TWO

Tapping Financial Resources

WHATEVER MODEL THEY USE, and whether they set up their ventures as for-profits or nonprofits, even the most successful entrepreneurs can soon find themselves on a nonstop treadmill where they spend every waking moment chasing money. Often, this can be at the expense of using their talents to strengthen the impact of their ventures. As Richard Jefferson, founder of the open source biotechnology organization Cambia, remarked, “I can no longer be the playwright, the director and the principal actor.”¹But so it goes. As organizations scale, the role of the entrepreneur changes—as does the nature, scale, and availability of the needed funding.

The very definition of an entrepreneur is someone who “shifts economic resources out of an area of lower production into an area of higher yield and production,” according to Jean-Baptiste Say, who is credited with coining the term entrepreneurship.² Social entrepreneurs who aim to transform communities almost inevitably operate under significant financial constraints, yet this might actually work in their favor, by forcing them to leverage the resources of the people they are trying to serve and, in the process, empowering those people to take charge of their own transformational process, on their own terms. This is not an argument for starving such entrepreneurs of resources but for understanding the particular models of transformation that the best of them use.

Take Joe Madiath from Gram Vikas, who works in Orissa, one of the poorest states in India and home to those most marginalized on the Indian social ladder: the tribal peoples. He has directly transformed the lives of two hundred thousand adults and children with just $6 million of capital each year. But he is able to leverage an additional $32 million from the contributions that each family in the participating tribal village provides to a “corpus” or community fund, which holds endowments or equity investments for future development projects that the community wants to embark on. Gram Vikas provides the technical expertise in water and sanitation and supports the community development process for about five years. Gram Vikas staff live in the villages during the process. In this example, tapping financial resources is about leverage from the bottom up, and Madiath leverages over five times the capital that he mobilizes from his basic donor community.

Despite such success stories, wherever you go in the world, most social entrepreneurs (and many environmental entrepreneurs) are acutely aware of the problem of the “missing middle”—the gap between the traditional funding of nonprofit ventures through grants, usually limited in size and excluding operational costs, and the more substantial financial investments necessary for rapid expansion. Experience shows that those organizations that manage to grow rapidly tend to focus on a single source of funding—for example, U.S. nonprofits tend to turn to the government for grants.³Other entrepreneurs take on debt, but doing so can be a mixed blessing in terms of supporting scale-up and replication. As Martin Fisher from KickStart puts it, “Why should I take on debt? I then have to go look for grants to pay it off.”⁴ Others have also observed a debt paradox—where social entrepreneurs take on debt to fund expansion, with the unintended effect of slowing their growth as they focus on servicing interest and paying down the debt.

Whichever model entrepreneurs choose, most soon look for advice from specialists on how to handle the financial side of their ventures. In some parts of the world, they are almost spoiled by the sheer number of choices.⁵ What follows in this chapter, therefore, is not a step-by-step guide to money management or financial planning. Instead, we explore some of the more interesting trends in resource mobilization for social and environmental ventures. In each case, we spotlight one or more entrepreneurs and their relevant experience and lessons learned.

In general, all enterprises—including the most profit-hungry mainstream ventures—start out as nonprofits, whether or not they are legally constituted as such. (It took Amazon over five years to turn a profit, for example.) But an enterprise’s ability to access traditional capital market mechanisms that allow it to grow depends on whether it is set up as a for-profit or a nonprofit. For the former, accessing financing can be relatively straightforward, although never easy. For nonprofits, there are fewer options, with social entrepreneurs, both the great and the mediocre, competing for a limited pool of funds. Consequently, these entrepreneurs have to be creative and arm themselves with persuasive business plans accompanied by a list of deliverables and timelines as they set out to find resources for their ventures.

Nonprofits tend to keep to the options outlined first in this chapter, from tapping foundations to conjuring up in-kind resources. Some are adapting growth models from the for-profit sector, including making sales and franchising, but their legal structure bars them from seeking funds from the capital markets. For-profits push toward more mainstream routes to finance, often attracting various forms of venture capital, and going public.

A major survey by Columbia Business School, the Investors’ Circle, and Social Venture Network clarified the prevailing patterns among some two thousand U.S. for-profit social and environmental entrepreneurs. Over two hundred CEOs replied, and the average size of the firms proved to be very small, with more than 75 percent having fewer than twenty-five full-time employees.⁶ Most of the CEOs thought that their companies could scale without sacrificing values or priorities, the first of which was “improving the environment,” followed by “improving health and developing communities.” Most had been financed to date by money from founders, family and friends, and angel investors. While some firms had used bank debt and institutional equity financing, including venture capital, as for-profit ventures they were much less likely to use foundation grants and similar sources of funding available to nonprofit enterprises. Most of these social venture CEOs reported that they planned to continue holding their companies privately, although attitudes toward acquisition and going public varied considerably by sector.

The fundamental challenge that all such entrepreneurs face is persuading the rest of the world—particularly potential funders— that their basic concept is both important and viable. When we asked some of the top social entrepreneurs what advice they would give young people starting out in the field, Barry Coleman of Riders for Health suggested that they should “put a decorated, framed copy on [their] office wall citing the social entrepreneurs’ call to action: ‘It can’t be done!’ ”⁷ The power of the unreasonable people profiled in these pages flows from their recognition that it can— indeed, must—be done. But, while we like the sentiment expressed in the title of a book by Coffee Republic founders Sahar and Bobby Hashemi—Anyone Can Do It—it really can’t be done by just anyone.⁸ The people we spotlight truly are a rare breed.

So how do the successful ones do it? To find out, SustainAbility carried out a quantitative survey for the Skoll Foundation of over one hundred leading entrepreneurs around the world.⁹ We were closely involved in the project, Elkington as head of the project, Hartigan as a member of the project advisory panel. The size of the sample does not permit in-depth analysis of the funding approaches of different types of enterprises, but it does provide a useful sense of the overall trends. Given the scale of respondents’ ambitions, it is hardly surprising that almost all of them felt resource constrained, with many expressing a need to diversify their sources of funding. It was clear that raising money is the single-greatest challenge entrepreneurs face, with “access to capital” the most mentioned issue in the survey (by 72 percent of respondents). And there are no easy answers. “All sources of money come with their own challenges,” as one entrepreneur put it. Figure 2-1 shows the sources of money and other resources these entrepreneurs reported relying on; figure 2-2 shows the sources they think they will be tapping five years in the future.

Nearly every entrepreneur also noted the importance of time frames. In particular, the work they are engaged in tends to be longer term (five to ten years to results was typical) and requires consistent long-range partnerships and funding. Access to flexible funding was also a consistent theme: most entrepreneurs are able to obtain specific project financing, but they have a harder time accessing funds that will support more general infrastructure needs.

FIGURE 2-1

Preferred sources of funding

FIGURE 2-2

Sources of funding in five years

The survey’s overriding conclusion was that the unique approaches of social entrepreneurs are hard to fit into existing investor models and criteria, although the same point probably could be made about all forms of entrepreneurship. Foundations and governments tend to be siloed and conservative; as a result, they struggle to take on grantees that don’t fit their narrow sense of solution options. Worse, these groups generally do not lend to for-profit organizations, which leaves out a significant number of social and environmental entrepreneurs. Traditional debt instruments are sometimes used, but as already noted, they can present major challenges because entrepreneurs have to service the debt. Current equity investments are shorter term than what is needed—and are often too expensive for entrepreneurs with a social mission.

We found entrepreneurs following one or more of the following ten routes to money. The descriptions in this chapter are sequenced in the order a typical entrepreneur might try them out, but the actual ranking by frequency of reported use was rather different, with foundations at the top, followed by sales/fees, public fund-raising, and governments.¹⁰ The question we asked entrepreneurs was this: “Thinking about financing your initiatives, which sources of funding do you think will be the best avenues for you to pursue?”

For ventures structured as nonprofits (leveraged and hybrid nonprofits), foundations turn out to be the top funding source today, at least for those in the sample. That said, one of the most striking findings was the remarkable collapse in the number of entrepreneurs expecting to rely completely on grants in five years— from 27 percent today to 8 percent five years out. On the other side of the equation, there was an equivalent jump in those expecting to fund their own operations with no reliance on grants—up from 8 percent to 28 percent. In the middle ground, we saw a somewhat less dramatic fall in the proportion of respondents saying that they expect to still rely on grants with some income (from 27 percent to 22 percent) and a more striking growth in the proportion expecting a significant rebalancing in favor of earned income (from 38 percent to 50 percent).

Let’s run through the sequence of funding sources to get a sense of what is keeping today’s social and environmental entrepreneurs airborne, apart from sheer will and personal momentum.

Fishing in Back Pockets

Many mainstream entrepreneurs start out tapping the resources of their families and friends—although only 8 percent of our respondents checked this box. Given that few social entrepreneurs have the money to finance a venture using their savings or credit cards, it was no great surprise to find that this was the second-least-preferred option. Those who had considered tapping friends and family sources generally decided to avoid it because it comes with such intense personal pressure.

An example of such strains on family relationships comes from Brazil and has a happy ending. When Vera Cordeiro decided to leave her position as a pediatrician at the Lagoa Hospital in Rio de Janeiro to set up Renascer, she found herself looking at every family member and friend as a potential contributor. Cordeiro decided to leave after despairing about what seemed like the hospital’s revolving door, through which the same children were readmitted time and again. She realized that, as a doctor, she had no cure for the poverty that was making them sick. Rather, a host of nonmedical interventions was needed to improve their health—including nutrition, housing, and securing jobs for caretakers (in most cases, mothers who headed the household).

Cordeiro, clearly an unreasonable woman, invested all her savings to launch Renascer. When that was not enough, she started invading her teenage daughters’ closets and selling their clothes. The girls even ended up installing padlocks to ward off further raids. But when her husband Paolo’s gold Rolex watch disappeared, he walked out. Cordeiro steeled herself and struggled on, slowly rallying a growing army of individuals from middle-class Brazil and their companies to deploy skills and products in the service of poor children and families. Eventually, Renascer took off (and, in time, Paolo returned and now works with Cordeiro). Most significantly, perhaps, the Renascer model has been replicated at seventeen Brazilian sites, each of which supports a hospital that refers chronically sick children for help.

The handful of people who reported taking this route to money in our survey did see at least one key advantage: those using their own money tended to practice intense financial discipline. That said, a striking number of internationally known social entrepreneurs seem to come from relatively well-off backgrounds. Craig Cohon, for example, has invested a good deal of his own money in Globalegacy, his network of business, nongovernmental organizations (NGOs), and development practitioners who are developing new ways to use market-based enterprises to address poverty and sustainability issues. Asked where the initial funding came from, he replied, “I put in $200,000 from my back pocket, as well attracting $200,000 of in-kind support from the Monitor Group and another $100,000 from [the UK law firm] Freshfields.”¹¹ Cohon, who had previously worked for Coca-Cola and helped set up the beverage company’s Russian business, says that he was “determined to start this as a business and ensure that funders had equity.” That approach remains very rare in the social space, though it is much more common in the cleantech sector, where for-profit models rule.

Raising Funds from the Public

Public fund-raising just squeaked into third place, at 54 percent, with entrepreneurs underscoring the independence derived from money raised in this fashion. Fund-raising events are more common in some countries than others, with U.S. groups particularly likely to go this route. Celebrities are often used to draw in potential givers or investors, and few celebrities have been more successful than Bob Geldof in garnering media coverage and getting through to ordinary people. Although he may not like it, Geldof is now much better known for his work on campaigns like Band Aid, Live Aid, Live 8, and Make Poverty History than he is for his time as front man for the Boomtown Rats, which is funny because the Rats’ first single was “Lookin’ After Number One.”

Eventually, the Band Aid brand proved highly versatile. In 2005, for example, Geldof announced the Live 8 project to raise awareness of issues that burden Africa—among them, government debt, trade barriers, and HIV/AIDS. He organized concerts in London, Paris, Berlin, Philadelphia, and Barrie, Ontario. In the run-up to the G8 Gleneagles summit, he fronted British Prime Minister Tony Blair’s Commission for Africa, emphasizing public-private partnerships, free trade, and foreign direct investment. Although Gleneagles was praised as “the greatest summit for Africa ever” by the UN secretary-general, many aid agencies were disappointed. Indeed, figures released in 2007 showed that aid given to the poorest countries by the richest fell by $5.5 billion from the previous year.¹² But Geldof kept up the pressure, criticizing the world’s richest countries for falling short on their pledges.¹³

Another celebrity from the music industry, Peter Gabriel, was the driving force behind Witness, the human rights organization led by Gillian Caldwell. Gabriel was able to galvanize his counterparts, including Emmylou Harris and Chic, to raise money for and promote the venture. In Argentina, in a similar vein, Fútbol de las Estrellas (Soccer of the Stars) exploits the appeal of movie stars, singers, and soccer celebrities to attract media interest and win public support for a cultural center for disabled youngsters.

A different spin on the same principle works well for Linda Rottenberg, cofounder and CEO of Endeavor, an enterprising nonprofit that fosters business entrepreneurship in emerging markets. Rottenberg exploits the corporate and multilateral version of celebrity fund-raising. She has had little difficulty securing financial commitments from leading business entrepreneurs in Chile, Argentina, Brazil, Mexico, Uruguay, South Africa, Colombia, and Turkey— where Endeavor has set up country “spokes” that search for and select leading entrepreneurs.

U.S. funders have been less interested in supporting Endeavor’s New York hub because the benefits of the organization’s work accrue directly outside the United States. Still, Endeavor’s work has proved highly appealing to corporate and multilateral backers that recognize the critical need for job-creating entrepreneurial ventures in emerging economies. So Rottenberg has built Endeavor’s annual New York–based gala around honoring such people, including James Wolfensohn, former president of the World Bank; Sir Howard Stringer, chairman and CEO of Sony; and Jerry Wang and Terry Sernel of Yahoo! This raises about $1 million a year for Endeavor’s global operations—and helps engage the corporate and multinational community.

In Mexico, meanwhile, social entrepreneur José Ignacio Avalos has been particularly ingenious in devising strategies to raise cash from the Mexican public for one of his nonprofit enterprises—Un Kilo de Ayuda (A Kilo of Help). He devised money cards that sell for less than a dollar. Each has a bar code that registers a donation for Un Kilo de Ayuda whenever the cardholder makes a purchase at a participating organization. The card’s acceptance at more than twenty-five thousand points of sale across Mexico gives Un Kilo de Ayuda three times more coverage than other initiatives, including those run by Unicef.

Attracting Help in Kind

Although most entrepreneurs think in terms of raising financial support, in-kind resources often make up a major slice of the support nonprofit ventures end up attracting. Many donors—particularly businesses—find it easier to give in-kind support. Such help ranges from donations of surplus products (including books, carpets, and computers), sweat equity (in the form of volunteer labor), and pro bono services (such as the support many social entrepreneurs receive from such consultancies as Bain, The Boston Consulting Group, McKinsey, Monitor, and PricewaterhouseCoopers). In-kind donations came in sixth in our survey, at 31 percent, although volunteer effort and sweat equity were key resources for many. For example, Habitat for Humanity can build affordable houses for low-income families not just because the homes sell at cost and the mortgages are interest free but also because the construction involves extensive work from volunteers and the prospective homeowners.¹⁴

Some nonprofit social enterprises create revenues by taking in goods or equipment that others no longer have a use for, reconditioning them, and then making them available or selling them. In New York, Dress for Success and Career Gear collect suits and other business attire to help disadvantaged people dress for job interviews. The same approach is used by many other social entrepreneurs, notably those who ask companies for surplus IT equipment. The Committee for the Democratization of Information Technology uses donated equipment in some nine hundred computer schools in the slums of Brazil and other Latin American countries.

Increasingly, highly qualified professionals are interested in getting involved, offering their time and expertise. Some do so via their companies, which support and even encourage this work; others do so on their own initiative. Many social enterprises are becoming more and more discriminating in picking even expert volunteers, recognizing the critical importance of the quality of the support and services provided. In the Czech Republic, for example, a social enterprise called Bílý Kruh Bezpeči offers counseling and aftercare to victims of violent crime. To ensure its services are of high quality, the organization specifically aims to pull in well-trained psychologists and lawyers.

McKinsey’s support for Ashoka—whose founder, Bill Drayton, spent seven years at the firm—is higher profile. In fact, it was McKinsey’s values that drew Drayton to the firm in the first place. “I came to McKinsey because I felt it was an institution that had as its goal causing real and important change to take place,” he has recalled. “Causing significant change is different than just being brilliant.”¹⁵ This pairing of values and a desire for positive change resulted in the Ashoka-McKinsey Center for Social Entrepreneurship, established in Brazil in 1996, following a pro bono study for Ashoka. In this venture Ashoka identifies potential industry-defining leaders in the social sector with powerful strategies and strong organizations. McKinsey then helps these leaders build strategic and management skills, with the partnership now extending to fourteen countries.

Appealing to Angels and Foundations

Foundations, as already mentioned, came in first place (74 percent) for entrepreneurs working in the nonprofit field. Despite some frustrations, those relying on foundations—in whole or in part—see them as a dependable funding source. One advantage in countries like the United States was articulated by Jim Fruchterman, president of Benetech in the SustainAbility survey: “There are the advantages of size in the case of foundations and very rich people. An amount of effort is likely to land $250,000.”¹⁶

Some respondents mentioned that they were trying to change their focus from foundations to high-net-worth individuals—partly because they felt this was an untapped source, partly because they expected that such funding might come with fewer conditions. Successfully cultivating such relationships may take a good deal of effort, but they provide the bedrock on which organizations can build other fund-raising. “Over sixteen years, we have built up a donor base of foundation and individual funders who are very loyal to our organization and give year after year,” said the Nepalese Youth Opportunity Foundation in the SustainAbility survey.

The tide has been moving in angel investors’ favor. “Giving away money has never been so fashionable among the rich and famous,” Matthew Bishop observed in the Economist.¹⁷ Certainly, 2006, when his article appeared, will be remembered by some as the year when the second-richest man in the world (Warren Buffett) gave away his fortune to the richest (Bill Gates)—solely to expand the latter’s philanthropic capacity. It is not an accident that both Buffett and Gates are American. The United States has long dominated the field of philanthropy. In 2004, for example, charitable giving rose by 5 percent to a record $249 billion, representing over 2 percent of GDP, according to the Giving USA Foundation.¹⁸ Both in absolute terms and as a proportion of GDP, that money was more than any other industrialized country gave to charity.

History and culture are among the reasons why the country leads the world in philanthropic giving. People like Carnegie, Rockefeller, and Ford established a culture of “giving back,” a guilt-laden expression, suggesting the need to atone for the “crime” of having amassed vast wealth. Some of that guilt may well have been warranted, given that much of the wealth came at the expense of individuals, society, and the environment. Whatever the motivation, the United States has long benefited from setting well-defined rules and regulations to facilitate and encourage its population to contribute to charity. Those incentives include substantial tax exemptions, both for those who carry out the charitable work under 501(c)(3) status and for the philanthropists who contribute to such organizations.

Over time, other leading countries have adopted similar incentives. As a result, those looking for business angels know that they now come in many forms—including independently wealthy people, those who run independent foundations, and the super-philanthropists. From Bill and Melinda Gates to the founders of companies like eBay and Google, a new wave of wealthy people are bankrolling social and environmental entrepreneurs. There are thought to be around 600 billionaires worldwide, with a small but growing handful plunging into the field of venture philanthropy.¹⁹

Billionaire George Soros, who emerged early in the field, describes the network of organizations he finances as “a cross between a foundation and a movement.”²⁰ As the Financial Times noted, that movement “has subsidized ministers’ salaries in Georgia after the Rose Revolution, saved scientists in the former Soviet Union from starvation and seeks to promote government transparency, human rights and a free press.”²¹ The initiatives undertaken by such people have profound longer-term implications not only for the world’s poor and those fighting such problems as disease, corruption, and climate change but also for mainstream business and financial markets. Often, people like Soros have either made their money elsewhere or inherited it and, as a result, are less concerned about immediate financial returns than mainstream investors. But they are not naive—some also have an eye on the longer-term prospects of profitability once new markets are established.

Around the same time that Soros was getting into his stride, billionaire Swiss entrepreneur and industrialist Stephan Schmidheiny was founding Avina.²² Having worked for decades with big companies, Schmidheiny became interested in entrepreneurial solutions to the world’s great problems. He explained:

For me, a good entrepreneur is someone who consistently develops [his or her] business with a clear vision and an equally clear mission, works very hard, and has a special ability to efficiently administer the capital, the resources and the technology available. An entrepreneur is someone capable of persuading others to adopt [his or her] own vision, of motivating them to achieve [his or her] goals. However, the entrepreneur I now imagined would not have to build huge companies but rather bring about positive change that would afford as many people as possible the opportunity to lead decent, dignified and productive lives and to change the regional economy situation.²³

In a moment of serendipity, Schmidheiny stumbled across Bill Drayton and Ashoka when reading a magazine during a transatlantic flight. He soon built a partnership with Ashoka, using his capital to help fund its programs, particularly those in Latin America. Schmidheiny recalled: “The success of Ashoka’s entrepreneurs proved to me that heads of government and captains of industry— those who should actually be responsible for improving their societies—seldom bring about significant changes. The secret lies in searching for individuals with leadership abilities, not only among the so-called elites, but in all sectors of society.”²⁴

Some social entrepreneurs have been successful in winning one or more of the growing number of corporate foundation awards. Barefoot College, for example, won the $1 million Alcan Prize for Sustainability in 2006. Developed in partnership with the International Business Leaders Forum, the prize is awarded to “any notfor-profit, civil society or nongovernmental organization based anywhere in the world that is demonstrating a comprehensive approach to addressing, achieving and further advancing economic, environmental and/or social sustainability.”²⁵

Tapping the Government

Many social entrepreneurs provide goods and services to people that conventional government agencies struggle to reach, so it is no surprise that a fair number seek public sector finance and support. In fact, turning to the government for funding was favored by a significant proportion of entrepreneurs, coming in fourth place at 43 percent. Even for-profit entrepreneurs saw public sector agencies as a key funding source. “They represent the shortest paths to the level of funding we require,” said a representative from one solar photovoltaics company.

While some using government funding noted upsides—such as collaborating with leading scientists at government laboratories, public relations benefits, and access to government procurement sources—others were frustrated by the significant constraints associated with government funding and its prescriptive nature. Because government agencies remain accountable to the general public, they are often much less able to offer the kind of flexible funding guidelines that most social or environmental ventures need.

Many social enterprises do not invest the same effort in developing close relationships with governments as they do with businesses, but there are a growing number of them that do. One enterprise that illustrates the possibilities is the Childline India Foundation (CIF), which was started to provide a free telephone helpline to the deprived street children of Bombay. CIF persuaded the government that it could provide services that the government should have been supplying—and ended up getting the relevant ministry’s backing for a bold expansion plan to cover over forty Indian cities.

Another entrepreneur who has tapped government funding is Tim Smit, the driving force behind the United Kingdom’s extraordinary Eden Project, which welcomed its eight-millionth visitor in 2006.²⁶ A giant ecological theme park, housed in a series of domes that mushroom out of the floor of an old clay quarry in Cornwall, Eden employs five hundred people and is estimated to have attracted over $1.2 billion of spending to the county, the poorest in the country. While the $230 million project has already taken $170 million in public funding to get off the ground, it could considerably open out its funding by accepting corporate sponsorship of Eden’s major features. Smit has been wary of taking this route, however. The big phone companies have been itching to get involved, he says, “but we would lose something if we accepted their dough.”²⁷

Making Sales and Charging Fees

The Eden Project is already generating significant income through sales, entry fees, and membership subscriptions, even if the funds raised are insufficient to cover total costs. Earning income marks a clear watershed as entrepreneurs and their organizations move toward the for-profit model. Indeed, sales and fees are critical steps toward financial sustainability because they help nonprofit and forprofit ventures alike move from “fossil” sources of money (in the sense that wealth is laid down in dense, energy-rich seams in foundations) to renewable sources.

Over half (57 percent) of respondents preferred to draw some of their revenues from sales and fees, which came in second in our survey. One respondent, Jim Fruchterman of Benetech, noted, “Earned income is a mark of the value of your product—and provides feedback from your customers.” Earning income is easier in markets that are working (to some degree, at least) than where there are clear market failures. Some of those surveyed saw their sector as much less likely to generate sales and fees. “Education is an area where there is a lower expectation of profitability,” as the Fascinating Learning Factory put it.

A few respondents mentioned a tension at the heart of social entrepreneurship: on the one hand, there is a desire to give away information for free; on the other, there is a need to earn revenue to be sustainable. “We’ve not yet worked out a way to earn income from selling our knowledge,” said EarthLink in the SustainAbility survey. “In the recent book The Spider and the Starfish, the role of an intermediary, or catalyst, was described. Such people have a difficult time earning income from ideas they give away to anyone who will listen. Our aim is to create a hybrid, where we draw people from around the world to our Web site because the causes we address are important to individuals, foundations, and people in industry, and we earn income by the types of services and tools we use to support the learning and interaction of these people.”

When serving local populations in poor countries, social entrepreneurs must tailor their offerings to the needs and pockets of the disadvantaged. So, for example, Bangladesh’s Waste Concern is fighting the mountains of garbage in Dhaka by collecting and recycling organic waste. Operating in low-income neighborhoods and slums, the organization has demonstrated that the approach works and creates jobs. In the process, it has discovered that people in slum areas are willing to pay for the waste collection service.²⁸ Better still, Waste Concern sells the compost resulting from the recycling processes to fertilizer companies. Continuing this virtuous cycle, these companies then make an organic, environment-friendly fertilizer and sell that to farmers at a very low cost.

Some social entrepreneurs use a differential pricing model for their products and services, with the better-off charged more and the less well-off charged significantly less or, in some cases, nothing. Consider David Green of Project Impact, who has been successful in getting low-cost health products, including cataract implant lenses and surgical sutures, to millions of poor people in developing countries. He is also now focusing on creating local capacity to manufacture and sell affordable hearing aids. To make this work, he has introduced a pricing system based on the customer’s ability to pay. The poorest customers receive products for free, a service made possible by charging better-off customers more than the cost of the product—but still significantly less than they would pay for competing products.

Membership fees are another route to money. This approach is adopted by India’s Self-Employed Women’s Association (SEWA), a trade union for women working as vendors, as artisans, as salt workers, or otherwise on their own account. SEWA fights for these women’s rights and offers services ranging from health care to microcredit and insurance. It asks for a small membership fee and has over half a million paying members.

A developed-world counterpart, meanwhile, is the Freelancers Union started by Working Today, founded by Sara Horowitz. The Freelancers Union represents the needs and concerns of America’s growing independent workforce through advocacy, information, and services. These independent, self-employed workers—free-lancers, consultants, independent contractors, temps, part-timers, and contingent employees—currently make up about 30 percent of the U.S. workforce. To make sure that independent workers have access to health insurance and other benefits, Working Today has built relationships with professional associations, membership-and community-based organizations, unions, and companies. That way, the organization is able to reach large numbers of independent workers, giving them access to services and essential products previously available only to the traditional workforce of full-time, long-term employees.

Franchising

Franchising seemed to be somewhat outside the mainstream for the entrepreneurs in our survey, coming in eighth place (15 percent), but it is at least on the map. An example of a social enterprise that may franchise is Amsterdam-based Aflatoun, also known as Child Savings International, which has been considering franchising its Aflatoun brand to banks and other financial institutions. The organization’s founder and chair, Indian serial social entrepreneur Jeroo Billimoria, is pursuing a dual-level franchise model where one level addresses nonprofits and the other for-profits. On the forprofit side, where the aim is to partner with banks, she is setting up Aflatoun Inc., which will own the brand and open up the option of raising money through capital markets.

Many activist organizations and other nonprofits have evolved versions of franchising, including the World Wildlife Fund (or World Wide Fund for Nature, as it is known outside North America), human rights campaigners Amnesty International, anticorruption proponents Transparency International, and Habitat for Humanity. And there is a growing interest in experimentation. Jean Horstman, CEO of InnerCity Entrepreneurs, told us, “We are in the process of testing out licensing as the way to scale our impact quickly while growing our organization at a reasonable pace. We are exploring creating branches in the state of Massachusetts to learn to scale at the state level, while licensing our curriculum and support services nationally.”²⁹

Franchising is significantly more likely to work on the for-profit side, however, and has been adopted on a larger scale by for-profit social entrepreneurs. Most of those entrepreneurs founded their companies in part to drive a social mission—and many have managed to remain true to that mission, despite major challenges along the way. So what gets such people into the world of business and, in many cases, franchising? The stories differ, but they share common threads. Orb Energy, for example, is franchising to scale its operations in India, preferring this route rather than raising additional capital. The franchise branches enable the organization to get closer to customers, while establishing a common look and feel and affording greater economies of scale. A key challenge in this approach, as CEO Damian Miller told us, is ensuring that franchisees do not sacrifice quality for revenues.

Another example is the Body Shop. The company’s DNA was unusual from the outset and is summarized in its mission statement: “To dedicate our business to the pursuit of social and environmental change.” The challenges that the Body Shop’s late founder, Anita Roddick, and her husband and business partner, Gordon, faced were legion, as the company’s sheer size today indicates. The Body Shop became “a multi-local business with [2,100 in 2007] stores serving over 77 million customers in 51 different markets in 25 different languages and across 12 time zones.”³⁰ Roddick herself commented, “I haven’t a clue how we got there!” A key part of the answer, however, is franchising.

Critics considered Anita Roddick unreasonable, even in late middle age. But entrepreneurs who, like her, take the for-profit route have one satisfaction denied their unreasonable counterparts working in the not-for-profit sector: they can cash in some of their shares—or sell out entirely. A growing number of social entrepreneurs have been traveling that route, which we examine toward the end of this chapter. The Roddicks publicly regretted their own IPO because it threatened to turn the Body Shop into a business like any other. They eventually sold out to L’Oréal, which was somewhat ironic given that Nestlé—one of the world’s most boycotted firms—had a major stake in L’Oréal.

According to L’Oréal’s chairman and chief executive, the business would remain independent, and its shares would no longer be listed. However, ratings agencies that track public perceptions of brands and company reputations were soon reporting that the Body Shop’s favorability ratings had taken a significant knock. Roddick was rather more upbeat, however. “When you have the biggest cosmetics firm saying, ‘We want you to teach us how to support small farms and women’s cooperatives,’ it is a very exciting moment.”³¹ She also noted that L’Oréal “could work with our Nicaraguan farmers who sell us 70 tons of sesame oil. How many tons could they use, a thousand? I mean, it’s mind-blowing in terms of poverty eradication.”³² The proof, as her fellow Brits would put it, will be in the pudding.

Creating Partnerships and Joint Ventures

To scale up, most entrepreneurs must form partnerships or joint ventures—which makes it slightly surprising that less than a third (30 percent) of our respondents mentioned joint ventures as significant to their activities or plans. Those taking this route saw many potential nonfinancial benefits. Such partnerships, as noted on the Web site for Landmines Blow!, help both parties “leverage their assets, such as their expertise and client base, with other advantages including sharing knowledge, [cultivating] new relationships, developing a continuum of care, working successfully in different cultural settings, and [gaining] approval from the United States Federal Government and the United Nations.”³³

Those thinking about this option are concerned about the implications. “We have had a significant increase in companies wanting to sponsor us,” said one entrepreneur, who asked to remain anonymous. “The challenge is to remain selective and not to sell out, to maintain the purity of our program.” Many respondents wondered how they could learn to vet potential partners. Despite some social entrepreneurs’ concerns about power imbalances, most of them often see mainstream businesses as the most interesting partners for a number of reasons. One is the sheer scale of the potential resources available in the corporate sector and the geographic reach and political influence of large companies. Another reason is entrepreneurs’ growing appetite for understanding how to develop social and environmental initiatives on a more businesslike footing.

All over the world, companies are partnering with social entrepreneurs. Take Timberland, the maker of outdoor gear, which is traded on the New York Stock Exchange but is still owned by the founding family. Jeff Swartz, grandson of founder Nathan Swartz, took over as CEO in 1998 and recalls the moment when, some years earlier, he began to see the light. In 1991, he recalls, he was reading bible passages that his wife had given him. (As it happened, this was also the time that he had his first experience with City Year, in Boston.) “I thought: ‘Oh boy, that’s the text coming alive,’ ” he explains. “I felt the world moving under my feet, and I still do.”³⁴ When he had his Road to Damascus conversion, Swartz not only part-owned Timberland but was also on track to take over as CEO. To some degree, the company was his to steer as he saw fit. Most companies and CEOs find themselves in different situations; in other cases, the partnerships involve a much lower degree of commitment by the mainstream company, even though the outcomes may be crucial for a given social enterprise.

The academic community’s interest in partnerships and joint ventures is also growing. Jane Nelson, director of the corporate social responsibility initiative at Harvard University’s Kennedy School of Government, has been one leading pioneer, exploring what succeeds—and what doesn’t—when corporations join forces with the world of social entrepreneurship. In her work with Beth Jenkins, a senior consultant with Booz Allen Hamilton, Nelson has recommended that the business world expose more corporate leaders to social entrepreneurs through project visits, experiential learning, international forums, and integrating corporate responsibility and social entrepreneurship elements in mainstream business education.³⁵ Whether on the financial, management, or legal fronts, the need for brokering services seems likely to grow. We also need more companies that are willing to engage and invest in social and environmental entrepreneurs as part of their strategy, not just as part of their citizenship programs.

Pursuing Venture Capital

Venture capital ranked fairly high, in fifth place, with more than a third (39 percent) of respondents saying they plan to draw on some venture funding. This response is striking. It may be affected by the number of cleantech entrepreneurs in our sample or the fact that some social entrepreneurs fail to understand the nature of venture capital funding (specifically, venture capitalists typically expect high rates of return). Still, as entrepreneurs of every stripe drive toward mainstream markets, the stakes—and the prospects for longer-term profitability—will likely grow. As a result, venture capitalists, private equity funds, and other leading-edge financiers may become more interested.

Take one of the world’s top venture capital firms: Kleiner Perkins Caufield & Byers (KPCB). As early investors in start-up companies like Amazon, Google, and Intuit, KPCB is widely seen as having a sensitive collective nose for the next big thing. It now spotlights such market drivers as looming energy-security issues, the growth of megacities, and the risk of abrupt climate change. As a result, it is emerging as a major player in the cleantech space.

Although the involvement of venture capitalists and investment bankers is necessary, there are clear risks for those who want to ensure that their business retains its social or environmental mission. To date, entrepreneurs who want to raise venture funding and to preserve their values have had relatively few choices, but they have had some.

Consider Triodos, Europe’s leading ethical bank, based in the Netherlands. The bank was founded by four entrepreneurial individuals who came together in 1968 to think about how money could be managed in a socially conscious way. Triodos has tackled market opportunities neglected by other financial institutions and helped create new markets, including stimulating and supporting the development of alternative energy as a bankable sector. And Triodos has spread to the United Kingdom, Germany, Belgium, and Spain, focusing on companies and organizations that contribute to a better environment or generate social or cultural value added. Triodos manages venture capital funds and invests in social and environmental enterprises across Europe, targeting key sectors such as renewable energy, organic food, fair trade, clean technologies, culture, and integrated health. Since 2001, it has raised three venture capital funds totaling some $100 million.

One environmental enterprise Triodos has invested in, alongside the London-based venture capital firm zouk ventures, is the CarbonNeutral Company. Founded in 1990, the company—which helps citizens, business clients, and others offset their carbon emissions—has spanned the spectrum from celebrity-led public fund-raising to venture capital and plans for an IPO. Ask the company’s ex-CEO, Jonathan Shopley, what persuaded the company, once called Future Forests, to take the venture capital route, and he explains that the founders “were building not only a pioneering company but also a whole new low/no-carbon asset class for the economy.”³⁶ He further notes that there was a need to scale fast.

Good venture capitalists, he points out, bring more than just money. “The upsides are clear,” he says. “[Venture capitalists] can bring very powerful disciplines to bear. They provide invaluable counsel on the basis of huge experience. They understand risk and opportunity. And they can help you benchmark what you are doing against a wider field of high-potential businesses.” What about the downsides? “The downside,” he reflects, “is that you can end up having to give away what feels like a disproportionate share of the company in return for capital.” Venture capital can also push entrepreneurs more rapidly than they might like toward an IPO or acquisition. “Venture capitalists need an exit strategy,” Shopley concludes, “a way of realizing a return. This realization of value comes either via an IPO or—alternatively, particularly when a market is consolidating—via a trade sale to, or merger with, a bigger player.” A sale or merger may lead to the next stage: an IPO.

Selling Out—or Going Public

People like Bill Drayton of Ashoka and Muhammad Yunus of the Grameen Group have called for social stock exchanges because the current setup is so poorly adapted for social entrepreneurs. And that showed in our survey results, where the option of going public appeared at the bottom of the heap (2 percent). The relatively slow progress of initiatives like the Global Exchange for Social Investment hasn’t helped. As John Wood, founder and CEO of Room to Read, put it in the SustainAbility survey, “The capital markets for NGOs are blatantly inefficient. There is no mechanism that has the efficiency of the private sector [e.g., the New York Stock Exchange, Nasdaq, private placements, or venture capital] when it comes to raising large amounts of capital—especially unrestricted funding. The NGO world needs to have every large foundation seriously study—and, hopefully, emulate—this model.” What is true for NGOs is also true for most model 1 and 2 social enterprises.

Once proof of concept is achieved, most entrepreneurs are eager to grow and replicate. Unfortunately, this is where too many come to a screeching halt or are forced to endure a painfully slow take-off. Why? Despite a recent and unprecedented explosion of efforts to evolve the infrastructure needed to accelerate the flow of capital, considerably more capital is required to expand and strengthen replicable, innovative, and entrepreneurial organizations with social missions.

Part of the reason is because many of these entities, particularly if they’re model 2 organizations, operate in some sort of limbo. They look too much like business for the more traditional philanthropically minded crowd, but when they turn to the business sector to establish partnerships, they are often referred to the corporate social responsibility (CSR) department. Most philanthropists, like most CSR programs, do not yet have the mind-sets (or, in most cases, the capital) needed to help with scaling and replication, at least where NGOs are concerned. John Wood said in the Sustain-Ability survey, “Some organizations tell us that we have gotten big, ‘so you no longer need us.’ ” This reaction, he noted, “is very different from the private sector, where success attracts capital. Why should we be penalized for being successful, and why should any investor want an organization they have supported in its early years to remain small?”³⁷

Certainly, a growing number of organizations are committed to funding social enterprise. In fact, Ashoka, Echoing Green, New Profit Inc., the Peninsula Community Foundation’s Center for Venture Philanthropy, the Skoll Foundation, Social Venture Partners, UnLtd, and Venture Philanthropy Partners are all investing more than $1 million a year—in some cases, substantially more—in nonprofits. While these efforts are welcome, however, their collective effort comes to less than $100 million a year, a relative drop in the bucket.

To put very rough numbers on the three areas of social enterprise, cleantech, and philanthropy, we estimated in 2007 that less than $200 million was going into social enterprise from dedicated foundations, worldwide, compared with over $2 billion into clean-tech in the United States and the European Union and well over $200 billion into general philanthropy in the United States alone.

Overall, it is clear that any country that wants to build strong clusters of social enterprise must make much larger amounts of capital available, as well as other forms of financial and nonfinancial support. So if current capital markets don’t work, an obvious— if challenging—route is to set up your own. That was the idea behind the Global Exchange for Social Investment. Launched with much fanfare during the 2002 annual meeting of the World Economic Forum, this effort to create a global social capital market had a fairly bumpy start.³⁸ Yet, as with pretty much all entrepreneurial endeavors, early setbacks can become future strengths if those at the helm embrace feedback and respond accordingly.

Another fledgling initiative in this area, the Social Stock Exchange (SSE), is based in Brazil and was launched by the Bolsa de Valores de São Paulo (aka Bovespa, the São Paulo Stock Exchange). Bovespa launched the SSE in 2003 to bring together nonprofit organizations with Bovespa investors who wished to support social efforts. As SSE creator Celso Grecco puts it, the donor is making a “social profit.” Social organizations can submit their initiatives at any time. A team of experts reviews all the entries and recommends the most qualified to the SSE board. Once a proposal is approved, Bovespa and its 120 brokerage firms all over Brazil post the portfolio of initiatives to investors with the aim to sell these “social shares.” All funds raised by the SSE go directly to the organization, without commissions or fees of any kind. The SSE promotes a new kind of ROI, a “return on inclusion.” It seeks to create a new identity for NGOs, not as nonprofit organizations, but as “social profit organizations.”

This initiative has generated considerable interest. In South Africa the experiment is being replicated through JSE Securities Exchange South Africa, which launched the South African Social Investment Exchange in June 2006. The exchange opened its initial offering with fifteen selected “social profit” projects. As in the SSE scheme, investors can purchase shares online and follow the progress of their investments via the Internet.

The challenge is much greater than such early experiments might suggest, however. As Muhammad Yunus has put it: “To enable a social stock-exchange to perform properly, we will need to create rating agencies, standardization of terminology, definitions, impact measurement tools, reporting formats, and new financial publications, such as The Social Wall Street Journal.”³⁹ So what makes mobilizing capital for proven social entrepreneurs so difficult? Part of the answer lies in a finding from a study by the law firm Linklaters with the Schwab Foundation: in no country has a coherent, specific legal model been developed for establishing social enterprises.⁴⁰ At the root of this impasse lies the tendency across all countries and regions to separate out financial and social value. Currently, one segment of society is trying to maximize profits without much concern for the impact on the well-being of society as a whole, and another segment tries to deal with the fallout. Overall, the system is not working. It is time to change the rules of the game.