To summarize, social entrepreneurship is the practice of responding to market failures with transformative, financially sustainable innovations aimed at solving social problems.  Over the first half of this blog, we broke this down into three components: addressing a market failure, potentially transformative, and financially sustainable. 

Response to Market Failures
Social entrepreneurs can take three approaches in targeting beneficiaries and responding to market failures. In a no-market approach, beneficiaries are unable to pay anything  and, as a result, costs must be fully subsidized.  In a limited-market approach, beneficiaries have some ability to pay, and thus the social entrepreneur can rely on some earned revenues to sustain the initiative.  Finally, in a low-profit-market approach, beneficiaries have the capacity to pay the full cost and the social entrepreneur 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.

Potentially Transformative Innovation
As Ashoka Founder Bill Drayton famously commented, “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.” 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.  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.

Financial Sustainability
While social entrepreneurship is not defined by 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. Financial models generally include two components. Nonfinancial resources refer to the skilled or unskilled volunteers and one-time or recurring in-kind donations that enable social entrepreneurs to increase the sustainability of their initiatives.  Meanwhile, predictable revenue sources include 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.

We looked at two ways that such social entrepreneurial solutions assist government in fulfilling its role to benefit Americans:

Leveraging Public and Private Resources
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 they are able to implement solutions that have previously been too costly. At times, social entrepreneurs even shift costs from public budgets to private resources, thus freeing tax revenue to address other needs.

Testing and Developing Solutions
Despite the best efforts of government, nonprofits, and individual citizens, solutions for social problems can be hard to find. Given the challenges—and frequent failures—of attempts to innovate, social entrepreneurs supply a second valuable benefit to government: developing solutions, testing new theories, and designing new approaches to addressing social problems.

We now turn to government’s role in supporting social entrepreneurship.

Next week: Advancing Social Entrepreneurship: Recommendations for Policy Makers and Government Agencies

Another example of social entrepreneurs testing and developing solutions to social problems:

New Leaders for New Schools (New Leaders)

Market Failure
Many students in school districts located in low-income communities across the United States are performing below national standards. New Leaders founder Jon Schnur observed that in the school settings that served as exceptions to this rule, strong leadership by a committed principal was a common factor. “We’ve never seen a great classroom without an effective teacher, and we’ve never seen a school driving results for all kids without a great principal. Even where you’ve got good teachers, they don’t stay and they don’t work together in the right way and ultimately collaborate in the right way without a great principal.”  Yet there was little focus on the recruitment, selection, or training for these essential school leaders.

Transformative, Financially Sustainable Social Innovation
New Leaders was founded to test the hypothesis that putting resources towards selecting, training, and supporting principals who are committed to meeting high standards—even for children in the toughest neighborhoods with access to the fewest resources—will have a positive impact on students and ultimately the entire school’s performance. Through a highly competitive process (approximately 6 percent of applicants are selected each year), New Leaders identifies and trains educators whose values and skills suggest they can “lead and build schools’ cultures to drive high expectation for all kids.” Those chosen spend an intensive year as “residents” in an urban school, and then receive placement assistance and ongoing support as they take the reins as principals in schools of their own. New Leaders’ no-market approach is supported in part by public funds, in the form of the salaries their residents and principals receive from the school district where they work, and by several long-term philanthropic donors, who cover the costs of screening, selecting, training, mentoring, and providing ongoing support to their principals.

Six years of experience has proven their initial hypothesis true. Approximately 95 percent of people who train with New Leaders take on school leadership roles—80 percent as principals—compared with fewer than half of principal trainees becoming principals in other, more traditional programs. Across the 2004--2006 academic years, 100 percent of schools led by New Leaders principals for at least two consecutive years achieved notable increases in student achievement, with 83 percent achieving double-digit gains.

Societal Benefits
New Leaders provides an example of how social-entrepreneurial experimentation, when successful, can produce new practices that government can take up to benefit Americans. New Leaders was able to take on the initial costs and risk of testing out its theory that principals trained to be great leaders can build high-performing schools. Now, city governments across the country are looking to New Leaders as a model. Some have brought New Leaders to their cities, while others have started their own principal-leadership programs based on the New Leaders approach.

Learn how City Year tested the idea of voluntary national service and inspired the creation of AmeriCorps.

Next week: Summary of social entrepreneurship helping government to benefit America

Despite the best efforts of government, nonprofits, and individual citizens, solutions for social problems can be hard to find. As Gregory Dees notes, “With all of our scientific knowledge and rational planning, we still do not know in advance what will work effectively. Thus, progress in the social sphere depends on a process of innovation and experimentation…an active, messy, highly decentralized learning process.”  Given the challenges—and frequent failures—of attempts to innovate, social entrepreneurs supply a second valuable benefit to government. According to Jeffrey Robinson, assistant professor of management and entrepreneurship at NYU’s Stern School of Business, “Experimentation is the value of social entrepreneurship to government. How do you break a logjam? Social entrepreneurs are often successful in figuring it out.” 

Both Benetech and New Leaders for New Schools provide examples of social entrepreneurs helping government benefit Americans by developing solutions, testing new theories, or designing new approaches to addressing social problems.

Benetech

Market Failure
Twenty years ago, the best available technology for a blind person to read printed text was a machine the size of a clothes dryer with a five-figure price tag. It was an unrealistic and unaffordable option for accomplishing daily tasks like browsing a newspaper or looking over a piece of mail. Although the technology for creating an affordable, portable machine existed, the potential customer base—blind individuals and their employers—was too small to promise a traditional return on investment. As a result, technology investors were unwilling to take the risk to develop such a product.

Transformative, Financially Sustainable Social Innovation
Benetech was founded as a low-profit-market approach to ensuring the development of technology that promises to have a high social value despite low potential for generating a typical return on investment. The company’s first product, the Arkenstone Reading Machine, makes use of the optical character recognition (OCR) technology found in scanners and can be used with a personal computer to scan and read text aloud.

At a cost of less than $2,000, the Arkenstone Reading Machine quickly found a large customer base. In addition to blind individuals and their employers, people with learning disabilities and government agencies that serve the disabled, including the U.S. Department of Veterans Affairs, began purchasing the product. This expansive customer base helped to generate millions of dollars in revenue annually and ultimately led to the sale of the reading machine and the Arkenstone brand to a for-profit distributor of disabilities products, an example of how a low-profit-market approach can eventually develop a market that could be served by a traditional for-profit approach.

Societal Benefits
Benetech was able to test and ultimately develop a self-sustaining solution to a problem caused by a market failure that government was unable to address. Its inexpensive reading machine, tested in the early stages by accepting below-average returns, ultimately ended up creating a new and profitable market while serving the thousands of Americans—veterans in particular—who previously were unable to read printed text on their own.

Next week: Testing & Developing Solutions continued - New Leaders for New Schools

Transformative, Financially Sustainable Innovation
ITNAmerica provides rides in private cars available 365 days a year, 24 hours a day, with “door-through-door” service using a combination of paid and volunteer drivers. Taking a limited-market approach, ITNAmerica charges a nominal one-time membership fee of $35 and about 50 percent of the cost of a taxi for each ride. Payments must be made for every ride, but no money changes hands in the vehicle. Seniors fund personal transportation accounts in advance and receive a monthly statement by mail.

In embarking on an ambitious five-year growth strategy, ITNAmerica has been efficient in leveraging private resources. According to founder Katherine Freund, “We have a very flexible approach to resources. We say money is one kind of resource, but there are other kinds of assets that have economic value. And if we can find a way to capture different kinds of economic value, then we can use those resources also to pay for rides.”   Volunteer drivers make up about 40 to 60 percent of the driving team. This helps the organization keep costs manageable, and offers seniors a way to subsidize the cost of their own rides. Many of the volunteers who are over the age of 60 contribute their own volunteer driving time through ITNAmerica’s Transportation Social Security program, building up credits in their personal transportation accounts for their own future use while they are still safe and healthy to transport others. Family members also supply volunteer time and make in-kind contributions of their driving credits to their relatives who are using the service. Seniors may trade their personal vehicles when they are no longer able to use them and apply the liquidated equity to fund their personal transportation accounts. The donated vehicles are often used to deliver rides.

Societal Benefits
ITNAmerica has developed a highly efficient model that ultimately funds itself. When the organization starts an affiliate program in a new city, it limits the amount of public funding it accepts to 50 percent or less of the capital necessary. Moreover, no public funds may be used for day-to-day operations, because ongoing use of public funds crowds out the development of the private community support so essential for long-term sustainability. Freund explains, “Most of the resources for transportation are private. If you don’t have a model that is built to access them, then you’ll fall into the pattern of being one of many providers in a turf war over the public dollars.”  She notes that while many social problems require ongoing public support, senior transport—which targets a population willing and able to pay modest fees—is not one of them. Once ITNAmerica affiliates reach their full capacity, the public funding that helped to get them started can be directed to other needs. As a result, ITNAmerica leverages minimal initial support from government to meet the transportation needs of older Americans across the country.

Learn how KaBOOM! has leveraged public and private resources to build nearly 2,000 new playgrounds in underserved communities.

Next week: How social entrepreneurship helps government Part II: Testing & Developing Solutions