Sunday, September 21, 2014

Scaling up Investments in Social Enterprises

SaafWater (a social enterprise in Pakistan) had a vision to tackle the huge problem of access to affordable clean water across the developing world and their noble objective was to systematically use social entrepreneurship to solve this problem that was faced mainly by the world’s poor. They saw the opportunity to leverage existing ideas and technologies in achieving their objective. Just as any business would do, they did their market research and felt rest assured that a total addressable market of over 4 billion people more than validated the business case for their socially beneficial for-profit venture. 
Even better, they didn’t have to build their product from the ground up; the CDC had a water purification technology that had been waiting to be harnessed. Choosing a beachhead market wasn’t difficult either. Karachi, a large city in Pakistan had a ready consumer market with over 15 million residents, and the SaafWater team didn’t have to try too hard to find a willing sales-force. They only had to bear the initial cost of providing training plus performance-based incentives to get them moving.
SaafWater’s key innovation was around the business model and supply chain network. This is often the hard nut to crack in emerging markets, so they focused on this and grew the business organically. They sought to achieve a simple and straightforward two-fold objective: build a profitable company and prevent 500,000 cases of diarrhea per year per city.

In my opinion, they took a smart approach in pursuing this objective by using a for-profit vehicle. This allowed (or forced) them to apply the rigor and outcome based approach that characterizes private sector driven investments. It is obvious the problem of access to safe drinking water isn’t new, but has certainly seen (and continues to see) a lot of activity and investment from foundations, governments and non-profit organizations over the years. Sadly, this problem has just refused to go away. Why is the reason for this, you might ask?

The reason is not far fetched. These non-profit approaches have failed simply because they’ve lacked consistency and sustainability, and do not have the right incentive structure. Governments, foundations and non-profits have limited budgets and often have other bureaucratic and donor-related constraints that make it difficult to pursue their programs to logical conclusions. In addition, they have different incentive structures from non-profits. Non-profit organizations are often judged by how much they are able to raise and spend, and evaluated less by how effective they have been at tackling development issues. Their focus is often on popularity and acceptability, rather than on fact based results and quantifiable performance, so the problems seem to stick around despite huge investments.
I believe for-profit ventures and the private sector play the most critical role in advancing society. All other actors simply play hygiene or enabling roles. I also believe that nearly all social problems in the world today are amenable to some type of for-profit venture. Private sector organizations have very clear measures of success that everyone understands. When they fail, they are effectively punished by the market and when they succeed, they are rewarded with more resources and better access to markets. This is how Coca-Cola, Google, Microsoft and Toyota conquered the world. Could you imagine if we left drug development and biotech development to non-profit ventures? Where would medical practice be today?….. unthinkable!

What are the limits to social entrepreneurship?
Social entrepreneurship currently suffers from a perception problem. Even though social enterprises are technically classified as for-profit ventures, they are still seen by much of the world, and by many investors as belonging to the same broad category of non-profit ventures and NGOs. The reason is many people (including investors) have mental models that interpret doing good and doing business as two mutually exclusive endeavors. Social entrepreneurship is however a revolutionary attempt to bridge these two perhaps, distinct objectives and craft out visions that marry both into a harmonious union.

21st century capitalism may have also contributed to the dichotomy between doing business and doing good. Few can argue against the great technology and economic gains that capitalism has delivered to the world in the last 50 or more years. However, many also believe capitalism has fueled narcissistic and/or acquisitive tendencies that have produced few billionaires and countless peasants, and the Forbes list has a great way of reminding us that half of the world’s wealth is still controlled by less than 100 people.
Therefore, the investment community tends to look towards “pure” business ideas when they want to make huge capital investments, while they continue to reserve smaller amounts of capital for “social” entrepreneurs who they still consider as next-door neighbors to non-profits.
This problem of access to capital will continue to prevent social entrepreneurs from scaling up their ventures in ways that could deliver huge global impact comparable to global for-profit success stories such as Google and Amazon.

The good news is that there are more opportunities today than before with the increasing acceptance of the social entrepreneurship model and the creation of more social enterprise and impact investment funds across globe. Overall, the future of social entrepreneurship seems bright, but there are significant challenges to overcome.

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