The purpose of this typology is to elaborate the rich mosaic of highly differentiated and creative examples of social enterprise, and by doing so, to inspire innovative approaches to create greater value for people and the planet. The typology is also intended to advance the field of social enterprise by organizing these diverse approaches and strategies into a common framework. The occupation of identifying and defining operational models as well as organizational and legal structures is to provide a conceptual framework for efforts occurring in the field.
A basic premise used in this typology is that of a spectrum, which avoids bifurcating the landscape into opposing functions: one, the for-profit world whose raison d'être is to create economic value; and the other, the nonprofit world whose purpose is to create social value. In practice, these dichotomies are increasingly coming together through the application of methods that marry market mechanisms to affect both social and economic value resulting in total value creation. The emergence and the subsequent propagation of corporate social responsibility, business for social responsibility and social enterprise evidences this trend, and the social enterprise lens brings into focus this convergence through its methodological paradigm.
Value creation is the backbone of social enterprise and serves as a fundamental and unifying principle between different social change and economic development approaches. To this end, the typology is not intended to straightjacket practitioners into a prescribed set of formulas, but rather recognize and embrace the abundance of possibility under the umbrella of a larger vision.
Definitions of Social EnterpriseDefinitions of Social Enterprise
As early as 1996 The Roberts Foundation Homeless Economic Development Fund1 defined social enterprise as "a revenue generating venture founded to create economic opportunities for very low income individuals, while simultaneously operating with reference to the financial bottom-line."2
NESsT, on the other hand, uses the term social enterprise to refer to "the myriad of entrepreneurial or 'self-financing' methods used by nonprofit organizations to generate some of their own income in support of their mission."3
Both definitions capture the social and financial characteristics of the social enterprise; however, The Roberts Foundation's definition emphasizes social enterprise as a program approach, whereas NESsT's definition stresses it as a funding approach.
The Nonprofit Good Practice Guide offers a holistic definition: "A nonprofit venture that combines the passion of a social mission with the discipline, innovation and determination commonly associated with for-profit businesses [...]"
The UK-based Social Enterprise Coalition reminds us that the simplest definition of social enterprise - as business trading for a social purpose - allows for a wide range of interpretations and there is still an ongoing debate among practitioners and academics over the exact definition of social enterprise.
The Coalition invites us to consider some of the common characteristics that social enterprises display:4
- Enterprise Orientation - they are directly involved in producing goods or providing services to a market.
- Social Aims - they have explicit social and/or environmental aims such as job creation, training or the provision of local services. Their ethical values may include a commitment to building skills in local communities. Their profits are principally reinvested to achieve their social objectives.
- Social Ownership - Many social enterprises are also characterised by their social ownership. They are autonomous organisations whose governance and ownership structures are normally based on participation by stakeholder groups (eg employees, users, clients, local community groups and social investors) or by trustees or directors who control the enterprise on behalf of a wider group of stakeholders. They are accountable to their stakeholders and the wider community for their social, environmental and economic impact. Profits can be distributed as profit sharing to stakeholders or used for the benefit of the community.
The Coalition also supports the UK Government definition which many of its members were actively involved in helping to develop5 : "A social enterprise is a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners. [...]"
Virtue Ventures proposes the following working definition of social enterprise, inspired by these definitions and others, that captures the specificity of purpose and approach while encompassing the broad range of practical applications:
A social enterprise is 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.
In its widespread usage, "social entrepreneur" is the individual and "social enterprise" is the organization. Therefore, social enterprise is an institutional expression of the term social entrepreneur.
Additional information available on the World Wide Web:
- An Exploration of Contemporary Meanings of Social Enterprise, by Leo Bartlett, Australasian Institute for Social Entrepreneurship;
- A glossary of useful terms (PDF), from the Institute of Social Entrepreneurs;
- Toward a better understanding of social entrepreneurship: Some important distinctions (PDF), by Jerr Boschee and Jim McClurg.
- The Blended Value Glossary (PDF), by Elizabeth Bibb, Michelle Fishberg, Jacob Harold, and Erin Layburn
- 1The name was changed from The Roberts Foundation Homeless Economic Development Fund (HEDF) to The Roberts Enterprise Development Fund (REDF) in 1997.
- 2Jed Emerson and Fay Twersky, New Social Entrepreneurs: The Success, Challenge and Lessons of Nonprofit Enterprise Creation, The Roberts Foundation Homeless Economic Development Fund, 1996.
- 3Definition provided by NESsT (www.nesst.org); in 1997 NESsT began referring to self-financing--what today is referred to as social enterprise.
- 4Social Enterprise Definitions, Social Enterprise Coalition website
- 5Social Enterprise - a strategy for success DTI, 2004
History in BriefHistory in Brief
Social enterprise has a lengthy private history, but a short public one. Nonprofit organizations have long engaged in income generation and businesses to either supplement or complement their mission activities. 1
In the United Kingdom, cooperatives functioned as a means to fund socioeconomic agendas as early as the mid-1800s. Beginning in the 1960s, US nonprofits experimented with enterprises to create jobs for disadvantaged populations. Micro-credit organizations made their appearance in developing countries by the 1970s, at about the same time Community Development Corporations (CDCs) were gaining popularity in the United States. Yet it is only in the last 15 or 20 years that academics, practitioners, and donors have been studying and recording cases of nonprofits adopting market-based approaches to achieve their missions.
The growing practice of social enterprise is fueled by nonprofit organizations’ quest for sustainability, particularly in current times when support from traditional, philanthropic, and government sources is declining and competition for available funds is increasing. Social enterprise enables nonprofits to expand vital services to their constituents while moving the organization toward self-sufficiency. Nonprofit organization leaders understand that only by establishing an independent means of financing can they become a going concern.
John Durand began working with seven mentally retarded people in 1964, today Minnesota Diversified Industries is a for-profit social enterprise which employs over 500 disabled people. In 2000 the company reported $54 million dollars in annual revenues with only half a million coming from grants.
In 1971 with a $1,000 loan from a moneylender, Mimi Silbert began a program for recovering drug addicts and ex-convicts. Since its inception Delancey Street has successfully mainstreamed over 15,000 former clients on self-generated resources from its numerous businesses: restaurant, moving company and construction, which cumulatively net revenues of over $6 million a year (2001).
In 1963, Jack Dalton opened Pioneer Fellowship House as a residence for recovering alcoholics, he required each resident to pay $25 per week for room and board, perform house chores and attend nightly meetings.2 Today, through its employment, training, and behavioral health and community corrections programs, Pioneer Human Services (PHS) serves over 5,000 clients a year, 1,300 at any given time. PHS employs a staff of approximately 900, and has an annual budget of roughly $55 million, 99.6 percent of which is earned through sales of its products and services from its eight businesses which run the gamut from manufacturing, food service, distribution and logistics, real estate asset management, and printing.
Professor Muhammad Yunus, Head of the Rural Economics Program at the University of Chittagong, Bangladesh, began a research project in 1976 to explore the possibility of providing banking services to the rural poor. The Grameen Bank Project (Grameen means "village" in Bangla language) was piloted in three villages neighboring the University with the following objectives: to extend banking facilities to poor men and women; to eliminate the exploitation of the poor by money lenders; to create opportunities for self-employment for the multitude of unemployed people in rural Bangladesh; and to enable disadvantaged (mostly women from the poorest households) to self-manage money and business. Based on its success, the project expanded in 1979 to several locations throughout Bangadesh including Dhaka, the capital. By October 1983, the Grameen Bank Project was transformed into an independent bank by government legislation.
Today Grameen Bank serves over 2.4 million borrowers and has over 20 businesses including:
- Grameen Shakti (GS), a not-for-profit rural power company whose purpose is to supply renewable energy to unelectrified villages in Bangladesh as well as create employment and income-generation opportunities in rural Bangladesh;
- Grameen Telecom whose objective is to provide mobile phone service to 100 million inhabitants in rural Bangladesh by financing members of Grameen Bank to provide village pay phone service and by providing direct phones to potential subscribers;
- Grameen Knitwear Limited, a 100% export-oriented composite knitwear factory.
The Players and Practice: The Making of a FieldThe Players and Practice: The Making of a Field
Since it is not possible to detail a comprehensive history of social entrepreneurship movement and all those that have made contributions to its evolution in this report, this section provides a brief historical overview of some key players and events that have contributed to shaping the field of social entrepreneurship.
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.
Fair TradeFair 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
Community Development CorporationsCommunity 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
Social Firms or Affirmative BusinessesSocial 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.
- 1MDI annual report 2005
- 2Delancey Street Website
- 3Warner, 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.
- 4REDF's literature refers to social enterprises as social-purpose enterprises.
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 OrganizationsCivil 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)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.
- 1Prahalad, 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 FundersGovernment 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.
- 1Development Marketplace website: www. worldbank.org/developmentmarketplace
- 5Synopsis from Social Enterprise Unit, British Department of Industry and Trade website
- 6Nicholls, Alex, Social Entrepreneurship: New Models of Sustainable Social Innovation, Oxford University Press, 2006.
- 7Salamon, Lester, The Resilient Sector, Brookings Institution Press, 2003.
Venture Philanthropists and "Philanthropreneurs"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.
The State of the PracticeThe State of the Practice
Multi Sector - Social enterprise transcends traditional nonprofit sectors and applies as equally to health, environment, education and social welfare as it does to economic development or job creation programs. The motivation--mission or money--for engaging in social enterprise may differs between sectors. Economic and employment development organizations are a natural fit with social enterprise, and therefore frequently integrate social enterprise as a program strategy. Other social sectors tend to incorporate social enterprise as a financing mechanism, though in both cases programmatic and financial benefits can be realized.
Adaptive Design - A social enterprise is a mechanism for both accomplishing a nonprofit’s mission and generating funds for its social programs, therefore social enterprises must be designed to meet social needs as well as to achieve commercial viability. Similar to the private sector, business plans and other market research tools can be used to inform social enterprise design by analyzing an organization’s internal factors: core competencies, weaknesses, needs of its clients, etc.; and external market forces: legal and regulatory environments, markets, demand, access to capital. Thus, social enterprise operational models are customized to accommodate market realities, organizational capabilities and social needs.
Global Application - Although contemporary methodology is credited to the West, notably the United States and United Kingdom, nonprofit businesses, self-financing schemes, and earned-income activities have been practiced by nonprofit organizations around the globe for years. In emerging markets and transitional economies social enterprise has made the strongest showing to date. This is due in part to the rapid development and proliferation of nonprofit organizations, followed by a drop-off in donor support; thus nonprofit organizations have had tremendous pressure to look for alternative sources of funding or self-financing. Developing countries, however, should not be overlooked for examples, some of the most innovative and entrepreneurial cases of social enterprise can be attributed to nonprofits operating under some of the direst circumstances.1 In both industrialized and lesser developed country contexts, practitioners face advantages and disadvantages. In developed countries, market economies are mature and business know-how is readily available, yet distribution channels may be restricted, and competition is sophisticated and well-capitalized, which poses challenges to nonprofit-run businesses. In developing countries markets are opened but the legal environment often creates obstacles; as well, corruption and low business acumen may present constraints.
Today we stand at a juncture: the market for social enterprise is vast, yet the current pool of self-identified social enterprises is small, fragmented, and somewhat elite. A large group of nonprofit leaders and donors are either unfamiliar with the term or do not see the validity of analyzing the market for potential social enterprises.2
Paradoxically, at the practitioner level, whether born out of financial necessity or program innovation, the phenomenon of social enterprise is exploding. Herein lies an extraordinary opportunity to build the field. At this juncture practitioners and thought leaders alike are working to advance this emerging field, distilling "good practices" and sharing lessons among organizations committed to developing the social enterprise practice.
Practitioners globally agree however that they lack access to sufficient funding. Gains have been made internationally in a subset of social enterprise--microfinance, where there is now broad acceptance of nonprofits’ borrowing capital to facilitate business growth. Although social investors and foundation Program Related Investments (PRI) that fund social enterprise endeavors are on the rise, for the majority of social enterprises operating in other program areas, access to capital, whether loans or grants, is limited.
Social enterprise is a means to a more just and equitable society. Through its value maximization properties, social enterprise addresses one of the most pressing issues facing nonprofits today--how to achieve ongoing sustainable impact. This prospect is social enterprise’s promise as well as its future. Whether or not social enterprise is brought to bear as a mainstream nonprofit strategy rests on the participation and commitment of practitioners and funders. In a word, it will take a substantial investment of time, resources, and money along with the willingness to expand horizons into unknown territories.
As seen in this typology, many social enterprises defy neatly labeled boxes. The sprawling nature and diversity of the field could easily intimidate the risk adverse implementer yet delight the intrepid architect. The current state of the social enterprise field is not unlike that of early micro-credit and employment development programs: many of the obstacles and challenges it faces are similar. Dovetailing on the success of more than 30 years of microfinance, and employment creation, social enterprise is poised to enter the market in full swing.
- 1Etchart, Nicole and Lee Davis, Unique and Universal: Lessons from the Emerging Field of Social Enterprise in the Emerging Market Countries, NESsT, 2003.
- 2Spinali, Lisa and Hayley Mortimer, A Scan of the Not-For-Profit Entrepreneurship: Status of the Field and Recommendations for Action, Kauffman Center of Entrepreneurial Leadership, January 2001.
Toward an Integrated ApproachToward an Integrated Approach
The raison d’être of social enterprise practitioners is to create and sustain social value. Social value creation speaks directly to accomplishing a social mission and achieving social program objectives, while sustainability requires organizational and leadership capacity, business-oriented culture and financial viability. Thus, a social enterprise is more likely to achieve sustained social value when the enterprise is integrated within program, operations, culture, and finance.
Rick Aubry1 , Executive Director of Rubicon Programs, says of his organization’s social enterprises, “we are not in the business of baking cakes; we are in the business of transforming lives. We see business as the primary vehicle for achieving this change, but social enterprise is comprehensive and must be integrated into the whole [organizational] package.”2
Regardless of its degree of integration, a social enterprise catalyzes organizational change whether invited or not. Examples of organizations
whose social enterprises have survived, and gone on to thrive, recognize this—often after substantial trauma—and have ultimately integrated the enterprise throughout the organization and worked to manage this change.
The hypothesis follows: when integrated within an organization, social enterprise is a transformation and strengthening strategy that can increase mission accomplishment and social impact, improve organizational and financial performance and health, and engender a more entrepreneurial culture.
This “integrated approach” to social enterprise offers practitioners a new paradigm to create and transform enterprises into High Performance Organizations, organizations capable of achieving sustainability, appropriate scale, significant impact, and providing blueprints for replication.
However, the opportunity to realize social enterprise’s promise—High Performance Organizations—is being missed.
Fragmentation and Myopia
There is a lack of wholeness and integration in the social entrepreneurship field, evidenced by the divergence of players and three schools of thought—leadership, funding, and program.
- The “leadership approach” supports professional development efforts for individual “social entrepreneurs”. The shortcoming of this approach is that individuals are not replicable and too often their “social change innovations” have not been used to build the practice or replicate their successes.
- The “funding approach” advocates that nonprofits start commercial ventures to diversify their funding. Typically, the venture is structured as an auxiliary project of the organization. The funding approach to social entrepreneurship has increased the number of nonprofits incorporating market discipline and income-generating activities into their organizations, yet problems arise from disappointing financial returns, harder than expected implementation, complex legal and tax issues, organizational discord and mission dissonance.
- The “program approach” to social entrepreneurship is when business activities and social programs are one and the same, typically in cases where business activities are central to, or compatible with, the organization’s mission. The program approach suffers from the opposite problem of the funding approach—relying too heavily on social sector resources and lacking business acumen. Practitioners of the program approach are fragmented or “siloed” by sector, geography, and barred by industry vernacular thus, little sharing of knowledge and experience occurs between silos.
Bias Toward Funding
Among North American organizations there is a bias toward the funding approach.
Currently, the majority of the literature and public forums speak to helping nonprofits start earned income ventures. This is likely more of a PR issue than a practice issue—nonprofits need funding, grants or otherwise, and the promise of earned-income is the allure that leads nonprofits down the garden path.
This dangerously narrow view shifts attention away from the ultimate goal of any self-respecting social entrepreneur, namely social impact, and focuses it on one particular method of generating resources.3 Though profit is a sexy proposition for practitioners, the reality is that social enterprise as a funding mechanism has not paid off for many who have hungrily followed its lure.
Missing an Opportunity To Do More Mission
The emphasis on funding means that opportunities are being missed to realize other benefits that social enterprise offers. A recent Harvard Business Review article instructs nonprofits to “put their missions first rather than starting with a venture’s financial potential,” citing that “a
mission-first assessment of earned income opportunities returns the nonprofit sector to its fundamental principles.4 ”
Sadly, few recognize social enterprise as a deliberate method to accomplish social mission, achieve social impact, create a stronger organizations and affect a more entrepreneurial culture. Financial aspects of resource management are an integral part of the social enterprise
paradigm, hence the issue is less of perpetuating a money myth than missing a mission opportunity.
Resource Management—Not “Profit”
The perception that social enterprise is strictly about earned-income or profit is misleading. No amount of profit makes up for failure on the social impact side of the equation. Any social entrepreneur who generates profits, but then fails to convert them into meaningful social impact in a cost effective way has wasted valuable resources.5
Social enterprise requires effective resource management, which must go beyond the narrow view that financial resources are the only resources. Typically, nonprofits most valuable resources are their people, networks or members, and intangible assets such as methodologies, content, reputation and social impact. An integrated approach to social enterprise recognizes the financial as well as non-financial capital (human, social, environmental and physical) and motivates practitioners to productively employ and manage these assets.
Underestimating the Challenges, Risks and Learnings
Little research has been conducted to ascertain why social enterprises fail, however, the practice speaks volumes—cultural tension and low capacity are the main offenders. Change is hard and resistance to change is human nature, present in both for-profit and nonprofit sectors.
Social enterprise challenges the traditional concept of charitable action and its implications on social structures—do we (western society) really
want the poor no longer poor, or the homeless no longer homeless?
These potential institutional benefits of social enterprise, if left unmanaged, are equally a source of institutional risk. Authors and practitioners have shared many a cautionary tale of mission creep, cultural strife, stakeholder and/or staff tensions, lack of vision or capable leadership, financial losses, operational inefficiencies, weak marketing, and threats to an organization’s reputation.
Much of the value of social enterprise is in the process‑for example, the learning gained developing a business plan often exceeds the value of the plan itself. Social enterprise is an organizational change and transformation process, therefore there is a need to define a framework for monitoring the impacts that the process of developing and managing enterprise activities has on nonprofits themselves.
Lack of Inclusion of International Organizations
Microfinance institutions (MFI) are quintessential social enterprises and their leaders are some of the world’s most formidable social entrepreneurs, yet they have largely absent from the conversation.
From early on microfinance practitioners implemented MFIs as a vehicle by which to achieve wide-scale sustainable social impact. The microfinance methodology takes a holistic approach, its ethos is that the “social programs” (micro-credit services) must be institutionalized in order to be a going concern. Social programs and impact are not disaggregated from business activities and financial aspects of the organization, rather they are an integral part of the business model.
Capacity building is an enduring process and central to implementation and development of the MFI. Last year’s Micro Credit Summit celebrated reaching 100 million poor borrowers. This is success, yet little has been done to learn from their experience or share their immense intellectual capital with other practitioners.
A New Social Enterprise Paradigm
The reality of the current state of practice is that social enterprises are often executed in isolation—treated as a distinct project or activity—when in fact social enterprise has profound effects on the whole organization. The three approaches to social entrepreneurship (funding, leadership and programmatic), alone or in combination, do not go far enough. The true opportunity for social enterprise as an agent of organizational transformation lies in integrating these approaches in a way that builds high performance organizations.
An integrated approach takes the best of business and marries it to social interest. It is strategic, requiring a long-term vision and clear objectives in order to manage performance and change, and to measure results across the organization. Capacity building is tied to objectives and is systematically incorporated across the organization to strengthen it and support cultural shifts related to the enterprise. This approach recognizes resources inherent both to the organization and the external environment, and mobilizes and manages these resources to increase organizational productivity and yield. Mission is the cornerstone, and serving it, the impetus for venturing. The social enterprise is first and foremost a vehicle to accomplish, strengthen, enhance or expand the organization’s mission.
An integrated approach challenges the notion that unrelated business ventures are social enterprises, believing that if business activities are not central or strongly related to the social mission then it is pure business undertaken by a nonprofit, and not social enterprise. An integrated approach gives us a social enterprise methodology that helps practitioners do what they do better—innovate, increase impact and effectiveness, and improve performance.
- 1Rick Aubry received the Klaus Schwab Foundation “Social Entrepreneur of the Year” award in 2001
- 2Interview with Rick Aubry, Executive Director, Rubicon Programs, Richmond, California, March 19, 2005.
- 3Dees, Gregory, Social Entrepreneurship Is About Innovation and Impact, Not Income, Skoll Foundation Social Edge, September 2003.
- 4“Should Nonprofits Seek Profits” (January 2004)
- 5Dees, op.cit