Article in Business / Entrepreneur
Social entrepreneurship or enterprise is the new wave now in the nonprofit and for-profit world and there is a lot of hype around it and what exactly it is. This article tries to clarify what it is for the lay person so they can separate fact from fiction.
 
 
 

Work on Purpose – A book written by Lara Galinksy, senior vice president of Echoing Green, just came out this past March 2011. It is a collection of very moving personal stories of several nonprofit startup leaders. Their stories are told in vignettes and I found all these stories so very inspiring, particularly the one about the One Acre Fund, a social enterprise, teaching Kenyan farmers to grow crops better and trade and loaning them start-up seeds and capital. This increased their yield which produced a surplus that could be used and/or sold after their own needs were met, which in turn then staved off the dreaded hunger season before crops were harvested. I hope, as Echoing Green does, that it inspires others to try and change the world by helping others succeed also. Abundance begets abundance. A scarcity mentality begets scarcity. They inspired this article about social entrepreneurship, the current hybrid nonprofit wave, and what exactly is it as there is a lot of hype in this space right now.

A social entrepreneur is motivated by a desire to help improve social, economic, and perhaps even political situations by developing creative ventures that mitigate causes for those conditions. Theses ventures help empower the very community it is helping, to grow and become sustainable in maintaining and even further improving in efficiency, effectiveness and impact. They are not as interested in finding ways to do better handouts but they are interested in teaching people how "to fish” rather than "giving fish". Give people the tools to start becoming independent and self-sustainable, which includes but is not only money. Social entrepreneurs act within a market aiming to create and increase social value through the improvement of goods and services offered to the community and are predominately run as non profits. Zahra et al. (2009: 519) said that “social entrepreneurs make significant and diverse contributions to their communities and societies, adopting business models to offer creative solutions to complex and persistent social problems”. This is absolutely true.

However, there are debates about the definition and scope of social enterprise and their social entrepreneurs. On some websites, which shall remain nameless here, they sound like someone hired an expensive marketing and advertising firm to repackage the definition of a nonprofit leader into a sexy, superhero with amazing powers or rock star. Some definitions are broader and include all nonprofit managers and leaders while some are more narrow, and only include business related ventures and management techniques. So here we try to throw some light on this supported by research from the Stanford University Center for Social Innovation’s “Social Entrepreneurship: The Case for Definition,” Sally Osberg & Roger Martin in Stanford Social Innovation Review, and Wikipedia and other publicly available resources.

From Wikipedia, an entrepreneur is a person who has possession of a new enterprise, venture or idea and is accountable for the inherent risks and the outcome of a product.[1] The term was originally of French origin and was first defined by the Irish-French economist Richard Cantillon, author of Essai sur la Nature du Commerce en Général (Essay on the Nature of Trade in General), who was also a successful banker and merchant. Entrepreneur is a person who is willing to help launch a new venture or enterprise and accept full responsibility for the outcome. Jean-Baptiste Say, a French economist in favor of free trade and competition, is believed to have coined the word "entrepreneur" in the 19th century - "The entrepreneur shifts economic resources out of lower and into higher productivity and greater yield."

The terms social entrepreneur and social entrepreneurship or enterprise were used first in the literature on social change in the 1960s and 1970s.[3] The terms came into widespread use in the 1980s and 1990s, promoted by Bill Drayton the founder of Ashoka,[4] and others such as Charles Leadbeater, British author who wrote “The Rise of the Social Entrepreneur” and who was advisor to former British Prime Minister, Tony Blair.

A nonprofit leader or manager and social entrepreneur are somewhat different but not mutually exclusive. Like a nonprofit leader, a social entrepreneur recognizes a social problem and organizes, creates and manages a program or project to meet a community need that has not been met. Some nonprofits also bring in revenue from an exchange of goods and services created from certain projects or ventures, other than but not excluding donations and grants. This is done to create and diversify an income stream that sustains the organization’s operations and to create and deliver those goods. Whereas nonprofit managers and leaders are mostly running existing nonprofits, social entrepreneurs tend to start out as a nonprofit startup, trying to meet a need that current nonprofits, government or business have not been able to meet. This type of nonprofit leader is much closer to the definition of a social entrepreneur as they use business principles to supplement their grants and charitable contributions to sustain operations. This venture may or may not lead to social change as many sites profess but it definitely makes a social and sometimes economic impact, often with measurable results. A business entrepreneur typically measures performance in profit and return using business management skills and methods. A social entrepreneur uses those same savvy business skills of business, financial and human resource allocation management and marketing strategy, while artfully drawing, weaving and combining resources from its nonprofit/community/third sector with public (government) and private sector (business community and individuals) to focus on creating sustainable social capital. Thus, the main aim of social entrepreneurship is to further sustainable social goals with the help of all 3 sectors.

Social entrepreneurs are most commonly associated with the voluntary and not-for-profit sectors, but this need not preclude making a profit. A profit in nonprofit accounting is called a surplus. Common fallacy is that nonprofits do not or should not make money. However, they can and do make money and/or help others make money. That profit or surplus gets reinvested into the nonprofit to cover operations of an organization that meets some community needs, just like a business that reinvests its profits to stabilize and grow the business. It just does not go to shareholders as profit sharing. That is why it is then called a nonprofit or not-for-profit. For that community service, the IRS gives them a tax exempt status and the requirement for financial transparency because their tax returns become public information. Nonprofit is a tax designation for corporations whose revenues get reinvested into operations for charitable purposes to build social capital as opposed to it going into the pockets of shareholders.

Having run nonprofits, here is where I interject some much needed education about nonprofits or not-for-profits. Nonprofit does not mean it’s ok to lose money. Many people believe a nonprofit cannot make a profit or should not make a profit or that it’s ok to lose money and/or all of the above. From my experience, it seems to come from a misconception of what is profit by non-financially savvy nonprofit managers or misguided do-gooders. Just because a nonprofit helps people does not mean it should not be able to pay its bills or its staff because they consider the staff. These misconceptions come about because some people find it difficult to reconcile mission, service and charity and their relationships to money. Along the same line, there are nonprofit managers and staff that believe that since it's a nonprofit, it's ok to underperform because we have traded money for better quality of life, which for many means less hours, committment and productivity. However, we hope the ultimate reason you chose to work in nonprofit is you believe in helping people. Some rationalize that for lower pay nonprofit you should expect to a better quality of life in exchange. However, your quality of life even with lower pay is still probably better than many of those those we are trying to help. The lower performing you are, the less effective and efficient and impactful you are and then the less people you can actually help. This justification works against the purpose and mission of the nonprofit and should be the opposite. Some nonprofits pay frontline staff as borderline volunteers while paying management market rate salaries. It is one thing if a donor wants to volunteer time to help the poor, but it’s another thing to not expect staff should get paid. At some point, you cannot depend on volunteers alone for the successful implementation of a program as often they can be unreliable. It’s a bit like the dilemma between church parishioners who volunteer their time and commitment and church staff who gets paid to implement the programs and manage the volunteers. In most nonprofits, staff is needed to implement programs and often nonprofit wages for the front line service providing employees can be fairly low. To not believe a nonprofit should make enough money to be able to cover its costs nor to effectively implement its programs and to believe that it's ok to slack off and mismanage resources is irresponsible. This mindset causes more damage than good for the very people we are trying to help. Often it's used as an excuse for tolerating poor nonprofit financial management skills and performance. In good business and nonprofit management, to not have all your eggs in one basket, we can diversify risk by having multiple income revenue streams.

When I was running nonprofits, I worked more than when I was working in a for-profit because I felt if I slacked off, someone who desperately needed our services to survive and could be suffering more and my working a few extra hours would help alleviate that suffering even by one day would be worth it. In either for-profit or not-for-profit case, I was salaried so working overtime was not going to put any more money immediately into my own pocket. So you have to have a passion for helping people. From a leadership and management perspective, I never worked less hours than my staff. I found in nonprofit, you often have to be better than those working in for-profit because your resources are more limited and more had to be done so with less so must be more creatively managed, much more like in a for-profit startup.

The definition of a nonprofit from Wikipedia is below:

A nonprofit organization (NPO) is an organization that does not issue stock shares or distribute its surplus funds to owners or shareholders, but instead uses the funds to help achieve its goals. Examples of NPOs include charities (i.e., charitable organizations), trade unions, trade associations and public arts organizations. Most governments and government agencies are described by this definition, but in most countries they are considered a separate type of organization and not considered as NPOs.

While Not-for-profit organizations are able to earn a profit, more accurately termed a surplus, such earnings must be retained by the organization for its self-preservation, expansion, or plans. NPOs have controlling members or boards. Many have paid staff including management, while others employ unpaid volunteers and even executives who work without compensation.

Profit is not the primary goal of an NPO, but because an NPO can legally and ethically trade at a profit, the term Not-for-profit is often considered more appropriate than Non-profit. The extent to which an NPO can generate income may be constrained, or the use of that income may be restricted. Nonprofits therefore are funded typically by donations (which may be tax deductible) from the private or public sector, and are typically exempt from income and property taxation. Some NPOs may internalize profit in the form of comparatively good wages or benefits.

The IRS definition of a tax exempt charitable organization, also known as a nonprofit:

Exemption Requirements - Section 501(c)(3) Organizations

To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.

Organizations described in section 501(c)(3) are commonly referred to as charitable organizations. Organizations described in section 501(c)(3), other than testing for public safety organizations, are eligible to receive tax-deductible contributions in accordance with Code section 170.

The organization must not be organized or operated for the benefit of private interests, and no part of a section 501(c)(3) organization's net earnings may inure to the benefit of any private shareholder or individual. If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any organization managers agreeing to the transaction.

Section 501(c)(3) organizations are restricted in how much political and legislative (lobbying) activities they may conduct. For a detailed discussion, see Political and Lobbying Activities. For more information about lobbying activities by charities, see the article Lobbying Issues; for more information about political activities of charities, see the FY-2002 CPE topic Election Year Issues.

And on the New York State business incorporation site, the definition of a nonprofit or not-for-profit:

A not-for-profit corporation is a corporation formed pursuant to the Not-for-Profit Corporation Law. Not-for-Profit Corporation Law Section 201 (Purposes) provides a list of general purposes for which a not-for-profit corporation may be formed. The Certificate of Incorporation of a not-for-profit corporation must set forth the specific purposes for which the corporation is being formed. A not-for-profit corporation may not be formed for pecuniary profit or financial gain and the corporation’s assets, income or profit may not be distributed to or otherwise used to benefit the corporation’s members, directors or officers except as permitted by the Not-for-Profit Corporation Law, e.g., as reasonable compensation for services to the corporation. (See Sections 102 (a)(5) and 515).

Nothing in these definitions says a nonprofit should not turn a profit nor make money. A nonprofit designation just limits where the profit ultimately ends up.

Talking about corporations, there’s an interesting article in the Spring 2011 Stanford Social Innovation Review by Allen Bromberger about the use of a contract hybrid legal structures for the new social enterprises to combine nonprofit and for-profit arms.

Social entrepreneurship and enterprise highlights a form of revenue generating programs or activities that some nonprofits do to bring in money in exchange for goods and services. Hopefully, that results in a profit, which is it made more money than it cost to produce to sell. Not all nonprofits implement these activities but many do. Bake sales, as fundraisers, hope to generate a profit. The materials and labor are often donated so all proceeds from sales or income is pure profit as expenses are considered zero. That’s a very social entrepreneurial way to bring in funding. Case in point, the nonprofit organization Girl Scouts sells cookies. That is a bake sale on steroids. Other examples of social entrepreneurial nonprofits is the nonprofit, ROC (Restaurant Opportunities Center), started 9-11 by the former workers from Window On the World restaurant in the World Trade Center, who train dislocated workers in restaurant skills by day while running a restaurant at night called Colors in the evening; they have replicated this coop restaurant model across the country. The nonprofit DOE Fund who have programs doing job training for the homeless, the formerly incarcerated and veterans and run a professional catering, street cleaning, and pest control businesses, to name just a few.

The space is fast-changing. The U.N. mandated University for Peace is now offering a dynamic online course titled 'Entrepreneurship, Innovation and Social Change' which brings together social entrepreneurs from around the world for this unique opportunity.

So stay tuned and maybe we can save a lot of people by contributing to, participating with, helping, empowering and enabling them to become self sustaining and even successful entrepreneurs in their own right. Social entrepreneurs are not rock stars, but they are entrepreneurs who want to use their skills to save the world by helping us save each other and themselves and that is certainly to be celebrated and supported, assuming they are good resource managers.

Notes

  1. Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 6. ISBN 0-13-063085-3.
  2. Guide to Management Ideas and Gurus, Tim Hindle, The Economist, page 77,
  3. See William J. Baumol, Robert E. Litan & Carl J. Schramm. Good capitalism, bad capitalism, and the economics of growth and prosperity 3 (2007), citing generally Peter F. Drucker. Innovation and entrepreneurship (1985) (attributing coining and defining of “entrepreneur” to Jean-Baptiste Say, a treatise on political economy (1834)); but see Robert H. Brockhaus, Sr., The Psychology of the Entrepreneur, in Encyclopedia of Entrepreneurship 40 (Calvin A. Kent, et al. eds. 1982), citing J. S. Mill, Principles of political economy with some of their applications to social philosophy (1848). Note that, despite Baumol et al.'s citation, the Drucker book was published in 1986.
  4. "The Social Entrepreneur Bill Drayton". US News & World Report. 2005-10-31. Retrieved 2006-11-03.
  5. Zahra, Gedajlovic, Neubaum, Shulman (2009). "A typology of social entrepreneurs: Motives, search processes and ethical challenges", Journal of Business Venturing, 24 (5), pp. 519–532.

 

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Dr. Pearl Chin, PhD, MBA
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