Hi Will:

I certainly think that your post will stir things up just a bit. Can’t come up with a succinct reply as you raise too many interesting points.

I will take a stab at differentiating the work of social enterprise from traditional international development. In my direct experience, social enterprises are trying (with some success) to do things differently. They really are applying rigorous business practices to social problems and seeking to be held accountable—taking on true P&L responsibilities and meeting the demands of customers. That being said, there isn’t a whole crop of successful social enterprises that have broken through and don’t require some subsidy because the markets they work in are just very difficult and full of friction. Fundamentally, I don’t think social enterprises are happy to rely on donor subsidies but because the capital markets in this space are so poor social enterprises don’t have anywhere else to go to attract ultra-patient capital.

To me social enterprise is not a fancy way of saying charity. The social enterprise I work for is entirely different than my previous experiences in international development. I am wary, however, of charity using social enterprises to ride the “bandwagon”.

Finally, I think one has to be careful to say social enterprises “in general”, or any sector “in general” for that matter. There are best-in-breed social enterprises that measure constantly and are held accountable to their customers. There also are social enterprises that aren’t effective and, frankly, shouldn’t call themselves social enterprises. Unfortunately, as with the development sector, market forces don’t always force non-performing organizations to fail and leave the marketplace.

Just some thoughts to continue this great post.

Graham

I think that Graham comments are in line with what social enterprise does mean in micrfo finance industry (see above my contributions).

“Social Enterprise is a fancy way of saying charity” is like American president Calvin Coolidge, declaring in 1928, “The business of America is business.” The problem with both statements are not the means but the ends.

A best practice that works in a Andean village may be a disaster in a seemingly similar place and people in the Alpine Balkans. Obviously, the words and programs we use don’t matter to the poor; only the results.

One case as an example for this posting:
Service businesses like B&Bs and restaurants in SW Pennsylvania—where steelworker, mineworker, and railroad worker unemployment stood at over 65%—could not get financing beyond the declining equity in their family homes. An NGO—The Progress Fund (progressfund.org)—found that the resources of a Community Development Financial Institution could be used for bridge financing. The Progress Fund has now made 235 loans totaling more than $21.2 million, and created or retained more than 1,755 jobs since 1997.

This is a limited, focused, sustainable, social enterprise on a landscape moving from production to presentation (rafting, Fallingwater, heritage tourism, etc.) in a targeted region using revolving public funds in a public-private partnership with regional banks. In the planning, the objectives were both modest and tagged to existing businesses ready to expand in need of capital.

I do not believe that this problem is any different in international development and, in some situations, in approaching the poorest of the poor. Why try to force broadly complex solutions into narrow definitions? Ground-truthing, leadership, resources, creativity and experience around specific circumstances are the critical factors for success.

Great discussion and comments! I especially like the “charity” versus new approach to executing social change tete-a-tete. Let me throw a few questions back to the group.

Has our infatuation with business caused the social sector to stray from its essence—the business of making social change and solving social problems? Has the social sector become overzealous in adopting business practices? Are there not advantages of having access to both commerical and philanthropic capital? As the experience of commericalizing microfinance shown use that sometimes business can be to detriment of its original social purpose? As social entrepreneurs can we use subsidies “strategically” or “smartly” to make social impact using market-based approaches?

It seems that in recent years some proponents of using market-based approaches in the social sector have begun dangling the lure of “profit-making” and stirring new controversy into an old argument. Not so long ago, social organizations’ modus operandi was to operate at 100% deficit now these same organizations are trying to generate profits. How did the pendulum swing so far?

This is not to say social innovation should be stifled in favor or sticking to traditional grant-led approaches either, or that a fundamental goal of the social sector goal shouldn’t be to make sustainable change. For goodness sake, sustainability is part of our moral obligation to serve our clients until they no longer need the service or until the social problem is solved. This is not to say that fundraising can’t be as distracting and “mission creepy” as revenue-generating ventures or that nonprofit capital markets aren’t in need of reforms. There are numerous stellar examples of revenue-generating, moreover profit-making, social enterprises that have created exceptional social value and spurred systemic change, both fair trade and microfinance come to mind.

One characteristic of social enterprise is that of blended or mixed (social-commercial) capital nature. Grants, soft loans, patient capital, quasi-or-equity, PRIs, commerical debt, etc. are instruments of the social enterprise capital market that can be used to capitalize, grow, and subsidize social enterprise in addition to earned income. They can also be used strategically to subsidize certain activities—one time sunk costs for start up, social services that can not be covered by the business activity alone but benefit the client. Philanthropic markets as well as commercial markets are part and parcel of our financing tool kit. We see this as a comparative advantage of social enterprise over commercial businesses or pure social organizations. International aid and philanthropy are billion dollar industries, let’s not pretend that they don’t count or are in some way bad, they are simply players in our financial landscape.

It strikes me our debate has confounded an end: profit with a means: business. Business is simply a tool, not an end in and of itself. Money, be it from profit or subsidy, is also a tool. One can use a tool to build a house or to kill a neighbor. In refocusing our discussion it’s essential to recognize that using business practices in the social sector is a tool to help us do what we do only better: create greater social value and impact. Social enterprise uses business to solve social problems, improve organizational performance (by using management tools, business discipline) improve financial rigor and blended resource mobilization (grants, revenue, debt and equity), engender a more entrepreneurial and innovative culture and ultimately make greater social impact.

The more interesting issues surrounding the profit debate are: what is profit and why do we want it? The definition of profit is net surplus after expenses and taxes. In the minds of many practitioners, social enterprise “profit” is what comes from commercial activities (which may or may not be related to mission) and is then used to subsidize the social programs or overhead of the organization. However, in a mission-centered social enterprise social costs or social subsidies are part of the cost of doing business. For example, wages are a pure business expense, yet if yours in a livelihood enterprise whose mission is to employ people with barriers to employment, you may also pay a “wage premium” or a higher than market wage for a similar job because you want economic security and dignity for your clients. The premium could be considered a social subsidy but is in fact a legitimate business expense.

These socio-economic costs are also social program costs of running a social enterprise; for example if you want to reach clients in rural areas you may have to subsidize your service delivery. If the point of social enterprise revenue is to cover costs of social programs, when the business model is integrated between commercial activities and social programs then more we earn, the money we can spend on social program costs. Using this formula the more money made, the higher the expenditures. There is virtually no profit yet the yield is more social impact. Isn’t that the kind of accounting return we are after? “Smart” grant subsidies can also be part of this equation. Pro Mujer has is a lovely example of integrating microfinance with health services and using both revenues from interest on loans ans well as grants to subsidize their health services. This strategic decision to allocate revenue and fund raising for their health services to based on the social return on investment to the clients (impact!)

In the words of Social Enterprise Thought Leader, Dr. Gregory Dees, “And even if a social enterprise makes profit this does not absolve the social entrepreneur if that profit is not well spent. 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.”

Many of you must have seen John Elkington’s (Power of unreasonable people fame) social enterprises continuum. Basically would cover everything from Unilever, to a jobs training centre in Pittsburgh to Grameen. So what is it about social enterprises – a unique governance model, or the scale, or the impact or social value created that contributes to creating blended value. Why has the concept drawn the dialogue away from more structured initiatives that are striving to create growth, rather than contributing to them?

I though it was interesting that someone from the Ashoka Foundation recently raised the point that we cant be talking about 2 million dollar value creating social enterprises when whole value chains and sub sectors need to be essentially reconfigured and ‘hybridized’ to generate the kind of change we need at scale. I think its great to have a comment like that coming from Ashoka. So how can social enterprises catalyze this large scale change and can they?

I would argue probably not (just being provocative). Social enterprises are about social entrepreneurs. Entrepreneurs are about their own enterprises. They tend to not look outside the boundaries of their own enterprises when it comes to looking for business models that can work for growth. the tipping point is risk – when in a tight situation what would a social entrepreneur choose?

Lets take the case without naming names of a leading ‘social venture capital investor’ (also provider of technical services) in the cutting edge social enterprise clean energy field.. they want to grow the numbers of their investments manifold but what about growth capital where was that coming from? So if the small enterprise they invested in wanted to go from 10,000 customers for clean drinking water to maybe 1 million – the investment fund’s business model didnt support that. Fair enough they are a business and there is only so much risk they can take on. Moving on could they be a value chain catalyst. Would they create competition for their investment by supporting say other similar investments in the region? Could they help strategy development which allowed the current model to replicate – maybe but didnt.

Comments?

Quasi social entrepreneur
Coady International Institute

I think Rewa’s and other comments are very good. In essence each of the players in enterprise development have their own objectives, and they do need to be true to them. A complicating factor is that different players are playing multiple roles to meet the need in various situations.

What are the service categories?

Finances – MFI
Organizational Development – MFI, NGO, etc…
Market Linkages – MFI, NGO, SE, etc…
Value Chain Development – NGO, Govt, etc…
Business Enabling Environment work –
Other services….

And the players have different roles and multiple roles really. Does this create a conflict of interest. Certainly to Rewa’s point an SE will not likely seek to develop competition for itself where a VCD player will look at the broader development of the market. Nor would an NGO likely seek to develop an international marketing strategy.

Certainly each of the players serve an important role in their defined area of contribution.

My observation is that collaborating is complicated by the web of players providing multiple services.

Clearly collaborative solutions in any given country/region are comprised of a different assortment of players depending on the roles that each of the players have.

It might be interesting to categorize players by the services they offer making it easier to see the overlaps and the areas of synergy.

Angie

In MF Finance the service categeories – actually stakeholders – are the
Local Authorities (Government bodies), Donors (Funding Agencies), Final Beneficiaries (Final Borrowers), Lenders ( Finance organisations), Associations (enterprises, consumers, etc), MFI or Any NGO managing the business. Each and everyone do play
an important role and as a matter of business the Local authorities’ interest in the social goal (eradication poverty, jobless reduction, etc); Funding agencies aims at a proper use of resources; Borrowers want to get the most access at cheap price; NGO/MFI/Bank’s
role is to manage and stay within the assigned benchmark: this is not an easy task because all above actors want to achieve the best to protect their own interests.