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How Do Social Entrepreneurs Finance Organizations and Enterprises?

3p Contributor | Tuesday May 18th, 2010 | 4 Comments

(Editor’s Note: The following is an excerpt from David Bornstein and Susan Davis’ recent book, Social Entrepreneurship: What Everyone Needs to Know.)

By David Bornstein and Susan Davis

Launching an organization is a process of recruiting funders, advisors, board members, and staffers, one by one. Over the past thirty years, the resource landscape has exploded with a proliferation of financing options.

Inspired by the success of Web-based connectors, such as Kiva, MYC4, and DonorsChoose, many social entrepreneurs are also tapping support from large numbers of microcontributors. The Obama campaign used this tactic, redefining political fund-raising and breaking records. Moreover, people who begin with small financial contributions often end up devoting time and energy worth far more than their donations.

Ashoka identified this support-building technique in the 1990s as Fellows in many parts of the world reported success building decentralized bases of support from citizens (often in poor countries and without the benefit of the Internet). Social entrepreneurs tapped into the same yearning that Obama unearthed: the hunger to take part in real change.

In countries that lacked cultures of philanthropy or volunteerism, they created bases of support by initiating competitions, cultural events, open houses, bartering arrangements, membership programs, and activist television and radio shows. Out of the assembled microcontributions of citizens they were able to build organizations capable of attacking problems on a major scale.

Over the past two decades, social entrepreneurs have also increasingly employed business strategies to address problems and generate revenues. In the mid 1980s, while Yunus and Abed were drawing attention to the potential of social enterprise in Bangladesh, Ed Skloot of New Ventures and Jerr Boschee of the National Center for Social Entrepreneurs were advancing this model for achieving impact and sustainability in the United States. The idea was taking root in other parts of the world, as well. By the early 1990s, more than a third of Ashoka fellows had launched earned-income ventures.

The spread of social enterprise was striking in the developing world, and as the pattern accelerated in the late 1990s, not everyone was pleased. In India, Brazil, Indonesia, Thailand, and South Africa, where many social activists were associated with leftist politics, many were apprehensive about experimenting with business models.

On the political left in general, the concern was that the introduction of business thinking in social organizations would damage their civic ethos. It would reduce human values to cost-benefit analyses. On the right, in keeping with Milton Friedman’s dictum that “the business of business is business,” the initial reaction was indifference. The belief was that businesses attempting to solve social problems would be uncompetitive.

Over the past decade, thinking and practice has evolved considerably, and these arguments are now being tested in thousands of enterprises worldwide. From the Grameen Bank and BRAC in Bangladesh, to ShoreBank in the United States, to the Self-Employed Women’s Association in India, to the Population and Community Development Association in Thailand, many of the world’s leading social organizations have achieved dramatic results through complementary nonprofit, business, and hybrid enterprises.

Social enterprise promises to be a powerful change strategy. Profitable businesses grow quickly and attract imitators. A successful new business can shake up an industry almost overnight. Businesses are also compelled to listen to their clients in a way that charities are not. The shift from “beneficiaries” to “customers” isn’t only a shift from “free” to “fee.” When done well, it can reorient the focus of an organization from its own needs to the needs of its clients.

To be sure, many businesses are poorly managed, and many social goods do not lend themselves to market approaches. In coming years, perhaps entrepreneurs will devise business models to provide affordable health insurance, quality education, or organic food to poor inner-city families. But so far, it hasn’t happened. In these areas, it currently seems more likely that people will create new enterprises that break even, earn a token profit, or require a partial subsidy.

Jed Emerson coined the term “blended value” to describe the commingling of social and financial objectives. As more organizations work in this gray area, they will require new kinds of financing, especially financing that crosses the borders between philanthropy, business, and the public sector. Social entrepreneurship used to operate in a binary world of pure grant making (-100 percent returns) and pure market investing (+5 percent returns, or better). This omitted a wide range of investment opportunities.

Today, as a result of initiatives such as Ashoka’s Social Financial Services program, the Acumen Fund Investor Gatherings, the Social Capital Markets (SOCAP) conferences, the South Asia Social Enterprise and Investment Forum, the Aspen Network of Development Entrepreneurs, and the Global Impact Investing Network, entrepreneurs and investors are learning how to combine the full spectrum of financing instruments, which include grants, equity, soft loans, and commercial debt, to maximize social impact. Good Capital, Gray Matters Capital, KL Felicitas Foundation, Investors’ Circle, Intellecap, Bridges Ventures, and the Deutsche Bank Eye Fund are examples of blended-value or “impact investors” that target social businesses.

The question of how to finance and build effective social change organizations gets to a deeper set of challenges: determining which legal structures and organizational formats are best suited to different kinds of problems. This is not merely a question of determining whether something should be handled through a business, social, or governmental entity, or financed by investment, philanthropy, or tax dollars.

Arguments between all-or-nothing pro-market and pro-government ideologues still fill up our political discourse, but they are fast becoming anachronisms. Stark distinctions between for-profit, nonprofit and governmental organizations no longer serve society’s needs. As people and capital begin to move more fluidly across the old sector boundaries, we are likely to break free of mindsets that limit our ability to imagine solutions.

——

David Bornstein specializes in writing about social innovation. His newest book, Social Entrepreneurship: What Everyone Needs to Know (written with Susan Davis), offers an overview of the field and explores where it may be heading. David is also the author of How to Change the World: Social Entrepreneurs and the Power of New Ideas, which was described by The New York Times as “must reading” for “anyone who cares about building a more equitable and stable world” and a “bible” in its field. In April 2010, David launched Dowser.org, a news organization that covers who is solving what and how in the field of social innovation.

Susan Davis is the founder and current President & CEO of BRAC USA, a newly created organization to support BRAC’s global expansion to Africa and other countries in Asia. In addition she was a founding board member and Chair of the Grameen Foundation and is a current board member.


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  • http://twitter.com/nocostwebsite Alex Johnson

    Very helpful information. I bookmarked it. Thanks.

    Jessica S.
    http://nocostwebsite.co.cc

  • http://twitter.com/nocostwebsite Alex Johnson

    Very helpful information. I bookmarked it. Thanks.

    Jessica S.
    http://nocostwebsite.co.cc

  • http://twitter.com/davidmbaptiste David Baptiste

    Helpful article, thanks. I've switched over to bartering recently for most of anything I can get without having to shell out cash. There are a couple sites out thereto use, to connect with people who are looking to barter trade/swap items or even services (carpentry work for auto work, etc). One of the sites I use is Baarter – http://baarter.com

  • DavieAlvin

    There are a lot of organizations these days. For anything a man can or can't do, there is an organization ready to take an action. So it's true what you say about the fact that the more organizations work in this gray area, they will require new kinds of financing, especially financing that crosses the borders between philanthropy, business, and the public sector. I wonder where they find sponsors like Kiva, MYC4, DonorsChoose or Sightline Payments, that help them with fund-raising.

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