Supporting Social Entrepreneurship

For philanthropists accustomed to more traditional grantees, funding social entrepreneurs can feel like entering uncharted territory. Donors might find themselves intrigued by the potential for change, and yet, at the same time, unsure of what to expect in a field where the unexpected is the norm. That’s why we wrote this brief guide—an introduction to social entrepreneurship.

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Introduction

Social entrepreneurs are natural born innovators who work to solve challenging issues. As pioneers, they tend to shape their roles as they go—creating new solutions to old problems, new rules, and sometimes entirely new disciplines. They are responsible for sparking much of the positive change our world has seen, and have been around well before the term “social entrepreneur” was formally coined—think Martin Luther King, Jr. and Susan B. Anthony.

For philanthropists accustomed to more traditional grantees, yet interested in backing these groundbreaking leaders, funding social entrepreneurs can feel like entering uncharted territory. Donors might find themselves intrigued by the potential for change, and yet, at the same time, unsure of what to expect in a field where the unexpected is the norm.

That’s why we wrote this brief guide. Think of it as an introduction to social entrepreneurship. Part of our Philanthropy Roadmap series, the guide is designed to help philanthropists evaluate whether they want to include support for social entrepreneurs in their giving or investment programs, and how to begin doing so.

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Social entrepreneurs are not content just to give a fish or teach how to fish. They will not rest until they have revolutionized the fishing industry. - Bill Drayton, CEO, Chair and Founder of Ashoka, a pioneer in funding social entrepreneurship

What is a Social Entrepreneur?

What is a Social Entrepreneur?

Let’s start by defining the subject. The Skoll Foundation, which has been a leading funder in this area for more than 10 years, offers the following description:

“Social entrepreneurs are society’s change agents, creators of innovations that disrupt the status quo and transform our world for the better.”

Here are other key characteristics:

Social entrepreneurs typically use innovative methods to address social or environmental problems.

Social entrepreneurs are not limited to nonprofit organizations. In fact, they can be found at or lead for-profit companies as well. They can even be seen at the helm of hybrid organizations that bridge profit and purpose like L3Cs or for-benefit corporations (B-corps). 

Today social entrepreneurs are often associated with social enterprise projects that earn income as well as deliver social and environmental benefits. 

Social entrepreneurship has taken off considerably in the past decade, but has been around for a very long time. At the root of most great periods of social progress are individuals with a vision for change and the savvy to grow a movement and the organizations to sustain it. Those people are social entrepreneurs.

Here is a very short list of such game-changers from the past:

Maria Montessori in early education

Florence Nightingale in nursing

John Muir in wilderness preservation

Mohandas K. Gandhi in nonviolent civil disobedience 

 

What is a Social Enterprise?

A mission-driven organization with a market-based strategy. Social enterprises include nonprofits which run income-producing businesses and for-profits which prioritize positive social and environmental impact. A recent study released by the Great Social Enterprise Census reported that in the U.S.:

60 percent of social enterprises were created in 2006 or later

Nearly half of social enterprises have less than $250,000 in revenue, and nearly 50 percent have fewer than five employees (just eight percent have over 100 employees) 

35 percent of social enterprises are 501(c)(3)s and 31 percent are regular C-corps or LLCs

For donors, the opportunities to support social entrepreneurship are expanding. Donations and investments can be made to support a wide range of social impact and can be made at varying levels of risk. Philanthropists also have the chance to back different stages of the entrepreneurial process.

In sections that follow, we offer examples of social entrepreneurs from the past and present, along with four questions thoughtful philanthropists can ask as they begin their exploration of social entrepreneurship.

Questions to Consider

Questions to Consider

1. Do you believe in the social entrepreneur and his or her vision?

Strong leadership—or the lack of it—can be a decisive factor in making funding choices about social entrepreneurship. A philanthropist’s decision will often hinge not only on the idea and the strategy, but also on a social entrepreneur’s personal integrity, vision, ability as a leader and track record.

Social entrepreneurs often become the public face of the organizations they found. Their management style, experience and motivation can have a huge bearing on the effectiveness of their work.

Here are some questions philanthropists can use to evaluate leadership:

What is the leaders’s vision? Is it backed up with a solid business or strategic plan?

How does the leader make and communicate decisions?

Is the leader a good team-builder?

Is the team the leader has assembled capable of carrying out the mission? (Few entrepreneurs have all the skills necessary to execute their plans without a supporting cast).

Is the social enterprise stable and poised for growth?

How does the leader handle conflict?

Does the leader inspire trust and loyalty?

How does the leader balance passion with strategy?

Does the leader have a succession plan for her organization?

A social entrepreneur is more than just a person with a new, clever idea. A social entrepreneur is a catalyst, a motivator, a manager, a fundraiser, a role model and a decision-maker. But above all, a social entrepreneur, like any leader, is accountable for results—to colleagues, to clients, to communities, to investors and, of course, to donors.

See our guide to Investing in Leadership for more information on this topic.

 

2. What makes the social entrepreneur’s approach different?

Many social entrepreneurs seek game-changing impact— whether they work in the nonprofit or for-profit worlds. But ambition and passion are not enough on their own. Philanthropists will also want to examine the entrepreneur’s ability to create innovation that delivers results.

Social entrepreneurs use new approaches and insights to find solutions to problems. Sometimes the solution is not a radical departure, but a tweak on a previous solution that makes it more effective. Sometimes the solution offers efficiencies that come from bringing in new partners to improve an old approach. Whether the solution requires major or minor innovation is not the central issue. What’s more important for the philanthropist is finding out if the entrepreneur’s approach has merit.

This is where due diligence can play a decisive role. When evaluating any new idea or organization, it’s advisable to talk to experts in that issue area and review the quality of an entrepreneur’s concept and strategy.

Assessment is a buzzword in philanthropy—usually it refers to the review and evaluation of the impact of a donation. Many philanthropists who support social entrepreneurs have learned that the most important assessment comes before any gift or investment has been made. That assessment is based on three questions:

Could this approach be better than existing ones?

Does the approach have the potential to succeed?

Can the entrepreneur guide the design and delivery of a new product or service over time? 

 

Assessing a Business or Strategic Plan

Donors who come from the world of commerce will be aware that any new venture depends on thorough research and planning as well as innovation. Whether operating in the for-profit or nonprofit worlds, social entrepreneurs should have solid plans of action. Those who do have a plan should be able to field some basic questions, such as:

What are other organizations doing in the same issue area? 

What are the goals of the business or strategic plan? Are they clear?

How will the desired change be achieved?

Is the strategy plausible?

What specific outcomes are sought? And how will success be measured? 

Who is the target audience?

Who will act as key partners?

What external factors may impact the plan, and how will they be addressed? What assumptions is the plan based on? 

How is flexibility built into the plan so strategy can be adjusted as necessary? 

Is there an exit plan in case of failure? 

After looking at the plan, donors might consider making a site visit if work is already underway. Donors can also build relationships with other funders who support similar projects. Valuable information can be obtained discretely on a donor-to-donor basis.

Donor or impact investor?

Charitable gifts and grants support social entrepreneurs. But in recent years, a complementary practice called impact investing has grown in popularity for philanthropists. A donor gives—usually to nonprofits—and seeks results in terms of social and environmental benefit. An impact investor, on the other hand, uses a variety of financial methods including loans, guarantees and private equity, and seeks a financial return as well as positive social impact. That financial return can range from market rate or better to the simple repayment of principal. Both nonprofits and for-profit organizations can be supported with these investments.

For more information, see our guide Impact Investing.

 

3. What partners are involved – and how does the social entrepreneur leverage these partnerships?

One thing that marks an effective social entrepreneur is the ability to create partnerships. Echoing Green, a foundation that supports social entrepreneurship at its earliest stages, says it looks for individuals who are extraordinary “bridgers.” These leaders can engage diverse stakeholders in their work, attracting corporate, government and nonprofit support.

Of course, this means they have the networking skills necessary to perform perhaps the most important initial challenge faced by all startups—gathering investors or donors. Cheryl Dorsey, President of Echoing Green, calls these social entrepreneurs resource magnets. “They not only draw money to the causes they care about, but they also garner human capital—volunteers, champions, supporters and media attention—all the things that are required to execute on an idea.”

Established social entrepreneurs will have had more time to build partnerships. But earlier stage social entrepreneurs can be evaluated in this way, too. Donors can gain insight into a new project at any stage simply by evaluating the quality of the entrepreneur’s existing partnerships and the functional role that planned partners will take with the project in the future.

 

4. At what stage do you want to get involved?

This question might also be “With what level of risk are you comfortable?”

Social entrepreneurs are leaders committed to new ideas for change—individuals who see society’s problems as their cue to start delivering on solutions. Of course, from a philanthropist’s perspective, any such reliance on an individual—no matter how talented, visionary or charismatic—entails some risk. These entrepreneurs often work with great urgency to address pressing problems. And though they may have substantial experience, their projects can be relatively new and untested. That means they can—and sometimes do—fail to completely deliver on their intended impact.

On the other hand, they can change the world. Like Muhammad Yunus and the micro-lending revolution pioneered by Grameen Bank (see case history in this guide), these innovators can create a powerful new force for good in the world.

The risk in supporting social entrepreneurs can be likened to the risk in venture capital investment. Angel investors often provide initial, very high-risk funding to try out a new idea. Startup funding can literally get an organization in operation. Working capital keeps a company going in its early stages. And mezzanine funding supports the expansion of the organization.

Donors can control their risk to some degree by giving to social entrepreneurs who have already been operating for some time. But it’s worth remembering that social entrepreneurs, like their purely capitalist counterparts, cannot be separated from the risk that accompanies their innovative approaches. Some donors not only accept this higher risk, they plan on it. The idea, they say, is to swing for the bleachers—hit the occasional homerun and accept the strikeouts as part of an ambitious approach.

Donor Risk in Funding Social Entrepreneurs

Seeking social change, philanthropic money can be used to take on risk that capital markets won’t. But savvy donors recognize that risk levels vary, often in relation to how far a social entrepreneur has progressed with a project. The diagram below illustrates these types of risk (though risk can be high or low in any of these phases).

As the above diagram shows, philanthropists can start thinking about social entrepreneurship by finding a risk level at which they are comfortable. Once they know their comfort zone, the help of trusted professional advisors can be invaluable to carry out due diligence and fully assess any particular project’s exposure to risk.

 

Social entrepreneurs do not want to capture a market, they want to change the world. - Bill Drayton, CEO, Chair and Founder of Ashoka, a pioneer in funding social entrepreneurship

Moving Forward

Moving Forward

Patience. Analysis. Intuition. Collaboration.

Donors may find these four qualities useful if they want to include supporting social entrepreneurship as part of their philanthropic portfolio.

Patience

Patience is something donors are likely to need whether they are investing in a social enterprise or giving to a game-changing nonprofit. The simple reason is that new ideas can have a longer time horizon before significant impact can be seen.

Analysis

Analysis breaks logjams in decision-making. Philanthropists can move forward quickly with some common sense questions and some attentive listening. Does the pitch for the project emphasize the problem or a particular solution? Does the approach have plausible outcomes? Does it reflect research and planning as well as entrepreneurial passion? Do the entrepreneur’s capabilities match his commitment to achieving change?

Intuition

Intuition is a savvy donor’s secret weapon. Our world seeks metrics and analytics for everything, but there is still no replacement for gut instinct. Risk comes with ideas that are meant to change the world, but there is a difference between risk that arises from the problem being tackled and risk that is due to the social entrepreneurs themselves. Personal integrity, resourcefulness, commitment—vital attributes of any social entrepreneur—often speak directly to our intuition. Donors will benefit by being aware of what their inner radar—as well as their outward antennae—is telling them.

Collaboration

Collaboration is key. Discovering and assessing social entrepreneurs can often be harder than funding traditional grantees, so talk to those who are also supporting them. Collaboration with others who have been investing in social entrepreneurs will also dramatically increase your pace of learning, and will leverage your research and ultimate impact if you decide to co-fund an entrepreneur.

Social entrepreneurship is one of the most exciting and fastest-changing parts of philanthropy. It offers new ways to deal with big problems and carries the potential to change not only the circumstances of human existence but our systems. Still, much of social entrepreneurship is social experimentation. In that light, it’s wise to remember that the best philanthropy always starts inside the minds and hearts of philanthropists. Thoughtful engagement on a personal level is often the first step to effective giving and investing.