FINDINGS

Social entrepreneurship and social entrepreneurs have many of the characteristics of for-profit entrepreneurship and commercial entrepreneurs. They fit both the Timmons and Moore models in the following ways:

Founders who give up jobs to pursue opportunity, driven by conviction, persevering in spite of obstacles, investing sweat equity, energized by triggering events.

Opportunity starts as an idea, has a variety of origins. It goes through various stages of refinement (anywhere from one to five years in our sample) before launch; and the intention is to create value.

Resources are initially garnered by bootstrapping, networking, making critical alliances, and using other people's resources; but unlike Timmons' high-potential ventures there is no initial "lump sum" of capital from a venture capitalist or banker to support the new venture.

There are important differences as well, stemming from fundamental differences between for-profit and not-for-profit ventures.

Both intend to create value, but for the commercial venture there's a market test for value created with quantitative measures such as revenue growth and profitability.

What customers pay for the good or service determines the economic reward - the primary goal of commercial ventures; whereas for providing social benefit or doing good is the central purpose of social ventures.

Economic self-sufficiency, while desirable, is often unattainable due to the inability of customers to pay a full costed price for the venture's goods and services. In order to provide benefits, the not-for-profit venture depends upon a variety of "subsidies" - such as donations of funds, volunteer labor, and staff willing to accept below market wage rates.

These differences point to the need to investigate some key issues in order to develop a framework for social entrepreneurship. Notably missing in the accounts analyzed is the concept of harvest. Other areas requiring attention are issues relating to funding (i.e., providing operating cash flow), human resource management (i.e., attracting, motivating and retaining staff); and performance evaluation (i.e., measuring success).

 

Harvest

Harvest is a critical part of the Timmons framework. For the founders and employees of high-potential commercial ventures and their investors, the harvest is financial and is a key motivator. For the smaller business and life-style commercial venture, which is by far the most common type of US startup, it's independence, an alternative to a 9 to 5 job. Social venturing has all the upfront characteristics of commercial venturing: the career risk, hard work, personal cash flow and net worth risk. Yet the notion of a financial reward was not discussed per se in any of the case studies analyzed. Is the harvest concept strictly motivating in the case of for-profit startups? Is this because of the absence of a financial "pot of gold" to be shared among the stakeholders as with for-profit ventures? Is it because of measurement difficulties attached to quantifying social benefit: what is the quantifiable value of "investing in human capital:" self esteem, empowerment, life skills, attitudes, etc.?

Certainly the notion of harvest can be inferred as involving multiple stakeholders and taking multiple forms. Society, for instance, is a stakeholder. There is an implied opportunity cost of wasting human assets (the mind) resulting from system imperfections (perceived inequalities in banking, health care, business) as well as a real cost to not providing intervention mechanisms for at risk, inner city youth. The inner city youth is a stakeholder whose harvest entails opportunities that otherwise weren't likely to be available, such as going to college, getting an uncollateralized loan, getting appropriate care for a disease stage, starting a business. The researchers have also noted the more fundamental process changes that allow building self respect, changing attitudes, learning life skills, etc.

The founder is a stakeholder whose harvest is a dream realized, a passionate concern acted upon -- making a difference. Founders impassioned by perceived injustices variously refer to "fomenting the democratization of capital," not perpetuating perceived deepening inequalities in health care system; "the problem is business." They gain satisfaction from knowing that they are doing something about it, trying to make, even making a difference. The researchers also wondered if there is another type of reward or payoff for organizational members and particularly the founders which has an ego component, the status of being recognized as someone who is doing something good, taking action, etc.

Donors are stakeholders who "invest" funds in programs designed to make a difference in areas of concern. The value created by their investments can be measured at least in output terms (i.e., courses finished, businesses started, loans made, etc.) The issue is: what is harvest to the social entrepreneur? Is there a sort of ongoing "harvest" which organizational members experience, a feeling that one is doing something that matters, or is working in an organization that matters as opposed to the classic commercial notion of harvest which involves the prospect and ultimate realization of a substantial cash out.

 

Funding

Closely related to the notion of harvesting of commercial ventures is the method of funding. In the "ideal" Timmons' high-potential startup, the total amount of capital needed to bring the new company to positive cash flow from operations is known at the very beginning and the financial return that may reasonably be expected from a future harvest can be estimated. Hence at the beginning of the company, sufficient capital is committed to make it commercially viable.

But among all startups, the Timmons’ high-potential is the rarest type. Most commercial startups are inadequately financed from the beginning. In the short term, both commercial and social entrepreneurial ventures are quite similar in profile. Each is likely to lose money and experience cash flow problems in the early years; everyone sacrifices in the beginning. There's a constant scramble for funds and resources in each instance. Founders are often either underpaid or not paid; there's a heavy reliance on sweat equity, bootstrapping, etc. Motivation seems to be high in both venture types, driven on the one hand by the promise of profits or financial gain for commercial ventures, and on the other hand, by the belief in the mission of the organization. Over the longer term, however, there would appear to be differences between the two types of ventures. These differences are especially notable in the areas of staffing and funding, which are closely connected.

Unlike commercial startups, not-for-profit ventures face little to no prospect of economic self sufficiency primarily due to the inability to charge customers fully costed prices for services rendered. Additionally, nonprofit organizations have no owners and accordingly no access to equity markets for funding. Without the prospect of equity capital or operating surpluses, nonprofits must rely on donors and donations for resources. Fund raising was observed to be a major and persistent activity in the the four ventures in our sample which were operating at the time the cases were written.

In our sample, considerable time was spent on fund raising both at startup and in early launch years. We observed an incremental-like pattern of resource acquisition, a "get-a-little, do-a-little" mode of behavior. Descriptions of the persistence of the fund raising task began to sound like a sort of financing treadmill and led researchers to wonder whether the constant focus of attention on financing might come at the expense of mission and programs. Is the continual striving for money affecting strategy? Does this opportunistic reactive operating mode become a vicious cycle which results in strategy starved organizations? Is there not a danger that this mode of behavior will result in a self-fulfilling prophecy in terms of the size and effectiveness of the organization involved?

From another perspective, can funding be predictable for these types of organizations? Are there social ventures which have been successful in routinizing financing and, if so, how have they accomplished this? How does one shift from donor dependence to alternative sources of revenue? What’s the best mix of funding sources? Answers to these and similar questions could provide valuable insights about how to avoid or to transcend the financing treadmill.

 

Staffing

As noted earlier, motivation seems to be high in both commercial and social entrepreneurial ventures, albeit for different reasons. However, over the longer term, there would appear to be differences between the two types of ventures.

Unlike the high potential ventures of the Timmons model, not-for profit ventures are not structured to provide handsome rewards to potential employees. Nor do they tend to pay fair market salaries as shown in a recent report which observes that "nonprofit practitioners’ salaries average about 87% of the average for all state employees" (Minnesota Council of Nonprofits, 1995). What appears to motivate people in our sample organizations is the appeal of the mission and the passion of the founder whose values they share. People appear to be drawn to a cause because of mutual concerns about the injustices to be addressed (in our sample, lack of access to opportunity, education, capital and health care) and because they want to make a difference. Manifestations of the "leverage" of the mission were evident throughout and took various forms including sweat equity on the part of founders, expertise-stacked boards, volunteer labor and the pro bono work of professionals.

As with commercial startups, there was considerable evidence of boot strapping or using other people’s resources in our sample. Unlike for-profits, however, social ventures depend in varying degrees on volunteer labor for day-to-day staffing. Little was mentioned about the role of volunteers in these ventures. The researchers wondered if this was because a free good is valued less. While perceived to be "free", volunteers are not without cost. They require training and ongoing motivating. Absenteeism and turnover are not only costly but also place additional strains on remaining, stretched-to-the-limit organizational members.

Over time, the founders’ seemingly "endless stream of passion for what they’re doing" - an effective motivator short term - may lead to burn out, disillusionment and high turnover levels as individuals experience feelings of being overwhelmed in their struggle with delivery aspects of the program and mission and a chronic "starvation diet approach to administration." Sample cases provided ample evidence of overstretched staff. Also evident was the need for new sets of skills requiring the organization to shift from an owner-informal to a more formal style of management, not atypical of for-profits. But the new skills required in addition to an underpaid, overstretched organization would seem to exacerbate the treadmill-like conditions noted earlier.

Clearly there is a need to learn more about surviving the startup stage. Are there organizations that have successfully transcended the treadmill-like conditions noted in our sample firms and, if so, how have they accomplished this? Were they able to anticipate the treadmill up front? As with funding, answers to these and similar questions could provide useful insights for social entrepreneurs.

 

Performance Measurement

Challenges exist to evaluating social enterprise performance. Not-for-profit or social ventures differ from for-profits in their multiple stakeholders, multiple goals and absence of a single generally accepted measure of performance. In the harvest section of this paper, we began to identify types of stakeholders and the diversity of their goals. What matters to one constituency may be of far less concern to another. Clearly one issue to deal with in attempting to evaluate the success of a social enterprise is what to measure depends upon one’s perspective.

Additionally, benefits desired tend to be intangible in nature, further complicating the measurement issue, making it difficult to ascertain whether value has in fact been created and resources used effectively by social venture managers. Neither Moore nor Timmons’ models were helpful in this regard. So we looked to our sample cases to see what we could discern.

What we found was that program goals can be measured in a rather literal sense. Each social venture studied had mission-specific programs like art education, entrepreneurial literacy, or peer leading. These programs had goals which were clearly stated, tangible and measurable, e.g. businesses started, loans made, and courses completed. In our sample, the number of people served and the cost of serving them were most frequently mentioned as measures.

What complicated the measurement issue was that the program was viewed as a means to a less easily definable end. The program in each of the launched ventures was variously referred to as a "vehicle" or a "catalyst" for a process the results of which were less tangible and more difficult to measure. As one founder noted, "we can’t teach self esteem but we can allow students to build it by creating a business." . In another case, the notion of "investing in human capital" was raised and discussed in terms of "building empowerment ... as well as businesses." Other terms used were "learning life skills," "unleashing creativity," and "experiencing attitude changes." These outcomes, referred to by one manager as the "unwritten goals" of the program, would appear to be the essence of social entrepreneurship; yet they tend to be intangible in nature and less amenable to measurement.

For instance what do terms like life skills and empowerment mean? They seem to connote clusters of attributes. Can concepts like life skills and empowerment be broken down into measurable components? And when should these be measured? There would appear to be for-profit parallels like trying to measure customer satisfaction in service industries. Are the differences between social and commercial ventures a matter of degree? What might be learned from commercial service industries’ efforts to measure intangible customer benefits?

In short, what to measure, for whom and how in considering the issue of social venture performance needs further investigation. The absence of measures may exacerbate the aforementioned financing and staffing treadmill-like condition these organizations experience. Devising effective measures to capture these concepts could lead to better decisions about the use of resources in social ventures as well.

 

CONCLUSION

Our research shows that the Timmons model, while addressing an important subset of entrepreneurial ventures, is less useful in considering the phenomenon of social entrepreneuship. Moore’s process model is a better fit. It applies to all ventures, from part-time to mom and pop to high potential. The social entrepreneurs we looked at are closer to the mom and pop end of the spectrum than the high potential end. Timmons deals with the phenomenon of large leaps where the founder starts large; whereas the social entrepreneurs in our sample seem to start at the micro-enterprise end of the spectrum and try to move toward the larger end. Our sample entrepreneurs tended to think micro-entrepreneurially in the beginning and to move incrementally, to "try a little bit, fund a little bit, then try a little bit" more rather than to think about how to make the enterprise big from the beginning. As a result of our research, we are alerted to the danger of social ventures falling into a hand-to-mouth-type of existence due to a funding and staffing treadmill-like effect.

 

Implications For Future Research

This research was intended as an exploratory paper. The Moore model is a good fit. The process does appear to apply but with a few exceptions. In order to address the special nature of social entrepreneurship, as depicted in our sample, some issues need to be teased out in future research relating to the notions of harvest, funding, staffing and performance measurement. In addition, further investigation is needed into the so-called treadmill effect, its causes and, especially, measures to address it. The value to society of this research in increasing the efficacy of social venturing, while difficult to measure, is deemed to be considerable.

 

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Last Updated 1/15/97 by Geoff Goldman & Dennis Valencia

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