Social Entrepreneurship Yields High Returns
April 2007

by Julia Novy-Hildesley

 A few years spent living without electricity in a remote Indian village opened Harish Hande’s eyes. Haunted by the loss of opportunity in living without electricity, Mr. Hande sought a way to improve village life. His solution: solar power.

Mr. Hande set out with $500 from his family and purchased a solar unit. He adapted it to the needs of the economically underprivileged residents of his own village, sold it, reinvested profits into another unit, made adaptations to that one and sold it, too. Lacking the working capital necessary to buy inventory, Mr. Hande repeated the process 500 times over three years. At that point, he secured $1.1 million in an initial equity investment funded by individuals, social-venture capitalists and European social-venture funds. The company he founded, Solar Electric Light Company (SELCO), grew from serving 100 households in 1996, to serving around 65,000 today. Revenue climbed from $20,000 in 1996 to $3 million in 2004, when the company achieved profitability.

SELCO’s solar systems present myriad opportunities for customers, most of whom would otherwise live without electricity. Some rural street vendors now use SELCO systems rather than kerosene lanterns to operate at night, allowing them to save money, operate more safely and cut back on pollution. The company estimates that its products annually displace around 5,000 tons of CO₂. SELCO is aggressively diversifying by expanding its product line, and aims to reach 200,000 households by the middle of 2011. To do that, the company is in the midst of acquiring $1.5 million in debt or equity financing. Another $600,000 in grants will enable SELCO to establish a division for research and development.

The story of SELCO is a good example of the way social entrepreneurship can resolve social and economic problems and be financially profitable. Rather than presenting communities with cheap versions of first world products, social entrepreneurs improve lives and create opportunities to generate income by codeveloping robust and tailored innovations in collaboration with local people. Household-by-household, social entrepreneurs solve big picture problems. Effectively, they are building a middle class from the bottom up.

Studying and collaborating with innovators has demonstrated that social enterprises are hindered by the isolation in which social entrepreneurs find themselves. Absent from their sphere are the networks enabling more traditional entrepreneurs to succeed. However with proper support, social-value minded inventors and innovators can not only make the world a better place, but also generate financial returns for investors.

The business plans of social entrepreneurs are centered on financial sustainability, but achieving this goal can be challenging. In many cases, businesses striving to meet the needs of the people at the base of the pyramid are the first in their geographic area to provide their specific products or services. In addition, they are often required to invest significant resources in “blazing the trail”—making consumers and bank loan officers aware of the potential returns on their innovations.  

Timelines for phases of research and development, and engineering and design often drastically exceed those of more traditional businesses. Marketing the product, almost always performed face-to-face, is also a slow, time-consuming process.

Similarly, timelines for returns from businesses in which fixing societal problems takes priority over profit exceed what traditional investors are willing to accept. And profit margins may be squeezed to keep products and services affordable, presenting investors with a scenario to which they are unaccustomed.

Once balance-sheet fundamentals are achieved, social entrepreneurs labor to connect with the global field of private capital. Many are building their businesses in developing nations without investment rating agencies or informational opportunities such as investor forums. The struggle is compounded by severely limited capital for social entrepreneurs, particularly at the expansion stage where large infusions of funds are required. No market currently exists for connecting social entrepreneurs and appropriately oriented investors.

The result, as bloggers on the social entrepreneurship Web site, Social Edge (www.socialedge.org), wrote this spring, “is an untenable and surely bizarre situation: High-performing organizations with demonstrated potential go un-funded. Mission-motivated financiers who could well be willing to integrate extrafinancial performance into their understanding of returns, are left scratching their heads as to why they can’t seem to make the numbers square on deals too large for grant funds, but without corporate structure or market rate returns to support private equity investments.” Reaping the high yields of social enterprises requires placing value on the social and environmental impacts of these organizations, as well as extending the time horizon on expected financial returns.

Strong Foundations

Many groups are recognizing that the individuals best equipped to solve some of the biggest problems are already within the vastly underserved populations of developing nations. The Lemelson Foundation, a private philanthropy based in Portland, Oregon that provides early-stage, high-risk seed funding to inventors and entrepreneurs, launched its “Invention for Sustainable Development Program” in 2003. This program supports inventors and innovators in developing countries at all stages of enterprise development, including the high-risk, early stage of mere ideas. Through invention, Lemelson strives to achieve systemic and scalable social change.

Lemelson’s most recent major commitment, announced late last year, is a new partnership with U.S.-based nonprofit Ashoka. Lemelson is providing $4 million for Ashoka to bring 100 inventor-entrepreneurs into Ashoka’s new Ashoka-Lemelson fellowship program. These fellows are designing or disseminating technologies with potential to serve at least one million people, and the likelihood to replicate throughout the grantee’s country and possibly even globally. Ashoka-Lemelson fellows receive stipends so they can focus on advancing their business models. Through the two organizations, fellows also have opportunities to access global networks of similar entrepreneurs and much-needed knowledge systems.

Recognizing the transformative potential of this group, foundations increasingly are responding to the unique needs of social entrepreneurs with supportive programs. For instance the Switzerland-based Schwab Foundation for Social Entrepreneurship was established in 1998 to work “from the bottom up,” in the words of Klaus Schwab. His foundation assists late-stage social entrepreneurs by providing opportunities for executive training, connections between entrepreneurs, investors and companies, as well as access to other types of support networks.

EBay cofounder Jeff Skoll refers to social entrepreneurs as “change agents of the 21st century” and supports them with a variety of programs. The Skoll Foundation announced recipients of its 2007 Skoll Awards for Social Entrepreneurship in March. The awards provide $10.2 million to ten social entrepreneurs to expand their enterprises. In 2003 the Skoll Foundation launched the Skoll Centre for Social Entrepreneurship at the Saïd Business School, University of Oxford. The school aims for its graduates to “advance systemic change where existing economic and political structures have failed or are underdeveloped.”

Help Wanted

Governments, especially those in developing nations, are focused primarily on keeping up with the basic needs of their rapidly growing populations. For this reason, and because too few cultures place high value on innovation, little government money is available for research and development, especially the R&D needed by social enterprises.

Concurrently, large corporations are only beginning to recognize the potentially lucrative opportunities to provide products and services affordable and appropriate for people at the base of the pyramid. Corporate giants would find easier portals into these underserved markets by supporting the efforts of social entrepreneurs who provide products tailored to the needs of local people and designed to generate income or boost living standards. Possibilities abound for innovative corporations and social entrepreneurs to form mutually supportive partnerships. For example, providing access to mentors and internal training programs comes at little or no cost to many corporations.

In developing nations especially, higher education systems need tools for connecting with the private sector to scale the ideas of innovators. Databases on academic research and innovation need to be linked in order for entrepreneurs to avoid reinventing the wheel. Additionally, intellectual property protections in developing nations are necessary to provide incentive to entrepreneurs and investors.

When the greater global business community provides social entrepreneurs with the resources required to create and fund solutions to meet social and economic needs, it will become a powerful force in this rising tide. Financial returns on economic investment in the world’s underserved markets will be possible. Helping people lift themselves out of poverty will no longer be a wish but a matter of installing a systematic set of processes from one country to the next. And the rise of a global community of technology-based social enterprises could, in turn, enhance the practices of the original private investors, investment funds and corporations that decided to take a chance on social entrepreneurs.

Ms. Novy-Hildesley is executive director of the Lemelson Foundation in Portland, Oregon.

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