toward a better understanding of social entrepreneurship

7/31/2019 Toward a Better Understanding of Social Entrepreneurship

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Toward a better understanding

of social entrepreneurship:Some important distinctions

By Jerr Boschee and Jim McClurg

Social entrepreneurship is one of the most misunderstood phrases in the nonprofit sectortoday. Everybody, it seems, has a different definition of what it means.

This is our attempt to bring some clarity to the discussion. Our perspective has been shapedby 50 years of experience in the field, one as the head of a national consulting firm and the otheras the CEO of a $15 million social enterprise.

Twenty years ago the idea of nonprofits acting in an entrepreneurial manner was anathemato most people in the sector: The idea of merging mission and money filled them with distaste.But the phrase social entrepreneur is bandied about freely these days.

British Prime Minister Tony Blair praises the emerging tide of social entrepreneurs that ischanging the face of Englands voluntary sector and senior executives at INDEPENDENTSECTOR talk about social entrepreneurs in the United States who find new and exciting waysto attract contributions and government support for their programs. Both are right to praise theingenuity of nonprofit organizations but most of what they are praising has nothing to do withentrepreneurship.

Here is the gist of the problem: Unless a nonprofit organization is generating earnedrevenuefrom its activities, it is notacting in an entrepreneurial manner. It may be doing good and

wonderful things, creating new and vibrant programs: But it is innovative, not entrepreneurial.

Why is the distinction so important?

Because only earned income will ever allow a nonprofit to become sustainable or self-sufficient. Innovation is a precious resource and it served as the primary engine of nonprofitgrowth through the 1970s and 1980s. But innovation can take a nonprofit only so far. Its onething to design, develop and implement a new program -- and quite another to sustain it withoutdepending on charitable contributions and public sector subsidies.

The rules of the game for nonprofits have changed dramatically during the past 20 years.Operating costs have soared, resources available from traditional sources have flattened, thenumber of nonprofits competing for grants and subsidies has more than tripled, and the number

of people in need has escalated beyond our most troubling nightmares. Smart nonprofitmanagers and Board members realize they must increasingly depend on themselves to insuretheir survival . . . and that has led them naturally to the world of entrepreneurship.

Copyright 2003 Jerr Boschee and Jim McClurg. All rights reserved. Reproduction in whole or in partin any form or medium without the express written permission of Mr. Boschee and Mr. McClurg is prohibited.


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Copyright 2003 Jerr Boschee and Jim McClurg 2 Toward a better understanding

However, too many nonprofit managers and trustees continue to use old methodologies andold definitions to gussy up their books and their brochures. It has reached the point where almosteverything new in the sector is called entrepreneurial and the people who create these newapproaches (not to mention the people who write about them and underwrite them) walk awaysatisfied that theyve changed the fundamental equation.

They have not.

FOUR KEY DISTINCTIONS

As more and more nonprofits begin to claim entrepreneurial status, its important to makesome careful distinctions. The purpose of this essay is to define some core concepts and invitecomment from others in the field.

In addition to the differences between entrepreneurship and innovation, we believe there arefour other distinctions that are fundamental to any genuine understanding of entrepreneurship inthe nonprofit sector:

The differences between entrepreneurship and socialentrepreneurship

The differences between sustainability and self-sufficiency

The differences between earned income strategies and social purpose business ventures

The differences between innovators, entrepreneurs and professional managers

1. The differences between entrepreneurship andsocialentrepreneurship

According to Webster, an entrepreneur is a person who organizes, manages and assumes

the risks of a business enterprise. In a 1998 column forInc. magazine, Norm Brodsky expandedon the definition. Starting with nothing more than an idea or a prototype, he wrote,entrepreneurs have the ability to take a business to the point at which it can sustain itself oninternally generated cash flow.

The italics belong to us. Successfully running a business means sustaining it with earnedincome, not grants or subsidies.

The most commonly quoted definition of social entrepreneurship today was formulated byProf. J. Gregory Dees of Stanford University in 1998, but his essay contained a fundamentaloversight. He outlines five factors that define social entrepreneurship: Adopting a mission tocreate and sustain social value (not just private value); recognizing and relentlessly pursuing newopportunities to serve that mission; engaging in a process of continuous innovation, adaptation,

and learning; acting boldly without being limited by resources currently in hand; and exhibiting aheightened sense of accountability to the constituencies served and for the outcomes created.

He never mentions earned income.

We think that is not only conceptually flawed, but also psychologically crippling. It letsnonprofits off the hook. It allows them to congratulate themselves for being entrepreneurialwithout ever seriously pursuing sustainability or self-sufficiency. They still return, year after year,to the same individual donors, foundations and government agencies.


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What, then, is social entrepreneurship? And how does it differ from entrepreneurshipper se?

A social entrepreneur is any person, in any sector, who uses earned income strategies topursue a social objective, and a social entrepreneur differs from a traditional entrepreneur in twoimportant ways:

Traditional entrepreneurs frequently act in a socially responsible manner: Theydonate money to nonprofits; they refuse to engage in certain types of businesses;they use environmentally safe materials and practices; they treat their employeeswith dignity and respect. All of this is admirable, but their efforts are only indirectlyattached to social problems. Social entrepreneurs are different because their earnedincome strategies are tied directlyto their mission: They either employ people whoare developmentally disabled, chronically mentally ill, physically challenged, poverty-stricken or otherwise disadvantaged; or they sell mission-driven products andservices that have a direct impact on a specific social problem (e.g., working withpotential dropouts to keep them in school, manufacturing assistive devices for peoplewith physical disabilities, providing home care services that help elderly people stayout of nursing homes, developing and selling curricula).

Secondly, traditional entrepreneurs are ultimately measured by financial results: Thesuccess or failure of their companies is determined by their ability to generate profitsfor their owners. On the other hand, social entrepreneurs are driven by a doublebottom line, a virtual blendof financial and social returns. Profitability is still a goal,but it is not the only goal, and profits are re-invested in the mission rather than beingdistributed to shareholders.

2. The differences between sustainability and self-sufficiency

The nonprofit sector has traditionally been driven by a dependency model, relying primarilyon philanthropy, voluntarism and government subsidy, with earned income a distant fourth. But

social entrepreneurs have turned that formula on its head: Philanthropy, voluntarism andgovernment subsidy are welcome, but no longer central, because the dependency model hasbeen replaced by two others.

In the nonprofit world, sustainability can be achieved through a combination of philanthropy,government subsidy and earned revenue. Its a wonderful thing, sustainability, but for manynonprofits its only a way station. Self-sufficiency, on the other hand, can be achieved only byrelying completely on earned income, and is the ultimate goal of the most ambitious socialentrepreneurs.

In short, as long as nonprofits continue to be dependent on contributions from individuals,grants from Foundations, subsidies from government and other forms of largesse, they will neverbecome sustainable or self-sufficient.

But why should they want to?

Its my theory, says Kathleen Buescher, President and Chief Executive Officer of ProvidentCounseling, Inc., a $5 million family services organization in St. Louis, that nonprofits in thefuture will have to fund a lot of their mission this way. Were just not going to have sufficient othermoney to do it. Well have to earn it ourselves. And the beauty of making a profit, as weve beenable to do during the past 15 years, is that you can do a lotwith the money, you can do what youwant to do. You can do it howyou want to do it for as longas you want to do it and you donthave to make anybodyhappy except your own Board and staff. You dont have to meet anybody


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elses expectations. Thats a very freeing idea, and once you feel it, you dont want to go back tothe confines of any other type of funding.

Without self-generated revenue, nonprofits will remain forever dependent on the generosityof others . . . and thats a risk social entrepreneurs are unwilling to take. They are passionatelycommitted to their mission but they are just as passionately committed to becoming financiallysustainable or self-sufficient . . . in order to do more mission! As traditional sources of fundingdried up or became less available during the 1980s and 1990s, a growing number of nonprofitsdiscovered the importance of paying their own way -- and their managers became genuine socialentrepreneurs who understood the difference between innovation (doing something new) andentrepreneurship (doing something that makes money).

3. The differences between earned income strategies and social purpose business ventures

Many nonprofit Board members and executives are daunted by the prospect of socialentrepreneurship because they think it means starting a business venture, something few knowhow to do. But creating a business isnt the only way to be successful as a social entrepreneur.In fact, the most fertile ground for the vast majority of nonprofits is something called earned

income strategies, and they have nothing to do with starting a business venture.

The two approaches differ substantially in terms of purpose, expectations and structure:

Earned income strategies: Every nonprofit has opportunities for earned income lyingfallow within its existing programs. The opportunities may be tiny, but exploiting themcan have a significant cumulative impact. By aggressively turning inward andsearching for pockets of existing opportunities, nonprofits have been able to registerimpressive gains, often raising their percentage of total revenue from earned incomeby as much as 15 per cent within one to three years.

Business ventures: Once a nonprofit has successfully carried out a variety of earnedincome strategies, it may want to consider launching a formal business venture -- but the

goals would be much more ambitious and the strategy completely different. The onlyreason for a nonprofit to start a business venture is to exploit a specificopportunity forsignificant growth and profitability a substantial difference from earned income strategies,which are designed primarily to cover more of a programs costs, without any realexpectation of making a profit or even reaching a break-even point. The pioneers in the fieldhave also discovered that the chances for success with a business venture increasedramatically if the organization creates a skunkworks, a completely separate entityinsulated as much as possible from the day-to-day operations of the parent organization.That means having a separate staff, separate compensation policies and even a separateBoard of Directors if necessary to achieve as much independence as possible.

4. The differences between innovators, entrepreneurs and professional managers

Perhaps the single most important lesson learned by the pioneers in the field has been adeeply personal one that strikes to the very heart of their self-perceptions. So often, nonprofitsdiscover (too late) that their entrepreneurial efforts have been doomed simply because they arebeing led by people with the wrong types of skills. The mistake occurred because they did nottruly understand the differences between innovators, entrepreneurs and professional managers.

Regardless of whether a nonprofit is attempting to engage in a variety of earned incomestrategies or trying to launch a business venture, its important to understand the differences


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between the three types of leaders: They are all needed in the evolution of a healthy organization,but at different times, and rarely does an individual possess more than one of the three skills.

Innovators are the dreamers: They create the prototypes, work out the kinks -- and then getbored, anxious to return to what they do best, which is inventing more prototypes. They arerarely concerned, ultimately, with the financial viability of what they do.

Entrepreneurs are the builders: They turn prototypes into going concerns -- then theygetbored. For them, financial viability is the single most important aspect of what they do.

Professional managers are the trustees: They secure the future by installing and overseeingthe systems and infrastructure needed to make sure the going concern keeps going.

Unfortunately, in the nonprofit sector, often because resources are scarce, organizations tryto shoehorn people into positions where they dont fit, and many of the problems nonprofits havewhen they begin adopting entrepreneurial strategies arise from having an innovator or aprofessional manager trying to do an entrepreneurs job.

SOME FINAL THOUGHTS

The culture of a traditional nonprofit, no matter how innovative, is vastly different from theculture of an entrepreneurial nonprofit. Entrepreneurs have a higher tolerance for risk, a greaterappreciation of margins, an eagerness to compete. Traditional nonprofits distrust the capitalmarkets, prefer collaboration to competition, and underestimate the productive capabilities oftheir disadvantaged employees. They watch other nonprofits become increasingly sustainable orself-sufficient, but are unwilling to emulate their practices.

Instead, they criticize. My god, the resistance, says Rick Walker, who runs seven smallbusinesses out of his nonprofit in Marshfield, Massachusetts. To a great extent, nonprofitpeople are not risk-takers, and their unwillingness to think outside very standard parametersconstantly amazes me. I see a few of them trying things, but usually on a very, very limited scale.

Quite frankly, weve had a lot better luck getting people outside the nonprofit world to understandwhat were doing and feel comfortable with it.

Perhaps, if traditional nonprofits come to a better understanding of what socialentrepreneurship is actually about if some of the confusing terminology that is currentlyplaguing the movement can be clarified more of them will summon the courage to beginemphasizing earned income, sustainability and self-sufficiency instead of charitable contributions,government subsidies and eternal dependency.

(Jerr Boschee has spent the past 20 years as an advisor to social entrepreneurs in theUnited States and abroad; to date he has delivered seminars or conducted workshops in 41

states and ten countries and has long been recognized as one of the founders of the socialenterprise movement worldwide. Jim McClurg is the former CEO of Northwest Center Industriesin Seattle and is currently a partner in the Social Enterprise Alliance, a resource network forsocial entrepreneurs and their advocates.)

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