One morning about 15 years ago, I had a conversation that forever changed the way I think of impact organizations. I met with Jim Koch in his cramped office on the campus of Santa Clara University, a Jesuit school located at the heart of Silicon Valley and the oldest university in California.
He told me about his vision for being able to improve on the traditional model of nonprofit organizations, using Silicon Valley thinking to create a new kind of startup — "social ventures," he called them — that could harness the power of markets while delivering social impact at scale.
Jim is one of those guys who has the kind of gravitas that makes an entire room go quiet when he speaks. After getting his MBA and Ph.D. from UCLA, he went into corporate management, then moved to the academic world where he helped build Santa Clara University's MBA program into the nationally-ranked business school it is today. He also spent time as Acting Dean of Santa Clara's renowned School of Engineering — a pretty rare feat.
As we sat in his office that morning, Jim talked about how the traditional charity model needed to be updated. Nonprofit organizations tend to live on a hamster wheel of pursuing donations to meet the most urgent problems — or just the ones that donors care about right now. Conventional nonprofits are incentivized to produce fast relief because actual systemic change takes much longer and is much more difficult.
When there is famine somewhere in the world, charities raise money to send in truckloads of food. Once people are fed, the charities and donors move on to the next humanitarian crisis without ever having addressed the underlying reasons why the famine occurred in the first place. "If what we care about is sustainability," Jim told me, "then we need a new kind of organization. We need to bring entrepreneurial thinking to the impact world by creating social ventures."
Although I had never heard the term "social entrepreneur" before meeting Jim Koch that morning, it turns out that a McKinsey consultant named Bill Drayton had been using it for several years to describe individuals creating innovative ways to address society's most pressing problems. Unlike traditional nonprofit charities, social entrepreneurs might have a for-profit aspect to their operations, using earned income to create sustainability and drive scale.
"Social entrepreneurs are not content just to give a fish or teach how to fish. They will not rest until they have revolutionized the fishing industry." — Bill Drayton, founder of Ashoka
I finished my meeting with Jim Koch that morning and drove back to my office thinking about all of this. Two years earlier, Muhammad Yunus had been awarded the Nobel Peace Prize for "efforts through microcredit to create economic and social development from below." It started when he lent $27 to a group of poor families so that they could start a business making and selling handicrafts. He was astonished when they paid it all back, plus interest, and went on to build meaningful livelihoods for themselves. He then founded Grameen Bank and pioneered the field now known as microfinance — and not only did his bank lift tens of thousands of people out of poverty, it did so profitably.
Read that last sentence again because it sums up the radical concept that an organization can both do good and do well at the same time.
Jim Koch was exactly the right person to take these lofty thoughts and put them into structured practice — at the intersection of his experience running a leading School of Business and a School of Engineering at a Jesuit university dedicated to bettering humanity. Synthesizing the concepts developed by Bill Drayton, Muhammad Yunus, and others, Jim co-founded what is today called Miller Center for Social Entrepreneurship at Santa Clara University. The Center runs the world's leading startup accelerator program for social ventures, and I've served as a volunteer Executive Mentor for more than fifteen years. We've had more than 1,300 social entrepreneurs go through our program, and our graduates have gone on to raise nearly a billion dollars in capital and deliver social and economic impact all over the world.
Social ventures in action.
Here are four social ventures I've worked with at Miller Center, just to give you a flavor:
Nnaemeka Ikegwuonu
Smallholders Foundation
Nigeria
Established a community radio station delivering relevant content to smallholder farmers — weather, market information, tutorials on improving agricultural yields — to help improve their livelihoods. Earned income comes from selling air time to NGOs and others who want to reach the same populations.
Diana Sierra
Be Girl
Mozambique & across Africa
An industrial designer who moved to Mozambique and built a social venture around menstrual health — developing reusable products and educational curricula now adopted by government programs. Has reached over half a million young women across Africa. Read the full case study →
Manoj Sinha
Husk Power Systems
India & Africa
Builds and deploys micro-grid electricity systems in rural communities that depend on kerosene and diesel for light and power. Husk's microgrids deliver 100% renewable energy at 30% lower cost than alternatives. Now serves over 50,000 rural households across India and Africa.
Charlot Magayi
Mukuru Clean Stoves
Kenya
Repurposes locally sourced waste metal to manufacture efficient cookstoves, sold and distributed by local women, replacing hazardous charcoal cooking. Sold over 250,000 stoves, impacted 1.2 million lives, and reduced 500,000 tons of CO₂ — with a fully sustainable earned-income model.
While these four ventures address very different problems, they all use entrepreneurial thinking to create social impact in a way that harnesses market forces to give sustainability to their operations. There's another key aspect to most social ventures: they typically treat base-of-the-pyramid populations as partners rather than just charity cases. This is what makes successful social enterprises different from other impact-focused organizations: they have an earned-income model that creates systemic change by treating underserved communities as customers and partners.
Using The Launch Path for social ventures.
How is building and launching a successful social venture different from a traditional startup? Honestly, I think it's probably 85% the same. It begins by identifying a problem worth solving; you'll still need to get to Product-Market Fit, understand the competitive landscape, and build an economic model. But here are the key differences:
Ordinary startups need a business model — a rationale by which the organization creates, delivers, and captures value in the form of earned income. Social ventures need the same. But as organizations dedicated to impact, they also need an impact model — a theory of change by which they are creating, delivering, and measuring a desired social or environmental improvement.
Charities live on contributed income (donations and grants), whereas for-profit companies operate on earned income (profit from operations). Many social ventures blend the two — a typical model might use contributed income to launch and then become sustainable through earned income from ongoing operations.
We have well-established ways of measuring financial performance: revenue growth, net profit, debt-to-equity ratio. With a social venture, you'll also need quantitative and qualitative ways of measuring impact. Social ventures are sometimes called "double bottom line" organizations — one economic bottom line (profits that provide sustainability) and one social bottom line (lives impacted or carbon emissions reduced).
With social ventures, the population you impact may be different from the customer you're selling to. I like to draw a "how the money flows" diagram showing the different personas involved and how they fit into your overall engine of sustainable impact.
In the old-fashioned bifurcated world of nonprofit and for-profit organizations, there were no established sources of capital for mission-driven organizations. Social ventures weren't "nonprofit enough" to pitch foundations for grants, and they weren't "for-profit enough" for venture capital. Fortunately, in the past ten years this has changed dramatically. More on this below.
A traditional US nonprofit is incorporated as a 501(c)(3), a tax-exempt organization operating within a constrained set of parameters. Social ventures will often be better off incorporating as a traditional corporation or a B-Corp, giving more flexibility with regard to financing.
Many tech entrepreneurs dream of a Google acquisition or a billion-dollar IPO. With social ventures, those outcomes are much less likely. This makes the investor pitch a bit different — if you are looking for equity or debt capital, you'll need a proposition by which the capital makes a round trip back to the investor with some upside, even if there is no acquisition or IPO in the future.
Sources and structures of capital for social ventures.
Social ventures are less likely to be a fit for traditional venture capital since it's unlikely the equity can be sold at a huge multiple over the purchase price — the basic equation that VC relies on. But here are some of the financing types that work well for social ventures:
Traditional Grants
Many social enterprises raise seed capital from foundations structured as grants. A venture developing new agricultural technology for emerging markets, for example, might get a grant from the Gates Foundation to develop the technology, with the understanding that the enterprise will become self-funded on earned income once the product is launched.
Impact Loans
Loans specifically designed for social ventures, sometimes called "soft loans" because the terms may be friendlier than a commercial bank would offer — a below-market interest rate or flexible repayment terms. The lender helps achieve social impact while still having the capital make a round trip, and the social venture gets capital with more favorable terms.
Program Related Investments (PRI)
Because of the nature of US tax law, foundations often can only issue grants to 501(c)(3) organizations and may be subject to a special excise tax if they invest in for-profit entities. A Program Related Investment allows a foundation to fund a social enterprise that aligns with its mission while still hoping for a financial return on their investment.
Demand Dividend
A structure that blends aspects of debt and equity. Like debt, it goes on the books as a loan. But like equity, it gives the lender a claim to future profits — with an agreement that profits will be paid out as dividends "on-demand" in order to pay back the loan.
Revenue Share Notes
A simple and common arrangement by which the investor gives money to the social enterprise in return for a share of revenue capped at a certain amount. For example: $100K invested in exchange for 2% of all future revenue until $150K is received back.
Social Impact Bonds (SIB)
Despite the name, they aren't really bonds in the traditional sense — they're more of a pay-for-performance agreement. A private investor provides capital, and a government or other party agrees to pay down the bond based on measurable outcomes achieved. If all goes well, the city gets its problem solved, the investor gets their capital returned, and the social venture gets funded.
As with any sort of financing, the key is to find a structure where the interests of the investor are aligned with the interests of the organization. With social ventures, getting this alignment can be a little more challenging — but the good news is that today there are sources and structures available that make sense to align investors and social entrepreneurs.
Summary.
The world faces many challenges today. We have a climate crisis that threatens the planet, we can't feed all eight billion people we have now (let alone the ten billion we'll have by 2050), plus we want economic equality for women and social justice for all. These are big hairy problems.
Traditional charity still has a role to play, as do governments — but social entrepreneurs can bring unique agility, fresh thinking, and innovation to bear on these problems. Social entrepreneurs all over the globe today are working at the intersection of innovative thinking, a passion for improving the world, and expertise in harnessing the power of markets. I believe they can deliver change that is powerful and sustainable.