Introduction: Reconciling the False Dichotomy Between Citizens and Consumers
The idea that profit-seeking businesses should engage in socially responsible practices is not new. However, the social enterprise sector, as it has evolved over the last ten years, represents an expansive rethinking of the role of businesses in impacting society, with some researchers finding it to be an increasingly important cultural phenomenon (Dey 2006). Within the new social enterprise paradigm, social ends are no longer a transparent add-on relegated to secondary priority; rather, they are as central as financial returns to the business purpose. This new paradigm is one in which many social innovators implement business plans in the service of their social mission. As explained by Zoe Selzer, Executive Director of GoodCompany Group, these new social enterprises are ones in which, “social mission [is] baked into the fiber of the venture” (GoodCompany Interview 2012).
As consumers grow increasingly wary of exploitative business practices and as seemingly intractable social problems are of increasing concern in the public psyche, social service providers and businesses are recognizing the benefits of reconciling their approaches to respond to citizens as consumers and vice versa. In 2009, the New York Times found “indications that there is increasing interest in the idea of using business to tackle the world’s big problems” (Alboher 2009), a gargantuan undertaking traditionally assigned to public or nonprofit actors. But in a time of deteriorating government finances and growing skepticism regarding government’s ability to meaningfully address pressing social problems such as poverty, social exclusion and the environment (Dacin, Dacin and Tracey 2011), the search for new solutions is focusing on the potential of the social enterprise sector.
There is a growing interest among the general public inbecoming a social entrepreneur, with The Economist noting that “a decade ago the term was scarcely heard; today everyone from London to Lagos wants to be one” (The Economist 2010). This is not surprising considering the increased exposure of inspiring, passionate, successful individuals making a difference in the world through their entrepreneurial innovations, thanks to sophisticated organizations such as Ashoka and the Skoll Foundation (Dacin, Dacin and Tracey 2011). A career of doing good while doing well is powerfully compelling, especially as anecdotal evidence of the personal, social and financial rewards inspire the public imagination. As David Borenstein notes, “people everywhere [want to] apply their talents in ways that bring security, recognition and meaning….What has changed in recent years is that the citizen sector offers a broad avenue to satisfy those needs: to align what you care about, what you are good at and what you enjoy doing…and have real impact” (Borenstein 2004, 9 ).
Government interest in social enterprises has grown alongside that of the general public, as evidenced by recent legislative activity aimed at creating a friendlier legal and tax environment for these unique businesses to launch and thrive. In 2009, Philadelphia became the first U.S. city to pass a sustainable business tax credit, which is currently in the first year of its pilot phase. According to Councilman James Kenney, this is a strategy for attracting “sustainable businesses…that meet environmental and social performance standards”(B Lab 2011). At the state level, the Pennsylvania legislature is currently considering a benefit corporation bill that would allow companies to incorporate, or change their existing articles of incorporation, to include fiduciary responsibility to constituencies other than shareholders (LegiScann.d.). If Pennsylvania House Bill 1616 is passed, the state will be joining 10 others that have passed similar legislation to support social enterprises(B Lab 2012). At the federal level, the Jumpstart Our Business Startups (JOBS) Act intends to facilitatethe development of tools that support social enterprises, most notably by loosening securities regulations in a way that legalizes crowdfunding. Crowdfunding leverages online networks to raise capital by aggregating small amounts of equity from a large pool of investors.
The potential of social enterprises has not escaped the attention of the investment community, either. Impact investing is a growing phenomenon that has largely functioned as a niche activity among socially conscious investors, sometimes referred to as “philanthrocapitalists,” and a handful of foundations. Impact investment is now entering the mainstream, with powerful investment institutions beginning to recognize the potential of social enterprises (The Economist 2011). Notably, J.P. Morgan released a market analysis of impact investments as an emerging asset class in 2010, finding tremendous potential for both financial and social returns. Based on independent analyses conducted by J.P. Morgan and the Monitor Institute, the sector can be estimated to have the growth potential of about $500 billion over the next 10 years (J.P. Morgan Global Research 2010; Freireich and Fulton 2009).
Many of the elements necessary for facilitating the growth and development of social enterprises have begun to take root; governmental, popular and private financial support are all mobilizing to nurture social innovations and enterprises. Despite this backdrop, social entrepreneurs face important obstacles to creating viable and disruptive solutions. These obstacles can be broadly understood as a need for improved, coordinated mechanisms for building business capacity.
Social Return on Investment
Social Return on Investment
Social Return on Investment (SROI) is acost-benefit analysis method that seeks to quantify the non-financial value created by activity using invested resources.An SROI calculation allows organizations to assess their social impact and efficiencyin terms analogous to assessing financial returns.The potential impact of an organization such as GoodCompany that equips other promising social entrepreneurs to scale and replicate their solutions more broadly is potentially enormous, but also difficult to quantify. Measuring the SROI for such an organization requires an aggregate calculation that begins with identifying stakeholders for each of the social enterprises supported by GoodCompany, determining and valuating the inputs, outputs and outcomes for each social enterprise’s stakeholders, and so forth.
Assuming it were possible to collect all of this information for each social enterprise, two fundamental questions arise: deadweight and attribution. The question of whether a social entrepreneur would have succeeded regardless, the ‘deadweight’ measure, is impossible to answer without some subjectivity. Attribution is also challenging due to the increasing number of social enterprise incubators around the country, especially given that many entrepreneurs attend more than one incubator, albeit for very different reasons. Once we factor in the deadweight and attribution rates, we have to apply these rates to each organization participating in a GoodCompany program. To examine the potential cumulative SROI of an organization such as GoodCompany, we have conducted the calculation for One Degree Solar (ODS), a graduate of the Ventures program and current resident, as a proxy. The exact figures for each input were confirmed with ODS, but are not being published at the authors’ discretion to avoid disclosing proprietary pricing and sales information, particularly at a time when the company is in advanced conversations with potential investors. We should also note that these figures are based on actual sales figures during the ODSpilot phase, and these numbers will dramatically increase as ODS fully launches its product and spreads to additionalmarkets.
Gaurav Manchanda of One Degree Solar (ODS) attributes much of his business acumento date to GoodCompany, finding that the Ventures curriculum was critical to pivoting into a successful business model, especially given his previous experience working for an international health nonprofit.The company has its first office in Kenya as it focuses on providing affordable, renewable energy to low-income small businesses and households that currently depend on candles, kerosene and propane for basic lighting. ODS designs, manufactures and distributes BrightBox, a micro-solar lighting system that also serves as a power hub for portable electronics, particularly cell phones.ODS has three primary customers in its value chain. The first are independent resellers and vendors selling the BrightBox units, generating a reasonable margin from the resale. The second stakeholder group consists of microenterprises purchasing the units to increase their hours of operation. The benefits to these microenterprises are a savings in kerosene and an increase in productive hours from the additional light in both the morning and evening. The third customer group is individual households that financially benefit from a reduction in kerosene costs, but also benefit from the reduced health risks associated with indoor kerosene use.
*(I) refers to ‘investment’ or ‘input’ and (B) refers to ‘benefit’ or ‘outcome’.
In addition to ODS’ primary customers, the company also hires local sales staff that earn competitiveincomes and keep the money generated within the Kenyan economy. Lastly, there are the environmental benefits resulting from reduced CO2 emissions caused by a reduction in kerosene burning.
*(I) refers to ‘investment’ or ‘input’ and (B) refers to ‘benefit’ or ‘outcome’.
The ‘Opportunity Cost’ calculation is based on the average salary an ODS salesman would make in another occupation. The calculations are based on public information about the minimum wage in Kenya as well as market prices for CO2. Using the social e-valuator tool (www.socialevaluator.eu), we calculated the net social value for ODS’ pilot year:
These numbers are impressive given the conservative estimates used for cost savings, revenue increases, health benefits and CO2 emissions. This does not factor in economic multiplier effects in the country. What is most impressive is that these figures are based on a single country during a pilot year. Sales projections indicate an eight-fold increase over the next 18 months. Back of the envelope math brings their net social value to $1,560,000. But ODS has even greater potential given plans to expand outside of Africa into Asia. Per our calculations, if 0.01 percent of the 670,000,000 Indians that lost power during the July 2012 Grid Failure (Memmott 2012) purchased BrightBox units, their social impact would increase by at least eighty-fold.
Could ODS scale to this level? This is where the business fundamentals instilled byGoodCompany’s program can make an impact, especially for entrepreneurs with relevant industry experience but limited business training. Prior to GoodCompany, Manchanda himself would admit that scaling the original business model would not have been possible. Since graduating from the program, ODS has established supply chain networks that not only facilitate product delivery, but also use locally available replacement parts (such as batteries) to repair units. After-sales support is handled via SMS and phone support, allowing customers quick and easy product support from anywhere. The SMS support also facilitates the collection of social impact data that contributed to the underlying calculations above. It is worth noting that much of this information came voluntarily from customers. ODS’ customers are excited about their reduced kerosene usage (in terms of energy savings), increased productivity, and that a company is interested in their customer experience and actively collecting feedback (ODS Interview 2012).
You might have noticed the use of ‘customers’ rather than ‘beneficiaries.’ This is important to the commercially driven social entrepreneur such as Manchanda that is delivering a product to market, not a service to beneficiaries. ODS is a great example of a social enterprise targeting a specific ‘value chain’ opportunity in social impact. They are an organization focused on delivering a product with significant demand in the market(s) in which they operate. ODS is not designing for the poor or helping groups of beneficiaries that may ‘need’ their product or their support. Rather, ODS studies consumer psychology and brings proven strategies to untapped markets. In short, they don’t want to patronize or belittle their customers, they want to enrich their lives by providing a product that consumers choose and truly want. Their product is carefully deigned to consider locally available replacement parts, which certainly has social benefits, but was commercially motivated as a means to ensure customers continued to use and promote the BrightBox to friends and relatives. The SMS after-sales support network allows them to survey customers and collect social impact data, but it was designedas a means to connect with customers and gather valuable market research. These distinctions are incredibly important to this class of business savvy social entrepreneurs, and truly differentiate them from the plurality of social enterprises.
What does GoodCompany have to do with all of this? GoodCompany helped ODS revamp their business model through more targeted market analyses, pricing and supply chain considerations, and a myriad of other business-driven considerations that helped make the BrightBox commercially viable on a larger scale (ODS Interview 2012). We will remain conservative with our estimate and assign a deadweight measure of 50 percent, based on the Small Business Associations five-year startup survival rates (SBA 2011). We use the five-year measure based on GoodCompany’s anticipated time horizon for their graduates to start delivering measurable impact. How have external factors contributed to the success of ODS? This is a much harder figure to pin down, but it is clear that GoodCompany played a significant role in redirecting ODS, which most likely led to more productive encounters down the road. Based on ODS’ view of GoodCompany’s contribution, we’ll assign a 50 percent attribution measure. This means that GoodCompany can claim 25 percent of the SROI benefits based on their contribution to ODS. If they have a similar impact on each social entrepreneur that goes through their program, it is clear that their aggregate impact has the potential to increase very quickly.
GoodCompany’s SROI has the potential to be very high in the long-term, but will not be an easy one to measure. In order to arrive at their SROI, GoodCompany will need to aggregate the sector-specific SROIs of each of their graduates, which work across multiple areas of focus: education, environment, health, community and employment. A challenging exercise given the variance of metrics between sectors, but measuring each of these areas will be a valuable exercise. Authentic assessment of social impact is crucial to substantiating the effectiveness of social enterprises in addressing unmet social needs. It will also ensure that both traditional and impact investors are paying close attention to the potential of socially driven enterprises with solid business foundations.