Intentional Social Entrepreneurship

"The Funding Gap" explains how the concept of a social enterprise has developed over the years. While that is not the article's primary intention it still shows how the concept of a "for profit" social enterprise is much more mainstream now and how this concept has thrown a stick into the wheels of the traditional cycle of attaining funding for social sector initiatives . This concept of "for profit" social initiatives has resulted in the "funding gap" because potential investors/donors do not seem to know what they're funding as the hybrid that is social entrepreneurship is still something that has not been defined clearly in a lot of mediums even as it has become more prevalent.

Taking into account this current scenario I would like to share the model of the Acumen Fund as it seems to be the perfect blend that marries the concepts of charitable funding and funding that will be used as an investment and thus help reap eventual profits. The Acumen Fund is very active in Pakistan. Over there it has several business ventures that make use of the concept of Patient Capital. Patient Capital is the concept of using capital to start a social venture that will eventually become self sustaining and thus profitable.The important thing to note here is that the goal is to "maximize social benefit" and that making the venture profitable is simply a step that objective as if it is not a profitable venture the social benefit will not accrue to the society in the manner envisioned or at the optimal rate. This reasoning is very close to one of the explanations offered in this course only, as the difference between social and regular entrepreneurship.

Let us take the example of the Ansaar Management Company (AMC) which is low-cost housing and development company out of Pakistan that is backed by the Acumen Fund. Initially, "AMC will develop 150 commercial plots and more than 2,300 residential plots" (Acumen Fund), creating homes for nearly 30,000 people who can be grouped into the low-moderate income bracket. After a community of sorts has been built and the demand to live in the relevant area increases, the company will sell the remaining 30 percent of land at a premium. This will help ensure the company’s financial viability and sustain it in the long run. Eventually, the Ansaar Management Company  envisions itself as the market leader in providing affordable housing solutions.

In Pakistan there is a serious need for low income housing as it is under provided for by both the public and private sector. This model will help reduce slums and increase the quality of life for millions of people. It plans to start its initiative through charitable funding but eventually plans to be self sustaining by becoming profitable and thus empowering the community, thus truly following the concept of Patient Capital. To read more about this and other similar hybrid initiatives you can take a look at http://www.acumenfund.org/investment/ansaar-management-company.html.

Now that the lines between the terms of social and simple entrepreneurship have been blurred or rather in the case above merged, how can we judge the intentions of a potential "social entrepreneur". There is no doubt that in the case above there is a social benefit as a spillover effect but is it just that, a spillover effect? Or was it the primary reason with the profit being the spillover effect? The entrepreneur in this case obviously claims the former but we can never really be sure as with regard to intention. I thus think that eventually, as already mentioned in class, the term of social entrepreneur will disappear and we will only be left with entrepreneurs with both social and for profit intentions but in the end if a benefit is accruing to society, who cares about intentions?!

Flocks of Angel… Investors

The social innovation space epitomizes high-risk high-reward, with the additional complication of the reward not being strictly fiscal. Is an influential business that doesn’t have significant returns on the money still worth the risk? Chertok et al. aptly describe the heart of the problem in their 2008 article, The Funding Gap: “one of the reasons social enterprises have trouble raising money is that they do not fit neatly into either the traditional nonprofit or for-profit model.” Social innovation is an exciting and dynamic space is the same reason that it is such a difficult space to develop and flourish in. People are working to solve some of the world’s most challenging and deeply-rooted problems which requires a creativity in thought unparalleled by standard consumer products and services.

Enter the hybrid model.

Rather than allowing the awkward middle stance between commercial and philanthropic to be a stumbling block for enterprise, innovators can draw from both sides and use it to their advantage -- if they play their cards right. Although this requires something of a schizophrenic organization where the social and financial outcomes must remain carefully separate, this is a promising strategy to overcome the awkward-teenage-years equivalent for social enterprise when the promising idea is coming to fruition but doesn’t have proven success to interest governments or late-stage investors.  This can even be done a couple of ways – chronologically, where the philanthropy boosts the enterprise to a level where it can gain interest for more investors, or it can be done simultaneously where distinct branches of the same organization interact symbiotically. Although this sounds incredibly difficult to execute successfully, I love the idea of simultaneously wooing investors and philanthropists to leverage the strengths of both to find growth capital.

Since unconventional model and funding methods are ironically becoming the norm, can a system like crowd funding be a solution to the dangerous stagnant period between early optimism and funded success? Sites like Impact Trader and Fundly may be the way that baby enterprises push through the funding knothole. In a world of tradeoffs and uncertainty, perhaps a little optimism can go a long way. I would be curious to see if money can reliably come from not just anywhere, but everywhere. Although crowd funding is in its infancy from both a financial and policy standpoint, I would like to put in my vote of confidence that it is a viable source of funding that will require some serious creativity to balance the complexity of a hybrid, bipolar business model and bringing value to the masses of investors.

As I read and reflect on the fascinating complexities surrounding every facet, “social innovation” is a term that is more meaningful than I ever knew. The innovation is not just necessary to develop the product brought to market, but also the plans to navigate dynamic markets, policies, and funding strategies for enterprises that don’t fit into any traditional molds. With the burgeoning of global markets, crowdfunding, social media, and mobile and embedded technologies, welcome to the wild west of social enterprise. 

Non-profit + For-profit = Awesome Hybrid

As I was discussing in my last blog post, why is it that social entrepreneurial organizations that create a profit have difficultly acquiring funding from philanthropic groups? It seems that social entrepreneurs run into problems because they are in the middle of the for-profit non-profit spectrum. Foundations/trusts as well as companies don’t know how to categorize these organizations and therefore are reluctant to financially participate. Although unfortunate, I do understand their point of view. For example, investing companies want to show that they have social responsibility and they want to get a tax break. If they are use to the benefits from donating to non-profits, they may be reluctant to try donating to other models. Same goes for a foundation/trust, they may see that a for-profit company or a business-driven non-profit has social benefits, but how do they know they are not solely profit driven. After reading one of this week’s articles The Funding Gap (by MichaelChertok, Jeff Hamaoui, and Eliot Jamison), I was thrilled to learn about the non-profit/for-profit hybrid.

           

This article discusses why social entrepreneurial organizations have difficulty obtaining funding and how different non-profit/for-profit structures can relieve this issue. The non-profit/for-profit hybrid is a brilliant structure where there are two separate groups that work together to accomplish their shared mission. The overall benefit to the hybrid is that it is easier to obtain funding because the non-profit can seek donations from individuals and grants while benefiting from tax-exemption and the for-profit can seek investors. Plus, the for-profit can make tax-deductible donations to its non-profit.¹ I looked online for examples of these hybrids and was surprised by its popularity and success. Below is a specific example of a hybrid:

Parent Earth
The for-profit Parent Earth Inc. and the nonprofit Parent Earth Foundation have the same mission—to educate the public about healthy eating habits—but they perform different duties. From offices in New York City, the nonprofit produces educational videos about food, while the for-profit generates advertising revenue on ParentEarth.com and pursues sponsorship opportunities. With this structure, the for-profit will be able to sustain the nonprofit while it waits for grant funding.²

Many hybrids begin as either a non-profit or a for-profit and then create the other to pursue another goal/mission. A popular example of this is a for-profit company creating a non-profit organization to manage its philanthropy. Many companies have taken this approach due it its convenience and tax benefits. Examples of this are even in Pittsburgh. PNC, EQT and Heinz are just a few that have separate foundations to create grants for non-profits. Another popular situation is a non-profit (such as a museum or theater) creating a for-profit to sell merchandise. One of my personal favorite examples of this is the NYC’s Museum of Modern Art online store where they sell prints of their art works and specially designed products. You can even register here for your wedding!

The non-profit/for-profit hybrid model is relatively new, but growing in popularity as well as evolving. New structures keep emerging and I believe that hybrids are going to become more and more standard especially for non-profits who wish to create a new sustainable revenue.

1) Chertok, Michael, Jeff Hamaoui, and Eliot Jamison. "The Funding Gap." 90-811:  Foundations of Social Innovations and Enterprise Course Packet (2012): n. pag.

2)"The Social Entrepreneurship Spectrum: Hybrids." Inc.com. N.p., n.d. Web. 27 Sept. 2012. <http://www.inc.com/magazine/20110501/the-social-entrepreneurship-spectrum-hybrids.html>.

Some Thoughts on Social Innovation and Social Enterprises in China

This week’s reading focuses on high-level topics: innovation diffusion (SIB), funding and evaluating. Combined with last week’s lecture on innovation diffusion, I realized that only designing an innovative product that satisfies people’s needs is far from enough, thus figuring out why prof said the goal of this class is to by no means to make us experts in this area but to make us sound less stupid… social innovation means innovations in Every aspects: Product, Organization Structure (hybrid enterprises), Financial Resources (social impact bond), Diffusion Approaches (SIB), Evaluation Methods, Government Policies and even people’s, especially investors’ Mindset…

Then I examine several factors in China to get a clear picture of why China lags behind and how we can do better. Among those success stories in social innovation field, majority of them happens in India and Africa instead of China.

1.       Government Engagement:

Before 2011, the threshold for establishing NGO in China is high since China has a “two-tier registration system” , which means they should get the approval from both Ministry of Civil Affairs and the so-called “professional government supervision department”. Thus the non-profit model of social enterprises can’t work out.  Luckily, in July, 2011, ministry of civil affairs announced the end of this two-tier system, meaning that millions of NGOs will have a legal identity in China.

Another thing worth mentioning is China has a distinctive type of company called “social welfare enterprises” (SWE) which bears some relevancy with social enterprises.  SWE is established with a mission to help the disabled. At least 35% of the company’s employees should be the handicapped and the business line should be something “suitable” for them to operate. SWEs enjoy tax deduction and other kinds of advantages from the government while other social enterprises cannot. That is why many social enterprises in China are related with the handicap. There is research saying that the number in Hong Kong is more than 70%. From this fact, we can see that the government regulations have great influence the development of social innovations.

In some European countries, government procurement of public service from social enterprises is a sign of support and important revenue for social enterprises. In China, only “social organizations” can apply for government procurement. Thus many enterprises registering in Ministry of Industry and Commerce are not eligible to apply.

2.       Funding:

This week’s reading “the funding gap” lists several funding sources, including direct and intermediary. In China, funding approaches are relatively simple. In recent years, many foundations, both domestic and some international organizations are launching initiatives to invest in social innovations. However, most of the efforts are in small scale. They give social enterprises seed funds and limited training on business management skills, very few of them touches on venture capital funds or other investment approaches (bond, equity..)

There are far more issues to analyze about China's social innovation and social enterprise status. In the researching process, i sensed that nearly all parties in China are increasingly paying attention to this area and i believe  many success stories will spring upin the coming decade.  

Social Enterprises Might Actually Work

On July 2000, Mexico became a democratic country. New transparent and strong institutions and participative citizens put a stop to more than 7 decades of authoritarian governments. Soon, Mexicans got to know freedom of expression and freedom of association for the first time. However, most of us didn’t know what to do with it. Even when the “black list” of books you couldn’t buy nor read was dismissed and even when journalists were able for the first time to criticize the President freely and without fear, citizens weren’t actually exercising their liberties. They didn’t know how to do it.

Eventually, generalized apathy became so annoying that a group of friends and I decided to take advantage of this window of opportunity.

On April 2008, we launched a non-profit organization with the mission of providing political education to the Mexican youth. On January 2009 we published the first issue of an online magazine in which we encouraged students to write freely about political issues. Soon, we got writers from many universities in the country and even from other Latin American countries, as well.

To present each issue we organized forums, conferences, film weeks, photographic exhibitions and many other events to complement the contents published in each issue. These events were so successful that we received funding from three Mexican universities and from several private sponsors. At the end of each issue we donated our profits to non-profit causes related to the topic we chose for each issue[1].

However, on January 2011, most of the original team of Interdependencia had graduated from college and the universities who sponsored our work decided to stop doing so.

Recruiting younger students helped us to attract support from new universities. One of them actually decided to adopt Interdependencia’s contents to do a print magazine. Nevertheless, our income was not enough for sustaining our activities and still donating our profits.

We participated in several start-up competitions, but we only won special mentions “for being the best fully running initiative in the contest”. Then, we tried to apply for government grants, but they told us that our non-profit organization was not old enough, so we could just apply for getting training support. After this experience, we didn’t even try to apply for foundation grants.

In order to contain the crisis, I deconstructed Interdependencia’s business model so as to turn it into a social enterprise.

First, I added two other branches to the organization. I realized that if we were going to implement important changes any way, it would be a good time for doing extreme changes. Since many of us debated constantly about the pros and cons of being an opinion magazine rather than an academic magazine, I developed the business model for a digital-interactive think tank that would do research and organize online lectures.[2] Also, I integrated a consulting branch that would let us sell our skills, get experience, do networking and finance the magazine and the think tank.

Then, I changed the whole organizational structure and added legal, accounting and organizational teams that could deal with a rather complicated flow of information and resources between the non-profit association and the for-profit enterprise. I have to say that Business Process Modeling has been a nightmare since then.

On January 2012, the team accomplished our goal and Interdependencia formally (and legally) transformed into Grupo Interdependencia. We celebrated by changing our image and our website.[3]

On May 2012, we sold our first project to a local government. Unfortunately we couldn’t develop it because the municipality did not comply with the terms stated in our proposal. However, we proved ourselves that this is the way to go. Currently, we are developing more services and I strongly believe that soon we will be able to overcome our funding gap. 

In the end, I learned a lot from this experience of success. However, after living throughout the whole process of transforming a nonprofit into a social enterprise, I wouldn’t advise any organization to walk my steps.

Firstly, legal and organizational mayor transformations are extremely costly. On the one hand, we lost some members of the original team who didn’t want to earn a profit, so we had to recruit and train new members. On the other hand, I believe that if Interdependencia’s members were not voluntary workers it would have been very expensive to exert accounting and legal changes.

Secondly, I learned that it’s extremely important to preserve your mission both in the non-profit and in the for-profit sides of the equation. Every time we had concerns or doubts about what we should do in any of our branches, by recalling our mission we were able to get the correct answer.

So, even if social enterprises might actually work in some cases, it is very important for organizations to understand that it is a costly and complicated process that won’t actually work in any context. You have to be prepared and give a serious thought to strategy issues. 

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[1] For example, we helped a community of women to build a small shelter for immigrants where the women could feed the immigrants and provide basic medical assistance. The women from La Patrona, a town located in Veracruz, Mexico, felt compelled to help immigrants because their sons have had to migrate too.

[2] This branch of the organization found its own social entrepreneur who is leading this initiative. They started working immediately after the team was informed about the changes in Interdependencia. They are now conducting a couple of research projects. One of them is monitoring legislators’ expenses. 

[3] If you are interested, I invite you to check our new and still in progress website at www.interdependencia.org.mx

Micro-finance Institutions: The Ethical Battle

The Economist, in its 2009 article titled “Financial Innovation and the Poor: A Place in Society” defines Social Finance as a movement based on the belief that financial innovation can be used directly to help society's neediest people. It goes on to cite microfinance as a main form of social investment that has grown dramatically in the past few years, even generating profits. While it is true that some of microfinance is targeted to sustain the poorest of the poor (a concept pioneered by Muhammad Yunus of the Grameen Bank), literature and examples around the world show that self-sustaining, profit -generating micro finance institutions (MFIs) are only targeting those strata of society that are not the neediest. This is because any capital given to the poorest of the poor goes to fund their daily requirements such as bread and water. Entrepreneurial ventures are only sustained when people have room to think beyond their basic necessities, and thus can generate a return to make lending to them viable (for a profit generating MFI).

The balance between social responsibility and financial return is fragile. While some believe that the poor must not be deprived of their rights, others believe that MFIs have a right to be self-sustaining in order to improve financial services for the poor. These considerations have led to a passionate debate within the microfinance world, primarily represented by Grameen Bank versus Banco Compartamos.

Muhammad Yunus asserted his belief in the non-profit microfinance model by stating, “When you discuss microcredit, don't bring Compartamos into it . . . Microcredit was created to fight the money lender, not to become the money lender” (Bloomberg Businessweek). Compartamos founders responded with an open letter asserting: “We believe in people, we believe that microfinance is finance and has to be sustainable, that economic value is a consequence of social value, that the main contribution of microfinance is the expansion of the market, that microfinance has great economic value, and that the challenge of combating poverty is much larger than microfinance itself” (Danel 2008).

The basic argument essentially boils down to three specific areas: interest rates, market forces, and self-interest.

Interest Rates

Grameen has long accused Compartamos of charging exorbitant interest rates. In Compartamos’ early years as a commercial bank, interest rates could total 100 percent annually. Compartamos claims that it is easier to reach a larger market because the high interest rate brings in more money that they can lend out to other people. The company has grown fast and the number of borrowers has increased from 60,000 to 900,000 over an eight-year period (2000-2008). This is hardly an indication of manipulation. The fact that people still borrow and have a 99 percent repayment rate is justification enough for the higher interest rates of Compartamos (Menon 1).

Furthermore, Compartamos argues that the increase in the income of the poor, after receiving a loan, is over 100 percent and sometimes even 200 percent. If the borrower has enough money to buy more raw materials (a sewing machine etc.), then their productivity will increase rapidly, because the individual can make more products that they can sell on the market. Thus, it is better to get financed at a rate of 100 percent than to not get financed at all.

Market Forces

Another argument claims that Compartamos is not facing true market pressures. Areas most in need cannot sustain a truly competitive market for financial services. However, as the commercial approach to microfinance becomes more popular, more banks will enter into microfinance therefore expanding the breadth, depth, and scope of microfinance. As commercial microfinance grows, there will be market pressures due to competitive access to borrowers. Commercial banks will face market forces with lower interest rates, expanded services, and increased access to the area’s poor. Furthermore, commercialization requires a great deal of transparency and accountability – to its investors, competitors, and the general public.

Self-Interest

            The last major argument is that Compartamos and other commercial banks are more interested in generating high returns rather than helping the poor. While others claim the bank is emphasizing profits over social returns, Carlos Danel defends this as necessary to allow Compartamos to fulfill its ultimate mission of helping the poor (PBS). Strong profits have allowed Compartamos to become self-sufficient so that it no longer relies on donor aid. Their return on equity was 55 percent compared to average MFIs that have an ROE of about 7.5 percent (Ashta, et al. 2009:5). Thus, the company makes high financial returns – over 7 times more than the average MFIs – that attract additional investors so that microfinance can be more sustainable, increase its access to more people, and continue to reinvest in its borrowers. Though it has expanded its approach over the years, Compartamos remains true to its original mission to help the poor (Danel 2008).

Conclusion

Grameen Bank has a business model driven by its social mission to reach the poorest of the poor. Due to its success it has been able to help more than 50 million people rise out of acute poverty. Its vision and implementation has helped to inspire other institutions to lend to the poor. Compartamos is one such institution which has taken the foundation of microfinance, and tailored it to its specific client base. While Compartamos offers similar services – loans and savings to small groups and poor individuals – it also has a broad range of services including insurance, emergency funds, and financial literacy programs. At the same time, as a commercial bank it seeks out private investors, encouraging an expansion in the microfinance world in order to achieve poverty reduction on a larger scale without dependence on outside funding sources. Compartamos is working toward self-sustainability while at the same time bringing transparency, accountability, and advanced financial services to microfinance.

The global demand for microfinance services is estimated to be $250 billion; existing institutions serve only about 10 percent of that demand (Weinstein).  Both the Grameen semiformal model and the Compartamos formal model could go a long way in meeting this demand. Compartamos could serve the lower-risk, vulnerable non-poor, and Grameen could continue to target unbanked poorer individuals (Weinstein).  All in all, microfinance is relatively a young industry.

A few questions arise regarding social financing: which model is better- which one serves the poor more, whether generating profit from the poor is even ethical or not. However I believe these arguments are premature since there are still billions of individuals in need of microfinance services and the concept of ‘financial dualism’ can work well in most developing countries: people have the option of choosing to borrow according to their needs and so, both systems can co-exist.