Business Modeling in Social Ventures – a Definition (3/3)

In this post I make two arguments as to why business modeling is an essential part of what defines social entrepreneurship. I argue (1) that being a social entrepreneur means serving a social mission and focusing on economic impact, and that (2) philanthropy can sometimes be disruptive to both long-term, positive economic impact and to social entrepreneurship.

During the 2013 Skoll World Forum, at a panel titled “Developing the Development Model: Reengineering Aid for the 21st Century,” at Oxford University’s Said Business School, Andrew Mwenda, a Ugandan journalist, articulated the dangers of conflating “self-righteous” philanthropic aid with “self-interested” entrepreneurship. (You can hear him in his own words, at the 16:00 mark)

To change aid it requires an architecture of thought that is much broader than what we think. What is it that justifies aid? It requires a certain presentation of Africa as a place of misery, poverty, disease. If you present any part of this world that way you will attract the most charitable people in the world and therefore the most self-righteous. Self-righteousness is a much more complicated quality to deal with than self-interest. Self-righteous people can be so destructive and dangerous. If you are a business in Africa, doing business, you are much more inclined to understand the idiosyncrasies and traditions and norms of a society for your business to succeed. If you are an aid giver you just want people to change tomorrow so that your aid can work according to your wishes. Because a business person who is self-interested is likely to lose his investment, but a charity giver has very little to lose because they get money from a good donor and apply it to a charitable organization in an African country. Media presentations of Africa as a place of war, disease, poverty scares away these types of businesses and the types of people who want to invest and come and make money. The most important people needed in Africa are the most self-interested, the most enterprising.

The notion that there are self-righteous philanthropists who can be “so destructive and so dangerous” is a pretty radical idea. He is not alone in thinking such thoughts.

Paul Boateng, Dambisa Moyo and Bunker Roy shared the stage with Mwenda, and they likewise suggest that the traditional model of aid and philanthropy – the model whereby outsider crusaders bum rush a problem to rescue the victims of poverty, injustice, racism, etc. – is broken and in need of deep repair. More on this in a minute.

Reset – What’s the context here?
Now, what do these disruptive thoughts about aid have to do with social entrepreneurship and social entrepreneurs? Why am I talking about aid to Africa in the context of this conversation about business modeling in social ventures? Because economists and activists alike believe that to solve some of the world’s largest social problems we must be investing in social entrepreneurship and less in “aid”. Ultimately, I am working to construct an argument for why there needs to be more foundation investment in social entrepreneurship versus non-profit grant-making, and why investments as opposed to philanthropic giving is more empowering and economically sustainable.

Quickly, let’s review where we’ve left off in the previous two posts in this series.

In the first post on business modeling in social ventures the launching pad for this topic was the question: How can nonprofits and social ventures develop stronger, sustainable business models? The short answer is by engaging in more rigorous business planning by leveraging such tools as (1) the business model canvas and (2) design thinking, and by examining the business models of other social ventures with strong, diversified and sustainable revenue models.

In the second post I examined Kiva’s business model and discussed the fact that social entrepreneurs work to have a strong grasp of the (1) problem, (2) solution, (3) market and (4) business. From the beginning of their venture entrepreneurs think about brand, marketing, human resources, revenues, sustainability.

Heretofore I have put off defining what exactly is a social entrepreneur and what is social entrepreneurship. In this third post on Business Modeling in Social Ventures I do both. Then I discuss why investing in social entrepreneurship vis-a-vis “aid” is the better approach to solving society’s biggest challenges.

What makes an entrepreneur “social”?
One thing that is not a social entrepreneur is an entrepreneur who adds a charitable cause – say, a 10% donation of profits to a non-profit – to the fundamental business model of his venture. It may make him an activist entrepreneur. But this kind-hearted fellow is not a social entrepreneur. Why hate on the philanthropically inclined? First, I’m not hating. Accurate definitions have important implications. So, second, muddying the waters and improperly co-opting terms can make things like fundraising, gaining market share, growing revenues, becoming sustainable and achieving scale more challenging. Accurate labels are also important for better understanding economic changes, impacts, and what models lead to such.

In “Social Entrepreneurship: The Case for Definition“, one of the first business school articles to make a serious case for defining social entrepreneurship as a distinguishable class of economic and societal contribution, Roger Martin and Sally Osberg define the social entrepreneur as one who “aims for value in the form of large-scale, transformational benefit that accrues either to a significant segment of society or to society at large” (pp 34-35). Also key to their definition is French economist, Jean-Baptiste Say’s description of an entrepreneur as one who “shifts economic resources out of an area of lower and into an area of higher productivity and greater yield” to create value (31). Building on this idea of value creation they further cite the definition of an entrepreneur as presented by the Austrian-American economist Joseph Schumpeter:

Schumpeter identified in the entrepreneur the force required to drive economic progress, absent which economies would become static, structurally immobilized, and subject to decay. Enter the Unternehmer, Schumpeter’s entrepreneurial spirit, who identifies a commercial opportunity – whether a material, product, service, or business – and organizes a venture to implement it. Successful entrepreneurship, he argues, sets off a chain reaction, encouraging other entrepreneurs to iterate upon and ultimately propagate the innovation to the point of “creative destruction,” a state at which the new venture and all its related ventures effectively render existing products, services, and business models obsolete. (31)

Creating value, driving economic progress, capitalizing on a commercial opportunity, setting off chain reactions that have larger economic implications – this is an entrepreneur.

Martin and Osberg go on to define social entrepreneurship as “having the following three components:

  1. identifying a stable but inherently unjust equilibrium that causes the exclusion, marginalization, or suffering of a segment of humanity that lacks the financial means or political clout to achieve any transformative benefit on its own;
  2. identifying an opportunity in this unjust equilibrium, developing a social value proposition, and bringing to bear inspiration, creativity, direct action, courage, and fortitude, thereby challenging the stable state’s hegemony; and
  3. forging a new, stable equilibrium that releases trapped potential or alleviates the suffering of the targeted group, and through imitation and the creation of a stable ecosystem around the new equilibrium ensuring a better future for the targeted group and even society at large” (p 35).

The foundation of Martin and Osberg’s definition of social entrepreneurship is the pursuit of justice AND driving economic impact. While one key metric for a social entrepreneur is working to accrue benefits for a significant segment of society, economic impact is still at the heart of their definition. Martin and Osberg acknowledge that there are areas of gray. And, to be clear, there are *lots* of foundations and non-profits who are engaged in social entrepreneurship. But not all philanthropic endeavors are lead by social entrepreneurs. And there are even fewer that are driving meaningful economic transformation. If you want to dive into the nuance of who a social entrepreneur is and what she does you can take a deeper dive into their article, along with checking out some additional sources here, here and here.

Social entrepreneurship and “aid”
Let’s start this part of the conversation from a 30,000 foot view, from a macro perspective. I promised I would return to Mwenda’s comments above. His argument has many layers to it. One of those layers is that Africa – which consists of 53 independent nations, is presented as a corrupt, poverty and disease-ridden hegemony. What impact does such portrayals have on investors? Think about that for a minute. The most poignant layer is his notion of self-interested entrepreneurship. What motivations does a charity have for wanting to understand the nuances and idiosyncrasies of the end-user, the consumer of their services or goods? If not driven by a bottom line, the odds that you will provide great customer service aren’t very high. Mwenda adds: “Aid is an instrument of control and an instrument of domination. If you get aid from any western country the first rule is that you must adopt the institutions and policies that have worked in the countries that are giving you aid.”

Says Dambisa Moyo (at 9:25): “Let us remember that there’s not a single country in the history of the world that has achieved economic growth and meaningfully put a dent in poverty in a sustainable way by relying on aid to the extent that Africa relies on aid today. Not one.” 

Let’s return again to our definition of social entrepreneurship and ask: what does aid to Africa have to do with social entrepreneurship? For now I am using this illustration of the impact of aid to Africa as a proxy for the counter-productive disruptions that grant-making foundations and some non-profits can have on the causes they are trying to fix. If the organizations that grant-makers and aid providers are funding are not having transformative economic impacts, then they are not, by definition, social entrepreneurs.

The challenges that are introduced into the world of social entrepreneurship by foundations, aid givers and other organizations who are less accountable to the market are many. Mwenda and Moyo mention at least six:

  1. Economic growth is stifled by aid/philanthropy
  2. Aid/philanthropy is a means of dominating and controlling a group
  3. Local policies, institutions, norms, customs must give way to – or at the very least will by influenced by – the aid-giving organization
  4. The end-user has no means of holding the aid/philanthropist accountable
  5. Local stakeholders are dis-incentivized to try to invest in solving their own problems – how can you compete with free?
  6. Local governments are likewise let off the hook and in fact are more prone to corruption as a result

Anything we can add to this list is overshadowed by the most important and powerful first point – a point worth repeating – the point made by the economist Dambisa Moyo: “There’s not a single country in the history of the world that has achieved economic growth and meaningfully put a dent in poverty in a sustainable way by relying on aid.”

We can address the counterarguments to Moyo and Mwenda’s stance another time (something Bill Gates has done in addressing Moyo). Here, I am using African aid as a proxy for illustrating the impact that foundation giving can have on social entrepreneurship as a means of highlighting the importance of business modeling in social entrepreneurship.

If aid is equivalent to suppressing economic development then aid (and it’s cousin, philanthropy) is antithetical to social entrepreneurship. Aid may help address specific problems, but how does it set off a chain reaction? Philanthropy undeniably helps people and brings relief, but how often is it designed to empower? Philanthropy usually enables people, but can sometimes be a market disruption. Entrepreneurship drives economic progress. And social entrepreneurship drives economic progress for those at the margins.

Why social entrepreneurs create business models
Just as leading finance ministers, economists and journalists are working to disrupt the paradigm of global aid to Africa, perhaps it’s time to rethink philanthropic models for charitable causes. Juxtaposing aid/philanthropy with social entrepreneurship has done two things for us: (1) It has helped illustrate the definition of what is/isn’t social entrepreneurship; (2) is has helped demonstrate the impacts and long-term chain reactions of investing in the self-interested versus giving through the self-righteous; and (3) it has helped us understand why business modeling in social entrepreneurship differentiates social entrepreneurship from both entrepreneurship and charity.

Social entrepreneurs develop business models because their goals are to drive economic impact, inspire creative destruction, and inspire transformative changes. They create ventures, inspire other entrepreneurs, and set off chain reactions. To achieve these things social entrepreneurs must develop strategies, drive revenues, have product-market fit. Social entrepreneurs are not simply do-gooders. They are that and more. They have to be (or become) good business people. Engaging in a process of thinking through, iterating on and establishing (a) business models is part of what it means to lead as a social entrepreneur.

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