An Introduction to Social An Introduction to Social EntrepreneurshipEntrepreneurshipBy Kamal FaridiBy Kamal Faridi

An Entrepreneurial RevolutionAn Entrepreneurial Revolution

• 1 million new ventures a year in U.S.1 million new ventures a year in U.S.• 85% of the new jobs in small and 85% of the new jobs in small and

start-up firmsstart-up firms• Product/service introduction rate Product/service introduction rate

higher than ever beforehigher than ever before• Rate of wealth creation explodingRate of wealth creation exploding• And itAnd it’’s a global revolutions a global revolution

What Is Entrepreneurship?What Is Entrepreneurship?

Process of creating value by bringing Process of creating value by bringing together a unique package of together a unique package of

resources to exploit an opportunityresources to exploit an opportunity

The New Buzzword:The New Buzzword:Social EntrepreneurshipSocial Entrepreneurship

So, is entrepreneurship basically So, is entrepreneurship basically entrepreneurship regardless of entrepreneurship regardless of the context?the context?

Or is Or is ““social entrepreneurshipsocial entrepreneurship”” something truly different?something truly different?

What Is Social What Is Social Entrepreneurship?Entrepreneurship?

Nonprofits making moneyNonprofits making money

What Is Social What Is Social Entrepreneurship?Entrepreneurship?

Nonprofits making moneyNonprofits making money

For-profits doing things to show For-profits doing things to show they are not evilthey are not evil

What Is Social What Is Social Entrepreneurship?Entrepreneurship?

Nonprofits making moneyNonprofits making money

For-profits doing things to show they are not For-profits doing things to show they are not evilevil

Process of creating value by bringing together a Process of creating value by bringing together a unique package of resources to exploit an unique package of resources to exploit an

opportunityopportunity, in pursuit of high , in pursuit of high socialsocial returns returns

The only big difference between The only big difference between commercial and social commercial and social

entrepreneurship:entrepreneurship:

Denomination of the returnsDenomination of the returns

Social and commercial Social and commercial entrepreneurship have most of entrepreneurship have most of

the same characteristicsthe same characteristics

The Process of Social The Process of Social EntrepreneurshipEntrepreneurship

1.1. Find an opportunityFind an opportunity

2.2. Develop a business conceptDevelop a business concept

3.3. Figure out what success means Figure out what success means and how to measure itand how to measure it

4.4. Acquire the right resourcesAcquire the right resources

5.5. Launch and growLaunch and grow

6.6. Attain goalsAttain goals

The Main Difficulty: The Main Difficulty: MeasurementMeasurement

• What is profit?What is profit?• How do we count it?How do we count it?• What is What is ““social return o n social return o n

investmentinvestment”” for venture for venture philanthropists?philanthropists?

• Can we compare investments?Can we compare investments?

Three characteristicsThree characteristics

• Social entrepreneurship meets Social entrepreneurship meets needs unmet by commercial needs unmet by commercial markets and (usually) the markets and (usually) the governmentgovernment

• Social entrepreneurship is Social entrepreneurship is motivated by social benefitmotivated by social benefit

• Successful social Successful social entrepreneurship usually works entrepreneurship usually works with, not against, marketswith, not against, markets

Case 1: Housing Opportunities Case 1: Housing Opportunities Made Equal (H.O.M.E.)Made Equal (H.O.M.E.)

• ServicesServices– Core services in housing disputes and fair Core services in housing disputes and fair

housing advocacy in Virginiahousing advocacy in Virginia– Special projects and lawsuitsSpecial projects and lawsuits

• Opportunity: Educate people on fair Opportunity: Educate people on fair housing before-the-fact, instead of housing before-the-fact, instead of fixing situations after-the-factfixing situations after-the-fact

• Enterprise: Start fair housing training Enterprise: Start fair housing training InstituteInstitute

• Returns: More housing for the Returns: More housing for the disadvantaged, fewer complaintsdisadvantaged, fewer complaints

Case 2: Boaz & RuthCase 2: Boaz & Ruth

• Opportunity: Underused human Opportunity: Underused human capitalcapital

• Endeavor: New businesses using Endeavor: New businesses using former inmates in an aggressively former inmates in an aggressively faith-based settingfaith-based setting

• Social returns: Young people not Social returns: Young people not returning to jail, peaceful returning to jail, peaceful neighborhoodneighborhood

Forces on Social Forces on Social EntrepreneurshipEntrepreneurship

Environmental factors• Social climate conducive to social

entrepreneurship• Political climate that facilitates

social innovation

Availability of financial and nonfinancial resources

Perturbation of the environment• Political change• Cultural change• Economic change

Entrepreneurial personality traits

Preparation to exploit opportunities

• Education• Experience

Social entrepreneurshipprocess begins

External forces

Internal forces

Environmental factors• Social climate conducive to social

entrepreneurship• Political climate that facilitates

social innovation

Availability of financial and nonfinancial resources

Perturbation of the environment• Political change• Cultural change• Economic change

Entrepreneurial personality traits

Preparation to exploit opportunities

• Education• Experience

Social entrepreneurshipprocess begins

External forces

Internal forces

Social Entrepreneurs Social Entrepreneurs ““LookLook”” Like Like Any Other Kind of EntrepreneurAny Other Kind of Entrepreneur

Innovativeness

Education and experience

Achievement orientation

Independence

Sense of control over destiny

Low risk aversion

Tolerance for ambiguity

Entrepreneurialorientation

Community awarenessAnd social concern

Socially-entrepreneurialorientation

Innate characteristics

Innovativeness

Education and experience

Achievement orientation

Independence

Sense of control over destiny

Low risk aversion

Tolerance for ambiguity

Entrepreneurialorientation

Community awarenessAnd social concern

Socially-entrepreneurialorientation

Innate characteristics

Risk + InnovationRisk + Innovation

High risk aversion

Low risk aversion

Highly-innovative

Dreamer Entrepreneur

Not innovative

Stuck Gambler

Opportunities vs. ThreatsOpportunities vs. Threats

Opportunities for social Opportunities for social entrepreneurs look like threats entrepreneurs look like threats

and tragedies to othersand tragedies to others

Myths about Social Myths about Social EntrepreneurshipEntrepreneurship

• Social entrepreneurs are anti-businessSocial entrepreneurs are anti-business• The difference between commercial and The difference between commercial and

social entrepreneurship is greedsocial entrepreneurship is greed• Social entrepreneurs are nonprofit Social entrepreneurs are nonprofit

managersmanagers• Social entrepreneurs are born, not madeSocial entrepreneurs are born, not made• Social entrepreneurs are misfitsSocial entrepreneurs are misfits• Social enterprises usually failSocial enterprises usually fail• Social entrepreneurs love riskSocial entrepreneurs love risk

Why does social entrepreneurship Why does social entrepreneurship matter?matter?

A Nation of Social A Nation of Social EntrepreneursEntrepreneurs

Immigrant stock with a high Immigrant stock with a high entrepreneurial orientationentrepreneurial orientation

+ Faith in own abilities+ Faith in own abilities

+ Vast ungovernable frontier+ Vast ungovernable frontier

= Citizens willing to meet their = Citizens willing to meet their own social needs, without an own social needs, without an

excessive reliance on the stateexcessive reliance on the state

The Result: Nonprofit NationThe Result: Nonprofit Nation

• 1.5m 1.5m registered registered nonprofitsnonprofits

• Something like Something like 9m grassroots 9m grassroots organizationsorganizations

• 30 nonprofit 30 nonprofit links per links per citizencitizen

3%

6%

7%

0%

1%

2%

3%

4%

5%

6%

7%

8%

All nonprofits Public charities Private foundations

Av

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nu

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ate

, 19

96

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04

A primer on nonprofit A primer on nonprofit organizationsorganizations

What Is a Nonprofit?What Is a Nonprofit?

• Tax & regulatory definition: an organization thatTax & regulatory definition: an organization that– Enjoys special tax statusEnjoys special tax status– Faces a nondistribution constraint (profit=0)Faces a nondistribution constraint (profit=0)

• Functional definition: an organization that forms toFunctional definition: an organization that forms to– perform perform ““public taskspublic tasks””

• environmental protection, social service environmental protection, social service provisionprovision

– perform tasks for which there is demand but no perform tasks for which there is demand but no supply from for-profits or governmentssupply from for-profits or governments• religious activity, art museumreligious activity, art museum

– influence the direction of public policyinfluence the direction of public policy• political party, issue organizationpolitical party, issue organization

23

International FactsInternational Facts

• U.S. is very largeU.S. is very large– represents more than ½ of all nonprofit represents more than ½ of all nonprofit

activity worldwide ($600b)activity worldwide ($600b)– has 45% of all worldhas 45% of all world’’s nonprofit s nonprofit

employeesemployees

• Rich nations tend to have more Rich nations tend to have more developed nonprofit sectors than developed nonprofit sectors than poor nationspoor nations– Government social spending is Government social spending is positivelypositively

correlated with nonprofit sector sizecorrelated with nonprofit sector size

International ComparisonsInternational Comparisons

Country Revenues from

government Revenues from

philanthropy Earned revenues Argentina 20% 8% 73% Australia 31% 6% 63% Austria 50% 6% 44% Belgium 77% 5% 19% Brazil 16% 11% 74% Colombia 15% 15% 70% Czech Republic 39% 14% 47% Finland 36% 6% 58% France 58% 8% 35% Germany 64% 3% 32% Hungary 28% 18% 55% Ireland 77% 7% 16% Israel 64% 10% 26% Japan 45% 3% 52% Mexico 9% 6% 85% Netherlands 59% 3% 38% Peru 19% 13% 68% Romania 45% 27% 29% Slovakia 22% 23% 55% Spain 32% 19% 49% U.K. 47% 9% 45% U.S. 31% 13% 57%

Source: Salamon, et al. 1999

Size of the Nonprofit Size of the Nonprofit WorkforceWorkforce

12.6

11.5

10.5

9.2

7.87.2

6.2

4.94.94.54.5

3.73.53

2.42.42.21.7

1.30.90.60.4

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Colo

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NPO Types in the U.S.NPO Types in the U.S.

• 34 types: 501(c)(1)-(27), 501(d)-(f),(k),(n), 521(a), 52734 types: 501(c)(1)-(27), 501(d)-(f),(k),(n), 521(a), 527• 501(c)(3): 501(c)(3): public benefit organizationspublic benefit organizations

– Religious, charitable, educational, scientific, Religious, charitable, educational, scientific, literary, amateur sports promotion, prevention of literary, amateur sports promotion, prevention of cruelty to animals or childrencruelty to animals or children

– Private schools, houses of worship, social welfare Private schools, houses of worship, social welfare charities, hospitals, libraries, etc.charities, hospitals, libraries, etc.

• 501(c)(4): 501(c)(4): mutual benefit organizationsmutual benefit organizations– Local civic leagues, social welfare organizations, Local civic leagues, social welfare organizations,

employee associationsemployee associations– Volunteer fire departments, homeownersVolunteer fire departments, homeowners’’

associations, social clubs, festivals, etc.associations, social clubs, festivals, etc.• 501(c)(6): 501(c)(6): Trade organizationsTrade organizations

– Business leagues, chambers of commerceBusiness leagues, chambers of commerce

Ref.: Section 501, IR Code

Nonprofits Are Nonprofits Are Proliferating in the U.S.Proliferating in the U.S.

Number of nonprofits

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

1975 1980 1985 1990 1995 2000

The Nonprofit Sector Is The Nonprofit Sector Is Larger than GovernmentLarger than Government

Share of GDP (1998)

Nonprofit, 13%

Commercial, 80%

Government, 7%

Health Organizations Health Organizations Dominate the SectorDominate the Sector

Health, 35.91%

Education, 14.03%

Human Services, 4.96%

Grantmaking, 4.90%

Arts, 2.15%

Member Benefit, 1.67%

Other, 7.13%

Unknow n, 29.10%

Source: IRS 990 data, 2003

Revenue Sources Vary a Revenue Sources Vary a Lot by SubsectorLot by Subsector

Subsector Portion of nonprofit sector1

Total revenues1

Government funding2

Private donations2

Earned income2

Education 18% $119.7b 19% 16% 65% Social welfare 12% $79.8b 52% 20% 28% Health 49% $325.9b 42% 6% 52% Arts 2% $13.3b 10% 44% 46% Religion3 12% $79.8b 0% 84% 16% Total 100% $664.8b 33% 20% 47% 1. Source: Independent Sector (2002) 2. Source: Salamon (2002) 3. This category only counts sacramental activity

Health Organizations Tend Health Organizations Tend to Be Hugeto Be Huge

$0

$5,000,000

$10,000,000

$15,000,000H

ealth

Mem

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Pub

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Source: IRS 990 data, 2003

All Subsectors Are Growing(but Health is exploding)

33 Source: Independent Sector 2002

0

50

100

150

200

250

300

350

Health Education Religion Socialwelfare

Arts andculture

Subsector

Bil

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of

19

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1977

1987

1997

Main Challenges at PresentMain Challenges at Present

• MoneyMoney• CompetitionCompetition• Demonstrating effectivenessDemonstrating effectiveness• TechnologyTechnology• TrustTrust• Human resourcesHuman resources• Public-sector relationsPublic-sector relations

Ref. Salamon 2002

Main Opportunities at PresentMain Opportunities at Present

• Demographic shiftsDemographic shifts• New philanthropyNew philanthropy• Heightened awareness of sectorHeightened awareness of sector• Increased social welfare Increased social welfare

spending through sectorspending through sector– Entitlement expansionEntitlement expansion– Welfare reformWelfare reform

Ref. Salamon 2002

Main Trends at PresentMain Trends at Present

• Explosive growthExplosive growth• Attention to marketing and Attention to marketing and

management movementsmanagement movements• Commercial venturesCommercial ventures• Development of umbrella Development of umbrella

organizations and formal educationorganizations and formal education• Effectiveness in competing Effectiveness in competing

economically and politicallyeconomically and politically

Ref. Salamon 2002

Main Risks at PresentMain Risks at Present

• Identity loss, Identity loss, ““mission creepmission creep””• Industry concentrationIndustry concentration• Pressure on managers for resultsPressure on managers for results• Loss of public trustLoss of public trust

Ref. Salamon 2002