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Profit Meets Purpose: Why Social Entrepreneurship Suggests a Possible Future for Global Capitalism

04/24/2013 11:20 am ET | Updated Jun 24, 2013

As the first Internet stock bubble neared its popping point in 1999, IBM chief executive Lou Gerstner famously dismissed the dot-com start-ups of his day as "fireflies before the storm--all stirred up, throwing off sparks." The Internet would truly achieve its disruptive potential, Gerstner argued presciently, when thousands of big institutions around the world started using the new communication and technology platform to transform themselves.

Nearly 15 years later, we see a new set of fireflies before a different storm. This time, an explosion of creativity in social entrepreneurship has unfolded against the backdrop of a crisis in global capitalism. Barely half of Americans polled in 2010 by GlobeScan said they believed in the free-market system, down from 80 percent in 2002. A large majority had lost trust in government. Throughout Europe, only small minorities said they believed in free-market capitalism.

Meanwhile, social entrepreneurs are developing innovative business models that blend traditional capitalism with solutions that address the long-term needs of our planet. They are tackling chronic social problems, ranging from healthcare delivery in sub-Saharan Africa to agricultural transformation in East Asia and public-school funding in the United States. Social entrepreneurs are working in close collaboration with local communities, incubating groundbreaking (and often lifesaving) innovations; modeling synergistic partnerships with governments, companies, and traditional charities; and building business models that deploy technology and enable networking to create wins for investors and clients alike.

This collaborative approach offers intriguing hints about how enterprises of all sizes can deliver value for themselves and society. In the new issue of Voices on Society, a McKinsey & Company publication that examines social issues of global concern, Richard McGill Murphy and I suggest four ways in which social entrepreneurs are showing the way forward. Here they are in brief:

Using profit to fund purpose
Many of today's leading social entrepreneurs have created organizations that are neither businesses nor charities, but rather hybrid entities that generate revenue in pursuit of social goals. While not entirely new (the Girl Scouts have been selling cookies for many years), this desire to blend purpose with profit has more recently been formalized in structures such as the US "benefit corporation" (B Corp), a corporate entity legally required to create benefit for society as well as its shareholders.

While B Corps are still rare, many nonprofit organizations generate revenue to advance the parent organization's social goals. VisionSpring, for example, is a social venture that provides eye tests and glasses to lower-income customers in more than 20 countries, including Bangladesh, El Salvador, India, and South Africa.

VisionSpring operates vision stores that generate income via programs in which higher profit margins on more expensive glasses subsidize basic eyewear for the poorest customers. VisionSpring founder Jordan Kassalow calculates that one pair of its glasses increases the average recipient's labor productivity by 35 percent, which works out to $216 in additional income over two years--a 20 percent rise.

Delivering individualized products that marry need and want
Successful social ventures leverage their small scale and intense customer focus to create products and distribution models that precisely match the needs and desires of the communities they serve.

In Bangladesh, a social entrepreneur named Mohammed Rezwan operates a fleet of solar-powered floating schools that provide mobile education to rural schoolchildren who are often isolated during the monsoon floods. Rather than building a school and asking children to show up, Rezwan brings school to the children, when and where they need it.

Similarly, Pakistan's Pehli Kiran School System is a network of schools for the children of impoverished migrant workers living in illegal settlements, or katchi abadis. Local authorities frequently raid and dismantle these settlements, forcing the families to move. Pehli Kiran schools move right along with them, with the goal of ensuring that students can continue their education no matter what happens to their homes.

Crowdsourcing the solution
We see crowdsourcing applications in many different realms, from open-source software development to financial-prediction markets and funding for creative projects through Kickstarter and similar sites. Crowdsourcing has been a particular boon to social entrepreneurs, who can use it to create disproportionate impact with modest resources.

Charles Best is the founder and CEO of DonorsChoose.org, a Web-based platform that raises money to fund class projects in American public schools. Individual donors contribute an average of $50 apiece to projects that typically cost about $500. DonorsChoose.org vets every project, pays all project costs directly, and makes sure that the teachers write thank-you letters to every donor. Best covers his operating costs by charging each donor an optional 15 percent administrative fee.

This year, DonorsChoose expects to receive at least 150,000 project submissions from public schools all over the United States, and it plans to disburse about $50 million in grants, 85 percent of them to teachers working in high-poverty schools. Best's organization has been entirely self-sustaining since 2010. Since inception, a total of 145,000 teachers at nearly half the public schools in America have received grants through the site.

Working themselves out of a job
One important test of any social venture is whether it can create sustainable impact beyond its own projects. Some of today's most farsighted social entrepreneurs have created business models that allow them to effectively work themselves out of a job by creating sustainable, lasting change in the communities that they serve.

I-DEV International, for example, is a New York-based impact investment firm that's in the business of what it calls "market-based sustainable development." In Peru, I-DEV helped impoverished farmers build an international business out of tara, a native tree species whose fruit had historically been consumed locally for medicinal purposes. However, plant researchers had developed new applications for tara in the global food, pharmaceutical, leather, and pet-food industries. I-DEV helped some 200 Peruvian farmers to organize a farming co-op that today is the largest and most successful supplier of unprocessed tara in Peru.

The co-op generates nearly $4 million a year in revenue for its members. I-DEV is currently gathering investors to help the farmers build a tara processing plant. The deal will be structured as a joint venture in which the farmers take the majority stake while I-DEV and equity participants are minority shareholders.

Social entrepreneurs and capitalism
Today's social entrepreneurs are testing many ideas about the proper relationship between business and society, some of which may eventually scale up and become standard practice for organizations of all sizes. While the solutions are diverse, most are based on the working assumption that profit and purpose need not conflict.

Despite their early successes, social ventures in this new generation are still entrepreneurial start-ups. Some may survive and grow into major organizations. Others may disappear. Regardless of their individual fates, we believe these organizations demonstrate a way forward for the capitalist mode of production, one in which economic and social value creation are no longer seen as antithetical.

Social ventures that create new value chains while generating profit in pursuit of social goals are a direct challenge to Milton Friedman's dictum that the social purpose of a business is to generate profit for its shareholders. With public cynicism about business at record levels, we may well see more organizations following their lead.

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