Role and Rise of Social Entrepreneurship in US

Below is one of my papers which I wrote for an assignment for one of my courses. This discusses Social Entrepreneurship, its role in United States, convergence between Social Entrepreneurship and Nonprofits. 

Pic Source: YEU International 

“Charity creates a multitude of sins” Oscar Wilde1

“Charity,” Paul told the Corinthians, “beareth all things, believeth all things,   hopeth all things, endureth all things. Charity never faileth1

The above quotes provide divergent views with regards to the charity offered by non government organizations. All being said, the truth is somewhere in the middle. I strongly feel the social enterprise movement is very good for US society and will positively impact the nonprofit sector in the US. America leads the world in philanthropy and charity, not only in terms of monetary value but also in terms of volunteering. In America, 56% of the population in US volunteered for 20 billion hours, which is equivalent to more than 9 million full time employees having an economic value of $226 billion to all institutions.2

Rise and Role of Nonprofits in United States

The serious role of nonprofits in United States began during the 1960s through the implementation of Medicare and Medicaid in 1965 which freed the hospital from charitable donations becoming profitable institutions generating revenue through patient billings.3This would give rise to emergence of for-profit hospitals, creating social economic problems. Over the period nonprofit firms emerged in four kinds of two models: the donative model like the Red Cross, which relies totally on charitable donations, and the commercial model, which relies on sales of goods and services. These models can be further subdivided as to type of management control. For nonprofit firms where management controls are further divided into mutual or entrepreneurship.  Many universities depend both on tuition fees and charitable donations which makes them both donative and commercial.

There are many theories discussing the role of nonprofits: The Public Goods Theory, Contract Failure Theory, Subsidies Theory etc. 3The prime economic role of nonprofit firms has been to operate to correct for market failure, i.e., they deliver goods when the commercial market is not able to provide goods or services.1In spite of all this, nongovernment organizations have started to resemble for profit organizations due to lack of support from government after the Reagan revolution. This has led to increased dependence on fund raising and revenues from alternative sources which make it difficult to focus on the core mission.

Very few nonprofits have been able to build a sustainable business model using internet through crowd funding to connect investors and small social entrepreneurs.4Kiva has been a rare exception in the micro funding space,considering it has effectively been able to leverage technology for international development. Kiva’s business model is unique since it’s been able to keep its operational cost minimal by eliminating intermediary channel of integrating investors with social entrepreneurs and students. This has resulted in limiting overheads i.e. direct and indirect costs which are a strict requirement in nonprofits.

An analysis by Bridgespan revealed that very few nonprofits are able to recuperate their profits when accounting for their direct and indirect costs.5 In order to fund its mission many nonprofits are becoming more entrepreneurial, diversifying into alternate sources of funding.

Even mainstream nonprofits have become entrepreneurial; Chronicle of Philanthropy publishes a list of top 400 nonprofits in US ranked by fundraising.6The 2003 report ranked American Red Cross which draws blood and sells it to hospitals on number three position.  The growing importance of self-financing business for projects in the social sector shows the blurring edge between nonprofits and social enterprise. Resurgence in philanthropy after the altruistic thrust by young technology billionaires has helped transform social sector to be more transparent and cause a paradigm shift in the prevailing social business model.

Social Enterprise

“A social enterprise is defined as a business venture created for a social purpose-mitigating or reducing a social problem or a market failure and to generate social value while operating with financial discipline, innovation and determination of a private sector business.”7Social enterprise main goals are to serve members of the community, provide social welfare with a business model to generate sustainable revenue. Social Enterprises work with the prime purpose of social impact with an aim to create economic value in social value sphere since for nonprofits financial sustainability cannot be achieved without external or self-generated funds. 

Why Social Enterprises are effective?

Social Enterprises are effective because they bring in creativity and best business practices through entrepreneurship and innovative structure with an aim to achieve its social value creation through income generation from commercial activities aligned with its mission for a sustainable market driven performance. Social enterprise works through various business models, one being integrated social enterprise, wherein they share costs and assets through shared business activities. Good example is of Scojo Foundation in India which is a healthcare social enterprise specialized in healthcare. To fund its initiative in providing free readymade reading glasses to rural people in India, it launched its operation in urban areas. Due to shared resources it is able to allocate recourses efficiently to subsidize its free reading glasses for poor people. It had started as a nonprofit and realized it could not be able to sustain its business over a longer time. The social entries model helps it to self-finance its mission in providing healthcare to people suffering from presbyopia- blurry close vision.7

Convergence between Nonprofits and Social Enterprise

Scojo foundation example illustrates the growing thin red line between role andfunction played by nonprofits and social enterprises. The distinction between social enterprise and nonprofits is that social enterprises more actively respond to market failure in solving social problems. Social enterprises are more focused on transforming social problem with financially sustainable innovations which incorporate features of nonprofits, government and business. Teach for America, developed a unique model of attracting the best talent in America to educate low income students. It recruited talent from best universities and provides on the job training to employees with opportunities to study at leading universities as an alternative compensation for low compensation. It built a long term sustainable model in providing best quality education to low income children with impactful results.

 

Capital and Philanthropy: Catalyst for Social Entrepreurship

One of the turning points in nonprofits is rise of new tech philanthropists like Pierre Omdiyar, Bill Gates, Larry Page, Jeff Skoel, SergyBrin and Mark Zuckerberg. Between 1995-2002, United States gave about 1.8% of GDP in philanthropy more than any other country in the world.8

This wave of philanthropy brought new thinking in the way charitable giving developed in United Sates. Philanthropists want to leverage innovation and technology for sustainable improvement in social improvement, which has resulted in increasedaccountability for charitable grants. One good example is eBay’s founder Pierre Omidyar’sFoundation, which invests into Omidyar Network, which is free to make for-profit investments as well as philanthropic donations to pursue its mission of “individual self-empowerment”8

This inspired social entrepreneurship since many of the philanthropists encouraged social entrepreneurs to generate well founded solutions to social problems.  With easy access to capital from angel investors, many talented graduates now pursue their dream for positive change in the society with much more ease than ever before. Most of the startups do not survive the first two years, wherein they need guidance and resources. Companies like Ashoka and Bridgespan help facilitate seed capital and expertise to help develop the business model. Take the case of Minneapolis where philanthropy gave rise to community service which in turn helped nonprofits.9

The role of venture philanthropy in encouraging social entrepreneurship cannot be understated   especially during the 90s and early part of this century.  Although there are various hindrances, venture funds gave preference to social return of capital and brining in best business practices which helped immensely wannabe entrepreneurs. One of the key hindrances was the ability to scale up business which might be viable for nonprofits like Red Cross which has a national presence but not viable for many social enterprises which are in niche segment.10

Social Entrepreneurs Complement Nonprofits, Businesses and Government

This in turn develops into a self-generating cycle. Philanthropy aids nonprofits and social entrepreneurship which in turn helps nonprofits to become more efficient. In many cases social entrepreneurship form alliances with other nonprofits bringing in better management and innovation as partners in eradicating the same social problem. Nonprofits have their own space in addressing social problems, especially in poverty eradication programs like economic development, where it’s very difficult to build a sustainable business model since clients are low income. Social Entrepreneurs in turn complement nonprofits in their goal to serve low income effectively.

Social enterprises are unique in collaborating with corporate for a symbiotic good.  “Share Our Strength leveraged its social cause, hunger relief, through a partnership with American Express. Each time a customer used their credit card a percentage of the purchase was contributed to eradicating hunger. The campaign raised money and consciousness for hunger relief and Share Our Strength”7Take case of microfinance companies that have leveraged their credit delivery methodology providing financial services to low income micro-entrepreneurs into successful commercial banks.7Kiva and Grameen bank are exemplary examples which have been able to operate successfully at bottom of the pyramid and serve as role models in microfinance space.

The Pitfalls Ahead

Nonprofits and social enterprises risk losing their focus on mission while generating income to self-finance their business. Young Men’s Christian Association helps Americans stay in shape by developing low cost gyms for low income people. However, over the years they expanded into upscale neighborhoods and were able to undercut price due to their tax exempt status. This has caused a lot of disillusionment among many donors.  To monitor nonprofits do not digress from their mission statement, it’s imperative that policies which can take away tax exempt status or preferential taxation treatment for nonprofits with a diverse mix of board members.

Proliferation of social enterprises effectively addresses market failures in social sector, supplements nonprofits in niche segments, drives innovation which percolates down to nonprofits through collaboration and improves efficiency through shared best business practices. This leads to better accountability, social impact and productivity making social sector pie to grow through charitable grants, philanthropy, venture philanthropy and government funding.

  1. Wrong way Corrigan and recent developments in the nonprofit landscape: a need for new legal approaches
  2. State of Non Profits in America
  3. Economic theories of non-profits
  4. The profit in nonprofit
  5. Should nonprofits seek profits?
  6. Profits for justice
  7. Social Enterprise Topology: Kim Alter
  8. The business of giving
  9. Emerald City of Giving Does Exist
  10. If pigs had wings
  11. Pitfalls of Profits