A new breed of entrepreneur is redefining capitalism. They claim to make profits by addressing and solving social problems, but they need help from big business.
 | Click to download the studyA new report published by Sustainability Ltd and the Skoll Foundation highlights social entrepreneurship |
The Scottish economist Adam Smith wrote famously of the "invisible hand" that orders chaotic and unrestrained markets creating a balance between supply and demand. Companies, Smith thought, would only have to look to their own interest. Competition among these "selfish" businesses would finally benefit society as a whole by keeping prices low, while providing necessary goods and services.
However, and this is less well known, Smith was also a moral philosopher, who claimed that sympathy was required to achieve socially beneficial results. Economists call this contradiction the "Adam Smith Problem." Despite its age, the contradiction is still relevant for a world where billions of people do not have access to basic health and financial services.
Bringing Mainstream Business into Action
Entrepreneurs like the Nobel Prize laureate Muhammad Yunus of Grameen Bank try to bridge the gap between morals and profits. They invest in services and regions that have been shunned by mainstream businesses because of high risks, political instability, and poor return on investment. Once their initial investments are successful and new markets develop, mainstream businesses join the game. Only then does Smith’s "invisible hand" start to act.
 | The Treatment GapThree diseases, HIV/AIDS, TB, and Malaria, disproportionately impact mortality and morbidity rates. The picture illustrates the gap that remains between help needed and the current offering (Source: Global Health Fund and WHO) |
Microloans and Microcredits as granted by Grameen Bank since 1976 have now become a nine billion dollar market. Banks and insurers like Allianz are entering this market that has long been the domain of NGOs and other non-profit organizations. Their investments and experience make services cheaper and more accessible.
However, the struggle and hard work behind such a success story often remains hidden. In a study called "Growing Opportunity: Entrepreneurial Solutions to Insoluble Problems" – another reference to Smith's contradiction – published by Sustainability Ltd and the Skoll Foundation, social entrepreneurs like Yunus were asked about the problems they encounter.
Out of 100 interviewees, 72 percent said access to capital was still their primary challenge; 41 percent said they struggled to promote and market their organizations and projects. A number of entrepreneurs also said they had problems finding talented professionals. The researchers found that interviewees were keen to work with businesses to address these problems.
Entrepreneurship - not Philanthropy
The findings correspond to a recent trend in development networks that Sally Osberg, president of the Skoll Foundation, calls the "Mindset 3.0." More and more NGOs and non-profit organizations try to link sustainable work to profitability and business growth, because they realize that this is the way to obtain the size and scope to really make a difference in their field of activity.
"After all, social entrepreneurs are entrepreneurs first and foremost," says Osberg. "It’s just that their value propositions target neglected, disadvantaged or suffering segments of society."
Recent trends seem positive. The proportion of social entrepreneurs that expect to be funding their own operations with little or no dependence on grants within the next five years jumped from 8 percent to 28 percent, researchers say.
One of the key findings of the "Growing Opportunity" study is that to address the marginalized and their needs, social entrepreneurs need support from mainstream businesses. But this does not have to be a one-sided deal, says Chris Elias, president of PATH (Program for Appropriate Technology in Health), a non-profit organization that provides health solutions for poor communities.
"Combating socio-economic problems across the world is easier for a more nimble organization that can gain access to markets that a more established corporation may not be welcome to enter," says Elias. "However, to increase our programs’ scope and scale requires skill sets and finances that many entrepreneurs don’t have, but businesses do."
The partnership between Allianz, the German Agency for Technical Cooperation (GTZ), and the Indonesian NGO Dian Mandiri is a good example of such a give-and-take. Allianz uses its experience and capital to provide insurance for Dian Mandiri’s microloans. To keep costs low, the NGO in turn handles most of the claims and deals with questions from individual clients, tasks that are usually managed by insurers. Both sides profit and thousands of people who had never been able to afford coverage are now secured by an insurance policy.
“We cannot do this alone”
Paul M. Achleitner, CFO of Allianz, one of the study’s co-sponsors, says Allianz sees it as their responsibility to empower people to protect themselves against natural disasters or to gain access to health services. "But we cannot do this alone," he says. "Our hope is that collaborating with creative thinkers will help our people realize their full potential – and to better serve the needs of present and future customers."
Although some cooperation between social entrepreneurs and mainstream business has begun, the capital market for social entrepreneurs is still very small, the study reports. While in the USA some 200 billion dollars is invested in philanthropy annually, only 200 million dollars is going into social enterprise worldwide each year.
Finally, the study adds that governments need to do more to shape public sector targets, tax incentives and pricing signals to ensure that partnerships between social entrepreneurs and big business reach their full potential and benefit society "as if led by an invisible hand."
editor: Thilo Kunzemann
publishing date: March 28, 2007
Do you have something interesting to add? Write a comment and discuss this topic with other readers. Comments should be on-topic, non-commercial, and not contain abuse of any kind.
Comment Policy
