment-model of social enterprise has been both replicated overseas by civil society organizations as well as adapted for an overseas application by practitioners of Making Markets Work for the Poor, who are creating employment or favorable conditions for employment for particular disenfranchised groups.

• 1. MDI annual report 2005
• 2. Delancey Street Website
• 3. Warner, Richard, M.B., D.P.M. and James Mandiberg, Ph.D., An Update on Affirmative Businesses or Social Firms for People With Mental Illness, American Psychiatric Services, October 2006.
• 4. REDF's literature refers to social enterprises as social-purpose enterprises.

Microenterprises

Although presently few microenterprise organizations commune in the social entrepreneurship space, social entrepreneurship field views the microfinance institution (MFI) as a quintessential social enterprise and sees its leaders as some of the world's most formidable social entrepreneurs. From early on practitioners implemented MFIs as a mission-centric vehicle by which to achieve wide-scale sustainable social impact.

Today, leaders like Mohammed Yunus are working to build relationships between the parallel, yet separate, communities of microenteprise and social entrepreneurship. Significant gains made by the microfinance industry in developing methodologies; spurring innovation; achieving scale, replicating globally, and nurturing second and third generations of microfinance innovators and entrepreneurs, offer many valuable lessons to build the nascent field of social entrepreneurship.

International microenterprise organizations that have begun to participate in social entrepreneurship forums and practice include: MEDA, TechnoServe, Grameen Foundation, Freedom from Hunger, Pro Mujer, CARE, Unitus, Accion International, Mercy Corps, Aid to Artisans, and Conservation International, among others.

Civil Society Organizations

Following the collapse of the Soviet Union, countries in this part of the world experienced rapid proliferation of civil society organizations (CSOs), their development aided in part by international development agencies. In the 1990s, previously well-funded NGOs and CSOs began to confront resource scarcity due to transitional economies and shifting funder priorities, coupled with the slower than expected private sector growth, thus creating a funding gap.

Market forces galvanized practitioners to explore alternative financing approaches, recognizing that their organizations' survival rested on the ability to augment or replace grants by other means. Development agencies in the region, as well as in other transitional economies such as Latin American countries, have supported this shift toward establishing an independent means of financing. NESsT, an early player in employing social enterprise as a means of self-financing social service organizations, adapted and replicated REDF's venture philanthropy approach and applied it to CBOs and NGOs in Latin America and Eastern Europe.

In addition to the establishment of income-earned ventures (social enterprise), CBO and NGO sustainability strategies include: the cultivation of local philanthropy; commercialization of NGO social services (fee-for-service); cultivation of local corporate social responsibility; and financial leveraging ensure that their organizations will be going concerns.

Base of the Pyramid (BoP)

Interest in the "base (or bottom) of the pyramid" was catalyzed by a paper written by two University of Michigan professors in 2002. In "The fortune at the bottom of the pyramid"1, C.K. Prahalad and Stuart Hart highlight the untapped market potential of the four billion people at the base of the economic pyramid. In this article, the global population is divided into three segments, based on purchasing power parity (PPP). BoP customers are defined as those with a PPP of less than $1,500 per year.

In the past several years, an increasing number of multinational corporations (MNCs) have recognized this opportunity and are making commitments to launch ventures in BoP markets. Well known examples include, CEMEX, Coca-Cola, Danone, Dow Chemical, DuPont, Hewlett-Packard, Intel, Johnson & Johnson, Nike, Procter & Gamble, S.C. Johnson, Tetra Pak, and Unilever.

While MNC exploration of low income markets is one well-publicized "BoP strategy," several other players and approaches have also emerged. It is apparent that small- and medium-scale enterprises will play an important role in this space, and a number of development agencies have created programs to facilitate BoP-oriented SME development. CARE Canada, for example, has launched CARE Enterprise Partners, a program that looks to help bridge the gap between entrepreneurs in the informal sector and larger businesses operating in the formal sector. Additionally, as ITC in India, DuPont in Latin America, and VegPro in Africa have discovered, the BoP is also a producer of high quality goods and services that can meet the needs of markets at both top of the pyramid and BoP markets.

• 1. Prahalad, C. K., & Hart, S. L. 2002. The fortune at the bottom of the pyramid. Strategy+ Business, 26(First Quarter): 2-14. Stuart Hart is now at Cornell University.

Government Funders

The Inter-American Development Bank began supporting social enterprises (cooperatives and NGOs) through the Small Projects Fund in 1978 long before there was a field associated with these organizations. In 1998, the Social Entrepreneurship Program (SEP), which replaced the Small Projects Fund, was created to promote social equity and the economic development of poor and marginal groups. In its 29-year history, the Bank has supported numerous projects that fall under the rubric of social enterprise through this program. Today, social enterprise is a key IADB instrument used to drive local economic development within the context of a strategic regional vision.

World Bank's Development Marketplace (DM), founded by Dennis Whittle and Mari Kurashi (currently CEO and President of Global Giving), stemmed from the need for better implementation results on the ground, and an understanding that good ideas can come through multiple channels. DM began as an internally-focused exercise to identify cutting-edge solutions to the most pressing social and economic concerns and change World Bank staff decision-making culture, encourage risk-taking, and shorten project development and delivery.1 With an allocation of US$5 million, the World Bank held its first internal "Innovation Marketplace" in 1998. Over 150 World Bank staff teams put forward ideas, of which 11 won awards.2

Based on the success of this event a decision was made to open the marketplace up to anyone interested in development issues from inside or outside the World Bank. In 2000, the World Bank hosted the first Global Development Marketplace (DM2000), or Global Competition. It was an open competition with over 1,000 proposals originating from both inside and outside the World Bank to address a range of issues from sustainable development to combating HIV/AIDS, winning projects shared the award pool of US$5 million in start-up funds.3 The success of DM2000 created demand for "in-country development marketplaces." The idea was to localize DM competitions to a single country, addressing the local development issues. To date, the Global DM competition has disbursed over US$23 million in awards to 171 winning proposals. The CDM competitions have awarded over US$11 million to more than 650 winners in 42 countries.4

After co-funding several private sector development winners of DM, International Finance Corporation's launched the Grassroots Business Initiative (GBI) in 2004 to strengthen and scale up innovative social enterprises- referred to as grassroots business organizations - that create sustainable economic opportunities for the poor, empowering and engaging them as entrepreneurs, consumers, employees and suppliers. Many of GBIs investments are DM winners that have finished their start up funding awarded though the competition. In addition to BoP strategies and social enterprises, GBI supports intermediaries that support them, with appropriate financing (grants and "patient capital" loans) and capacity building. GBI supports some 30 projects in Africa, Latin America and Asia aiming to bring income generating opportunities and needed products and services to the poor. GBI is currently discussing with the IFC the prospect of spinning off into a separate independent entity with significant seed capital from the IFC.

Government of the United Kingdom

In the United Kingdom Blair administration determined that social enterprises could play an important role in helping deliver on much of government's agenda by: helping to increase productivity and competitiveness; contributing to socially inclusive wealth creation; enabling individuals and communities to work towards regenerating their local neighborhoods; showing new ways to deliver and reform public services; and helping to develop an inclusive society and active citizenship.5

In response to these findings, the British government created the Social Enterprise Unit within the Department of Trade and Industry in 2002 to put social enterprise at the center its social reform policy. Social enterprise is now the fastest growing sector in the United Kingdom; data from a 2004 survey conducted as part of the Global Entrepreneurship Monitor (GEM) suggests that new 'social startups' at a faster rate than conventional startups in the UK.6 Research also shows that employment created by social enterprises has outstripped employment created by conventional business .7 The UK government has done more than other governments toward establishing an enabling environment for social enterprise. In 2004 a new legal form was introduced, the Community Interest Company, which addresses from a legal perspective the particular needs of the social enterprise hybrid.

• 1. Development Marketplace website: www. worldbank.org/developmentmarketplace
• 2. Ibid.
• 3. Ibid.
• 4. Ibid.
• 5. Synopsis from Social Enterprise Unit, British Department of Industry and Trade website
• 6. Nicholls, Alex, Social Entrepreneurship: New Models of Sustainable Social Innovation, Oxford University Press, 2006.
• 7. Salamon, Lester, The Resilient Sector, Brookings Institution Press, 2003.

Venture Philanthropists and "Philanthropreneurs"

In the last fifteen years, a huge amount of new wealth has been created which is influencing philanthropic giving. This year, as never before, the line between philanthropy and business is blurring. A new generation of philanthropists has stepped forward, for the most part young billionaires who have reaped the benefits of capitalism and believe that it can be applied in the service of charity.1 In the past, the rich endowed their estates upon passing. Now not only do they want to give their money away while living, but want to play an active role in doing so. Drawing on their success in business, new economy philanthropists apply market principles to their philanthropic efforts and view grant-making through a venture capitalist lens. They treat charity as "social investment" for which they expect to realize a measured social return (and often a financial return) and thus have been dubbed "venture philanthropists."

The venture philanthropy adapts the six tenets of venture capitalism: high funder engagement; multi-year funding; risk-return analysis and risk management; exit strategies; capacity building of the funded institution and measurable performance results (social and financial retuns). The first venture philanthropy fund is attributed to the Robin Hood Foundation in New York City and was founded in 1988, yet venture philanthropy as a funding approach was not popularized until the late 1990s. Between 1998 and 2000 a groundswell of new venture philanthropy funds were endowed; several then folded in early 2000-2001 when economic contractions reduced their asset base. There was also a settling period when funds and foundations built their own internal capacity to deliver grants using an investor or venture philanthropist approach. In the early years, language broadened to include terms like, "strategic funder," "engaged philanthropist," "social investor," "social angel," and "philanthropreneur." By the mid-2000s venture philanthropy funds and foundations using the approach become an ingrained part of the funding landscape and it become resoundingly clear that the culture of philanthropy was changing forever.

The approach of "philanthropreneurs" reflects the culture of the business that brought them their wealth: information technology, with its ethos that everyone should have access to information. By their way of thinking, the marketplace can have the same level-the-playing-field impact, and supply the world's poor with basic needs like food, sanitation and shelter.2 This generation of philanthropists is globally-oriented and thus interested in funding international development programs, a major difference from pervious generations. In the last ten years, "Venture Philanthropy Funds" or "Social Venture Capital Funds3 ," nonexistent ten years ago, today have formidable endowments and engaged founders.

Leading business innovators such as Pierre Omidyar (founder of eBay), Gib Myer (Mayfield Fund), Larry Page and Sergei Brin (co-founders of Google), Jeff Skoll (first president of eBay), Bill Gates, (Founder Microsoft), Steve Case, (co-founder of America Online), and Klaus Schwab (founder of The World Economic Forum) are focusing of their giving on social entrepreneurship. Therefore, this new type of philanthropist has become a serious contender in development funding which until recently has been dominated by governments.

The market-based approaches such as social enterprise and BoP strategies make these initiatives a natural funding match for new philanthropists. In fact, it is difficult to discern whether the rise of social entrepreneurship has fueled the growth of venture funds or visa-versa. Although many venture philanthropists have sector orientations, the bulk of their funding goes to support social entrepreneurship and market-based approaches, as opposed to traditional nonprofits or development projects. For example, Acumen Fund invests in water, health and housing by providing some grants, but largely loans and equity investments to social enterprises.

• 1. Strom, Stephanie, What's Wrong with Profit, New York Times, November 13, 2006
• 2. Ibid.
• 3. Also known as Venture Philanthropy Funds

Nonprofit with Income-Generating Activities

Nonprofit organizations that incorporate some form of revenue generation through commercial means into their operations. Income-generating activities are not conducted as a separate business, but rather are integrated into the organization's other activities.These activities usually realize little revenue relative to the organization’s overall budget and traditional fundraising contributions.

There are two types of income-generating activities, delineated here by purpose:

Social Enterprise

A social enterprise is defined as any business venture created for a social purpose--mitigating/reducing a social problem or a market failure--and to generate social value while operating with the financial discipline, innovation and determination of a private sector business.1

Social enterprises use entrepreneurship, innovation and market approaches to create social value and change; they usually share the following characteristics:

1. Social Purpose - created to generate social impact and change by solving a social problem or market failure;
2. Enterprise Approach – uses business vehicles, entrepreneurship, innovation, market approaches, strategic-orientation, discipline and determination of a for-profit business;
3. Social Ownership – with a focus on public good and stewardship, although not necessarily reflected in the legal structure.

Social enterprises may be structured as a department within an organization or as a separate legal entity, either a subsidiary nonprofit or for-profit.

The purpose of the social enterprise may be:

1. an additional funding mechanism for the organization’s social programs or operating costs;
2. a sustainable program mechanism in support of the organization's mission; or
3. a leadership development mechanism in support of social innovation.

Used for either purpose, business success and social impact are interdependent.

Social enterprises can be classified based on their mission orientation...

...as well as the level of integration between social programs and business activities.

• 1. Definition from Virtue Ventures LLC

Socially Responsible Business

For-profit companies that operate with dual objectives-making profit for their shareholders and contributing to a broader social good. Ben and Jerry's and Body Shop are examples of this type of hybrid.1

In socially responsible businesses the degree to which profit-making motives affect decisions and the amount of profit designated for social activities ranges. Socially responsible businesses are willing to forsake profit or make substantial financial contributions rather than distribute earnings privately, and frequently place social goals in their corporate mission statements. In some cases a socially responsible business may be considered a social enterprise when it is a registered for-profit subsidiary owned by a nonprofit organization (parent organization) created for the purpose of earning income for the parent organization as well as supporting a social cause.

For additional information, see the Business for Social Responsibility web site.

Green Mountain Coffee Roasters, an example of Socially Responsible Business

Green Mountain Coffee Roasters (GMCR), based in Vermont, is an example of socially responsible company. At GMCR every business decision is anchored in the company's core values concerning the environmental and the social impact of its business actions.

In 1989, GMCR established an environmental committee comprised of employees to explore the many ways its corporate environmental vision could be executed in its business practices. One outcome was the establishment of the Company's extensive on-site recycling program.

In 1992, GMCR launched its "Stewardship" line of coffees, which are grown and harvested using ecologically-sound sustainable farming techniques beneficial for the land and workers. GMCR employees travel to coffee farms in Hawaii, Mexico, Costa Rica, Peru, Guatemala, and Sumatra to evaluate the farm management and quality of the coffee. These visits help develop strong relationship with the growers and better profits.

In 1997, GMCR funded construction of a "beneficio and hydro" plant for 16 coffee-farming families in Peru. Then in 1998, the Company provided funding for a Coffee Kids micro-lending project in Huautsco, Veracruz, Mexico. This project has already grown to include over 270 participants.

In addition to these socially responsible business activities, GMCR contributes 7.5% of its pre-tax earnings, the highest amount allowable by law, to social and environmental organizations such as Conservation International.

• 1. Young, Dennis, Social Enterprise in the United States, 2001.

Corporation Practicing Social Responsibility

For-profit businesses whose motives are financially driven, but who engage in philanthropy. "Strategic philanthropy" helps companies achieve profit maximization and market share objectives while contributing to public good.

A private company or corporation engages in socially beneficial activities such as grant-making, community involvement, volunteering company personnel, and sponsorship as a means to improve public image, employee satisfaction, sales, and customer loyalty.

Corporate social responsibility is not classified as social enterprise, although philanthropic activities may support social enterprises, make a positive social impact, or contribute significantly to a public good.

Amanco, an example of Corporate Social Responsibility

Amanco, part of the Nueva Group based in Costa Rica, produces and markets piping for irrigation construction, infrastructure, and industry in 13 countries of Latin America.

Amanco Argentina has two plants, including one at Pablo Podestá where the company started a community integration program in 2000. They are working with the Agrupación Ecológica Oasis (Oasis Group), which brings together needy youth for local activities, including reforestation and tree planting, and collecting aluminum, glass, and newspaper that they sell to recycling companies. The money is used to buy school supplies, tools, seeds, and other items. The company provides them with a space to create a library and meeting center, for which Amanco employees collected the first books. Employees will also teach classes.

Amanco identified community leaders who will be trained to continue the work organized by the Oasis Group, and plans to bring other companies in the region into the program, which will be expanded to work with other local community groups.

Mission Orientation and Motives

In hybrid organizations money and mission are intertwined like DNA; however, they are not always equal partners. In practice, financial and social objectives are often in opposition or competition with one another. The initial decision to undertake a social enterprise is frequently motivated by either financial need or mission benefit.

Mission Orientation in Hybrid Organizations

The following diagram shows the relationship between mission orientation and type of organization.

Mission vs. Profit Motives in Hybrid Organizations

The following scatter diagram shows the relationship between the type of organization and its motives.

Mission Drift

The inherent challenge of operating a social enterprise is managing to its dual objectives. In practice, the business of generating social and economic value means decisions and actions are in frequent opposition. This translates into calculated trade-offs: decisions to forsake social impact to gain market share or increase profit margins; or conversely, expanding the scope of social good at a financial cost. Problems occur when an organization's enthusiasm to meet its financial goals begins to overwhelm its social mandate. Nonprofits' long history of struggling to secure funding can, in the advent of earned income, threaten to swing the pendulum too far in the other direction. In the early days of microfinance, donors and practitioners toiled to set parameters on "how far is too far" on the mission-money spectrum by quantifying loan sizes, duration of client relationships, and interest rates before arriving at a model that was both viable and scaleable.

The concern many nonprofit practitioners and donors face is that incorporating commercial approaches into a nonprofit will compromise the organization's mission or social services by causing a "drift" too far into the for-profit camp.

The feared results of the "drift" (real or perceived) are:

• drift may damage the reputation of the organization among stakeholders and the public;
• the social enterprise may jeopardize funding because donors either misunderstand its dual-intention social enterprise or believe donations are now unnecessary;
• it may threaten organizational culture by applying market-based approaches and bringing in business professionals and industry experts; and
• finally, some fear that the organization will lose focus, and stray too far into the commercial realm, neglecting its social mission.

Running a social enterprise is a balancing act, which requires vigilance and a clear understanding of the organization's purpose and priorities: what is the social impact that the organization is trying to achieve, and how much money does it need to make? It means strong market discipline coupled with an equally strong sense of ethics and integrity--and leadership consensus about limits on "how far is too far" in any direction. Generating economic value, or making money, is not an evil act; on the contrary, it's a tool for generating social value in a way that is more sustainable than relying on donor funds.

The social enterprise model and design will largely inform how its dual purposes are achieved; it is up to the leadership to manage the tensions. The following exhibit shows this relationship in the product and market mix.

Financial Spectrum of Social Enterprise

The level of social enterprise self-sufficiency is based on financial objectives, the type of enterprise, and its maturity. Social enterprise methodology does not dictate breakeven or profit-making; rather, financial performance is appraised by the ability of the social enterprise to achieve the financial objectives it has set.

For this reason, the chart below1 does not represent gradation from one stage of development to the next, unless the social enterprise's express objective is to move across the continuum and performance is a question of maturity.

• 1. Expansion on spectrum idea presented by Gregory Dees, Enterprising Nonprofits, Harvard Business Review, January-February 1998. Adapted from, Alter, Sutia Kim, Managing the Double Bottom Line: A Business Planning Resource Guide for Social Enterprises, Pact Publications, Washington, DC, 2000.

Methods of Income Generation

Social enterprises use a variety of methods to generate commercial income to sustain operations. At any given time, a social enterprise may use one or a combination of methods, based on the type of enterprise and business strategy.

Access to Capital

Social enterprises, like any other business--micro or corporation, need capital to grow. It's not only a question of financing, but also of the right kind; capital must correspond to social enterprise financial needs, business cycles, and maturity. Furthermore, like any other business, the best make good use of borrowed capital and their own risk capital.

Access to capital, however, is a constraint social enterprises continue to face. The reasons are fourfold:

• Nonprofit capital markets are immature and underdeveloped, and there is little availability of financial instruments appropriate for capitalizing nonprofit businesses.
• Ownership and regulatory issues bar nonprofits from access to financing--they cannot issue equity or distribute profits.
• Nonprofit managers are financially risk adverse and hence often steer clear of options to leverage or borrow funds in order to capitalize their enterprises.
• For the nonprofit manager willing to borrow, the lack of collateral, credit history, or financial competence are other factors that prohibit access.

Market Maturity

Market maturity and limited available resources present significant problems. Agencies such as the Inter-American Development Bank and social investors such as Calvert Foundation or Partners for the Common Good have worked to fill funding gaps with low interest loans and innovative financing programs, such as SEP.

On the other hand, few donors have come to the table to fund start-up or early stage social enterprise with grants. In cases where donors have funded social enterprises, the philanthropic funding cycle is typically slower than the social enterprises' business cycle (production and sales cycle), which can further challenge capitalization.

To exacerbate matters, there is the worrisome misconception that once an organization has launched a social enterprise, it no longer needs grants for social programs, when in fact early capitalization of the enterprise dictates the opposite. There is also the misperception that social enterprises only need loans. Capitalizing a nonprofit social enterprise may take four or five times longer than its private sector counterpart, due to the social costs and encumbrances of supporting dual objectives. These financial limitations hinder efforts of many social enterprises to take their activities beyond the start-up stage and to stabilize, expand, and diversify. 1

Funding Instruments

Appropriate funding instruments and greater awareness of capitalization issues is needed to facilitate the growth of the social enterprise field as a viable sustainability strategy for nonprofits. Assisting the development of social enterprises' capital markets is a role that onors, philanthropists, and local governments can play. The following exhibit shows the range of funding across the nonprofit and for-profit spectrum. Many of the same funders support both traditional nonprofit and hybrid nonprofit enterprises; however, greater participation and diversity of funding instruments are needed in the latter if this field is to emerge as a mainstay of international development.

Funding Spectrum2

• 1. Etchart, Nicole and Lee Davis, Unique and Universal: Lessons from the Emerging Field of Social Enterprise in the Emerging Market Countries, NESsT, 2003.
• 2. Adapted from Emerson, Jed and Sheila Bonni, The Blended Value Map: Tracking the Intersects and Opportunities of Economic, Social and Environmental Value Creation, September, 2003, www.hewlett.org.

External Financing vs. Revenues Over Time

Legend: SE = Social Enterprise; Y Axis = Money; X Axis = Time;
External Financing = all financing (grants, loans, contributions) minus revenues (internal financing)

Total expenses can be divided into three subcategories (moving upward along the Y-axis):

• SE Business Expenses include all costs found in similar businesses that are strictly for-profit, with no consideration for social impact and mission.
• SE Social Expenses comprise additional expenses incurred because of the social focus of the SE, such as special workplace or benefits requirements. Together, the SE Business Expenses and the SE Social Expenses total the total SE expenses.
• Program Expenses, in this context, represent expenses incurred to support social programs outside the SE.

From Time 0 to Time A (moving along the X-axis), the SE goes through a start-up phase requiring a lot of external financing. Expenses increase faster than revenues. This is a critical phase during which decision-makers must carefully weigh business expenses based on their potential for generating future revenues.

From Time A to Time B, the SE goes through a growth phase during which external financing is still required, but revenues grow at a faster pace than expenses, leading the way to traditional financial sustainability.

The SE reaches its first breakeven point in Time B, at which point the SE becomes sustainable as a traditional business (a business that does not incur additional social expenses). The difference between all Business Expenses and Revenues between Time 0 and Time B represent the total business investment over that period of time (light gray area on the chart). Even the best management team implementing the best business model cannot succeed in bringing a business to that critical point if decision-makers fail to recognize (and budget) the level of external financing that will be required over that certain period of time, both of which can vary greatly based on a variety of factors (all of which are considered during the business planning phase).

From Time B to Time C, the SE still requires external financing, but only to cover part of its Social Expenses (part of which is also covered by SE Revenues). Depending on the model, some social enterprises never grow beyond that point, in which case they serve in a context in which both SE Revenues and external social subsidies can be effectively leveraged to create social impact.

In Time C, the SE might be reaching a second breakeven point, at which all SE expenses are covered by revenues. Additional SE revenues now generate a profit that can fund social programs outside of the SE.

Program Areas

Program activities described in this section are not comprehensive, rather they relate only to social enterprise programs. All technical program areas have numerous activities not elaborated herein.

Economic Opportunities

Economic opportunities programs focus on starting social enterprises for the express purpose of creating fair-wage jobs or employment opportunities in a geographic target area. Other program activities center on developing transferable skills, job placement, or opportunities that foster self-employment. Economic opportunities programs may be single-focused on business or integrated with other social services such as insurance, literacy, health education, etc.

Community and Rural Development

Community and rural development programs develop community-based social enterprises aimed to provide local jobs, increase purchasing power, reduce urban flight, increase community wealth, and strengthen community cohesion. These social enterprises may be designed as community businesses intended to benefit the entire community by investing surplus revenue in wells, schools, libraries, community centers, gardens, etc., or as more traditional small and medium scale enterprises (SMEs).

Market Development

Market development programs start or support social enterprises that spur and facilitate growth in underdeveloped and under-served markets. These social enterprises operate in markets that are unattractive to private companies due to high market penetration costs (often related to rural distribution and educational marketing), slim margins, or both. The objective is to provide access to vital good and services to marginalized communities while strengthening markets to entice private sector players. Social enterprises working in market development consider private sector competition or cannibalization an exit strategy. Socially responsible fair trade organizations also serve to develop markets, but do not seek to exit markets based on emerging competition.

Access in Under-served Markets

In markets unattractive to the private sector, but where social need and demand coexist, the social enterprise fills a vital niche by providing access to products and services. Poor and rural markets are largely under-served due to high transaction costs, low purchasing, and low margins, making access difficult for many people in need of products and services, such as medical services, health inputs, financial services, etc.

Employment Development

Employment development creates employment and vocational training for disenfranchised, disabled or at-risk populations. These so-called "hard-to-employ" people earn a livable wage and develop marketable skills through their employment in the social enterprise. Employment development models of social enterprises were popularized in the US, and have proven successful in Latin America.

Microenterprise Development

Programs that foster the growth and development of microenterprises (businesses that employ 1-10 people) and self-employed people (microentrepreneurs) through the provision of affordable credit or business support services (training, technology, market information, etc.)

Institutional and Organizational Development

Institutional development programs are aimed at building the capacity of nonprofit organizations to self-govern and become sustainable. In addition to training and technical assistance in organizational development and nonprofit management, programs focus on income-generation and financial self-sufficiency, thus may incorporate social enterprise.

Sectors

This section describes a number of nonprofit sectors and some social enterprise applications in those sectors. This is by no means an exhaustive list; social enterprise can be applied in any nonprofit sector, particularly if is it used as a financing strategy. The sectors highlighted in this section are generally conducive to incorporating social enterprise as a program strategy.

Economic Development

Economic development is a sector that uses social enterprise as a sustainable program strategy to create economic opportunities and community wealth-building to enable poor people to attain economic security for themselves and their families. In many cases, business activities are "embedded" within the economic development organization; the social enterprise is the program--the means to effect social impact. Some of the possible social impact goals include increased household income, asset accumulation, investments in productive activities, job creation, increased school attendance, improved health, and quality of nutrition.

Environmental Conservation

"Eco enterprises" offer a wealth of creative methods to both raise money for, and awareness of, environmental issues. Eco-tourism's growing popularity provides lucrative opportunities to social entrepreneurs interested in capturing intrepid travelers. The tourist market, unlike many nonprofit "client markets," has money; therefore this business easily marries the social enterprise's financial and social objectives. Many environmental social enterprises also sell products, such as shade-grown coffee or items made from recycled materials. In other examples, environmental social enterprises operate organic markets or home delivery food businesses to finance sustainable agriculture and education programs.1

Social Welfare and Human Development

In some social welfare and human development organizations, there is crossover with employment development and job training programs, whereby the social service organization creates jobs and develops skills for clients--homeless, physically and mentally disabled, and at-risk populations--through a social enterprise. Human development organizations that target recovering drug addicts and alcoholics, former welfare recipients, or ex-convicts use social enterprises as rehabilitative programs. In other cases, the social welfare organization may commercialize its social services to a private pay market to fund its programs.

Arts and Cultural Preservation

Within the context of the cultural organization, social enterprise offers a range of possibilities to serve social and financial objectives. Selling cultural products through outlets such as an art gallery, cinema or theater; or educational services such as art, drama, music, cultural history, etc. are common social enterprise examples.

Health

In the health sector, nonprofit organizations have been incorporating social enterprise for many years. Hospitals and clinics are common examples. Pharmacies, medical supply companies, and group-purchasing businesses are also widely applied models. Selling health services is a growing industry in social enterprise: nutrition counseling, physical therapy, mental health counseling, care management, and alternative therapies.

Agriculture

Agricultural production, sustainable farming, food processing and animal rearing offer many social enterprise opportunities for rural communities in developing countries where few other economic opportunities exist. In the United States, social enterprises in the agricultural sector range from nonprofit or cooperative organic farms to economic development organizations that support entrepreneurs and small scale producers (cheese, jam, salsa, beer, etc.).

Education

Educational institutions have long used social enterprise as a means to diversify their income and strengthen education programs. Tuition or "fee-for-service" is the obvious method used by schools, colleges and universities. Many universities obtain research contracts with the government or private sector. Specialized skill or technology institutions provide an option to follow the service subsidization model by repackage classic education to new markets for a fee.

Children and Youth

Many nonprofit organizations serving adolescents and young adults, particularly from low-income families, conduct entrepreneurship and vocational skills training, or run hands-on business programs such as youth run enterprises or incubators. These types of program provide multiple opportunities for integrating social enterprise programs within the organization. Other children and youth organizations operate child-focused enterprises such as birthday parties, camp, after school programs, test preparation, tutorials, classes, extra curricular activities and sports.

Democratization and Governance

Democracy and governance programs are concerned with facilitating democratic and self governed organizations, advocacy, enabling legal environments, human rights and rule of law. Although democracy and governance organizations are not an intuitive fit for a social enterprise program, many provide paid legal services, training, consulting to nonprofits, government bodies and private companies. Creative examples exist in this sector; one social enterprise sells encryption services to human rights organizations.

• 1. Etchart, Nicole and Lee Davis, Unique and Universal: Lessons from the Emerging Field of Social Enterprise in the Emerging Market Countries, NESsT, 2003.

Mission-Centric Social Enterprise

The enterprise is central to the organization's social mission. These social enterprises are created for the express purpose of advancing the mission using a self-financing model.

Organizations created to employ disadvantaged populations (employment development) and microfinance institutions are examples of this type of social enterprise.

Mission-centric social enterprises often take the form of embedded social enterprises.

Mission-Related Social Enterprise

The enterprise is related to the organization's mission or core social services. Mission-related social enterprises have synergistic properties, creating social value for programs and generating economic value to subsidize the organization's social programs and/or operating expenses.

Commercialization of social services is a common form of the mission-related social enterprise. One example is a family services organization that provides free meals to the children of low income families enrolled in the organization's day care programs. Utilizing its industrial kitchen, staff dietitian and cooks, the organization starts a catering business serving the "social institutional" market segment--schools, day care centers, hospitals willing and able to pay for this service.

Mission expansion is another type of mission-related social enterprise. An example is a women's economic development organization that supports self-employed single mothers through small business consulting services; and then expands its mission by opening a sliding-scale fee-based childcare social enterprise to permit its clients more time to focus on their business.

Mission-related social enterprises often take the form of integrated social enterprises.

Social Enterprise Unrelated to Mission

The enterprise is not related to the organization's mission, or intended to advance the mission other than by generating income for its social programs and operating costs.

Business activities may have a social bent, add marketing or branding value, operate in an industry related to the nonprofit parent organization's services or sector, however, profit potential is the motivation for creating a social enterprise unrelated to mission.

Social enterprises unrelated to mission usually take the form of external social enterprises.

Embedded Social Enterprises

Social programs and business activities are one and the same. Nonprofits create Embedded Social Enterprises expressly for programmatic purposes. The enterprise activities are "embedded" within the organization's operations and social programs, and are central to its mission. Social programs are self-financed through enterprise activities and thus, the embedded social enterprise also functions as a sustainable program strategy.

Due to their mission focus, most embedded social enterprises are usually structured as nonprofits to protect against mission drift, but may also be registered as for-profits depending on the legal environment.

The relationship between the business activities and the social programs are comprehensive: financial and social benefits are achieved simultaneously.

Embedded social enterprises are usually mission-centric; the business activities are central to the organization’s mission.

Embedded social enterprises are evident in operational models where:

1. social and economic activities are unified;
2. social mission is the central purpose to the business; and
3. the target population (clients) is integral to the model as direct recipients of social services (beneficiaries) and either the market (customers), employees or owners of the enterprise.

The following operational models often take the form of embedded social enterprise:

• Entrepreneur Support Model
• Market Intermediary Model
• Employment Model
• Fee-for-Service Model
• Cooperative Model
• Market Linkage Model

• 1. Statistics from 2002

Integrated Social Enterprises

Social programs overlap with business activities, often sharing costs and assets. Organizations create integrated social enterprises as a funding mechanism to support the nonprofit's operations and mission activities.

In many cases integrated social enterprises expand or enhance the organization’s mission enabling it to achieve greater social impact. Mission expansion may be achieved by commercializing the organization’s social services and selling them to a new fee-paying market; or by providing new services to existing clients. Integrated social enterprises leverage tangible and intangible assets, such as expertise, program methodology, relationships, brand, and infrastructure, as the basis from which to create their businesses.

The integrated social enterprise may be structured as a profit center or enterprise department within the nonprofit, or as separate entity.

The relationship between the business activities and the social programs are synergistic, adding value--financial and social--to one another.

Integrated social enterprises are often mission-related; their business activities are connected to the organization’s mission.

Integrated social enterprises are evident in operational models where:

1. social and economic activities overlap;
2. synergies exist between the social activities and the economic activities, such as cost-sharing, asset leveraging, enhancing systems and expanding or strengthening the mission;
3. the target population (clients) is a direct beneficiary of income earned from the social enterprise vis-à-vis the financing it provides to the social programs; clients may or may not be involved in the enterprise's operations as employees or customers.

The following operational models often take the form of integrated social enterprise:

• Market Linkage Model
• Service Subsidization Model

External Social Enterprises

Social programs are distinct from business activities. Nonprofits create external social enterprises to fund their social services and/or operating costs.

The enterprise's activities are "external" from the organization’s operations, but support its social programs through supplementary financing. External social enterprises generally do not benefit from leveraging, cost sharing or program synergies, therefore to serve their purpose, they must be profitable.

External social enterprise may be structured within the parent organization as a profit center, or separately as a nonprofit or for-profit subsidiary. Legal status is often a function of the regulatory environment in which the external social enterprise operates, or a requirement to access capital, (i.e. loans or equity investments). External social enterprises registered as for-profit entities are subject to local tax laws.

The relationship between the business activities and social programs is supportive, providing unrestricted funding to the nonprofit parent organization

External social enterprises are often unrelated to mission; their business activities are not required to advance the organization's mission other than by generating income for the its social programs or overhead.

An external social enterprise generates economic value to support social value creation.

External social enterprises are evident in operational models where:

1. economic and social activities are linked via their nonprofit ownership and funding relationship;
2. motivation for economic activities is as a funding mechanism for social activities;
3. the target population (clients) is a direct beneficiary of income earned from the social enterprise vis-a-vis financing the parent organization, but are infrequently involved in enterprise operations.

The Organizational Support Model often take the form of external social enterprise.

Entrepreneur Support Model

The entrepreneur support model of social enterprise sells business support and financial services to its target population or "clients," self-employed individuals or firms. Social enterprise clients then sell their products and services in the open market.

The entrepreneur support model is usually embedded: the social program is the business, its mission centers on facilitating the financial security of its clients by supporting their entrepreneurial activities. The social enterprise achieves financial self sufficiency through the sales of its services to clients, and uses this income to cover costs associated with delivering entrepreneur support services as well as the business' operating expenses.

Economic development organizations, including microfinance institutions, small and medium enterprise (SME) and business development service (BDS) programs use the entrepreneur support model. Common types of businesses that apply this model are: financial institutions, management consulting, professional services (accounting, legal, and market information), technology and products that support entrepreneurs.

Theoretical example: a manufacturer and distributor of low-cost irrigation pumps sells its pumps and agriculture extension services to low-income rural farmers. The capital asset enables farmers to dramatically increase the productivity and profitability of their land. Income earned by the social enterprise is used to cover operating costs, including the high costs of marketing to rural, small scale farmers, investing in new product R&D, and educational marketing campaigns. (For the real story behind this example, see KickStart).

Market Intermediary Model

The market intermediary model of social enterprise provides services to its target population or "clients," small producers (individuals, firm or cooperatives), to help them access markets. Social enterprise services add value to client-made products, typically these services include: product development; production and marketing assistance; and credit. The market intermediary either purchases the client-made products outright or takes them on consignment, and then sells the products in high margin markets at a mark-up.

The market intermediary model is usually embedded: the social program is the business, its mission centers on strengthening markets and facilitating clients' financial security by helping them develop and sell their products. The social enterprise achieves financial self-sufficiency through the sale of its client-made products. Income is used to pay the business' operating expenses and to cover program costs of rendering product development, marketing and credit services to clients.

Marketing supply cooperatives, as well as fair trade, agriculture, and handicraft organizations frequently use the market intermediary model of social enterprise. Common types of business that apply this model are: marketing organizations, consumer product firms, or those selling processed foods or agricultural products.

Theoretical example: a craft marketing cooperative creates economic opportunities for rural artisans by purchasing their handmade rugs, baskets, and sculptures and then marketing them overseas. The cooperative buys the products outright at fair prices then sells them at a mark-up to cover operating expenses and business growth. Earned income is also used by the cooperative for social activities tied to business success: helping artisans with product development and quality assurance, and providing working capital loans to clients to purchase raw materials and supplies to produce quality art.

Employment Model

The employment model of social enterprise provides employment opportunities and job training to its target populations or "clients," people with high barriers to employment such as disabled, homeless, at-risk youth, and ex-offenders. The organization operates an enterprise employing its clients, and sells its products or services in the open market. The type of business is predicated on the appropriateness of jobs it creates for its clients, regarding skills development, and consistency with clients' capabilities and limitations, as well as its commercial viability.

The employment model is usually embedded: the social program is the business, its mission centers on creating employment opportunities for clients. Social support services for employees such as "job coaches," soft skill training, physical therapy, mental health counseling, or transitional housing are built into the enterprise model and create an enabling work environment for clients. The social enterprise achieves financial self-sufficiency through the sales of its products and services. Income is used to pay standard operating expenses associated with the business and additional social costs incurred by employing its clients.

The employment model is widely used by disabilities and youth organizations, as well as social service organizations serving low-income women, recovering addicts, formerly homeless people, and welfare to work recipients. Popular types of employment businesses are janitorial and landscape companies, cafes, bookstores, thrift shops, messenger services, bakeries, woodworking, and mechanical repair.

Theoretical example: a wheelchair manufacturing social enterprise is run by clients--victims of landmine accidents--who face discrimination and marginalization in the open market. Workstations are specially fitted to accommodate clients' handicaps. Clients learn marketable skills such as welding, casting, and assembly. The social enterprise sells wheelchairs to hospitals and medical supply companies. Income is used to reinvest in the business, to fund public education campaigns on landmines, and cover the social services costs of physical therapy and counseling for clients.

Fee-for-Service Model

The fee-for-service model of social enterprise commercializes its social services, and then sells them directly to the target populations or "clients," individuals, firms, communities, or to a third party payer.

The fee-for-service model is usually embedded: the social program is the business, its mission centers on rendering social services in the sector it works in, such as health or education. The social enterprise achieves financial self-sufficiency through fees charged for services. This income is used as a cost-recovery mechanism for the organization to pay the expenses to deliver the service and business expenses such as marketing associated with commercializing the social service. Surpluses (net revenue) may be used to subsidize social programs that do not have a built-in cost-recovery component.

Fee-for-service is one of the most commonly used social enterprise models among nonprofits. Membership organizations and trade associations, schools, museums, hospitals, and clinics are typical examples of fee-for-service social enterprises.

Theoretical example: a university charges tuition fees for its educational services, reimbursing costs such as professors' salaries, and building and ground maintenance. However, fees from students are insufficient to fund new facilities or academic research. Therefore, the university supplements tuition income with a second fee-for-service enterprise: commercial scientific and engineering research and development contracts are secured with pharmaceutical and technology companies.

• 1. Customers must submit proof of a qualifying disability

Low-Income Client as Market Model

The Low Income Client as Market model 1 of social enterprise is a variation on the Fee-for-Service model, which recognizes the target population or "clients" a market to sell goods or services. The emphasis of this model is providing poor and low-income clients access to products and services whereby price, distribution, product features, etc. bar access for this market. Examples of products and services may include: healthcare (vaccinations, prescription drugs, eye surgery) and health and hygiene products (iodize salt, soap, eyeglasses, earring aids, sanitary napkins), utility services, (electricity, biomass, and water), etc. for which they pay.

The Low Income Client as Market Model target population has also been described as those living at the "base of the pyramid." This is a socioeconomic designation of the 4 billion people who live primarily in developing countries and whose annual per capita income fall below $1500 purchasing power parity (PPP) 2; and earn less than $5 a day 3 . People in this income bracket cannot realize economies of bulk purchase, and ironically may pay up to 30% more for products and services than middle income consumers. 4

The social program is embedded in the activity by providing access to products and services that increase clients' health, education, quality of life, and opportunities. Income is earned from product sales and is used to cover operating costs and marketing and distribution costs. However, due to the low incomes of target population in the "low income client as market model" achieving financial viability can be challenging. The social enterprise must relies on developing creative distribution systems, lowering production and marketing costs, achieving high operating efficiencies, cross-subsidizing creative revenue markets to markets that require subsidy. Health, education, technology, utility frequently use this.

Theoretical example: a nonprofit hospital provides access to high quality healthcare regardless of ability to pay. The hospital focused a few specialized services, which would provide substantial benefits to clients; that could be standardized for high efficiency service delivery; and finally in which they compete on quality in the open market. Pricing is based on ability to pay, whereby clients who can pay full price, yet come for quality care, subsidize those that can't pay or can pay only a portion of full cost. To remove additional access barriers for poor clients, the hospital provides transportation services bringing clients from rural villages to the hospital or conversely, setting up temporary clinics in the villages.

• 1. In most literature, popularized by authors C.K. Prahalad and Stuart Hart, Base of the Pyramid (BoP) Strategies view the BoP as a latent market for multinational corporations and for-profit companies to sell goods and services, and thus the BoP can provide new growth opportunities and innovative selling approaches. For the private sector, the BoP strategy is a subset of corporate strategy, a business first approach which recognizes profit potential of untapped markets and unrealized business opportunities which may also create social or environmental impact as a byproduct. It's important to note that BoP strategy is not social enterprise, although social enterprises may use some of the BoP techniques to serve its low income clients.
• 2. Purchasing power parity (PPP) equates the price of a basket of identical goods and services in two countries. PPP provides a standard comparison of real prices between countries.
• 3. Prahalad and Hart 2002
• 4. Prahalad 2005

Cooperative Model

The cooperative model of social enterprise provides direct benefit to its target population or "clients," cooperative members, through member services: market information, technical assistance/extension services, collective bargaining power, economies of bulk purchase, access to products and services, access to external markets for member-produced products and services, etc. The cooperative membership is often comprised of small-scale producers in the same product group or a community with common needs--i.e. access to capital or healthcare. Cooperative members are the primary stakeholders in the cooperative, reaping benefits of income, employment, or services, as well as investing in the cooperative with their own resources of time, money, products, labor, etc.

The cooperative model is : the social program is the business. The cooperative's mission centers on providing members services. Financial self sufficiency is achieved through the sales of its products and services to its members (clients) as well as in commercial markets. Cooperatives use revenues to cover costs associated with rendering services to its members and surpluses may be used to subsidize member services.

Cooperatives social enterprises include agricultural marketing cooperatives, which market and sell its members' products, while agricultural supply cooperatives, provide inputs into the agricultural process. Fair trade organizations frequently work with agriculture and commodity producer-owned cooperatives--i.e. coffee, cocoa, wine tea, as well as nonagricultural products--i.e. handicrafts.

Self-Help Groups (SHGs) comprised of low income-women, and popular in South Asia, are frequently organized into cooperatives to support a variety of their members' interests related to commerce, health and education.

Credit Unions are another example of a cooperative tied to economic development and financial service programs, popular across West Africa, Latin America, and Balkans.

In the UK a slight variation on the cooperative, called "mutuals" or "societies" are commonly associated with social enterprise. Unlike a true cooperative, mutual members usually do not contribute to the capital of the social enterprise company by direct investment, instead mutuals are frequently funded by philanthropic sources or the government.

Theoretical example: cooperatively owned and run community savings and credit systems, "Rotating Savings and Credit Associations" (Latin America), Tontins (West Africa), Zadrugas (Balkans) are a form of indigenous credit union long implemented around the world to provide access to financial services. Self-organized community savings and credit systems are capitalized through member investments and savings, which are then mobilized as interest bearing loans also to members. Ownership is communal and equitable with all members owning a stake in the organization. Community savings and credit systems are democratically governed by an elected board of members responsible for financial oversight and loan approval and administration. Community savings and credit systems are self-sufficient through earned interest income from loans.

• 1. Statistics from 2002

Market Linkage Model

The market linkage model of social enterprise facilitates trade relationships between the target population or “clients,” small producers, local firms and cooperatives, and the external market. The social enterprise functions as a broker connecting buyers to producers and vice versa, and charging fees for this service. Selling market information and research services is a second type of business common in the market linkage model. Unlike the market intermediary model, this type of social enterprise does not sell or market clients' products; rather it connects clients to markets.

The market linkage model can be either embedded or integrated.

If the enterprise is stand-alone; its mission revolving around linking markets, and its social programs support this objective, the model is embedded. In this case, the social program is the business, income generated from enterprise activities is used as a self-financing mechanism for its social programs.

Market linkage social enterprises are also created by commercializing an organization's social services or leveraging its intangible assets, such as trade relationships, and income is used to subsidize its other client services. In this second example, social program and business activities overlap, hence follows the integrated model.

Many trade associations, cooperatives, private sector partnership and business development programs use the market linkage model of social enterprise. Types of social enterprises include, import-export, market research and broker service.

Theoretical example: an agricultural cooperative grows fruits, vegetables and horticulture products, which it sells in domestic, and export markets, saw a business opportunity to leverage its exclusive database of agricultural market data. Until this time only cooperative members had access to the comprehensive information market, however, producers and buyers alike could benefit from this valuable information. Therefore, the cooperative launched a market data and research social enterprise as a means to augment its social programs by extending services to nonmembers. The market linkage social enterprise sells information on local and export market for types of agricultural products, including buyers and producers, prices, export duties, shipping, and chemical and fertilizer regulations, storage, etc. The enterprise has two main services: database search and market information updates that can be purchased individually or by subscription; and market research services such as feasibility analyses and market studies. Most of the social enterprise's clients are farmers, other cooperatives, trade unions, producer groups, small agricultural firms and food processors. The cooperative uses the income generated by its social enterprise to subsidize member services concerning crop improvement, sustainable farming, animal husbandry and agricultural loans.

• 1. PhytoTrade Africa website

Service Subsidization Model

The service subsidization model of social enterprise sells products or services to an external market and uses the income it generates to fund its social programs.

The service subsidization model is usually integrated: business activities and social programs overlap, sharing costs, assets, operations, income and often program attributes. Although the service subsidization model is employed primarily as a financing mechanism--the business mandate is separate from its social mission--the business activities may enlarge or enhance the organization's mission.

Nonprofits that implement service subsidization social enterprises operate many different types of businesses, however, most leverage their tangible assets (building, land, or equipment) or intangible assets (methodology, know-how, relationships, or brand) as the basis of their enterprise activities. Commercialization of core social services leads to enterprise activities that are close in nature to the organization's social programs and may enhance the mission; whereas leveraging physical assets to sell to the public may result in an enterprise that is very different from the organization's social programs. In financial terms the business benefits from leveraging and cost sharing relationships, and provides a stream of unrestricted revenue to "subsidize" or wholly fund one or more social services. Service subsidization is one of the most common types of social enterprises because it can be applied to virtually any nonprofit. The service subsidization model may conceivably grow into an organizational support model if it becomes profitable enough to throw off revenue to the parent organization.

Service subsidization model social enterprises can be any type of business. Those that leverage intangible assets such as expertise, propriety content or methodologies, or exclusive relationships tend toward service businesses that commercialize these assets: consulting, counseling, logistics, employment training or marketing. Those that leverage tangible assets such as buildings, equipment, land, employees, computers, etc. may launch any number of enterprises that utilize infrastructure and capital assets: leasing, property management, product-based retail businesses; copying, transportation or printing services, etc.

Theoretical example: a senior service organization has two social enterprises that generate revenue to subsidize its social programs serving frail indigent seniors. The organization's "eldercare business" commercializes case management services it renders free of charge to its clients. This social enterprise sells "premium eldercare" services, using the organization's expertise in nursing, therapy, and elder wellness in markets where either seniors (or their adult children) have the financial means to pay full fee, or are insured by a company that covers the service. In this case, the enterprise enhances the organization's mission by reaching a larger number of seniors, though not identified as the organization's clients. The organization's second enterprise leverages its 10 passenger van that carries clients on outings, to doctors' appointments, and shopping. The organization leases the vans at night to another nonprofit organization that works to reduce drunk driving accidents by contracting with bars and driving intoxicated customers home after last call. Though the second enterprise provides a social purpose, it is >a href="seum">unrelated to the mission of the senior-services parent organization. The two businesses combined generate 45% of the organization's budget, covering a large portion of its program costs.

Organizational Support Model

The organizational support model of social enterprise sells products and services to an external market, businesses or general public. In some cases the target population or "client" is the customer.

The organizational support model is usually external: Business activities are separate from social programs, net revenues from the social enterprise provide a funding stream to cover social program costs and operating expenses of the nonprofit parent organization. Although organizational support models may have social attributes, profit not social impact is the perquisite for this type of social enterprise. This model of social enterprise is created as a funding mechanism for the organization and is often structured as a subsidiary business (a nonprofit or for-profit entity) owned by the nonprofit parent. Successful examples of this model cover all or a major portion of the parent organization's budget.

Similar to service subsidization model, the organizational support model may implement virtually any type of business that leverages its assets. This model is commonplace among western nonprofit organizations across sectors.

Theoretical example: an environmental organization created a separate for-profit subsidiary that contracts with the government to conduct environmental monitoring and compliance evaluations of private companies. Profits after tax and business reinvestment are funneled to the nonprofit parent, an environmental education organization. This income represents a major source of unrestricted funding, allocated to the nonprofit's operating expenses as well as environmental advocacy programs for which the organization is unable to obtain donor funding.

Complex Model

A complex model of social enterprise combines two or more operational models. Complex models are flexible; virtually any number or type of operational models can be combined into one social enterprise.

Models are combined to achieve desired impact and revenue objectives. For example, operational models that fall into integrated or external social enterprise categories may yield greater financial benefit, whereas embedded social enterprises offer higher social return, thus models are combined to achieve the dual objectives of the social enterprise. If appropriate for an organization's target population, the employment model is often combined with one of the other models to add social value--i.e. employment and organizational support model (as illustrated). Operational models are often combined as part of a natural diversification and growth strategy as the social enterprise matures.

Theoretical example: an African horticulture cooperative runs a social enterprise that links local growers to buyers in European markets. The services it provides to small producer clients include: horticulture technical assistance, quality control, contractual relations with flower importers and freight. This social enterprise earns income by charging European companies a commission on each sale, thereby covering the costs of its client services. After some years of operating their market linkage social enterprise, cooperative managers saw a lucrative opportunity to expand their business by entering the horticulture industry as a producer. To avoid competing with their clients, they choose to grow hybrid roses, a market whose infrastructure and costs bar small producers from entering. Hybrid roses are fickle, requiring constant care, which provided the cooperative an opportunity to create employment for a large number of low-income and unskilled people in the community. Profits from the rose business support the parent organization’s hard-to-fund operating costs, as well as funding the startup of a new social enterprise, a horticulture school. This example of a complex model combines: market linkage, organizational support and employment operating models.

Mixed Model

Many nonprofit organizations run multi-unit (mixed) operations, each with different social programs, financial objectives, market opportunities and funding structures. Each unit within the mixed model may be related vis-à-vis target population, social sector, mission, markets, or core competencies. A museum for example, in addition to educational art exhibits, might have both a for-profit catalogue business and highly subsidized research and acquisition operation.1

Nonprofits employing a mixed model combine social and business entities; subsidiaries owned by the parent organization or departments (cost or profit centers) within it to diversify their social services and capitalize on new business and social market opportunities. Like all social enterprises, mixed models come in a variety of forms depending on the organization's age, sector, social and financial objectives and opportunities. The diagram is representative of complexity, not conformity of organizational form.

Mixed models are often a product of an organization’s maturity and social enterprise experience. This model is common among large multi-sector organizations that establish separate departments or subsidiaries for each technical area--i.e. education, health, economic development, etc. and new business ventures. In nonprofits with mature social enterprises, mixed models are the convention, not the exception, a result of expansion and diversification.

• 1. Dees, Gregory, Enterprising Nonprofits, Harvard Business Review, January-February 1998

Franchise Model

An organization can franchise its "proven social enterprise model" and sell it to other nonprofits to operate as their own business. Franchising enhances nonprofit organizations that have viable, yet non-scaleable social enterprises, through replication. For example, a café that employs disabled people may be profitable only when it employs 12 or fewer disabled people. However, if franchised, the café social enterprise can create employment for hundreds of disabled people. Goodwill Industries’ used clothing and furniture retail stores are a good example of an employment model social enterprise achieving scale through the franchise model.

Hence, the franchise model enhances scalability and social value creation through replication. Purchasers pay franchise fees to receive the social enterprise model, methodology, etc., and ongoing technical support from the franchiser. Buying a franchise enables nonprofit organizations to focus on running operations of a proven enterprise, rather than worrying about what type of business to start, which products to sell, or what markets to enter. Becoming a franchiser creates a new social enterprise for the organization that leverages the organization’s industry and business expertise, and in turn creates new social impact opportunities and another source of earned income.

The franchise itself can be any successful and replicable social enterprise. The social enterprise model may be any of those listed, depending on the type of business and objectives. Ben and Jerry’s Partner Scoop Shop is another good example of a social enterprise enhanced through the franchise model.

Theoretical Example:

An integrated microfinance organization sells its trademarked methodology, which combines health and business education with financial services, to credit unions in developing countries. The US-based parent organization provides consulting and ongoing technical support to franchisees. This approach allows the franchiser to earn money, achieve greater social impact via scale, and keep costs low by leveraging its program methodology and credit unions' infrastructure.

Private-Nonprofit Partnership Model

The private-nonprofit partnership model of social enterprise is a mutually beneficial business partnership or joint venture between a for-profit company and a nonprofit organization. The partnership may occur with an existing social enterprise, or may result in the creation of a new entity or a profit center. The social enterprise may or may not be mission-related and leverages the nonprofit organization's assets, such as relationships with their target population, community, brand, or expertise. For the for-profit, the partnership yields one or more of the following benefits: lowers costs (cheaper labor/lower R&D costs); reduces restrictions (no strict regulatory oversight); improves community relations or public image; enables new product development; penetrates new markets; or increases sales. Partnership benefits for the nonprofit are financial return, marketing and brand equity, and in cases where the activity is mission-related, social impact. The market is most often external--the public, but examples exist where the paying customer and the client are one. The private-nonprofit relationship may be structured as a joint venture, a licensing agreement, or formal partnership.

It is worth noting that nonprofits use the term "partnership" loosely to refer to corporate philanthropy or cause-related marketing. The private-nonprofit partnership model is a partnership based on active operational involvement in a social enterprise, not simply a business relationship, which could be a funder, customer or supplier represented in other social enterprise models.

Theoretical example: an environmental organization forms a partnership with a travel and touring company to create a new "Eco Enterprise." The nonprofit organization provides environmental education, consulting services, and access to land conservation trusts and indigenous people under its auspices. The touring company handles marketing, and manages tourists and the touring logistics. The two organizations share the return. The nonprofit uses the proceeds to fund its environmental programs and the company retains or distributes their profit. Benefits for the for-profit are: access to the eco-tourist market, conservation land and local people, and an "eco-friendly" public image. The nonprofit gains: a new vehicle to promote it social programs--the tourist market, a new source of fundraising (many tourists donate to the organization) and social impact vis-à-vis new economic opportunities for indigenous people to sell their environmental products (i.e. handcrafts) or services (boat excursions). Both make money.