A New Approach to Social Problems

from Busi­ness­Week

Social Entre­pre­neur­ship or Social Respon­si­bil­ity? There is an ongo­ing debate as to what com­pa­nies and indi­vid­u­als doing this type of “busi­ness” does.

The terms “social entre­pre­neur” and “social busi­nesses” are gen­er­ally used to char­ac­ter­ize peo­ple and busi­nesses that bring entre­pre­neur­ship to ven­tures that have a social mis­sion. Yet there are those who would limit the social entre­pre­neur label only to those with­out any profit motive. A sep­a­rate, but related, cat­e­gory are com­pa­nies referred to as “socially respon­si­ble.” These are gen­er­ally com­pa­nies whose core busi­ness does not nec­es­sar­ily have a social mis­sion, but who dis­play socially respon­si­ble char­ac­ter­is­tics, like envi­ron­men­tal sensitivity.

The good thing about all this is that there is a grad­ual move­ment in our eco­nom­ics from purely cap­i­tal­ist or purely communist/socialist to a healthy (I hope so!) mix­ture of both. This is truly the age of the gray area. Even in eco­nom­ics, we see the com­plex­i­ties of find­ing solu­tions and moti­va­tions and doing good for mankind.

And while we have to see how this grows and becomes a real move­ment, we also have to applaud the fact that there are indi­vid­u­als and com­pa­nies will­ing to become more than what they have been expected to be–profit-making machines. When we hear sto­ries like this, we become more hopeful.

The world is becom­ing a more benev­o­lent place.

A Social Solu­tion, With­out Going the Non­profit Route
By MARCI ALBOHER
Pub­lished: March 4, 2009
http://​www​.nytimes​.com/​2​0​0​9​/​0​3​/​0​5​/​b​u​s​i​n​e​s​s​/​s​m​a​l​l​b​u​s​i​n​e​s​s​/​0​5​s​b​i​z​.​h​tml

It used to be that peo­ple who wanted to solve a social prob­lem — like lack of access to clean water or inad­e­quate hous­ing for the poor — cre­ated a char­ity. Today, many start a com­pany instead.

D.light, a com­pany cofounded by Sam Gold­man, who spent four years in the Peace Corps in Benin before earn­ing a master’s degree in busi­ness from Stan­ford Uni­ver­sity, is an exam­ple. Mr. Gold­man started D.light with the mis­sion of replac­ing mil­lions of kerosene lamps now used in poor, rural parts of the world with solar-powered lamps.

Hav­ing used kerosene lamps him­self while liv­ing in Benin, Mr. Gold­man learned first­hand of kerosene’s prob­lems — it is expen­sive, it pro­vides poor light and it is extremely dan­ger­ous. When the son of his West African neigh­bor nearly died after suf­fer­ing severe burns from spilled kerosene, Mr. Gold­man said he real­ized he wanted to cre­ate a ven­ture to solve both the social and eco­nomic prob­lems caused by these lamps. His time in Benin also con­vinced him, he said, that only as a busi­ness could a project become large enough to reach the great num­ber of peo­ple who use these lamps as their pri­mary source of light.

“We could have done it as a non­profit over a hun­dred years, but if we wanted to do it in five or 10 years, then we believed it needed to be fueled by profit,” he said. “That’s the way to grow.”

Since the com­pany incor­po­rated in May 2007, it has raised $6.5 mil­lion from a com­bi­na­tion of investors who, Mr. Gold­man said, are able to push the com­pany on both its social mis­sion and its profitability.

What to call these inno­v­a­tive busi­ness­peo­ple is the sub­ject of some debate. The terms “social entre­pre­neur” and “social busi­nesses” are gen­er­ally used to char­ac­ter­ize peo­ple and busi­nesses that bring entre­pre­neur­ship to ven­tures that have a social mis­sion. Yet there are those who would limit the social entre­pre­neur label only to those with­out any profit motive. A sep­a­rate, but related, cat­e­gory are com­pa­nies referred to as “socially respon­si­ble.” These are gen­er­ally com­pa­nies whose core busi­ness does not nec­es­sar­ily have a social mis­sion, but who dis­play socially respon­si­ble char­ac­ter­is­tics, like envi­ron­men­tal sensitivity.

Because of the dif­fi­culty of defin­ing these social ven­tures, it is hard to gauge the exact num­ber of them, but there are indi­ca­tions that there is increas­ing inter­est in the idea of using busi­ness to tackle the world’s big prob­lems. Last year, 630 peo­ple attended a new con­fer­ence, Social Cap­i­tal Mar­kets, on social ven­ture invest­ing. Accord­ing to Kevin Jones, the cre­ator of the con­fer­ence and a prin­ci­pal in Good Cap­i­tal, an invest­ment firm focus­ing on social busi­ness, two-thirds of the par­tic­i­pants signed up after the col­lapse of Lehman Broth­ers, which he called a sign that peo­ple are flock­ing to what he calls a “new asset class.”

Experts con­cede that not all social prob­lems respond well to the for-profit model. One exam­ple could be early child­hood edu­ca­tion. “If you set it up as a busi­ness, you might be able to raise money more quickly and grow more quickly,” said David Born­stein, the author of “How to Change the World” (Oxford Uni­ver­sity Press, 2004), an often-cited book on social entre­pre­neur­ship. “But if you want to be prof­itable, you might find that you have to make choices that dimin­ish the qual­ity of your pro­gram and then chil­dren won’t learn to read as quickly. While Stan­ley Kaplan can make a for­tune sell­ing edu­ca­tion to well-heeled peo­ple, pro­vid­ing the same ser­vices to low-income kids would prob­a­bly not pro­vide a very good income.”

Mr. Born­stein said it came down to one cru­cial ques­tion: “As you grow, will the eco­nom­ics of your busi­ness work in favor of your mis­sion or will they work against it? In the case of pro­vid­ing access to solar energy for peo­ple in vil­lages, the big­ger you get, the cheaper your prod­uct will be, so the economies of scale make sense.”

Conchy Bre­tos, too, chose a for-profit model for her ven­ture. While work­ing as Florida’s sec­re­tary for aging and adult ser­vices, Ms. Bre­tos learned of the dif­fi­cul­ties that force older peo­ple to leave their homes and move into nurs­ing homes for lack of proper care.

With a part­ner, Ms. Bre­tos started the MIA Con­sult­ing Group, a busi­ness that advises gov­ern­ments as well as pri­vate hous­ing devel­op­ers on how to bring assisted liv­ing ser­vices cost-effectively to low-income hous­ing com­mu­ni­ties so that older peo­ple can be cared for in their own homes.

Ms. Bre­tos said that a busi­ness was the nat­ural model for their ven­ture. “We came from a strong busi­ness back­ground and we devel­oped a busi­ness plan,” Ms. Bre­tos said. “By doing that, we dis­cov­ered that we were offer­ing some­thing that no one else was offer­ing. We got our first client even before we incor­po­rated and within a few hours we had to form a com­pany to be able to put together a con­tract. It was just easy to form an S corporation.”

Ms. Bre­tos said she also had to make a liv­ing. “In this nation, we equate suc­cess with profit,” she said. “We wanted to be prof­itable while also doing some­thing that was right and giv­ing back to the community.”

Advis­ers who work with these kinds of com­pa­nies say the rise in social busi­ness reflects the times. “His­tor­i­cally, social and legal norms tended to rec­og­nize and treat for-profit and pro­gres­sive social or envi­ron­men­tal moti­va­tions and activ­i­ties sep­a­rately,” said Jonathan S. Stor­per, a part­ner at the law firm Han­son Brid­gett who spe­cial­izes in sus­tain­able and socially respon­si­ble busi­ness. “These lines have blurred and con­verged as the busi­ness world attempts to respond to the mod­ern culture’s demand that busi­nesses be good stew­ards of the envi­ron­ment and society.”

Still, there are legal issues to con­sider. The basic analy­sis, Mr. Stor­per said, is whether the organization’s pri­mary goal is to max­i­mize share­holder profit or to ben­e­fit the pub­lic. “If the pri­mary goal is to ben­e­fit the share­hold­ers, then the legal struc­ture should max­i­mize the abil­ity to cre­ate wealth,” he said. “While non­prof­its have advan­tages, such as an exemp­tion from pay­ing taxes and the tax deductibil­ity of dona­tions, non­profit activ­i­ties are restricted to its char­i­ta­ble purpose.”

He noted that the gov­ern­ment and the pub­lic “gen­er­ally are less able to scru­ti­nize the oper­a­tions and finances of for-profit busi­nesses.” But, he added, “The mis­sion of an orga­ni­za­tion may ben­e­fit from the broad pub­lic involve­ment and sup­port inher­ent in non­profit organizations.”