04/05/2012 11:43 am ET Updated Jun 05, 2012

Helping Social Entrepreneurs Succeed: Lessons From 10 Years of the GSBI

We have just selected and will soon announce the 10th Global Social Benefit Incubator (GSBI™) cohort. The GSBI helps field-based social entrepreneurs build sustainable and scalable ventures that deliver essential goods and services to poor communities around the world such as safe drinking water, off-grid clean energy, access to healthcare, education, and livelihood training opportunities.

Social impact is much more challenging to measure than financial results, so we use a combination of metrics to gauge our success in helping social entrepreneurs build sustainable and scalable enterprises that positively impact the lives of the poor. Ninety percent of the ventures who have completed the entire GSBI are still in existence, and more than 50 percent are scaling, which we define simply as revenues growing faster than expenses. And collectively, with the caveat that there are diverse forms of impact -- some life-changing and others helpful tools in changing lives -- the GSBI alumni have positively impacted the lives of 74 million people. Eighty percent of them reference the GSBI as an important factor in their success.

Here are the top 10 conclusions that we have reached from the last 10 years of helping social entrepreneurs.
* Market-based (customer-need based) approaches tend to be more sustainable than philanthropy-based approaches. The poor are willing to pay for essential goods and services; in fact, the "poverty premium" has been recognized since at least Prahalad and Hammond's 2002 HBR Article, Serving the World's Poor, Profitably. Social entrepreneurs who deliver appropriate, quality products at a fair price can compete and succeed. In this case, success is defined as serving the poor better rather than being best at raising funds from charitable organizations. In many cases, "better" indeed means reducing or eliminating the poverty premium.
* There are a variety of sustainable business models (contributed or earned) that work. However, there's no magic business model formula for success in social enterprise: the "best" business models are influenced by factors including the good or service being delivered; the relative market being served; the ability to obtain funds for growth; and the political, social, and cultural context of the regions in which the social entrepreneur operates.
* Positive cash flow (= positive unit economics) equals sustainability; scalability means impact and income grow faster than expenses. We're fans of keeping definitions and math simple. Understanding unit economics throughout the entire supply and distribution chains helps the social entrepreneurs ascertain whether they can have a lasting and large impact.
* Human capital is as important as financial capital. As start-up ventures in Silicon Valley scale, they can hire talent from rich local resources. Often, social enterprises operate in communities that lack appropriately trained human capital. Without investment in human resources, social enterprises can't scale. Succession is a major risk.
* Grants and debt are more likely and have become more manageable forms of social capital than equity. We have made significant changes in the content of our GSBI program to reflect the emergence of a social capital market. As our director of Social Capital, John Kohler observes, "equity is to venture capital as [blank] is to impact capital. Fill in the blank." Social enterprises are inherently more complex and operate in more complex environments; capital that is to be repaid needs to be patient; social enterprises must understand what investment forms align with and support their missions. There may be opportunities for "market rate returns" in impact investing, but they are few and far between.
* Most social businesses have a strong service component. More customer training and follow-up is necessary to serve the poor than in better developed markets, and because infrastructure is weak, there's often no one else to call. Successful social businesses ensure their products work through service.
* Distribution is a key problem (and often a significant cost element) for most social businesses. Product development for social enterprises may not be easy, but getting to market is a significantly larger challenge. Other than oil companies and Coca Cola, there is little reach by multi-national corporations into base-of-pyramid markets; this turns out to be true both in rural, and surprisingly, in urban areas.
* While products/services and business models are similar around the world, organization and implementation are different. The features of developing markets vary more than developed markets; social entrepreneurs adapt their organizations both based on these features and their own ambitions.
* A mentored learning/training methodology produces results (as measured by participant feedback). We attribute our success in helping social entrepreneurs to both our rigorous selection process from a larger applicant pipeline and to this iterative, mentored learning process that we have developed. Silicon Valley executives who have built successful commercial companies help social entrepreneurs ask the right questions about their own social enterprises.
* There are good Off Grid Energy solutions (electricity and cooking). For the last three years, we've had a sector focus in this area, to better understand the technology solutions and business model innovations emerging. Our Energy Map summarizes lessons learned from 52 social enterprises. A major challenge to energy poverty is scaling good solutions and replicating them in different geographies.

As we contemplate the next decade of service to social entrepreneurs, we note that while the GSBI participants continue embrace their impassioned social missions, many now exhibit a more left-brained analytical skill or at least an inclination to be exposed to business concepts and constructs. More often than not, they arrive with financial statements and want to understand the implications of their business models for their financing strategies. They are more inclined to adopt different technology solutions, business models, or distribution channels. And some of the more transformative social entrepreneurs exhibit a distinct interest in replicating or modifying their enterprises to scale in different geographies. We are very encouraged by these trends and look forward to the next decade.

Author's note: I am indebted to Professor Eric Carlson, director of the GSBI, for his contributions to this blog.