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