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Wednesday, March 04, 2009

The Need to Fund Social Entrepreneurs

By Moses Lee

"Fixing the money pipeline".

Why do people play the lottery?  Some play because they love the thrill of it. Others play because they truly believe that they can beat the odds. If you're an economist, you'll probably answer the following: the potential for an enormous economic payout. Though the probability of striking gold is marginal, the expected payback (probability of winning multiplied by the payout) is high enough for someone to pay a few dollars for a ticket or a scratch card.

Likewise, if you ask an entrepreneur why he or she starts a new venture, the primary reason will be the same: the potential for an enormous economic payout.  We all know the stories of entrepreneurs who leave their stable careers or their college education to invest their time and energy into a new venture for the possibilities of making it rich. Just think of celebrity entrepreneurs such as Steve Jobs (Apple), Mark Zuckerberg (Facebook), and Bill Gates (Microsoft).

Indeed, it is easy to understand the incentive of an entrepreneur trying to start a new venture. But what about the social entrepreneur? What is the incentive for him or her?

Most will say and believe that the incentive for a social entrepreneur to start a social venture is the ability to make a social impact.  The payout is not financial, but the degree of social change. Because of this belief, we expect social entrepreneurs to forego financial benefits and to live very meager lives.  I see this in my own life.  As a donor to a social venture, I hate seeing my money going towards overhead, such as paying for salaries. 

I think holding this view towards social entrepreneurship is dangerous and actually limits the number of social ventures created in society.  When the financial incentive is discounted for social entrepreneurs, many of the best social entrepreneurs stay on the sidelines.  And that's not where we need them to be as a society - and as a world.

Last year, Catherine Casey, a 2008 Acumen Fund fellow, told me that one of the challenges she sees for students considering a job at a social venture or starting one is their higher-education debt. This makes sense. If you have a $100,000 plus loan hanging over your head, you're probably not going to start a venture that does not have the opportunity to for a financial payout, regardless of the degree of social impact.  When the economic return is little to non-existent, social entrepreneurship is squelched.

This is true anywhere in the world. If the financial opportunity cost is too high, most social entrepreneurs stay out. This is something my colleagues and I at WDI observed recently in a case study on talent management at the base of the pyramid.

I want to suggest that if we can close the financial gap for social entrepreneurs, perhaps we will see more social entrepreneurship activities unleashed.

So, where will this funding come from?  In cases where social ventures makes a decent sized profit, some portion should be returned to the social entrepreneurs, without them feeling pressured or guilt-tripped into giving it back to the social venture by donors or other stakeholders.

In cases where the social venture cannot do this, philanthropy can play a role.  In some cases, this is already happening.  For example, the Draper Richards Foundation and the Skoll Foundation have started programs to financially support social entrepreneurs. Universities with large endowments are another source of funding, particularly when it comes to debt repayment. I know here at the Ross School of Business, debt is repaid for those who take jobs below a certain income level to work for a nonprofit.

Additionally, government subsidies can help support social entrepreneurs.  Subsidies are meant to create balance in the market to allow for a socially optimal outcome.  If governments can appropriately target subsidies to social entrepreneurs, we may see more social ventures starting, both domestically and internationally. 

Now, I am not suggesting that social entrepreneurs receive the same payout as traditional entrepreneurs.  We all hear of the executives of nonprofits who milk donor dollars for personal gain.  If you want to make the millions of dollars, then you should work in the private sector.  

Somewhere, however, a balance needs to be struck, where social entrepreneurs are able to receive a moderate degree of economic return to have a suitable living. Finding this sweet spot will allow social entrepreneurs to be unleashed to do what they do best: create a better world. 

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