As new contributors in the realm of social problem solving, social entrepreneurs have come to serve as resources for government as it addresses social problems to improve the lives of Americans. As Citizens Schools Co-founder and CEO Eric Schwarz explains, “The best social entrepreneurs have great results. Government is looking at ways to get results at low costs. Social entrepreneurs can help them achieve this. They can test new ideas and innovations, and partner with government to bring successful ones to scale.”

Government leaders continually face pressures to allocate limited tax revenues to address pressing societal needs, and many have achieved a great degree of success. While social entrepreneurs will never take the place of government, conversations with social entrepreneurs and experts in the field suggest that social entrepreneurship is uniquely positioned to help government officials better address societal needs. Specifically, the social entrepreneurs interviewed help government improve the lives of their constituents in two primary ways: (1) leveraging public and private resources and (2) testing and developing solutions.

Leveraging Public and Private Resources: ITNAmerica
Because of their focus on financial sustainability, social entrepreneurs identify and utilize new and existing resources, both financial and nonfinancial, to help them address social problems. Often this means that social entrepreneurs are able to implement solutions to social problems on a wider scale that have previously been too costly. At times, social entrepreneurs also end up shifting costs from public budgets to private resources, thus freeing up government tax revenue to address other needs.

Market Failure
ITNAmerica provides a good example. Too often, older Americans must choose between their safety and their mobility—between continuing to drive as their abilities decline or remaining homebound and dependent on others after giving up their cars. Prior attempts to address this problem have failed to fully meet the needs of their target senior consumers. Senior transportation programs, often government funded, have typically relied on attempts to convince older people to ride buses or subways; on organizing volunteers to pick up vanloads of seniors for group trips; or offering rides to a handful of specific destinations, such as medical appointments. Finding these options insufficient, many seniors continue to drive when they are no longer fit to operate a vehicle, or become increasingly housebound as they restrict their own driving and become dependent on favors from family and friends. As ITNAmerica Founder Katherine Freund explains, “Depending on the private automobile for transportation is inadequate for years before people actually stop driving. And then people who do stop driving outlive that decision by about ten years. It’s a very big problem because of the aging of the population. There are more older people. There are more older people living longer. There are more older people outliving the ability to drive longer. You can see if you multiply those things together you come up with a pretty big social problem.”

Next week: Leveraging public & private resources, continued:  ITNAmerica’s solution

Market Failure
U.S. recidivism rates are at about 60 percent throughout the nation.  While reducing these rates would produce significant societal benefits by reducing the overall prison population, cutting down on incarceration costs, and ultimately ending up with more productive citizens, there is little hope of a market-based solution to meeting this need. Prisoners have little ability to pay. RSVP, a San Francisco–based government initiative housed in the city’s sheriff department, provides an example of a social-entrepreneurial initiative addressing a no-market opportunity.

Transformative Innovation
Dissatisfied with traditional approaches to prisoner rehabilitation, a diverse planning committee of former offenders, crime victims, and community leaders participated in the development of the RSVP model.  Explains program administrator Sunny Schwartz, “We had victims’ rights advocates; formerly abusive men and gang members; orthodox rabbis, Baptist ministers, atheists; and deputy sheriffs from line staff to upper echelon. And then the usual stakeholders—probation and people on the bench.”

The resulting program differs from the usual approaches by encouraging and teaching offenders to take responsibility for their crimes. The program also includes a class that teaches offenders to experience empathy for those who have been harmed by violence. Victims of crimes work with former offenders and community stakeholders to develop the curriculum used for these classes and to participate as trainers. When offenders are released from prison, many participate in an “internship” program and receive employment training while performing restorative acts in the community. Those who are successful eventually return to the prison as facilitators of RSVP sessions. Some of the victims of the RSVP participants become advocates and work with RSVP.

RSVP’s results thus far indicate that the organization is on its way to developing a rehabilitation method for violent offenders that has the potential to transform current practices in U.S. prisons. An independent, quantitative evaluation of RSVP found that the average annual incidence rate for fights and other forms of in-prison violence for their program participants is essentially zero, compared with 28 in a traditional “lock-up” prison setting—even though the participants sleep in open dorms. Further, offenders who participated in the program for at least eight weeks had a 46 percent lower rate of re-arrest for violent crime than those who served their time in a traditional jail. This difference increased to 83 percent for those who completed at least 16 weeks of the program.   Governments and organizations around the country and world have approached RSVP for advice on replicating the program, some of which has already begun.

Financial Sustainability
For no-market approaches, achieving financial sustainability requires full subsidies in order to start and maintain the initiative. One option in no-market conditions is to work within the government, where public funding is available. RSVP, whose staff is made up entirely of public employees, was able to secure predictable funding with a line item in the City of San Francisco’s budget.

Read additional case studies about Triangle Resident Options for Substance Abuse (TROSA)’s limited-market approach and Outside The Classroom’s low-profit market approach in the full chapter.

Next Week: How social entrepreneurship helps government Part I: Leveraging Public & Private Resources

Social entrepreneurship - the practice of responding to market failures with transformative and financially sustainable innovations aimed at solving social problems.

Financial Sustainability
While social entrepreneurship is not defined by any one standard model for achieving financial sustainability, working toward financial sustainability is essential if an approach to a social problem caused by market failure is to be successful enough to have transformative potential. Each organization must find a model responsive to the unique character of the social problem they are trying to solve, and grounded in the realities of the type of approach to market failure they have adopted. Social entrepreneurs also tend to prefer business-like productivity and efficiency measures to determine their capture and use of resources. Many produce cost-benefit analyses, reports on “social” return on investment, report cards on organizational performance, or other integrated measures of financial and programmatic success that will ultimately help the organization optimize their use of resources and maximize their results.

While the details vary, such financial models generally include two components: nonfinancial resources and predictable revenue sources.

Nonfinancial resources   
These are skilled or unskilled volunteers, and one-time or recurring in-kind donations that enable social entrepreneurs to increase the sustainability of their initiatives.  For instance, David Eisner CEO of the Corporation for National and Community Service points out that “Engaging the public in developing and implementing social solutions is a proven and inexpensive strategy. Look at the way nearly 600,000 volunteers were leveraged to complete intensely needed work in the year after Hurricane Katrina in a way we never could have paid for.” 

Predictable revenue sources
These are long-term, repeat, and performance-based funding sources—foundation, individual, government, corporate, and fee-based—that will provide predictable funding, despite conditions of market failure. Which type of predictable revenue sources a financial sustainability model contains will depend on the organization’s approach to market failure, as well as the social problem being addressed. No-market approaches will look for long-term, repeat, and performance-based funding sources, and may also develop an earned-income venture to build into the model an alternative to receiving income from the direct beneficiary. Limited-market approaches will focus on the same funding sources as no-market approaches, in addition to collecting a portion of their costs from the beneficiaries of their product or service. Low-profit-market approaches will ask the beneficiary to pay, and look for “patient capital” from socially motivated investors who are willing to accept below-market returns, or wait for profits while the market is developed, in exchange for social impact.

In summary, social entrepreneurship provides a solution that has great potential societal benefit, but little hope of generating the profits required by traditional for-profit companies. Social entrepreneurs—adopting no-market, limited-market, and low-profit-market approaches—address these problems while striving for what can be considered a different kind of profit: the generation of new and transformative solutions to the nation’s most pressing social problems.  Next week, we’ll look at a case study of the Resolve to Stop the Violence Program (RSVP), a no-profit approach to lowering recidivism rates.

Next Week: Case Study of a No-Market Approach: Resolve to Stop the Violence Program (RSVP)

Social entrepreneurship - the practice of responding to market failures with transformative and financially sustainable innovations aimed at solving social problems.

Transformative Innovations
Ashoka Founder Bill Drayton has famously commented that “social entrepreneurs are not content just to give a fish or teach how to fish. They will not rest until they have revolutionized the fishing industry.”  Like other entrepreneurs, social entrepreneurs are creative thinkers, continuously striving for innovation, which can involve new technologies, supply sources, distribution outlets, or methods of production.  Innovation may also mean starting new organizations, or offering new products or services.  Innovative ideas can be completely new inventions or creative adaptations of existing ones. 

Many scholars take this focus on innovation even further. Social entrepreneurs are “change agents,”  creating “large-scale change through pattern-breaking ideas,”  “addressing the root causes” of social problems,  possessing “the ambition to create systemic change by introducing a new idea and persuading others to adopt it,”  and changing “the social systems that create and maintain” problems.  These types of transformative changes can be national or global. They can also often be highly localized—but no less powerful—in their impact. Most often, social entrepreneurs who create transformative changes combine innovative practices, deep and targeted knowledge of their social issue area, applied and cutting-edge research, and political savvy to reach their goals. For all entrepreneurs, whether in the business or social realm, innovation is not a one-time event—but continues over time.

Of course, while addressing a social problem with a potentially transformative innovation is an essential component of the definition of social entrepreneurship offered here, succeeding in generating such transformation is not. The field, like any other, includes success stories and strong leaders, as well as those who fall short of their aspirations.  Nonetheless, the definition of social entrepreneurship requires that initiatives at least have the potential for transformative social innovation on a local, national, or global scale. This characteristic distinguishes social entrepreneurship from other nonprofit, business, or government service providers that may be more narrowly focused on meeting the most pressing social needs as they emerge.

Next Week: Definition Part III: Financial Sustainability

Social entrepreneurship - the practice of responding to market failures with transformative and financially sustainable innovations aimed at solving social problems

Response to Market Failure
The social problems that social entrepreneurs address result from market failures—in which profitable markets are unavailable, insufficient, or underdeveloped and where the potential monetary gains for responding to a societal problem are less than the overall, society-wide positive impact of that response. Because of the lack of opportunity to generate profit, private-sector entrepreneurs—who succeed by finding market opportunities and maximizing profits—often leave these needs unaddressed. Traditionally, government responds in such cases by deploying public funds to address the unmet needs.

Social entrepreneurship presents another option. Like private-sector entrepreneurs, social entrepreneurs seek opportunities to create value—but the value they pursue is social rather than purely economic. As Gregory Dees explains, “Markets do not do a good job of valuing social improvements, public goods and harms, and benefits for people who cannot afford to pay. These elements are often essential to social entrepreneurship. That is what makes it social entrepreneurship.”  Roger L. Martin and Sally Osberg echo this idea that social entrepreneurs can be considered entrepreneurs who pursue social value: “Unlike the entrepreneurial value proposition that assumes a market that can pay for the innovation, and may even provide substantial upside for investors, the social entrepreneur’s value proposition targets an underserved, neglected, or highly disadvantaged population that lacks the financial means or political clout to achieve the transformative benefit on its own.”

Through interviews with leading social entrepreneurs and conversations with experts in the field, the author has identified three different types of approaches that social entrepreneurs take in targeting beneficiaries and responding to market failures (Figure 3).

No Market
In a no-market approach to solving a social problem, the beneficiaries of the potential product or service will not be able to pay for it.  As a result, a social entrepreneur who selects such an approach cannot rely on any earned revenues from the beneficiary to sustain the initiative. Most commonly, no-market approaches take the form of government initiatives or nonprofit organizations.

Market-Failure Continuum of Social-Entrepreneurial Approaches to Solving Social Problems
 

Limited Market
In a limited-market approach, the beneficiaries or clients have some ability to pay. As a result, a social entrepreneur who selects such an approach can rely on some earned revenues from the beneficiary to sustain the initiative. Most commonly, limited-market approaches tend to be nonprofit organizations.

Low-profit Market
In a low-profit-market approach, the beneficiary has the potential to pay the full cost while solving the social problem and thus has the potential to generate a profit. However, the market may be underdeveloped, or investments in this market may yield returns that are less than typical for for-profit ventures. Examples of this type of approach exist in both the nonprofit and private sectors. In some cases, low-profit-market approaches eventually develop the market for a product or service enough that they become traditional for-profit enterprises.

Next Week: Definition Part II: Transformative Innovations