Social Entrepreneurs Seek New Investments to Reach a ‘Tipping Point’

On Oxford University’s 900-year-old campus, nonprofit leaders and others interested in the relatively new field of social entrepreneurship grappled with the need for more money to finance growth, the field’s relationship with business, and the very definition of what it means to be a social entrepreneur.

More than 675 people from 40 countries — charity officials, scholars, business people, and policy makers — gathered for the Skoll World Forum on Social Entrepreneurship at the Said Business School here to discuss ways to blend business techniques and social goals.

“There’s still a shortage of funds, and the funds that are there are still very hard for social entrepreneurs to get,” said Martin Fisher, chief executive officer of KickStart, a nonprofit organization in Nairobi that sells water pumps to poor farmers in Africa. “Every social entrepreneur I’ve met is spending far too much time working to raise money.”

Instead, he argued, they should be working to develop “the next big thing, the next equivalent to microfinance.”

Microfinance, he said, has now reached a point where millions of dollars — both philanthropic and for-profit — are being poured into lending projects, enabling loans to more than 110 million of the world’s poorest people.

“We have to remember very clearly that it’s taken microfinance 30 years and hundreds of millions of dollars of consistent investment to reach the place where it is today,” said Mr. Fisher. “So to get to a tipping point, any of the new innovations are going to take a large amount of time and a large amount of money.”

The daunting size of the problems social entrepreneurs are tackling makes rapid growth imperative, said Roshaneh Zafar, president of the Kashf Foundation, a nonprofit organization in Lahore, Pakistan, that makes small loans and other financial products available to poor women.

“It’s about transforming systems and policies, and that’s why scale becomes important,” said Ms. Zafar. “But how big is big enough? When I think of my own institution and of our plan to grow to one million clients by 2010, that’s only 8 percent of the poor people in Pakistan.”

The difficulty that organizations face finding the money they need to grow could pose a long-term threat to the nascent field, said John Elkington, founder of SustainAbility, a company in London that provides consulting and research on corporate responsibility.

“I wonder whether we are possibly in danger of creating a thousand flowers blooming without necessarily having the resources to take them to the necessary next step,” he said.

He then explained that’s how capitalism works. Periods of enormous investment in new companies — like the dot-com boom or the current growth in environment-conscious, clean-technology firms — are followed by drastic retrenchment.

“So the question is, Are we going to see a shakeout in this area?” said Mr. Elkington.

To analyze the current state of social entrepreneurship, SustainAbility conducted a survey of more than 100 people — mostly leaders of nonprofit organizations, but also some executives of businesses designed to make money and further a social goal. The organization also conducted 20 in-depth interviews with such leaders.

Nearly three-quarters of the study’s participants reported that raising money was one of their two biggest challenges.

The survey also examined how social entrepreneurs were working with companies, and whether they were open to such partnerships.

“Across the board the social and environmental entrepreneurs were keen to work with business,” said Mr. Elkington. Some of the organizations were already collaborating with companies, but he said there were concerns.

“One of them was, ‘We don’t know how to pick the right sort of corporate partner,’” said Mr. Elkington. “‘Even if we get into negotiations with a particular potential partner, we don’t know how to negotiate the best sort of deal for our organization.’”

The study, “Growing Opportunity: Entrepreneurial Solutions to Insoluble Problems”, is the first part of a three-year project to increase partnerships between social entrepreneurs and corporations. The Skoll Foundation, in Palo Alto, Calif., is supporting the project with a $1-million grant.

Another report, “Nothing Ventured, Nothing Gained,” published by the Skoll Centre for Social Entrepreneurship, discusses the need for more growth financing and looks at possible solutions.

The potential that partnerships with corporations hold for helping social entrepreneurs expand the reach of their programs was very much on the mind of conference participants.

Christopher J. Elias, president of PATH, an international health charity in Seattle, talked about his organization’s success in working with a company in New Jersey to help it crack a problem it faced.

International health groups distribute vaccines, which need to be kept within a certain temperature range to be effective. When delivering vaccines to remote areas in developing countries, the “cold chain” can easily break down at many points along the way. So in the early 1990s, PATH tried to develop a temperature-sensitive marker that could be placed on a vaccine vial and would show if it had been exposed to temperatures outside the acceptable range.

The product PATH was working on, however, had problems — including the fact that the dye used on the labels gave people a rash. Then the charity found a company that had superior technology and had already developed markers for poultry products.

Mr. Elias said PATH was able to introduce the company to the complex world of international health and development, and persuade major players like the United Nations and the World Health Organization to require the new technology on the vaccines they purchased.

Initially the company was skeptical about the partnership, but today, he said, vaccine markers are its major source of revenue.

“The company could never have gotten the commercial success without us playing essentially a brokering role,” said Mr. Elias.

PATH currently has partnerships with more than 60 pharmaceutical and biotechnology companies. The key to building and maintaining those relationships, said Mr. Elias, is understanding the business perspective. To that end, the organization has on its staff 10 employees who have both an MBA and experience in either the pharmaceutical or biotech industries.

While PATH has been successful working with companies, Mr. Elias estimates that about three-quarters of large pharmaceutical and biotech companies are sitting on the sidelines when it comes to research and development that could improve health in the developing world. He hopes that the companies that have been taking a role in global-health issues will talk to their colleagues about the benefits of working with charities.

Said Mr. Elias: “They’re not going to believe us, because we’re looking to do a partnership, but they will believe their peers.”

Gaining access to traditional sources of capital to finance growth is possible, but will be a challenge, an executive in the investment industry told conference participants.

John Schaetzl, a vice president at GE Asset Management, tried to explain how such companies work while noting that he did not speak for his employer, which manages General Electric’s investments.

“We’re a conventional, everyday investor. We’re not a socially responsible investor. We’re not even an ethical investor,” Mr. Schaetzl said good-naturedly, to laughter from the audience. “That doesn’t make us bad people, but recognize that that’s part of our responsibility to our investors.”

Investors put capital at risk with differing expectations of return, depending on the amount of risk they’re taking. The problem with the case most social entrepreneurs present, he said, is that the expected returns are not very high. “If you could make money serving the poor and the disenfranchised, it probably would have already been done,” said Mr. Schaetzl.

Charitable money, however, could be used to make social entrepreneurs’ projects more attractive to conventional investors. For example, he said, a block of money from a foundation that only expected to get its money back could be used to attract conventional investors. Financial returns would then be split among just the commercial investors, who would get a higher rate because the foundation wouldn’t be taking the portion that its money had earned.

Foundations could also guarantee the money that commercial investors put up, further hedging the risk.

Nevertheless, Mr. Schaetzl said, he was unconvinced that the capital markets are a viable source of income for social entrepreneurship.

“I am trying intellectually to move out of darkness and into the light,” he said, “but I remain cynical and suspicious of how well either public equity or private equity can undertake social responsibility.”

Underlying many of the discussions at the meeting was the question of what it means to be a social entrepreneur.

The Skoll Foundation takes a broad view.

“Social entrepreneurs identify a status-quo equilibrium that is not working for society, that is marginalizing, neglecting, or causing the suffering of enormous swaths of society,” said Sally Osberg, the foundation’s chief executive officer. “The social entrepreneur sees in that an opportunity, designs a new model, and over time, that model creates transformational change.”

Other speakers talked about social entrepreneurship in more explicitly economic terms, suggesting that being a social entrepreneur means using business or market forces to help solve social problems.

The once hard-and-fast boundaries between the for-profit world as the organizations that make money and the nonprofit world as the organizations that try to solve social problems are breaking down, argued Mark Kramer, managing director of FSG Social Impact Advisors, in Boston.

“Social entrepreneurship is an interim step in many ways that has emerged as we are trying to grapple with how to put these two things together, how to find more effective ways of addressing social problems,” he said.

Lester M. Salamon, director of the Center for Civil Society Studies at the Johns Hopkins University, in Baltimore, took exception to the idea that social entrepreneurship was somehow different or separate from the rest of the nonprofit world.

Since the 1970s, the nonprofit arena has grown significantly faster than the rest of the economy, despite cutbacks in government aid to nonprofit groups and relatively flat giving rates by individuals (as percentage of income). Charities have financed that growth by increasing the amount of money they bring in through fees and other earned income.

“Entrepreneurialism is very much alive in the nonprofit sector at large,” said Mr. Salamon. “It seems to me that more intense cooperation between these different components of the sector is what’s needed.”

Video broadcasts of selected sessions of the Skoll World Forum are available on the Skoll Foundation’s Web site at http://www.skollfoundation.org.