The Need to Fund Social Entrepreneurs

Why do people play the lottery? Some play because they love the thrill of it. Others play because they truly believe that they can beat the odds. If you're an economist, you'll probably answer the following: the potential for an enormous economic payout. Though the probability of striking gold is marginal, the expected payback (probability of winning multiplied by the payout) is high enough for someone to pay a few dollars for a ticket or a scratch card.

Likewise, if you ask an entrepreneur why he or she starts a new venture, the primary reason will be the same: the potential for an enormous economic payout. We all know the stories of entrepreneurs who leave their stable careers or their college education to invest their time and energy into a new venture for the possibilities of making it rich. Just think of celebrity entrepreneurs such as Steve Jobs (Apple), Mark Zuckerberg (Facebook), and Bill Gates (Microsoft).

Indeed, it is easy to understand the incentive of an entrepreneur trying to start a new venture. But what about the social entrepreneur? What is the incentive for him or her?

Most will say and believe that the incentive for a social entrepreneur to start a social venture is the ability to make a social impact. The payout is not financial, but the degree of social change. Because of this belief, we expect social entrepreneurs to forego financial benefits and to live very meager lives. I see this in my own life. As a donor to a social venture, I hate seeing my money going towards overhead, such as paying for salaries.

I think holding this view towards social entrepreneurship is dangerous and actually limits the number of social ventures created in society. When the financial incentive is discounted for social entrepreneurs, many of the best social entrepreneurs stay on the sidelines. And that's not where we need them to be as a society - and as a world.

Last year, Catherine Casey, a 2008 Acumen Fund fellow, told me that one of the challenges she sees for students considering a job at a social venture or starting one is their higher-education debt. This makes sense. If you have a $100,000 plus loan hanging over your head, you're probably not going to start a venture that does not have the opportunity to for a financial payout, regardless of the degree of social impact. When the economic return is little to non-existent, social entrepreneurship is squelched.

This is true anywhere in the world. If the financial opportunity cost is too high, most social entrepreneurs stay out. This is something my colleagues and I at WDI observed recently in a case study on talent management at the base of the pyramid.

I want to suggest that if we can close the financial gap for social entrepreneurs, perhaps we will see more social entrepreneurship activities unleashed.

So, where will this funding come from? In cases where social ventures makes a decent sized profit, some portion should be returned to the social entrepreneurs, without them feeling pressured or guilt-tripped into giving it back to the social venture by donors or other stakeholders.

In cases where the social venture cannot do this, philanthropy can play a role. In some cases, this is already happening. For example, the Draper Richards Foundation and the Skoll Foundation have started programs to financially support social entrepreneurs. Universities with large endowments are another source of funding, particularly when it comes to debt repayment. I know here at the Ross School of Business, debt is repaid for those who take jobs below a certain income level to work for a nonprofit.

Additionally, government subsidies can help support social entrepreneurs. Subsidies are meant to create balance in the market to allow for a socially optimal outcome. If governments can appropriately target subsidies to social entrepreneurs, we may see more social ventures starting, both domestically and internationally.

Now, I am not suggesting that social entrepreneurs receive the same payout as traditional entrepreneurs. We all hear of the executives of nonprofits who milk donor dollars for personal gain. If you want to make the millions of dollars, then you should work in the private sector.

Somewhere, however, a balance needs to be struck, where social entrepreneurs are able to receive a moderate degree of economic return to have a suitable living. Finding this sweet spot will allow social entrepreneurs to be unleashed to do what they do best: create a better world.

Leila Chirayath Janah

Mar 4, 2009

On funding

The social business model advocated by Muhammad Yunus is very hard to fund in the US, because capital is bucketed into two distinct camps: funding for nonprofit ventures, and funding for for-profit ventures.

In my experience trying to get a non-profit social business off the ground, I've found that philanthropic organizations committed to the idea of social enterprise are still more interested in funding traditional charities than organizations that have a strong revenue model. They'll argue that organizations like mine should just be for-profit-- since we make money, we shouldn't be taking charitable dollars out of the pool of available funds for more ostensibly non-profit projects that never have a chance at earning revenue from goods or services (such as, for example, a refugee organization).

The for-profit side, including triple-bottom line funds that look at social and environmental returns alongside financials, need to generate good returns to stay in business. A social business that just makes just enough money to keep operating and expand at a reasonable rate is not very attractive to a for-profit investor that wants his money to perform.

As Yunus argues, we need a new legal category of business that is recognized by the IRS and various other stakeholders as a social business. This new legal category might place a cap on profit margins, or require that surplus revenues be reinvested in the business rather than given to shareholders or equity investors. We're seeing the beginnings of this in Vermont (which approved the "low-profit Limited Liability Company, or L3C) -- now this needs to become mainstream. (For more on the L3C, check out: http://cole.dinse.com/vermonts-new-l3c-law/)

--Leila Chirayath Janah, Samasource (www.samasource.com)

— Moses Lee replied over one year ago

Thanks Leila. You raise something that is very interesting related to shareholders and expected returns. One of the challenges for social for-profit ventures is finding shareholders who see their return through the triple-bottom line lens. This is something that I believe should be further discussed/researched. Thanks for the comment and your thoughts.

Davey Boy

Mar 5, 2009

I Disagree

I like your article but think that there are also suitable alternatives, one thing I have been looking at is extended profit forecasts - for example in the UK we expect to generate profit within a short timescale, whereas eastern businesses have a more expansive time period before they are expected to generate a healthy profit.

In relation to your article I think if you were able to 'offset' your expected level of profit, this would allow for more non-profit expenditure.

On a different note, you have to look at your level of non-profit involvement, our company provides charitable work, but it is done without using our name or brand, on the basis that we do it for the community and not column inches.

Davey Boy www.totalfranchise.co.uk

Hi, Thanks for your comment. What I didn't go into here are the different types of social ventures out there. What you seem to be talking about is a for-profit with a CSR initiative. What I tried to suggest in the article is that social entrepreneurs should be able to receive some sort of economic return for their work overall, and that we shouldn't assume that a social entrepreneur is willing to forgo that completely.

Jonathan Peizer

Why an entrepreneurs Starts a business

Most often it's because they have a vision and love something they are doing and want to make a success out of it. That's not different from social entrepreneurs -- the payoff is just different.

I think you have conflated the objective's of the entrepreneur and entrepreneurial spirit with the objectives of a lottery or get-rich quick scheme.

But i do agree because the payoff is different that Social Entrepreners need specialized investment/grant/incentive programs.

Hi Jonathan, I don't disagree with you that there are many reasons for entrepreneurs to start new ventures. For the SE, it's definitely bent towards social return. But why can't there be a financial incentive as well for the SE? Without any, many SE will just not get in the game.

Ross Shanken

Mar 6, 2009

I mostly agree with your article

As a long time non-social entrepreneur, and newbie social entrepreneur, I am just as motivated to make my new venture (http://www.BetterHumanRace.com) successful as previous ones.

If I am very successful, there will be less payoff, but I for one am looking (1) for an outlet for my business skills, while (2) helping as many people in need as possible and (3) being able to afford my lifestyle, which is nice but not overboard. The amount of money that wealthy businesspeople can make (which is a small % of overall entrepreneurs) is so much more than needed. I don't need more cars or houses or whatever at the expense of someone having water to drink or food to eat. It just doesn't make sense. That being said, we live in a society where what I'm writing here may not make sense to most people.

There are ways to leverage your business building skills and make plenty of money for yourself, and as long as you're not greedy & don't go overboard, you can make plenty of money for people in need as well.

Ross, what you are sharing makes a whole lot of sense to me. I appreciate the comment.

Beth Carls

Mar 8, 2009

People, Profit, Planet

Moses, there is a groundswell created by B Labs and their certified B Corporations of businesses who subscribe to higher standards and expect accountability and transparency. Their members commit to considering all of their stakeholders - not just shareholders - in our decision-making process. In the end, I believe, that will result in a better company whose eye is on the ball as well as their people, their profits and the planet. Everyone calling themselves a social entrepreneur should check them out.

OneSeventeen Media (www.oneseventeenmedia.wordpress.com), as a start-up social media venture, has recently been certified as a B Corporation (www.bcorporation.net) and we are excited that there are finally people who realize that "patient capital" is not just wanted but needed in order to start businesses and help them flourish amide the wash of get-rich quick enterprises and investors.

Could I go further to say that the foundation of our entrepreneurial system depends on it? I believe so. What's the benefit? Joining forces with companies and investors who believe investing in good companies not just good marketing.

Footnote: In your thinking and exploring, please consider women entrepreneurs in this discussion as well. Women own nearly 85% of the small businesses in this country and have access to only 6% of capital (in good years). Organizations like Astia (www.astia.org) and Make Mine A Million (www.makemineamillion.org) are working to change that but we need the thinking and commitment from a lot more people like you.

Hi Beth, Great comment. Thanks for the links, will check them out. Have heard of B Labs before and think certification is important for the overall movement as well. My hope is that investors will truly value investments in these types of companies.

Paul Lee

Mar 17, 2009

Hybrids?

Great article! The issue with "SE payout" was a very real topic that I had to deal with in my housing/community development project in Uganda. As ideal and simple as this may sound, we created a hybrid company, that is engaged in both private for-profit and "social" non-profit real estate development work. With the financial profits generated from the for-profit activities, we're using this to fund our non-profit developments. Then again, new SE's most likely do not have the many types of resources & capital needed to create these hybrid organizations. Clearly this isn't a radical new idea, as you see this model played out in established private and public for-profit companies today.

— Thanks replied over one year ago

Thanks Paul. In time, as the SE topic is studied more, I think we'll be able to figure out what models work and don't work well.

Jason Webb

Jul 7, 2010

Profit

Thanks for the article. I am a young finance professional myself who recently launched a fund in Utah and I love to read about others who did the same and made it to the top. Hope to be there someday.

Development through Enterprise

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Moses Lee

Center for Entrepreneurship at the University of Michigan

Ann Arbor, MI