Social Entrepreneurs: Addressing Society's Challenges While Turning a Profit

Jan 28, 2013

In the continuing global economic recovery, entrepreneurs have been championed for their ability to generate employment, spur competition and increase prosperity. But a growing number of innovators and business leaders are applying business strategies to address ongoing social problems.

To be sure, most businesses contribute to the general public welfare by addressing consumer challenges or needs – be it with life-saving pharmaceuticals or a more comfortable pair of sneakers. While innovative products and services can generally improve the quality of life, social entrepreneurs bring to market new ideas that tackle persistent social challenges.

For example, economist Muhammad Yunus, who developed the concepts of microcredit and microfinance, launched Grameen Bank to provide small, affordable loans to artisans and other poor entrepreneurs in Bangladesh. These microloans helped artisans buy needed materials while paying less in interest to their lender, which in the aggregate, helped segments of the Bangladeshi population escape a cycle of poverty. For his work, Yunus was awarded the Nobel Peace Prize in 2006.

When the term “social entrepreneurship” was first used in the 1980s, it simply referred to someone who uses their entrepreneurial passion to tackle a social need. Today, the boundaries of what constitutes social entrepreneurship are less clear and more widely debated, though there is some agreement in how social entrepreneurs differ from their purely business-focused colleagues. The central difference hinges on an entrepreneur’s value proposition, write Roger Martin and Sally Osberg in the Stanford Social Innovation Review. For business entrepreneurs, a new venture is designed for financial gain – the business strategy, structure, and operation are geared to minimize costs and maximize profit. For social entrepreneurs, however, a venture’s primary value is its ability to make an impact on society’s woes. That is not to say, however, that profit is irrelevant for social entrepreneurs. On the contrary, business revenue is what funds their work on a social issue.

Social entrepreneurs differ from social service providers such as non-profit organizations and public sector groups. The latter strive to satisfy as many needs as their funding allows. A social entrepreneur, however, looks for innovative solutions that can overcome root problems and alleviate – rather than only satisfy – social needs. If social service providers strive to treat society’s ills, then social entrepreneurship works to cure them. Doing so means breaking with some common assumptions about business and altruism.

Giving Through Profit

Addressing social ills has traditionally been the domain of non-profit and public sector groups. But non-profits must perpetually solicit donations and resources to fund their work and public sector organizations are at the mercy of elected officials who appropriate public funds.  For-profit ventures, however, depend on consistent revenue that can grow with sales. To be sure, no all for-profit ventures are successful, but those that are enjoy numerous benefits that support a business’s work on a social issue.

Greg Dees and Beth Anderson of the Duke University Center for the Advancement of Social Entrepreneurship write that there are several areas where the for-profit business structure holds advantages over non-profit and public sector organizations:

  • The need to maximize investments and limit costs provides incentive for greater efficiency and innovative improvements.
  • Turning a profit requires fast response to market changes, surging when demand increases and withdrawing when it falls; non-profit organizations are slower to adapt.
  • Less bureaucracy, greater resources, and higher financial rewards attract talented, skilled employees.

These advantages give successful social enterprises access to an ongoing source of funding. A recent initiative, the Great Social Enterprise Census, shows 22% of social enterprises garner more than $2,000,000 in revenue. An earlier survey from Duke University poled 400 people operating social enterprises and found that 34% had earned-income revenue more than $1 million. What is more, Duke found a correlation between revenue growth and the length of time a social enterprise was in operation. Of the early social enterprises launched in the 1970s, 80% now earn more than $1 million a year, while only 77% of younger enterprises saw comparable revenue. Overall, there are more than 30,000 social enterprises in the United States, representing more than $40 billion in revenue, according to B Lab, an organization that certifies social ventures.

For-profit social ventures are also advantageous because of their ability to attract funding. There is a growing pool of capital available for ventures that seek to solve social problems. These so-called “impact investments” are expected to reach $9 billion this year, according to a survey from JP Morgan and Global Impact Investing Network. Impact investors look for ventures that can sustainably carry out their goals and achieve widespread influence. For-profit ventures typically have a detailed business plan and strategy, as well as sales revenue, which inspire investor confidence.

While there are numerous advantages in the for-profit model, social entrepreneurs face the unique challenge of managing a two-fold metric for success – profitability, as well as social change. A long-held common assumption was that for-profit organizations could not fairly focus on promoting social change while also striving for profit. However, businesses throughout the United States are proving that assumption to be false.

Sell a Pair, Give a Pair

One proven model for a profitable social venture matches sales with donations. One of the first enterprises to use this approach was Toms Shoes. Founder Blake Mycoskie was working with an under-resourced non-profit in Argentina, providing shoes for impoverished children, when he realized a for-profit business would be better able to continually provide shoes to those in need.

“I started Toms with about a half a million dollars of my own capital,” says Mycoskie. “If I would’ve taken half a million dollars and just bought shoes to give to the kids, I would’ve been able to give the shoes once. It never would’ve been as far-reaching and sustainable as Toms Shoes is now. If you take the option of starting a for-profit business that gives back a large part of what it brings in versus a straight charity, you’re going to help a lot more people with the for-profit business.”

To date, Toms has donated more than 2 million shoes and generated millions of dollars in revenue. With Toms’ success, other social entrepreneurs have adopted the one-to-one model in their ventures, such as Two Degrees, which makes nutrition bars; Warby Parker, which makes and sells eyeglasses; and Hand In Hand Soap, which sells luxury, organic soaps. These for-profit social ventures offer sustainable charity, something non-profits and public sector organizations are hard-pressed to achieve.

Some for-profit social ventures, like Carbon Lighthouse, are focused on reducing energy use and environmental impact. The company helps commercial and public buildings reduce energy use by analyzing data and adjusting building operations. Carbon Lighthouse then buys carbon offsets to achieve net-zero building emissions for its clients’ buildings.

Social ventures can also help other entrepreneurs. Muhammad Yunus’ Grameen Bank is one example. Another is Frogtek, which sells cheap mobile software to “micro-entrepreneurs” in Mexico, Colombia, and Spain, helping shopkeepers and artisans manage their inventory and increase productivity. While the company profits from technology sales, it is focused on helping entrepreneurs escape a cycle of poverty and creating new supply chains that are fair to all.

Social entrepreneurship is a developing field, and the organizations that work towards widespread social change are varied in their make-up and value proposition. But one thing is certain: entrepreneurship and free enterprise are powerful tools that can be as effective in solving society’s toughest social challenges as they are in driving America’s economic recovery.

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