The Schwab Foundation for Social Entrepreneurship on the Evolution and Future of Social Enterprise
Rahim Kanani, The Huffington Post
Probably more than other organizations, we place emphasis on the financial sustainability of the social enterprise. When we analyzed the entrepreneurs in our network over time, we noticed that the for-profit enterprises, or those with an earned revenue stream, grew, on average, three times faster than those purely focused on donations. We therefore search for those models that are able to sustain part or all of their budget through earned income. This income should be directly raised through the core activities of the organization, not a business that is unconnected to the core strategy of the organization and purely set up for funding purposes.
We see social entrepreneurs covering a large segment on the spectrum between traditional for-profit and nonprofit/government organizations. Five years ago, we started to subdivide the spectrum into three different categories, which refer to the financial and organizational model of the social enterprises:
1) Leveraged nonprofit ventures
The entrepreneur sets up a non-profit organization to drive the adoption of an innovation by engaging a cross section of society, including private and public organizations. Leveraged non-profit ventures continuously depend on outside philanthropic funding, but their longer term sustainability is often enhanced given that the partners have a vested interest in the continuation of the venture.
2) Hybrid nonprofit ventures
The entrepreneur sets up a non-profit organization but the model includes some degree of cost-recovery through the sale of goods and services to a cross section of institutions, public and private, as well as to target population groups. Often, the entrepreneur sets up several legal entities to accommodate the earning of an income and the charitable expenditures in an optimal structure. To be able to sustain the transformation activities in full and address the needs of clients, who are often poor or marginalized from society, the entrepreneur must mobilize other sources of funding from the public and/or philanthropic sectors. Such funds can be in the form of grants or loans, and even quasi-equity.
3) Social business ventures
The entrepreneur sets up a for-profit entity or business to provide a social or ecological product or service. While reasonable profits are ideally generated, the main aim is not to maximize financial returns for shareholders but to grow the social venture and reach more people in need. Wealth accumulation is not a priority and profits are reinvested in the enterprise to fund expansion. The entrepreneur of a social business venture seeks investors who are interested in combining financial and social returns on their investments
The leveraged nonprofits currently make up 20 percent of the social enterprises in the Schwab network, hybrid nonprofits 50 percent and social businesses 30 percent. This categorization has helped reduce confusion around the social entrepreneur definition and allows investors and philanthropists to identify the organizations they are most likely to finance.