An article by Steve Wright of the Grameen Foundation redefining Social Enterprise.
Current definitions of social enterprise are based on how social enterprises are like financial enterprises except they are required to create good in addition to revenue. Financial enterprises are those enterprises that are not required to create good. They are only required to create revenue; therefore, it is of course possible that they create bad. Bad is created by a financial enterprise either by design or it is a negative externality meaning it is a consequence of the work but not an intended output. The cost of these negative externalities are largely borne by indirect stakeholders. A great example of this is the 2008 economic devastation wrought by treating housing as a speculative commodity. While a tremendous amount of money was made (and lost) in the financial enterprises engaged in this market, there was a negative externality experienced by homeowners who lost massive amounts of value in their homes and in many cases lost their actual homes. (It is worth saying that: 1) financial enterprises that create bad are… well… bad, and 2) some financial enterprises do not create bad.)
I believe we need to change the definition of social enterprise to one that is categorically different from financial enterprise. This new definition should focus on the two unique aspects of social enterprise. The first is the primacy of creating value - doing good. I have written about this aspect before so I won’t go into it here. The second is the presence of an ecosystem of players with common purpose like clean and accessible water, education, financial services for the poor, housing, healthcare… No single organization can solve any of these problems alone but working collectively is largely unexplored. I believe the reason for that is the adoption of the financial enterprise model as the foundation for the definition of social enterprise. The financial enterprise model focuses on 1) profit first, 2) competition and differentiation. Where the model does enable cooperation the goals tend to be efficiency and economy. These are good things but they are not enough. We need a definition of social enterprise that explicitly recognizes a community of actors that comprise a social enterprise ecosystem. The purpose of the social enterprise ecosystem is to account for all aspects of cost and benefit and therefore eliminate negative externalities. An interesting example of turning negative externalities in to positive opportunity in the housing market was described by Matt Taibbi in his Rolling Stone Column. Another wonderful example is Sanergy, a Kenyan company that uses human waste - an output from their sanitation business - as an input for their alternative energy business.
The goal of understanding the economy as an ecosystem is to reconcile inputs and outputs at a larger scale and apply conservation laws to the whole system. It is critical that we conceptualize the health of the social enterprise ecosystem as not simply the aggregate value of many social enterprises. The theory of change must involve the math of emergence and the idea that the whole social enterprise ecosystem will be greater than the sum of its parts. The most unique aspect of a social enterprise ecosystem comes from the amorphic adjective “social” and the reality that monopoly, or monolithic scale, is antithetic to success. I believe there is additive value in cooperation and something like interdependence-with-redundancy that can be realized as accelerated progress towards global solutions. This is not social as in social media. This is social as in society and community. Social like love not social like Twitter.
The purpose of social capital is to serve the social enterprise ecosystem. Unlike our financial capital cousins, social capital is not an industry apart. Social capital markets are part of the social enterprise ecosystem. What this means is that success for social capital products is defined as identical to the success of the social enterprise ecosystem. I believe there is also a corollary that states definitions of success for social capital markets that are independent of the success of the social enterprise ecosystem are are distracting at best and destructive at worst. Distracting because it detaches social investment and social investors from the goals of the social enterprise. Destructive because social investment goals that are independent of social enterprise goals put an undue burden on the entrepreneur and actually lessen the ability to advance the social goal.
The financial capital investment industry disagrees with this. There is much that social enterprise can and should borrow from financial enterprise but when a social enterprise simply replicates the entire financial enterprise model, it fails. This is the lesson of microfinance. Not that microfinance is somehow categorically bad. That is silly. The lesson of microfinance is that financial success is not a proxy for social success and that profit maximization is bad. The same holds true for social capital. Social capital markets must shrug off any power or status they have attracted due to their association with their casino cousin. To use a horrible quasi-religious metaphor, the role of social capital markets is to pay for the hammers to be used by the carpenters who are working to build us a better world. (Social capital enterprises need to do this sustainably which means they need to earn sustaining revenue. The purpose of that revenue is exclusively to enable the work to continue.)
Social capital markets have and should borrow much from financial capital markets but if we simply duplicate the model, we will fail. It may be useful to be an asset class as a stage in the development of social capital markets but to adopt a definition of asset class within financial capital markets in the long term is a mistake. We (those of us that are “social”) are not one end of a good <-> rapacious spectrum. The defining characteristics that set us apart are 1) that both the calculus of investment and the logistics of enterprise are part of the same ecosystem and are not separate industries (social capital enterprises are social enterprises), 2) recognition that all components of the ecosystem have a common purpose.
The tactics or presence of “the exit”; the amount of patience in patient capital; the quantity, quality and reality of the return; the amount available to catalyze scale or the missing middle; the provisioning of high risk seed capital; these are all design issues and the relative importance of these features depends entirely on the purpose of the product. To continue in this ridiculously declarative style, the purpose of the social capital product is to serve the social enterprise ecosystem; to first prove the model as described above and then to demonstrate that value comes to all of us if the social enterprise ecosystem is successful. This, I believe, is how we must begin to understand and measure our success. Is the social enterprise ecosystem healthy? This will require us to understand what healthy looks like. A critical aspect of this health is that it delivers value to (through?) all of its components or members or nodes. I think of this as a second iteration of value returned t the investor where the first iteration is a direct return from a specific social enterprise in proportion to the investment. The clearest example of this is the shop-local paradigm where living in a community and investing in a successful local business will provide you a first iteration return on the money you invested and a second iteration return that you can realize as a member of the community.
If we define the social capital product’s purpose exclusively in terms of a first iteration return provided to the investor per dollar invested, then we don’t solve the problem that we need to solve. If we focus on and get stuck at this first iteration then we will only create yet another powerful marketing and PR campaign to be exploited and stripped of all meaning and we will fail to integrate social investment into the social enterprise ecosystem. However, if we find and design practical and compelling ways for investors to realize value from the outputs of the social enterprise ecosystem, thus becoming part of the social enterprise ecosystem, then we have created something truly different and hopefully truly disruptive.
4 years ago, with his focus on institutionalised children in Ukraine, my colleague who died in his efforts a year ago, asked what is social enterprise and in his article distinguished between social media and that step further to deal with those who fall between the cracks where traditional capitalism does not reach:
He died, having been unable to leverage the funding that would have given all children a loving family home.
http://economics4humanity.wordpress.com/2012/06/14/what-is-social-enterprise/
Great stuff Steve. I find the likeness to an ecosystem spot on and use that much in my work. An ecosystem, fully functioning, is not static but rather one of ‘dynamic equilibrium.’ Always shifting, but striving (unconsciously) for overall balance. In nature, there are many cues that allow various parts of an ecosystem to react and respond. What we need more of in this movement is the connective tissue between efforts- the space between the nodes of a network as you say in your comment above.
The question for me then is how do we create that interaction between nodes to allow both individual activity ‘and’ a movement towards dynamic equilibrium. The answer is no doubt complex, but at least two parts are key- tools and behavior. The tools in many ways are the easier part. Free and inexpensive platforms make online collaboration easy and painless. Across organizations, simply knowing what one another is doing can work wonders, even without direct one-on-one communication. Cues permeate through the system much as they do in nature (or on Twitter). Behavior change, not surprisingly, is much more elusive.
Most people have the best of intentions, but like a gym membership, intentions are often not acted upon. So how to affect behavior change towards mild collaboration even if the intentions are there? I’d be lying if I said I’ve cracked that nut, but one area that can be effective is some outside pressure. Board members, investors, foundations- those with a stake outside of the day to day madness of running a social enterprise can be instrumental in cross-organizational collaboration. Not necessarily requiring, but enabling and encouraging information sharing can go far. Once information is shared, in social enterprise or in nature, systems tend to adapt even without any intentional direction.
Brett,
Thank you for this. Great comments. I particularly resonate with the idea of “behavior change”. In my work in financial services for the poor behavior change is a huge issue. We have studied this and find that there are two very different interventions. The first has a lot to do with marketing and the presentation of information. Things like, when presenting a list of items the last item is usually chosen, is one approach. That is really trickery. The second and more interesting school of thought has to do with community and trusted referrals/recommendations. This is what an ecosystem is all about. How does value move across connections from node to node. I believe scale-free network structure (http://en.wikipedia.org/wiki/Scale-free_network) likely applies here. Additionally, I think there is a fractal element in collaboration and community (http://www.ted.com/talks/ron_eglash_on_african_fractals.html). My problem with existing collaboration and community tools is that they focus on aggregating value AT THE NODE as opposed to discovering un-tethered value as it moves or emerges within the network. P2P infrastructure (as the Internet was originally designed) lends itself perfectly to this. I ran across an amazing video that exposed health issues in a p2p wireless mesh network which is a fantastic analogy for community and the efficacy of the space between the nodes. Essential it infers value on the nodes relative to their ability to move information through out the network! http://www.youtube.com/watch?v=6Ng78Go-A-g
Beautiful post Steve. It sparked a lot of thoughts. Essentially, your concept of ecosystem is very powerful. My comments revolve around issues and ideas to add flesh to the body.
A. On the scope of an ecosystem
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You say: “we need to change the definition of social enterprise to one that is categorically different from financial enterprise. [...] The purpose of the social enterprise ecosystem is to account for all aspects of cost and benefit and therefore eliminate negative externalities.”
This is a binomial classification:
(1) there are two categories of enterprises.
I would like to present two alternative classifications:
(2) A 2×2 matrix: one dimension is whether or not enterprises seek to do good; and the other dimension is whether or not they eliminate negative externalities.
(3) The second dimension now becomes a spectrum: it is no longer whether or not the enterprise eliminates negative externalities, but rather to what extent they place a relative value on these externalities, and what weight they give to them in their decisions. This relates to a concept that is dear to my heart: rational decisions to make trade-offs between competing values.
This may sound like a theoretical debate, but it has a number of practical ramifications. The first one is: what is the scope of your ecosystem, Steve? The concept of an ecosystem is very powerful, and I sense that stating more precisely how you decide who is in and who is out will help guide the reflection to determine what can be done with it and how it can be implemented.
B. On the role of the blacksmith and the carpenter
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You say: “The role of social capital markets is to pay for the hammers to be used by the carpenters who are working to build us a better world.”
There are a number of ways to understand this sentence. If my response does not correspond to your meaning, please let me know!
I agree that money should not be considered as an end, but as a mean (see the overused quote that ends with “only then will you realize that money cannot be eaten”). Let me be more specific: money should not be considered as a _collective_ end, but as a _collective_ mean. In other words, it is ok to have blacksmiths who specialize in production of hammers; and carpenters who specialize in production of houses. Put in a capital market context: it is ok to be profit seeking on an individual level if (i) this is what you do best and (ii) you internalize all non financial value created or destroyed when you make decisions.
The question now becomes: we are a system (should I dare to say: ecosystem?) composed of many independent yet interrelated agents (blacksmiths and carpenters) who make idiosyncratic decisions. How do we work towards optimizing the output (measured as true end, not as money) of this system? How do we “align” these agents to maximize the value creation as a whole? How do we maximize the “the whole is greater than the sum of its parts” aspect that you are mentioning?
This is a textbook example of economics. This relates to my white paper on impact economics that we discussed a couple of months ago.
Tying back to your writing: the ecosystem that you are introducing, Steve, is composed of a great number of agents who still make individual decisions and are still exposed to market forces. An ecosystem is nothing without symbiotic relationships between its parts. How do you implement these relationships (both at the micro and macro levels)? Can my impact economics model be of any help?
C. On the difference between traditional finance and social enterprise
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You say:
“Social capital markets have and should borrow much from financial capital markets but if we simply duplicate the model, we will fail. [...] [We recognize] that all components of the ecosystem have a common purpose”
I would add: “common purpose that goes beyond profit maximization”. Why do I add it? Well, if we consider that non-social enterprises seek to maximize profits, you could make the case that it is a remarkably strong common purpose. So social enterprises have a more complex purpose; and if we simply duplicate the traditional model, there is only one possible outcome: failure.
Here is one way to realize how most of the financial tools that were created decades or even centuries ago are inadequate for social enterprise: accounting and performance measurement in traditional finance are easy because they are one dimensional: $1000 + $200 + $30= $1230. In social enterprise, however, we strive to measure multiple dimensions of value. How can we sum saving one adult from paludism, sending one kid to school for one year and $30?
Here is hope: the difference is less fundamental than it seems. How do you compare a 10-year bond with a 20-year bond? Bankers agree because of an equilibrium between supply and demand, but really they can do it because they have created the interest rates (the economic model underlying interest rates is one of collective intertemporal preferences). How do you compare a stock share with cash? Investors agree because of an equilibrium between supply and demand, but really they can do it because Markowitz and Sharpe developped tools to value risk (the economic model underlying the CAPM formula is one of collective risk preferences).
You see the recurring theme? Fundamentally, all things in finance are multi-dimensional; but people agree because they have tools to collapse these dimensions into one (the dollar) using collective preference models.
Now back to social enterprise: we do not have collective preference models. But we can come up with individual preference models to measure our own performance (the 1.0.1 version is to assign a subjective dollar value to impact. Some social enterprises are already doing it). This is the first step, the individual step. The second step is then to use these individual preference models when communicating with external stakeholders (donors, social investors, other social enterprises, etc.). In that respect, systems like GIIRS are extremely valuable. This is the inter-individual step. The third step is to see the emergence of practices that are shared by sufficiently many individual stakeholders that they become a standard. This is the collective step, at which point we will be well equipped to do many more cool things.
I hear you thinking: “Wait a minute, did you spend this entire paragraph to say that it will be great when everyone uses GIIRS? Thank you Genius!” No. Not at all. I mean yes, of course, but I am not emphasizing the role of GIIRS. GIIRS is an accounting system, much like USGAAP or IFRS. Clearly, it is a prerequisite. But the preference models that I am talking about are tools that allow people to make decisions based on the GIIRS reports they see. I am talking about the “social interest rates”, the “social CAPM”, the “social efficient frontier”, the “social portfolio theory”, etc. These will most likely come from academia. I have high hopes in that respect. I have high hopes for a very simple reason. Contrary to what many MBAs are lead to believe, these tools do not require general adoption to be useful. The first person to use them is already at an advantage, which leads to a second person to use them.
Back to your text, Steve: I agree with you that replicating the financial market 1.0 will set us up for failure. In that line of thought, I see tremendous value in the formalization of why exactly we are different (without preconceptions). This will guide the reflection to design the ecosystem to fit these differences.
D. Miscellaneous
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You say: ” The lesson of microfinance is [...] that profit maximization is bad”
Very nice way to put it. Do you think that the lesson has been learned?
You say: “The purpose of the social capital product is to serve the social enterprise ecosystem”
This is a very powerful statement. It reminds me of one of the golden rules for social capital markets that Jed Emerson and Anthony Bugg Levine state in their book: “Don’t be redundant”. If you (or any other social capital investor) were not investing into a social enterprise, would there be a profit-maximizer to take your place? This is a very difficult pill to swallow for impact investors, because it essentially means that they are doomed to have submarket risk-adjusted returns on average. Even though I have a heavily impact-first mindset, I struggle to accept that dichotomy.
Benoit
Many thanks for the comments. I am greatly appreciative of your additions to this model. A few very specific comments…
A: several people have commented on the role of a node in the network relative to negative externalities. My sense is that it is the role of the ecosystem to balance out and the role of the nodes to find their balance. Carbon credits are an early and crude effort in this vein. Ecosystem is only a lens. The ecosystem exists today. It is just unmeasured in terms of the balance. Though, it is clear it is unhealthy, we just don’t know how or why.
B: Yes!
C: Doooooood, thank you for this. I read your paper (http://www.nef-consulting.co.uk/new-economics-for-impact-investing/) and fought like hell to grok it. this gives me a greater understanding of what I think you re talking about and yes! it makes good sense. I get painted with the radical brush when what I am saying does not feel radical. I was talking with a friend today about understanding the evolution of social impact and social evaluation or, maybe, value evaluation (?) and we can to the conclusion that we are at an evolutionary stage and your comments seem to confirm this.
D: Agreed, kinda. I firmly believe that the profit-maximizers are fundamentally bad for humanity and that what we are building is a disruptive innovation like the wheel, transistors and email.
So, yes, do do it if a profit-maximizer would be glad to take your place but don’t do it because it is not worth doing. It is not valuable.
Thanks again!
Amazing stuff Steve. I am having a hard time imagining an ecosystem with no negative externalities - there’s a price to pay for everything. But I am in agreement here. HBR has been publishing lots of articles in the last year about big business recognizing that, for example, a healthy environment makes for a healthier, and more profitable business. The articles are always a little breathless, but there seem to be some interesting examples. I am also surrounded in Portland by folks who are starting businesses that are intentionally small, and slow and avoid the trap of delivering value to investors so that they can create their own value. These entrepreneurs often have to cooperate to survive. And while their value isn’t social in the sense of being purely about creating a better community, they see themselves as part of a better community. They don’t house the homeless, but they want to produce things the community needs in a way that doesn’t also harm the community. Do they count in your model?
Holly, yes, absolutely! We need to increase the community to anyone practicing sustainable, value-first business. I am eager to learn more about the businesses you mention in Portland and understand the tactics for including these sorts of enterprises in the model.
As to the no negative externalities, I agree, that is a pipe dream. However, I think we can get to a model where the balance of inputs and outputs (real-cost and real-benefit) is part of our assessment of the health of our economy.
I agree, Steve - we really need to focus on this drastic transformation from one system to another. I’m ecstatic that there seems to be so much traction for the new system but I also am concerned that it’s lack of quick uptake is leading to erosion.
Whenever we try to reconcile a new systemic way of thinking with the old, we are confronted with fundamental assumptions that differ. There’s a leap to get past the disruption, and frankly this is one of those times where people seem confronted by their own denial that it can really be as bad as it is. I think those people who have already received at least one personal traumatic realization of “wait, this is NOT how it’s supposed to go…” are perhaps more resilient to facing whatever muck they find themselves faced with, but who knows?
Assuming impact investment is about providing resources to build human endeavors, then creating a productive good or service is a sometimes-occuring event that happens the end of the process of building knowledge, trusted relationships, and safeguarding health. Once we are accounting for all these things in one coherent whole, the concept of “externality” is removed. (And it was just a simplification to begin with; we should remember Finance 1.0 was built with slide rules…. you can’t model much like that!)
In any case, thank you for putting all this into words!
Jessica, thanks for the comment. I really appreciate the final paragraph. I am eager to build a understanding of a social enterprise ecosystem. The list you presented is a level of detail I can’t get to. Let’s talk about how this all comes together
There was also a comment as to the appropriateness of the term “ecosystem”. I think ecosystem fits here for two reasons. The first is the math of emergence where the whole is greater than the some of its parts. A bunch of social enterprises do not an ecosystem make. It is only when we learn to vale the space between the nodes of a network than we can understand the value of the whole network. The second reason is that an ecosystem pays attention to the cycle of inputs and outputs. All cost is accounted for as part of valuing the whole.
I have received a lot of comments in other venues, Email and Facebook mostly. (Facebook are certainly stolen a lot of interchange that used to happen in more product places. topic for another conversation
) I thought I’d reply to some of the comments generically here.
1) “The post is oppositional.” Yes. Yes, it is.
2) Several people have expressed something akin to defense of what I have termed “financial” enterprise. (Maybe a more accurate term than “financial enterprise” might have been “profit-first enterprise”.) It was pointed out that many enterprises, that would not necessarily qualify as social enterprises, can and go produce good by focusing on demand and the value that they provide to their customers. This is an important point and one that I should have included. Essentially, I think that these enterprises should be considered “social” enterprises. Maybe a better term than social is value-first enterprises. So, If we consider value-first vs. profit-first in stead of social vs. financial, maybe we will have less semantic baggage. And to be clear, profit-first = bad and value-first = good.
3) Other’s commented on the role of competition and how competition and the laws of supply and demand and valuation of time will will kill or cripple any business that isn’t providing value regardless of their intentions relative to value-first or profit-first. It is my contention that this is simply no longer true and is simply the capitalists Horatio Alger myth. Examples abound: massive numbers of homeless or slighted-housed and massive number of houses sitting idle; high demand for sustainable energy and exciting new distributed (decentralized) energy models; high demand for affordable health care many examples of functional health care systems around the world; desperate need for an informed citizenry and exciting new distributed media models; responsible financial services for the poor and massively resource rich financial institutions. In all these cases we see a clear demand and an available supply but entrenched centralized interests are intentionally suppressing the market response. I can only speculate as to the reason but my speculation is based on an assumption of profit-first rapaciousness.
[...] “The purpose of the social enterprise ecosystem is to account for all aspects of cost and benefit and therefore eliminate negative externalities”. Social Enterprises, their definition and the possibilities of work together as an ecosystem are some of the issues tackled in this article of Steve Wright, from the Graeme Foundation. You can read it here. [...]
[...] Steve Wright of Grameen Foundation examines the importance of the social enterprise ecosystem and the role of social capital markets in ensuring the health of this ecosystem. | SOCAP| [...]
[...] [...]
[...] The purpose of social capital is to serve the social enterprise ecosystem. Unlike our financial capital cousins, social capital is not an industry apart. Social capital markets are part of the social enterprise ecosystem. What this means is that success for social capital products is defined as identical to the success of the social enterprise ecosystem. I believe there is also a corollary that states definitions of success for social capital markets that are independent of the success of the social enterprise ecosystem are are distracting at best and destructive at worst. [...]