Social Entrepreneurship 

Dipayan Baishya 

During the last couple of decades it has been conclusively proved that government intervention or
foreign aid can achieve only a limited success in eradicating poverty and uplifting societies. On the
other hand, free markets coupled with the freedom of opportunity and enterprise has been
instrumental in creating wealth for a much wider segment of population and has changed the
standard of living for millions. Free-market economic reforms of the past two decades have brought
an unprecedented surge of wealth to India, China, Brazil and nations in central and Eastern Europe as
well as in Latin America and Africa. Capitalism has helped usher in an era of wealth and economic
growth that foreign-aid programs have tried but failed to do since World War II.

Yet, as one drives through the cities of any of these emerging economies, one can’t help but notice
large swaths of land covered by slums wherein people live with a shockingly low standard of living.
And that is when one wonders if markets have failed to deliver?

The Gap
A closer look reveals that almost everyone living in these areas are gainfully employed and have a
livelihood – without it they wouldn’t have chosen to live through the hardships of city life. Yet, their
income doesn’t translate into a higher standard of living. The same holds true even for the rural poor
where doubling of income from $1 a day to $2 a day doesn’t translate in a significant improvement in
the standard of living.

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Recent studies and books such as ‘Fortune at the Bottom of the Pyramid’ showed that there is a large
addressable market for companies to cater to, which if tapped properly could earn the enterprises a
‘fortune.’ Buoyed by such sentiments large multinationals launched products to tap into this segment.
Cola at Rs 5, shampoo at Re1 sachet are just some examples of these. Though they have met with some
success, they definitely haven’t earned a ‘fortune’ for the companies or have significantly changed the
lives of its customers.

Possibly that is because none of this ‘innovation’ was relevant to their lives and the standard of living
of the poor. For the rural or urban poor a change of standard of living comes from more improvement
in the basic necessities of life – sanitation, clean water, healthcare, education, energy and ofcourse
certain food and consumer products. And even doubling of income doesn’t necessarily translate into
better access to safe drinking water, sanitation, better healthcare or any better standard of living.

In fact, studies have shown that the urban poor often end paying a far larger premium for basic
utilities and necessities than the affluent in the city. While people living in apartments in Mumbai do
not pay for water, the poor in the slums of Dharavi in Mumbai pay a price for it. The price of milk, rice
or even electricity is higher within slums than it is outside. To access hygienic sanitation and dignity, a
family of five has to shell out a minimum of Rs 300 a month at the community toilet. That’s 10% of the
earning for a $2 a day earner.

While it is apparent that the poor are willing to pay for each of these, they end up paying a far higher
amount that people outside the slums pay for. Even if the $2 a day earner doubles his or her earning
and starts earning $ 4 a day, it doesn’t mean that he or she can set up a clean toilet in her house, or
buy a water purifier or afford preventive healthcare. For that he or she has to earn almost five times or
more. The reason for this is the lack of an efficient market within the slum areas. Seldom do the poor
find relevant products and services that have been developed with an understanding of their needs
and available at a price that they can afford.

However, things are changing and one can notice the emergence of a new wave of entrepreneurs who
are building businesses to tap into this gap in the society. They are the social entrepreneurs.

The Social Entrepreneurs

Social entrepreneurs combine technology with market-driven, innovative distribution strategies and
smart financing options to drive innovation in products and services that are relevant and affordable
for the people at the bottom of the pyramid. Here are some examples.

D.Light Design is taking advantage of the advances in light emitting diode (LED) technology to
provide portable lights that are both AC-rechargeable and solar-rechargeable, and can provide up to

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40 hours of light on a full charge. What’s more, it even has a socket to charge mobile phones as well.
For families without access to electricity or very limited access, owning these lights mean that the
child in the family can study longer or women or men in the family can work longer in their houses.
D.Light is using an incentive-based, market-led distribution strategy that aims to reach out these $10
lights and improve the lives of 10 million families in Tanzania and India by 2010. And they have
another 1.4 billion people to reach out to who do not have access to electricity.

Japanese firm Sumitomo has tied up with a number of social enterprises in East Africa and Asia to
manufacture mosquito bed nets made from special polymers impregnated with a long-lasting
insecticide. These bed nets are effective for up to five years instead of the usual six months and do not
require any re-treatment. Thus with use even if the nets tear-off, they remain effective in malaria-
prevention. In Africa, where a million people die every year from malaria, one of Sumitomo’s partner
companies, Tanzania-based A to Z Textiles is aiming to decrease the cost of production of these nets
from $7 to $5 by acquiring massive scale in production and distribution.

This autumn in Bangladesh and Kenya, slum dwellers will have access to the Peepoo bags that are
single-use toilet bag that turn human waste into fertilizer. It doesn’t require water, is odour-free and
safe for burial. The Swedish manufacturers expect that with scale they will be able to sell these for
around Rs 2 a piece. At probably an even lower price, this product can change the lifestyle of 2.6
billion people who do not have access to a toilet.

What remains common across all these social enterprises is that they are building and distributing
products and services that can change the standard of living of the people at the bottom of the
pyramid and are delivering them at a price point that is affordable to them. They are customized for
this segment and do not aim to target higher income groups. They are aiming for massive scale to
drive down costs and improve accessibility. And in each of these cases they are tapping into a new
generation of capital that is funding such enterprises.

If it is a question of scale, isn’t it easier for large multilateral conglomerates like Unilever, Tatas or
Pfizer to develop such products? Not necessarily. The cost structures and overheads of large
corporates are geared to develop products for the more affluent. ‘Reverse Innovation’, a phrase and
the idea that has become popular since GE Chairman, Jeffrey Immelt’s article in Harvard Business
Review, will focus on more evolved products, while social entrepreneurs focus on the basic necessities
of the poor.

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To arrive at price points that make sense to the people at the bottom of the pyramid, one requires
building a very different kind of organisations that not only has a widely different cost structure, but
also a different set of values, mission and objectives. Developing such products and services require
empathy. In fact these social entrepreneurs and their employees come from such social background or
have spent enough time with their target communities that allow them to understand, empathise and
deliver relevant solutions to the rural and urban poor. And there are a growing number of enterprises
which are able to achieve this.

What It Isn’t
At a recent conference, a team took on the onerous task to define what is social entrepreneurship.
Having spent countless hours and tea breaks discussing and debating it, the consensus that emerged
was ‘any business that isn’t anti-social is social enterprise.’ It isn’t easy defining what binds together
these new generations of enterprises. But what they aren’t can still be defined.

A large number of companies, government-led initiatives and non-governmental initiatives focus on

building livelihood solutions for poorer sections of the populations. These involve engaging
communities to manufacture or grow certain products and then develop market linkages for them –
thereby helping the community members earn a livelihood. These also include organisations engaged
in ensuring ‘fair trade,’ ‘environmental sustainability’ and other causes. However, the new generation
of social entrepreneurs do not ask you to drink a particular blend of coffee and then assure you that
you have played a role in changing the planet. Rather than focusing on improvement in livelihood for
their target communities, these social entrepreneurs are focusing on improvement of lifestyles of the
communities they deal with.

Social entrepreneurs are also not those who are involved in implementing and extending the corporate
social responsibility programs. Neither do they depend on grants to deliver products and services at
subsidized rates. Social entrepreneurs are hard-nosed businessmen running for-profit organisations
with a clear aim of scaling it up as much as possible. They blend technology with market-driven
distribution solutions and aim for scale to drive down their costs. This ensures opportunity for earning
profits from the business. Being for-profit, market-driven entities, they have a far better feedback
mechanism for building and selling these products and are efficient in managing limited capital and
other scarce resources in their enterprises.

Rural-based innovators in India and elsewhere have built certain products that use creativity and
imagination to develop several labour-saving devices. Examples include, the washing machines run by
cycle pedals, automatic pulley and lever mechanisms for drawing water from deep wells, using
agricultural pumps for making vehicles etc. However, such innovation often lacks scalability or comes
at a cost that is not commensurate with the benefits provided by such devices. Social entrepreneurs
steer clear of such ‘creative innovation’ that can’t be scaled or replicated in a massive way.

The micro-credit and micro-finance segment has grown tremendously during the last few years. The
success and recognition earned by institutions like Bangladesh’s Grameen Bank, India’s SKS
Microfinance and Mexico’s Compartamos has brought funds, talent, resources and attention to this
sector. While the growth has also raised a few questions, it certainly can’t be denied that micro-
financiers have brought about a paradigm shift in the lives of many communities and deserves to be
recognized as a sector by itself. While social entrepreneurs may use the distribution and out-reach of
micro-financiers and self-help groups, financing is not part of their business.

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Patient Capital
Ideas, enterprise, technology and the zeal to improve the lives of other people are not exclusive to this
era. So what explains the sudden rise of such social entrepreneurs in recent times? The biggest enabler
for the rise of social enterprise is a new generation of capital which could be referred to as ‘patient
capital.’

Across the world capitalists and professionals have realised the scope and potential of building
businesses that tap into the billions residing at the bottom of the pyramid. However, such businesses
have long gestation period and can test the patience of entrepreneurs and investors. Unlike
conventional businesses, social enterprises can’t deliver spectacular financial returns in short periods
of time. Conventional private equity and venture capital funds that aim at providing returns within a
three or five year time-frame find such businesses unappetising.

However, a new generation of financiers are willing to invest in building ‘patient capital’ that can
invest in such businesses and wait for returns to accrue over the long-term. And in doing so, their
objective is to maximise both social and financial returns. Interestingly, they do not see a trade-off
between the two and instead believe that one leads to the other.

Patient capital funds first identify only those businesses that deliver social returns by targeting
customers at the bottom of the pyramid and then decide on investing in them based on their current
and future financial performance.

One of the first funds to start with this concept was the US-based Acumen Fund that has invested over
$40 million in more than 40 social enterprises in East Africa, India and Pakistan. Investments are
made in different portfolios like healthcare, housing, sanitation, water and energy.

Similarly, Omidyar Network founded by eBay founder Pierre Omidyar is designed as a philanthropic
investment firm dedicated to harnessing the power of markets. The company states, “We support
organizations whose market-based approach has the capacity for large-scale, catalytic impact,” and
the company has invested in over dozens of for-profit enterprises.

Canada-based Sarona Asset Management, which started off with investing in dairies in Paraguay
today has a number of funds focussed on investing in micro, small and medium entrepreneurs with
social impact in Latin America. US-based Endeavor which is present in Latin America, South Africa
and Turkey claims to have worked with 170 ‘high-impact entrepreneurs’ who now collectively generate
$3.15 billion in revenues and has helped attract over $800 million investments into the sector.

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In fact, the response to such funds have been so huge that the Rockefeller Foundation, Acumen Fund,
Gates Foundation, among others have come together to start an institute dedicated to impact
assessment of social entrepreneurs. Monitor Institute, the research arm of Monitor
Group, estimates that if this institute succeeds in developing a uniform impact assessment
mechanism, then within five to ten years impact investing could grow to $500 billion, around 1% of
the world’s total assets under management in 2008. Ofcourse, impact investments also includes
investments in areas of clean technology and fair trade. Forbes estimates that in the past year, impact
investment outperformed mainstream investments and delivered returns of around 6%.

What is also interesting is that in a number of cases, impact investors, patient capital funds and
philanthropic funds are teaming up with conventional private equity and venture capital funds in
investing in certain companies, thereby proving the social and financial returns can go hand-in-hand.
D.light for example, has apart from Acumen, five private equity investors including Draper Fisher
Jurvetson and Nexus Ventures. In Kenya, as part of the Ripple Effect project, the Bill and Melinda
Gates Foundation has joined hands with Acumen Fund and IDEO, a leading design firm, to apply
design thinking and entrepreneurial, market-based solutions to the challenges of safe water storage
and delivery.

In India too, there are already a few funds built on patient capital and focusing on impact investment.
Probably the oldest one is Aavishkaar that has a $14 million fund for social enterprises and $18
million fund for micro-finance institutions. The fund has invested and grown 22 companies and is
already planning exits in a couple of them. Some of the sectors include energy, access to information,
low-cost automated teller machines, personal hygiene products and water.

IFMR Trust, an off-shoot of Chennai-based Institute of Financial and Management Research, operates
IFMR Holdings which partners with micro-financiers, IFMR Advisory Services which is launching a
private equity fund for rural enterprises and IFMR Capital that operates as a financial intermediately
for such social enterprises.

Specifically targeting innovation in rural areas, Chennai-based Villigo Innovation Foundation extends
loans to social enterprises. Ideas that it has helped grow include an irrigation model that conserves
water by more than 70 % and a stove that uses farm waste for fuel.

It is only natural that each of these funds go beyond investing. Apart from mentoring and managerial
assistance, these funds help the social entrepreneurs find talent, make them aware of organisational
and systemic risk and often handhold them to develop markets and investor base. While some funds
are ‘financial first investors’ wherein they raise risk capital, the ‘social first investors’ raise
philanthropic capital. However, in both cases the investors are looking for investments wherein the
social and investment returns go hand in hand.

Philanthropy 3.0
The reason social investments is gaining such traction and popularity is because the people who fund
these are from a new generation of capitalists who have themselves created wealth by building
enterprises. They are not only aware of the long-lasting, sustainable impact that businesses and
markets create but have also seen how raising capital helped them catalyze the growth of their
businesses. In their new avatar as millionaire and billionaire capitalists they want to make sure that
the capital they invest in bringing about social change behave in an efficient way similar to the way
they used capital for growing their own business.

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This new social capital is bringing about the third wave of philanthropy aimed at eradicating poverty.
The first wave of philanthropy that was popular till the late Seventies primarily focussed on mitigating
the impact of poverty. During this period philanthropy primarily meant ‘hand outs’ directly to the
poor or in funding institutions that mitigated the effects of poverty. For example, donations were
made to orphanages, hospitals, schools charity homes etc. Institutions like Mother Teresa’s
Missionaries of Charity were the biggest beneficiaries of such philanthropy.

During more recent times, ‘hand outs’ based philanthropy moved a step ahead to create livelihood
solutions for the poor. A large number of government, charitable and NGO programs focused on
creating employment for rural and urban poor through promotion of products like handicrafts,
textiles and food products. Innovations like food-for-work programs and corporate intervention in
sourcing from producers from disadvantaged groups was also part of this age. The Indian
government’s National Rural Employment Generation Act (NREGA) is a spectacular example of large-
scale livelihood generation schemes.

The new wave of philanthropy today goes beyond generating livelihood solutions. By using the power
of business and markets, it focuses on the improving the standard of living of billions of people at the
bottom of the pyramid. This ensures better feedback mechanism, higher efficiency and better return
of capital in bringing about social change. In effect it creates far more sustainable and wide-spread
impact in improving the lives of billions of people.

What it is also achieves is it provides more dignity and opportunity to those who are at the receiving
end. They no longer have to accept ‘hand outs.’ Instead they are in a transaction of equals, where they
pay for the services they consume and hold their head high.

Access this document online @ http://dipayan.wordpress.com/2010/02/14/social‐entrepreneurship/ 

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