List of Figures and Tables
2 The phenomenon of Social Entrepreneurship
2.1 The emergence of Social Entrepreneurship
2.2 Actors in the emerging field of Social Entrepreneurship
3 The definition and process of Social Entrepreneurship
3.1 Definition of entrepreneurship
3.2 Social Entrepreneurship vs. Business Entrepreneurship: Analyzing the process and defining the difference
3.3 Entrepreneurial traits in the process of Social Entrepreneurship
3.4 The assessment of value creation
4 The case of two socially entrepreneurial ventures
4.1 Grameen Bank
4.2 Associaçâo Saúde Criança Renascer
5 Philanthropy - a source of resource for Social Entrepreneurship
5.1 The phenomenon of philanthropy
5.2 Changes in the structure of philanthropic practice
6 Venture Philanthropy - the other side of Social Entrepreneurship
6.1 Definition of Venture Philanthropy
6.2 The case of two Venture Philanthropy organizations
6.2.1 Ashoka - Innovators for the Public
6.2.2 Echoing Green
6.3 The relation between Venture Philanthropy and Social Entrepreneurship
7 Social Stock Exchange - connecting philanthropists and social entrepreneurs
7.1 The need for a coordinating mechanism in the market for social financing
7.2 The Social Stock Exchange in Brazil
7.3 Perspectives for the social sector capital market
8 Conclusion and Perspectives
Bibliography and internet sources
The phenomenon of Social Entrepreneurship refers to the application of an entrepreneurial process in order to achieve social goals. This adoption of traditional business principles has captured the fascination of social change activists around the world, and yet, a lack of understanding its characteristics such as value proposition, opportunity, innovation and the creation of value can be observed. At the same time, similar changes in the philanthropic sector are taking place, with the phenomenon of Venture Philanthropy pioneering a new model of financing social change by translating the conventional venture capital approach from the business world to the social sphere, turning philanthropists into social investors. These complementing phenomena show a new relation between the financing and executing side in the social sector and challenge traditional categories such as non-profit vs. for-profit by choosing hybrid organizational forms. As these changes advance, efforts towards the creation of a social capital market that build on these two phenomena can be observed in order to restructure the current system of financing social change, applying principles from the financial markets. These changes challenge the traditional dichotomy of social and economic value that defines our current understanding of capitalism.
Keywords: social entrepreneurship, philanthropy, social sector capital market
List of Figures
Figure 1 : Organizational forms of Social Entrepreneurship with regards to its funding dimensions
Figure 2: Process of a socially entrepreneurial venture
Figure 3: Impact value chain
Figure 4: Associaçâo Saúde Criança Renascefs approach
Figure 5: Comparison of the child’s health at the beginning of ASCR’s support and in the project discharge
Figure 6: Comparison of the family income before and after ASCR’s intervention
Figure 7: Organizational forms of Venture Philanthropy
Figure 8: Fund-raising performance of the Brazilian Social Stock Exchange
illustration not visible in this excerpt
The Norwegian Nobel Committee has decided to award the Nobel Peace Prize for 2006, divided into two equal parts, to Muhammad Yunus and Grameen Bank for their efforts to create economic and social development from below. Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty. [...] Yunus's long-term vision is to eliminate poverty in the world. That vision can not be realised by means of micro-credit alone. But Muhammad Yunus and Grameen Bank have shown that, in the continuing efforts to achieve it, micro-credit must play major part. (The Nobel Peace Prize 2006 Press release, emphasis in original text)
When delivering his Nobel Lecture on 10 December 2006, Muhammad Yunus seized the moment of public attention and exposed his vision of how 21st century’s global challenges are to be faced. His approach is the topic of this thesis: Social Entrepreneurship (SE). Because of its actuality, his speech will serve as an introduction for this paper and several aspects of it will be broached again below:
I am in favour of strengthening the freedom of the market. At the same time, I am very unhappy about the conceptual restrictions imposed on the players in the market. This originates from the assumption that entrepreneurs are onedimensional human beings, who are dedicated to one mission in their business lives to maximize profit. This interpretation of capitalism insulates the entrepreneurs from all political, emotional, social, spiritual, environmental dimensions of their lives.
[...] Many of the world's problems exist because of this restriction on the players of free market. The world has not resolved the problem of crushing poverty that half of its population suffers. [...]
By defining "entrepreneur" in a broader way we can change the character of capitalism radically, and solve many of the unresolved social and economic problems within the scope of free market. Let us suppose an entrepreneur, instead of having a single source of motivation (such as, maximizing profit), now has two sources of motivation, which are mutually exclusive, but equally compelling a) maximization of profit and b) doing good to people and the world. Each type of motivation will lead to a separate kind of business. Let us call the first type of business a profit-maximizing business, and the second type of business a social business. (Yunus 2006)
Bangladeshi economist Muhammad Yunus himself is considered a representative of this other type of entrepreneur, mostly referred to as 'social entrepreneur'. Various organizations in the emerging field of SE refer to him as an example of how SE is paving a new road in order to find solutions to current social problems. In agreement with Yunus, Professor Johanna Mair (2005, p. 2), a leading scholar in the field of SE from the University of Navarra, argues that [...] social entrepreneurship, as a practice and a field for scholarly investigation, provides a unique opportunity to challenge, question, and rethink concepts and assumptions from different fields of management and business research.
However, it is crucial to mention that the phenomenon of SE is not only gaining increasing attention in the academic sphere; an overall exponential growth in public attention of SE can be observed over the past years as an internet search (www.google.com) shows: in June 2005 the term ‘social entrepreneurship’ produced 158,000 hits (Seelos and Mair 2005). In March 2007 this number had already grown to 1,100,000 hits, proving the public interest in the phenomenon.
This rise in attention comes from different fields such as politics, business, academia and civil society. This is due to the appealing approach implicit in the term SE: it refers to the application of an entrepreneurial approach in order to create social value. As conventional business entrepreneurship has been shaping with great success today's way of thinking and acting in the context of business and economic ventures, this expectation is translated by advocates of SE into the social sphere, regarding it as a promising approach to address global discomforts of the 21st century.
Therefore, people are attracted to social entrepreneurs for many of the same reasons that they find business entrepreneurs so compelling. Outstanding 20th century entrepreneurs such as Henry Ford, the founder of Ford Motor Company and father of the assembly line, or Bill Gates, the founder of Microsoft who introduced an easy accessible operating system for computers have influenced today’s world in an unexpected way. They came up with revolutionary ideas and against all odds succeeded at creating new products and services that dramatically improved people’s lives.
Globalization, capitalism, and entrepreneurship dominate the world today and might have generated as much wealth as problems, many of them remaining unsolved. Far too few people benefit from the grapes of these developments: an estimated 2.6 billion people, almost half of the population of the developing world, were still living on less than $US 2 a day in 2004 (World Bank 2007) and people are disappointed by the disability of large-scale government programs to find solutions to social challenges. Consequently, interest in and awareness of SE have been continuously rising over the last 10 years. In the spring 2007 issue of Stanford Social Innovation Review, Martin and Osberg (2007, p. 30) explained the particular attraction of SE as follows:
The interest in social entrepreneurship transcends the phenomenon of popularity and fascination with people. Social entrepreneurship signals the imperative to drive social change, and it is that potential payoff, with its lasting, transformational benefit to society, that sets the field and its practitioners apart.
Because of its appealing concept, “SE has many champions and a notable lack of detractors” (Cho 2006, p. 34), resulting in a blurred general understanding of what SE is and what it hopes to achieve. Its advocates agree on its potential as a promising way to regenerate society in terms of finding effective solutions to address problems related to poverty, health, education and environment. As a result, SE is currently used as an umbrella term to describe the people, the ventures and the activities that create substantial social value by going new ways (Perrini 2006).
And yet, little research has been carried out about this phenomenon in order to provide a deeper understanding of those people whose motivation is according to Yunus, "doing good to people and the world". The phenomenon of SE only began to be theorized and discussed in the 1990s and no consensus has been reached yet on where the boundaries of this field are to be drawn or even if there should be boundaries. Consequently, when it comes to details about what is and what is not SE, no clear line can be observed; on the contrary, there is a lot of disagreement about this term (Dees 2001).
This leads to the question of what it takes to be considered socially entrepreneurial. What does it comprise and what not? In summary, there is a need to understand the phenomenon of SE as such and define its particularities.
Apparently, SE does not evolve as a separate phenomenon, but interacts with other players in the social sector whose actors are engaged in finding solutions to social problems. The nexus between SE and those actors financing social change is of particular interest. Therefore, this paper chose to analyze the field of philanthropy as a special source of resource for SE that corresponds to the role investors play in the conventional business world, enabling ventures to grow and strengthen by providing them with the necessary capital. The philanthropic landscape is currently experiencing massive changes which have gone more underreported in terms of public attention in comparison to the phenomenon of SE. An internet search in March 2007 of the term ‘venture philanthropy’ that may be considered the ‘other side of SE’ on the financial supply side, produced only 172,000 hits. The term ‘venture philanthropy’ already implies its proximity to the business world where venture capital acts, looking for the best investment opportunities in order to maximize their profit. The relation between these two phenomena is of particular significance as it provides a basis to deepen the understanding of SE and observe tendencies concerning the future structure of financing social change.
With entrepreneurship entering the social sector and business principles being adopted by philanthropic organizations, the issue of how demand and supply may be linked is receiving increasing attention. The underlying concept is known as the ‘social capital market’, an even newer concept that produced merely 13,000 hits in the same internet search. Yunus (2006) also presented his vision of such a social capital market in his Nobel Lecture:
[...] to connect investors with social businesses, we need to create social stock market where only the shares of social businesses will be traded. An investor will come to this stock-exchange with a clear intention of finding a social business, which has a mission of his liking. Anyone who wants to make money will go to the existing stock-market.
Again, this notion is inspired by the conventional business capital market and the legitimate question is, if the translation of functioning mechanisms from the business world to the social sphere is possible and how its modus operandi might look like.
Analyzing these aspects that can currently be observed with regards to finding sustainable solutions for social challenges, this paper aims to contribute to a better understanding of the phenomenon of SE and its nexus with current changes in philanthropy.
Pursuing this goal, the issue will be approached according to the following structure:
In the following part (The phenomenon of Social Entrepreneurship, p. 5 - 10), after presenting the main factors that contributed to SE’s emergence, the vast field of SE with various supportive actors that influence its development will be outlined, providing an understanding of the context of SE.
In the third part (The definition and process of Social Entrepreneurship, p. 11 - 25), a definition of SE will be derived by analyzing the characteristics of what it takes to be considered entrepreneurial and how SE differs from its counterpart in the business world. These observations will be complemented by looking at individual characteristics that coin the genus entrepreneur. All those findings will be put into a larger process scheme before concluding with an analysis of the current state of how the creation of social value is being measured.
Part four (The case of two socially entrepreneurial ventures, p. 25 - 36) features two examples of SE, illustrating definition and process elaborated in the preceding part and therefore translating it from theory to practice. Due to its actuality and international recognition, the Grameen Bank was chosen as the first case study. The second case study is from a Brazilian social entrepreneur, Dr. Vera Cordeiro, whose pattern-breaking initiative in the area of child health care is considered socially entrepreneurial by various actors in the emerging field of SE.
After this SE centred part, the paper will proceed in the fifth part (Philanthropy - a source of resource for Social Entrepreneurship, p. 36 - 43) with analyzing the above mentioned specific source of resource of SE: philanthropy. After shedding light on the phenomenon of ‘giving’, current changes in the philanthropic sector will be analyzed in order to obtain an accurate understanding of the current state of philanthropy.
The new model of high-engaged philanthropy, Venture Philanthropy (VP), will be explained in the sixth part (Venture Philanthropy - the other side of Social Entrepreneurship, p. 43 - 51) in more detail and two short case studies will illustrate this new approach. The first case study will present the work of a pioneer supportive organization in the field of SE, Ashoka, whereas the second case shows the translation of business principles into the philanthropic sector, Echoing Green. These initiatives will put VP in the context of SE and illustrate why it may be considered the other side of SE.
The seventh part (Social Stock Exchange - connecting philanthropists and social entrepreneurs, p. 52 - 58) will concentrate on the notion of a social stock exchange as a mechanism to connect social entrepreneurs and philanthropists in the larger context of a social sector capital market where supply and demand in financial terms meet. The pioneering initiative of the Brazil stock exchange will be presented in order to analyze the viability of such an approach before drawing conclusions on the future of a social sector capital market.
The final part (Conclusion and Perspectives, p. 58 - 61) will summarize the observations made throughout the paper and draw conclusions of the changes analyzed with regards to the future.
2 Social Entrepreneurship
The term SE came up in the 1960s and 1970s in the literature on social change, but its current widespread use is due to its promotion in the 1980s and 1990s by SE pioneers such as Bill Drayton, the founder of the non-governmental organization (NGO) Ashoka - Innovators for the Public, and British author Charles Leadbeater and his book on ‘The rise of the social entrepreneur’ in 1997. David Bornstein’s publication ‘How to change the world: Social Entrepreneurs and the power of new ideas’ (2004) marked the latest step in this tendency in terms of raising awareness of the phenomenon before Yunus and with him the phenomenon of SE was awarded the Nobel Peace Prize in 2006.
These people have strongly influenced the development of this phenomenon, as they observed changes in the social sector and used the term SE to describe and communicate their observations: entrepreneurial elements are enjoying increasing attention by actors in the social sector, making them more effective and efficient in the effort to finding solutions to social problems.
The next chapter will highlight the context in which SE emerged and present factors that influenced its development before introducing significant actors in the field of SE and elaborating a definition and a process scheme in the following part.
The emergence of SE is embedded in the larger context of changes in the social sector in the past decades. Lester Salamon, the founding director and principal research scientist at the Institute for Policy Studies at Johns Hopkins University (1994 cited in Bhagwati 2004, p. 36) observed a tendency within this sector that he called the “association revolution” with reference to the spread of NGOs:
The upshot [of this “striking upsurge” in “organized voluntary activity and the creation of private, nonprofit, non-governmental organizations”] is a global third sector: a massive array of self-governing private organizations, not dedicated to distributing profits to shareholders or directors, pursuing public purposes outside the formal apparatus of the state.
Despite their magnitude, these changes have been underreported. The explosion of the ‘dotcoms’ gained major public attention, but millions have still not heard about the explosion of ‘dot-orgs’. (Bornstein 2004). Salamon (2003 cited in Nicholls 2006, p. 3) points out the significance of these changes by stating that
[...] the not-for-profit sector generated $1.3 trillion of aggregate expenditures in 1999, accounting for 5.1 per cent of the combined GDPs of the countries in which they operated. [...] with nearly 40 million full-time equivalent workers and close to 200 million volunteers.
These organizations in the social sector grew in number and sophistication and comprise people who care and take action to serve others and cause needed change. In order to cause this change, a variety of different organizations, working with non-profit, for-profit sector, or often hybrid organizational structures, emerged in this social sector. Obviously, not all of these ventures can be defined socially entrepreneurial, but still such data proves that the social sector was experiencing massive changes and SE emerged as a substantial part of it. According to Bornstein (2004), there are and have always been social entrepreneurs. What has changed is the scale and reach of the social impact being generated, as well as the variety of approaches being employed.
The term ‘social’ entrepreneurship was not chosen by accident to describe this phenomenon, as it implies a close relation to conventional entrepreneurship in order to depict the translation of business principles into the social sector. This observation leads to the following question: if SE is regarded as the ‘social face’ of entrepreneurship, why has it only recently begun to develop, whilst its business face has been dominating the economic sector during the last centuries?
As Baumol reports (2002 cited in Drayton 2006, p. 46),
[...] from the time of ancient Rome to 1700 there was zero growth in per capita income in the West. And then, over the next three centuries, it grew, 20,200, and 740 per cent.
According to this study, this dramatic take-off is a result of business becoming entrepreneurial and competitive. A profound change in the architecture of this economic half of society set in motion a compounding of innovation and its spread, whereas the social half of society remained rather stuck until roughly 1980.
The reason for this stagnancy is obvious: there was simply no pressure for the social sector to become structurally entrepreneurial and competitive in a country where the state took care of everything. It was easy to tax the new wealth being created by business to pay for the canals, roads, schools, and welfare systems. In addition, this money flowed through monopoly institutions, which try to avoid competition as it cannot long survive it. This is true for any sector: economic or social. The result was a social sector with poor performance, low repute and self-esteem, miserable salaries, etc. (Drayton 2006).
This was to change with the beginning of the crisis of the welfare state in the advanced economy, an increased competition within the nonprofit sector as a result of the ‘association revolution’, changes in the structures of philanthropic giving (Perrini 2006), and political shifts that relate to the advancement of globalization. The necessary pressure for the social sector to develop and reinvent itself had come up and entrepreneurship discovered its ‘social face’. Due to outstanding examples such as Yunus and his Grameen Bank, social entrepreneurs have also been labelled “new social architects” (Lassiter 1997 cited in Martin 2004), referring to the need of creating new structures in the social sector.
During the 1980s, the welfare state in the developed nations started to face a change in the patterns of supplying public services, as privatization and decentralization substituted traditional structures. In Europe, these changes in public policy were led by Margaret Thatcher as a consequence of a general slowdown in national economic growth rates and high unemployment. But this shift away from the traditional welfare state approach to development and towards a neo-liberal approach with an emphasis on market forces as primary mechanisms for the distribution and redistribution of resources left an increasing number of social needs unfulfilled and a demand for new private providers arose in order to match socially relevant goals (Perrini 2006). This demand helps to understand the background of the above mentioned explosion of ‘dot-orgs’.
This demand for new products and services in the social sector was accompanied by an increased competition within the nonprofit sector, due to changing funding conditions as public grants were cut. A rivalry for scarce resources was the consequence and conventional non-profits were forced to reinvent themselves in order to adapt. Therefore, they started to experiment with business management practices, using tools found in the for-profit sector, such as business planning or economic performance evaluation, to enhance their competitiveness in order to accomplish their work. As a consequence, new funding strategies were elaborated, leading to new hybrid organizational forms that mix elements from the nonprofit and the for-profit sector (Perrini 2006).
This competition for scarce resources permitted philanthropic organizations to become more ambitious in terms of applying performance criteria, strategic thinking, a global scope, transparency and accountability for funding organizations in the social sector (Martin 2004). Nowadays, the philanthropic sector is experiencing a profound change in thinking, as it is no more looking only for ways to address needs; on the contrary, business expectations are translated to the philanthropic sector with donations being regarded as investments. Consequently, there is a tendency that philanthropy seeks to maximize its ‘social’ return on investment. These ambitions and expectations concerning the effective and efficient use of money relate to the emergence of SE as it claims to fulfil these criteria by applying business principles to their work. The relation between a specific philanthropic phenomenon, Venture Philanthropy (VP), and SE will be analyzed in more detail in part three of this paper.
In less developed countries where a welfare system had never been established, fearful governments used to block any effort towards such a change in social structures until the military regimes ended in most regions in the 1980s and the Berlin Wall fell in 1989. From then on, democracy, capitalism and with it entrepreneurship could spread all over the ‘second’ and ‘third’ world. Both the economic and the social sector began to become structurally entrepreneurial and competitive and grew with an unprecedented speed and energy (Robinson 2006).
Globalization with its revolutionary information technology has enormously increased the visibility of inequality and poverty in the world. As Jacqueline Novogratz, CEO of the venture philanthropy organization Acumen Fund explains the consequences of this newly-wired world in a panel speech at the Skoll World Forum on Social Entrepreneurship in March 2007: “for the first time in history, the rich can see how poor the poor really are - and the poor know how poor they are.”
The aggravation of inequality, paired with this explosion of perceived needs, reshape the social sector as well. Most people sense that these unjust conditions and its aggravation are a consequence of an unfair globalization. They search for meaning in traditional business activities and try to apply their entrepreneurial spirit to the social sector. New markets, so- called ‘bottom-of-the-pyramid’ markets, which target the disadvantaged part of the population, are beginning to be exploited (Martin 2004), further blurring traditional sector boundaries.
In summary, SE is a historically contingent phenomenon that is related to the transformation of the social sector in response to political and economic changes and the rise of globalization. The next chapter will present different actors engaged in the emerging field of SE that have influenced current interpretations of SE.
2.2 Actors in the emerging field of Social Entrepreneurship
When observing the different kinds of actors in what currently comprises the area of SE, it is remarkable that they come from all parts of society: business, academia, civil society and politics. This chapter will briefly introduce some exemplary actors from each field, providing a better understanding of their respective engagement in SE.
An increasing number of supportive organizations, which regard SE as a promising approach or even as a panacea to address social challenges, are being founded in order to promote the development of the field. These organizations have to be considered significant when trying to understand the phenomenon of SE, as they are the driving force which supports and promotes SE, and which are seeking to define the field and mobilize interest and resources. They have their own definitions of SE and apply different criteria to identify social entrepreneurs that often have to pass a rigorous process in order to be selected to join a network, membership, or fellowship (Grenier 2006).
Various examples of successful businessmen and a new generation of philanthropists engaging in such supportive organizations can be found in Europe and the USA. Usually, networks and support organizations are created to provide a diverse set of services that range from grant-giving and consultancy to elected membership communities.
The first example of such an organization dedicated to SE is Ashoka - Innovators for the Public, created in 1980 by Bill Drayton, a former McKinsey consultant, who applied his business knowledge to the social sector. Ashoka is considered the pioneer in SE and perhaps the most influential and well established network in the field of SE (Nicholls 2006). This organization will be analyzed in more detail in the case study of a venture philanthropy organization in chapter three.
In 1998, Professor Klaus Schwab, president and founder of the World Economic Forum, started the Schwab Foundation for Social Entrepreneurship "to encourage and foster entrepreneurs working for the public interest - to support them and provide them with access and funding to an international platform for experience that they might otherwise lack" (www.schwabfound.org). Selected social entrepreneurs have been invited to participate in the annual meetings of the World Economic Forum in Davos, Switzerland, for the last years in order to support the development of the field of SE.
In 1999, Jeff Skoll, co-founder of eBay, created the Skoll Foundation "to advance systemic change to benefit communities around the world by investing in, connecting and celebrating social entrepreneurs" (www.skollfoundation.org). It realizes the annual Skoll World Forum on Social Entrepreneurship that brings together practitioners and thought leaders in the emerging field of SE.
In the United Kingdom, the government encourages SE officially and the administration of a £100 million permanent endowment fund of the Millennium Awards Trust, established in 2003, was assigned to UnLtd. - The Foundation for Social Entrepreneurs (www.unltd.org.uk), to ensure that people across the UK will continue to benefit from this Lottery money for generations to come. Another example for the belief of British Government in SE as a promising approach is the Department of Health that established in 2006 a Social Enterprise Unit to "encourage innovation and entrepreneurialism in health and social care and pave the way for new services which better meet patients’ and users' needs" (Department of Health Press release 2006).
In academic attention, “The Rise of the Social Entrepreneur” (Leadbeater, 1997) seems unstoppable: a review in 2002 pointed out that 75 per cent of articles on SE had been published in the last three years of a period of fifteen (Gentille). Within this period, a considerable number of teaching and research centres emerged at various renowned universities in North America and Europe, promoting academic study on this new phenomenon, in order to advance the understanding of SE and enable students to study SE and social innovation by integrating it into their curriculum. The Harvard Business School's Initiative on Social Enterprise pioneered this initiative in 1993 and gradually more universities started to dedicate resources to this field, just like the Center for Social Innovation at Stanford University (since 2000), the Center for Advancement of Social Entrepreneurship at Duke University's Fuqua School of Business (since 2002), the Research Initiative on Social Entrepreneurship at Columbia Business School (since 2002), the Skoll Center for Social Entrepreneurship at Saïd Business School at Oxford (since 2003), etc.
This growing interest in SE is a clear sign of the potential associated with this phenomenon, which has been institutionalized for more than 25 years as a field of practice, but as a field of research, it is still in its infancy. The following part will approach the phenomenon of SE by building its understanding on current theories of entrepreneurship in order to define the particularities of ‘social’ entrepreneurship in comparison to its conventional business cousin and analyze how these characteristics become manifest in the socially entrepreneurial process.
As SE operates in different forms in a broad field all over the globe, a definition of SE is highly problematic. Are there common patterns that can be observed throughout these diverse initiatives all over the world? Some supplement hospital care to children from low- income communities in Rio de Janeiro (www.criancarenascer.org.br), while others teach aggressive men in Germany how to control anger by using boxing (www.hand-in.de)? It is important to bear this in mind in the effort to define SE and its characteristics as a global phenomenon, as
[...] the dominant definitions of social entrepreneurship in the UK may make no sense to actors in other countries, because they do not resonate with their personal experience and the history they look at to situate their observations. (Martin 2004, p. 9)
Current definitions of SE range from regarding it as belonging to theories pertinent to the nonprofit sector to a totally new, intersectorial field of study (Perrini 2006). The following two definitions are an example of the heterogeneity observed within the study of SE:
Social Entrepreneurs are nonprofit executives who pay increasing attention to market forces without losing sight of their underlying mission, somehow balancing moral imperatives and the profit motives - and that balancing act is the heart and soul of the movement. (Boschee, 1998)
It’s a process whereby the creation of new business enterprise leads to social wealth enhancement so that both society and the entrepreneur benefit. These benefits include the creation of jobs, increased productivity, and enhanced national competitiveness and better quality of life. (MacMillan, 2003, cited in Perrini 2006)
These observations show that the phenomenon of SE is associated with different notions and expectations. Whereas Boschee regards it as pertinent to the non-profit sector, MacMillan associates SE to business ventures that act with a double bottom line by creating social and economic value.
In order to understand SE, this paper will define the term 'entrepreneurship' in the first place, creating a basis on which to analyze the process of ‘social’ entrepreneurship in contrast to the conventional business entrepreneurship and consequently understand characteristic aspects of the phenomenon. A definition of SE has to take into account the diversity of socially entrepreneurial phenomena while drawing certain boundaries to the concept. Absent such boundary setting, SE runs the risk of not living up to the expectations put into it, as a result of failed ‘non-social’ or ‘non-entrepreneurial’ efforts which claim to act within the concept of SE (Martin and Osberg, 2007).
The term entrepreneur, a loanword from French stems etymologically from the word entreprendre meaning to undertake, in terms of operating a venture. In the 19th century, French economist Jean Baptiste Say defined an entrepreneur as someone who "shifts economic resources out of an area of lower and into an area of higher productivity and greater yield." (cited in Dees 2001). In this view, entrepreneurship is about creating value. Austrian economist Joseph Schumpeter's theories in the 20th century on entrepreneurship are closely related to what he called Unternehmergeist, a German expression meaning entrepreneur-spirit, and defined entrepreneur as someone, whose function is [...] to reform or revolutionize the pattern of production by exploiting an invention, or more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply of materials or a new outlet for products, by reorganizing an industry and so on. (Schumpeter 1942, p. 132)
In this context, entrepreneurs are innovators who drive the process of creative destruction which Schumpeter considered the defining element of capitalism (Schumpeter 1942). They precipitate major structural changes in the economy, as they are „the change agents in the economy. By serving new markets or creating new ways of doing things, they move the economy forward.” (Dees 2001, p.1).
Current theories integrate further aspects when it comes to describe the characteristic elements of entrepreneurship. Peter Drucker (1985 cited in Dees 2001) stressed the concept of opportunity, arguing that you do not necessarily have to cause change to be an entrepreneur; instead you exploit the opportunities created by change (in technology, consumer preferences, social norms, etc.). Drucker regards the entrepreneur as someone who “always searches for change, responds to it, and exploits it as an opportunity.” (1985 cited in Dees 2001). The entrepreneur sees a changing environment through a lens that tries to discover chances and possibilities rather than obstacles; therefore, opportunity is always bound to a specific context that determines the emergence of an entrepreneurial venture. Drucker’s concept remains true to the Say-Schumpeter tradition while adding the new element of opportunity to create value. He points out that starting a business is neither sufficient nor necessary for being considered an entrepreneur. If there is nothing especially innovative or change-oriented in a venture, it can hardly be considered entrepreneurial (Perrini 2006). At the same time, an entrepreneurial opportunity may also occur and consequently be exploited in public service institutions, explaining why it is not necessary to launch a business for being considered an entrepreneur (1985 cited in Dees 2001).
Howard Stevenson, a Harvard Business School professor for business management, builds on the theory of Drucker and adds another element to his concept of opportunity exploitation: resourcefulness. According to Stevenson (1983 cited in Dees 2001), this distinguishes entrepreneurial management from ‘administrative’ management, as the entrepreneur pursues an opportunity without regard to resources currently controlled. Administrators allow the resources available to limit their visions and actions, whereas entrepreneurs look for the means to make come true their vision, rather than to focus on obstacles that hinder the endeavour. They are willing to take risks to achieve their goals and entrepreneurship is the method that distinguishes from administration in the use of tools.
All these characteristics of entrepreneurship are not limited to business start-ups, nor do they require a profit motive, so that they can easily be applied both in the business and the social sector.
In summary, I offer the following definition of entrepreneurship which is based on the strong tradition of Say, Schumpeter, Drucker, and Stevenson. It seeks to offer a foundational concept on which to elaborate an accurate understanding of the phenomenon of SE in the following chapter:
Entrepreneurship is the combination of resources usually beyond control in an innovative way in the pursuit of opportunity in order to create value.
3.2 Social Entrepreneurship vs. Business Entrepreneurship: Analyzing the process and defining the difference
These aspects of entrepreneurship mentioned above can become manifest anywhere, allowing it to occur in different spheres and not being limited to the conventional economic sector, although this is where it has mostly developed. Therefore, social entrepreneurs have to be considered one species in the genus entrepreneur (Dees 2001). This chapter will analyze the context in which SE materializes in form of a socially entrepreneurial venture (SEV) and look at its underlying process in order to define the difference between SE and its conventional counterpart: Business Entrepreneurship (BE).
A first approach when trying to define what distinguishes SE from BE is to look at the venture’s organizational form. Obviously, business entrepreneurs are limited to act within for- profit structures, but what about their social counterparts? Social entrepreneurs are innovative when it comes to exploit different organizational forms in the pursuit of an opportunity, disregarding institutional and organizational norms and boundaries (Nicholls 2006).
As mentioned above, entrepreneurship does not require the launching of a new organization or business, but still it is likely that many entrepreneurs will opt for this way at some moment in their work. When reaching this point, the primary distinction between SEVs’ organizational forms lies in which funding models are adopted with respect to achieving the respective social objective; this is at the heart of their organizational diversity that is illustrated in the figure below. According to Nicholls (2006, p. 12), social entrepreneurs
[...] employ for-profit, not-for-profit, and hybrid organizational forms (or a mix of all three) to deliver social value and bring about change. Such ventures can variously be incorporated as: charities, co-operatives, companies limited by shares or guarantee, community businesses, development trusts, as well as more conventional private limited companies.
The funding model determines the degree of relative financial dependency that ranges from self-sufficiency to complete external dependency:
illustration not visible in this excerpt
Figure 1 : Organizational forms of Social Entrepreneurship with regards to its funding dimensions
Source: Adapted from Nicholls (2006)
The decision to be a for-profit or a non-profit entity certainly depends on the area where SE appears, as human rights issues are less likely to offer a financial opportunity than microcredits. However, the decision is also important with respect to other issues, as it sends out a message to potential stakeholders and funders. In most countries, the legal structure of nonprofit organizations does not permit them to pay any dividends to boards members and all profits from year to year must be reinvested in the organization, cutting off the chance for creating personal wealth. As a result of this legal status, non-profits have tax-exempt status, creating incentives for possible contributors to donate funds and resources as they are given significant tax alleviation for doing so. In contrast to this, a for-profit status permits the creation of personal wealth in the pursuit of opportunity to create primarily social value. In addition, a for-profit structure can signal to the environment that they are ‘serious’ about organizing their venture with efficient business processes (Robinson 2006). In some countries, e.g. the UK, the government has already adapted to the changes observed in the social sector where hybrid organizations emerged and introduced a new legal form: the
Community Interest Company, part non-profit, part equity offering limited company (Nicholls 2006).
However, one organizational form has attracted particular public attention: the social enterprise. Whilst social enterprise and SE are sometimes used as synonyms (especially in the USA), the former is, in fact, a subset of the latter fitting within a broader view of SE. Social enterprises strive to reach self-sufficiency via the creation of income streams by exploiting profitable opportunities in the core activities not-for-profit venture or via for-profit subsidiary ventures and cross-sector partnerships with commercial companies (Nicholls 2006).
According to Yunus’ description of two types of entrepreneurs, their source of motivation is what distinguishes them: profit vs. ‘doing good’. But can the expectation of making money really be considered the driving force behind an entrepreneurial venture? In most cases of business entrepreneurship, the prospect of obtaining a major financial gain is against all odds. Therefore, in harmony with Martin and Osberg (2007) and based on the definition of entrepreneurship elaborated above, this paper pursues a broader approach and does not merely ascribe the difference between these types of entrepreneurs to their motivation: financial gain vs. altruism. Instead, it is suggested that entrepreneurs are motivated by the opportunity they identify. They pursue that opportunity persistently and derive a considerable psychic reward from the process of realizing their ideas. Therefore, the critical distinction between those two types of entrepreneurs lies in the value proposition itself.
For business entrepreneurs, the creation of economic value, namely financial profit, is a logical consequence of their value proposition that anticipates and is organized to serve markets that are able to comfortably afford the respective innovative product or service offered by the entrepreneur. Financial profit is a necessary condition for the survival of their venture, as it ensures sustainability. The derivation of personal financial gain both for the entrepreneur and the investors in the successful pursuit of this opportunity can be expected.
In contrast, social entrepreneurs are not expected to create substantial economic wealth, neither for themselves nor for the investors. This assumption is linked to the idea of social entrepreneurs working in the non-profit sector. But as mentioned above, SE is more complex and crosses organizational boundaries in order to achieve its goals. It is not that social entrepreneurs are against making profit, it just depends on the organizational form they consider appropriate in the pursuit of the opportunity: for a socially entrepreneurial for-profit venture, the creation of economic value is as indispensable for its survival as for a business entrepreneur. In these cases, both the social entrepreneur and the investors are expected to obtain a personal financial gain.