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«SESSION IV: SOCIAL ENTERPRISE AND PRIVATE ENTERPRISE THURSDAY, AUGUST 2, 11:00-12:45 P.M. PHILANTHROPY AND ENTERPRISE: HARNESSING THE POWER OF ...»

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A Searcher hopes to find answers to individual problems only by trial and error experimentation.” 14 This is much harder to do from within a bureaucratic environment, which tends to favor those Easterly calls “Planners.” Major corporations may have a role to play in addressing social issues, including poverty, but they are not a substitute for social entrepreneurs. In fact, social entrepreneurs often serve as the catalysts for engaging larger firms. They do this by finding opportunities that would escape the notice of larger firms, demonstrating the profitability of a new product-market, and/or providing a valuable complementary service, perhaps as part of what Bill Drayton, founder of Ashoka and pioneer in social entrepreneurship, calls a “hybrid value chain.” 15 Major banks are getting involved in microcredit only now that the market is established, and they are typically engaging only at a secondary market level, leaving the loan origination and collection process to a local social enterprise. It is not clear how much large William J. Baumol, Robert E. Litan, Carl J. Schramm, Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity, (New Haven: Yale University Press, 2007): 86, italic emphasis in the original.

13 George Soros, Open Society: Reforming Global Capitalism, (New York: Public Affairs, 2000): 162.

14 William Easterly, The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good, (New York: The Penguin Press, 2006): 6.

15 See http://ashoka.org/hvc for a brief explanation. The concept is also discussed in Jane Nelson and Beth Jenkins, “Investing in Social Innovation: Harnessing the Potential of Partnership Between Corporations and Social Entrepreneurs,” Corporate Social Responsibility Initiative Working Paper No. 20, March 2006, Cambridge, MA: John F. Kennedy School of Government, Harvard University.

Philanthropy and Enterprise 6 J. Gregory Dees corporations would do, particularly by publicly held companies, in the absence of social entrepreneurs.

SELECTED ENTERPRISING SOCIAL INNOVATIONS:

A number of social entrepreneurs are combining their creativity with the use of business methods to increase the economic participation of the poor.

Poor as Producers: KickStart provides technologies that help generate income for the poor. Its main product is a relatively low-cost portable human-powered irrigation pump that it markets to farmers in Kenya and Tanzania. This technology significantly increases crop yields and income for poor farmers. In a recent article, co-founder, Martin Fisher states that over 59,000 pumps have been sold, leading to the creation of over 40,000 new businesses, 22,000 new wage jobs, and $40 million in new profits and wages.1 KickStart continues to innovate by developing new productivity tools, including smaller, lower cost pumps to increase the market.1 Poor as Consumers: Scojo Foundation serves poor consumers by making reading glasses available and affordable. It does this through low cost production, a distinctive micro-franchise distribution system, and partnerships with some major NGOs. The Scojo Foundation achieves low cost of production (about $1 per pair of glasses delivered in country) in part by leveraging its partnership with the for-profit Scojo Vision, LLC. By distributing through a creative franchise system, Scojo not only reaches remote areas at low cost, but helps provide a source of income for the vision entrepreneurs who hold the franchises, as well. Scojo has sold over 50,000 pairs of glasses in Guatemala, El Salvador, and India, and has the goal of selling 1 million pairs by 2110.1 Poor as Savers: Opportunity International, a pioneer in micro-finance, operates through a network of 42 organizations in 28 developing countries. In 2000, it began operating formal financial institutions that are able to provide a wide range of financial services, including savings accounts. Administering savings accounts can be difficult in countries with high degrees of illiteracy and low levels of official identity documentation. To address this problem, Opportunity has begun using biometric fingerprint readers and “smart cards” to replace signatures. This paperless process has made banking more widely available to the poor. According to information provided by the organization, Opportunity banks opened nearly 250,000 accounts in 2006, worth nearly $160 million.1 Poor as Borrowers: The pioneers of microcredit are relatively well known. However, the process of innovation continues today with new entrants. Consider Kiva, an organization that uses the Internet to connect entrepreneurs in developing countries with individuals who have money to lend.1 Kiva works with local microfinance partners to screen the entrepreneurs and up load information about them, their businesses, and their financial needs. Individual lenders choose to lend a portion or all of the amount requested, as little as $25. The local microfinance partner tracks the performance of the business and collects the repayments. Performance of the partners is tracked online. When the loan is repaid, the Kiva lender has a choice to re-lend the money or withdraw it. In just over two years, Kiva has reportedly brokered over $6 million in loans to some 9,000 entrepreneurs from some 50,000 lenders.

PHILANTHROPIC VALUE ADDED





Philanthropy and Enterprise 7 J. Gregory Dees Philanthropists can add value by accelerating market development in ways that improve the lot of the poor, directing their capital and resources to the ventures most likely to engage the poor in a constructive way. It is only natural for the profit-seekers (both entrepreneurs and capital providers) who are driving market expansion in developing countries to start with what they see to be the low hanging fruit, highest return relative to the capital provided. Businesses that engage the poor in constructive ways are typically seen as costly and risky. Profitability, if it comes at all, may be a long way out. By contrast, philanthropists are in a position to make these investments because profits are not their primary consideration. They can take risks, subsidize higher cost structures, and be more patient than profit-seeking investors. It is useful to think of this kind of philanthropic support falling in three categories, though the boundaries can be blurry.

Supporting social enterprises to achieve social impact. 16 Social enterprises have a social purpose, and they often need patient, low-return or no-return capital to pursue that purpose.

As Soros notes, “in social entrepreneurship, profit is not a motive, it is a means to an end.” 17 Social entrepreneurs are valuable because they have an inherent incentive to find opportunities where others are not even looking and to develop innovative approaches that make the opportunities into viable enterprises, when possible. If Yunus were simply looking for the best profit opportunities in Bangladesh, he would not have focused on microcredit and would not have crafted Grameen’s innovative peer-lending model. Because he was determined to reduce poverty in his country, he saw an opportunity and engaged in a process of innovation that would otherwise have been neglected. Philanthropic capital was crucial for start-up and the rapid early expansion. This is true for most ventures started by social entrepreneurs, including those mentioned in this paper. Philanthropists are a good fit because they are focused more on social return than financial return. The Ford Foundation’s support for Grameen is a good example. Even with on-going subsidies, a social enterprise might represent the most cost effective use of philanthropic funds.

Helping social enterprises move into mainstream capital markets. Some social enterprises may always need a philanthropic subsidy; others may become “self sustaining” or channel their modest profits back into their social mission. However, many have the goal of becoming commercially viable, able to provide market-rate returns to investors and, thus to tap into mainstream capital markets. Some social entrepreneurs see this as the only way to achieve sufficient scale, given the limits on philanthropic capital. Philanthropists can make enterprise investments explicitly to demonstrate the commercial viability of businesses that serve the poor. This is the logic behind the Omidyar-Tufts Microfinance Fund. The Fund was created with a $100 million endowment gift from Pierre and Pam Omidyar to Tufts University to invest in microfinance, “demonstrating its potential commercial viability to a wider institutional investor audience.” 18 These kinds of philanthropic investments are not about providing subsidies, accepting low returns, or demonstrating great patience. They are about generating market-rate returns in a timely fashion so as to attract mainstream capital.

16 Note that not all examples of social entrepreneurship take the form of business enterprises. Also note that

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Supporting socially beneficial forms of private enterprise. A business enterprise does not have to be a social enterprise to improve social conditions. As Adam Smith pointed out, businesses frequently serve the public good without having the specific intention to do so.

Philanthropists may wish to support selected private enterprises when these happen to serve the poor or provide other social improvements. By making these investments, philanthropists can help accelerate market development and influence the direction of that development in ways that increase constructive participation by the poor. In countries without an infrastructure to support entrepreneurship, markets are likely to favor those who have power, connections, and resources. As a result, many talented profit-seeking entrepreneurs will lack access to the kind of capital and expertise they need to launch and grow their businesses. Even in the U.S., many entrepreneurial businesses have limited access to capital markets. They have to “bootstrap” their ventures, using personal savings, borrowing from family and friends, drawing on personal credit cards, and taking home equity loans. 19 In developing countries, many entrepreneurs simply do not have access to this kind of “bootstrap” capital. Philanthropists may wish to fill this capital gap by selectively investing in profit-seeking businesses that have significant potential to increase economic participation of the poor. This could include, for instance, businesses owned by members of groups normally excluded from mainstream economic activity (such as, women, minorities, outcasts, etc.), businesses that locate in economically distressed areas and provide productive employment to people in those areas, or businesses that provide needed products and services to the poor, such as cell phones. 20 Philanthropists can also provide this support indirectly by supporting the development of a more open entrepreneurial economy in economically distressed areas, for instance, ventures that lower barriers to business formation, improve legal protections of property rights and enforcement of contracts, and increase access to capital, entrepreneurial education, and technical assistance. 21 Some would take this point further, arguing that philanthropists should not limit their involvement to ventures that “need” philanthropic funding and cannot raise capital on private markets. Developing markets may benefit if there is a philanthropic voice among the investors backing major new private enterprises. Making a similar point, Nicholas Sullivan argues that Celtel, the highly successful African telecommunications company, benefited by taking funds from development finance organizations as well as mainstream venture capitalist. 22 Through strategically selected investments in private businesses that have major implications for the poor, philanthropists may enhance the social impact of those businesses.

Their involvement may also give enterprises additional credibility as it negotiates with governments or interest groups.

19 See Amar V. Bhide’s “Bootstrap Finance: The Art of Start Ups,” Harvard Business Review (November 1992), and his book The Origin and Evolution of New Businesses (New York: Oxford University Press, 2000).

20 Nicholas P. Sullivan, Can You Hear Me Now: How Microloans and Cell Phones Are Connecting the World’s Poor to the Global Economy, (New York: John Wiley & Sons, 2007).

21 This list draws on the discussion in William J. Baumol, Robert E. Litan, Carl J. Schramm, Good Capitalism. Bad Capitalism, and the Economics of Growth and Prosperity, (Yale University Press: New Haven, 2007), on pp. 153-163 22 Nicholas P. Sullivan, Can You Hear Me Now: How Microloans and Cell Phones Are Connecting the World’s Poor to the

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NEW CHALLENGES OF ENTERPRISING PHILANTHROPY

When business and philanthropy are treated as separate realms, practitioners have a relatively clear understanding of how to make decisions. This traditional logic of business investing focuses on wealth creation, considering factors such as risk, uncertainty, liquidity, and time horizon. The traditional logic of making grants focuses on achieving an intended social impact, considering factors such as a donor’s philanthropic goals and alternative uses of the funds. Some observers object to this bifurcation, arguing for a common logic of “blended value” creation. 23 Whether or not a common logic can be developed, philanthropists who support enterprises are faced with creating a logic suitable to making decisions about supporting enterprises. This poses some new challenges. It is useful to discuss a few of the prominent ones.

Defining and measuring success. Measuring social impact is often difficult to do in a reliable, timely, and cost-effective fashion. Enterprise investments pose an additional challenge: To what extent should financial performance of the enterprise be included in the assessment of social impact, from a philanthropist’s point of view? Even when profit is simply a means to an end, financial performance is an indicator of the ability of an enterprise to survive and grow in the future, with minimal (perhaps no) further philanthropic subsidy.



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