Social Enterprise

Written by Alexis Davenport

Definition

Social enterprises are innovative, revenue-generating ventures that use profits to fund public purposes. In 1993, Harvard Business School launched the “Social Enterprise Initiative”, acting as a cultivator for generating the increase of social enterprises within the United States. Social enterprises primarily exist as for-profit businesses that sell products or services, and as nonprofit organizations that support their missions through revenue generating activities and fundraising. Whichever form social enterprise takes on, the two primary goals are always to serve public purposes while simultaneously generating revenue.

Historic Roots

Although there is not an affirmed source of social enterprise, one of the best early representations in the United States is Goodwill Industries, established in 1902. Founder Edgar J. Helms established the organization in Boston, Massachusetts, where items were collected from the wealthy, which were then repaired and sold by individuals of a lower socioeconomic standing. Helms believed that ending the cycle of poverty could be achieved through helping those in need to become self-sufficient. Because of this innovative method to addressing a social problem, Goodwill Industries can be identified as one of the earliest known representations of social enterprise in the United States. Throughout the years, Goodwill has mastered the ability to create a dependable source of revenue while also providing meaningful job opportunities to disadvantaged individuals — embodying what it means to be a true social enterprise.

There was an immense need for enhanced social services during the economic downturn of the late 1970’s. Identifying these calls to action, many charities began exhibiting modern-day social enterprise characteristics, such as strategized methods to increase revenue from sources other than grants and donations. In the United States, revenue generated by charities practicing commercial activities increased by 20% between 1982 and 2002 — representing the rising interest in enhancing revenue generating methods focused around social purposes (Doeringer 2010, 293). Alongside innovative methods of revenue generating, charities began implementing job-training and work-integration programs, resulting in the steady rise of social enterprise organizations throughout years to follow.

Importance

Social Enterprises are frequently identified as being integrated hybrid models — entities that simultaneously produce social value and commercial revenue through a unified strategy (Battilana 2012, 51). With these hybrid models being a relatively new concept to the masses, the unfamiliarity of combining social purposes with commercial activities can be a challenging aspect to the success of these organizations (Battilana 2012, 51). But, according to a comprehensive survey, researchers affirmed that social enterprises have a significant role in the economy because of the innovative, hybrid market-driven dedication to social missions — serving societal needs is gaining economic leverage.

In 2014, Stanford researchers surveyed 1,030 social enterprises, learning that these entities generated more than 6 billion dollars in revenue, served 871 million beneficiaries, and employed just over half a million people (Huysentruyt 2016). On a global scale, through selling to the private market, social enterprises financed nearly 57 percent of their activities. One of the most beneficial aspects of social enterprises is that they avoid having to choose between mission and profit — both goals are integrated within the same strategy. Overall, one of the most important factors of the emergence of social enterprise is that these organizations are transforming how we understand and conduct business (Huysentruyt 2016).

Ties to the Philanthropic Sector

Philanthropy, “voluntary action for the public good” (Payton 2011, 6), is directed toward enhancing the world. Typically, these actions are directed toward public purposes and have been rooted in donations of time and money. Common activities necessary to create commercial revenue have not always been a method to enhance social welfare, but many organizations are adopting a variety of strategies in order to fulfil their monetary needs and missions. In comparison, for-profit companies are utilizing non-profit values— rejuvenating how businesses operate and changing the future of how we perceive social impact (Learning to Give).

Corporate Philanthropy is “the act of a corporation or business promoting the welfare of others through charitable donations of funds or time” (Double the Donation). In 2016, $17.77 billion was donated to nonprofit organizations from corporations in the United States, including arts and cultural organizations, health and human services, and education institutions (Double the Donation). Because of the monetary capabilities of the for-profit sector, corporate philanthropy has a significant impact on serving those in need.

Key Related Ideas

• Nonprofit Organizations are tax exempt entities that are limited to the following purposes: charitable, scientific, religious, education, and human and animal welfare. Overall, these organizations operate with intentions to enhance a social purpose. Despite the name, nonprofit organizations can earn a profit but are limited in how the profits can be earned and spent. Nonprofit organizations typically operate on a combination of donations and grants, which vary in dependability and quantity. In combination with strict regulations, an estimated one-third of all nonprofits fail within their first five years (Vitello 2011, 566) (Learning To Give).
• The L3C tax code is how the organizations are taxed on investments intended for public purposes, such as those of nonprofit organizations. Columnist John Cromwell explains that “an L3C can raise capital by issuing debt or selling shares”, despite the difficulties of attracting investors to philanthropic purposes (Legalzoom). To counteract the challenges involving investors, the L3C tax code allows private foundations to engage in program related investments (PRIs). John Cromwell continues, “With approval from the IRS, nonprofit foundations may invest in businesses through PRIs so long as the business in some way promotes the foundation's charitable purpose. L3Cs are structured to expedite IRS approval for PRI’s, and there is a movement to make it so any PRI made to an L3C is automatically approved” (Legalzoom).
• Social Entrepreneurship is a mechanism of innovatively pursuing ventures that address societal issues in an effort to enhance and stabilize social values. When founding for-profit and nonprofit organizations, social entrepreneurs utilize and design new methods to achieve a variety of missions. In 2008, Alex Nicholls described social entrepreneurship as “a set of innovative and effective activities that focus strategically on resolving social market failures and creating new opportunities to add social value systemically by using a range of resources and organizational formats to maximize social impact and bring about change” (Nicholls 2008, 3).
• Corporate Social Responsibility CSR) represents a business perspective that believes businesses are to do more than just make a profit. Ethical business practices, such as TOM’s Shoes, has a “one for one” mission — for every item purchased, one is donated to an individual in need (www.toms.com). Cala, an upscale Mexican eatery in San Francisco, CA has a third of the staff hired through halfway homes, probation departments, and through public defenders — providing opportunities to individuals who typically struggle to find employment (Goldstein 2017). All of these social enterprises are acknowledging that their businesses can make profits while also creating positive impacts in the world (Learning To Give).
• Social capital was proposed by Robert Putnam in 1993. Social capital is the idea that social ties based in trust, that combine knowledge and power can result in strengthened collective action toward common goals. Individuals, entrepreneurs, and organizations that possess strong social capital are exposed to a larger foundation of support — stabilizing the success of various endeavors. As described in 2001 by sociologist Lin, social capital may also be identified as an investment in social relations with expected returns in the marketplace. (Lin 2001). Social capital can be identified as a key factor relating to the success of social enterprises.

Important People Related to the Topic

• Rev. Edgar J. Helms (1863-1942) founded Goodwill in 1902 in an effort to enhance social welfare. Helms spent much of his time collecting unwanted goods from the wealthy, hiring individuals of lower socioeconomic levels within the community to refurbish and resell these goods. At times, the staff could even bring home the items for their own usage. As stated on Goodwill’s website, Helms described Goodwill Industries as an “industrial program as well as a social service enterprise…a provider of employment, training and rehabilitation for people of limited employability, and a source of temporary assistance for individuals whose resources were depleted” (Goodwill) (Learning To Give).
• Muhammad Unis (1940-Present) founded the microcredit lending organization, the Grameen Bank. The Grameen Bank provides zero-interest loans based in trust and solidarity, encouraging and enabling individuals to take personal initiatives in promotion of their own welfare. Most individuals receiving loans develop their own business and agricultural initiatives that provide them an income, enhancing their lives. As stated on the Grameen Bank website, “On any working day Grameen collects an average of $1.5 million in weekly installments. Of the borrowers, 97% are women and over 97% of the loans are paid back, a recovery rate higher than any other banking system. Grameen methods are applied in projects in 58 countries, including the US, Canada, France, The Netherlands, and Norway” (Grameen Bank).
• Paul Newman (1925-2008) founded Newman’s Own, a social enterprise that distributes 100% of its profits to charity. Normal business expenses and taxes are deducted from the income derived from direct sales of the products and royalties paid by both the Company and third parties that sell those products. That surplus is donated. Paul Newman said that Newman’s Own is “a premium quality food and beverage company, based on 2 principles: Quality will always trump the bottom line and 100% of the profits will go to charity” (Newman’s Own) (Learning To Give).
• Lauren Bush (1984-Present), niece of President George W. Bush, founded FEED Projects, a for-profit fashion company. All FEED products are created under fair labor conditions, which supports the development of skills and provides job opportunities. In addition to that aspect of the company, FEED, as the name hints, provides nutritious meals to children in developing countries. (Feed Projects)
• Jonathan Cedar (1982-Present) founded Biolite, a for-profit organization that generates revenue from selling energy products intended to be used in off the grid settings. The Biolite website states that its “Parallel Innovation business model pairs the needs of families living in energy poverty with the passions of outdoor enthusiasts pushing the boundaries of life outdoors and on the go” (Biolite).

Related Nonprofit Organizations

• Schwab Foundation, founded in 1998, acts as a catalyst to advance social entrepreneurship through fostering social entrepreneurs in their efforts. Through a grant application process, the Schwab Foundation identifies entrepreneurial leaders from around the world. Awarded grantees are provided with opportunities to interact and exchange ideas with other entrepreneurs, creating meaningful relationships within various communities (www.schwabfoundation.com).
• Virtue Ventures is “a leading and pioneering organization dedicated to empowering social sector practitioners to solve the world’s problems through entrepreneurship, business tools, and sound management practices” (Virtue Ventures). The organization has received awards for its major contribution to the field of social entrepreneurship. Virtue Ventures offers a variety of capacity building services, including: entrepreneurial leadership mentoring, organizational development assisting resources, performance management methodology, strategic planning cultivation, information systems, and financial self-sufficiency cultivators (www.site.virtueventures.com).
• Echoing Green is “. . . a nonprofit with a 25-year record of supporting early stage social entrepreneurs, reviewed more than 3,500 recent Echoing Green Fellowship applications to better understand hybrid models. Over the last five years, applications from organizations that combined earned and donated revenue grew significantly: In 2010 and 2011, almost 50 percent relied on hybrid models vs. 37 percent in 2006” (Battilana 2012, 51) (www.echoinggreen.org).

Reflection Question - If you created your own social enterprise, what would it be and how might it help enhance your community? How could it change the world?

Bibliography

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This paper was developed by students taking a Philanthropic Studies course taught at the Lilly Family School of Philanthropy at Indiana University in 2017. It is offered by Learning To Give and the Center on Philanthropy at Indiana University.