Generations X and Y are passionate about starting social businesses to address pressing social problems, from alleviating poverty to improving access to clean water. Every social entrepreneur hopes that these businesses will be operationally and financially sustainable, and perhaps even profitable. However, the failure rate for social businesses is extremely high. The problem is not a shortage of hope or good intentions, but rather the absence of an appropriate business model. Can we identify ways to help social entrepreneurs to improve their chances for success?
Based on my study of more than 100 social businesses during the last five years, I have identified three major lessons that social entrepreneurs may find useful:
Beware of ideas that sound too good to be true: no pain, no gain.
Consider PlayPump, a social enterprise that was founded in late 1989. The co-founders, Trevor Field and a professional engineer named Ronnie Styver, co-designed an innovative product: PlayPump — a child’s merry-go-around that pumps potable water from a deep borehole to a 2,500-liter storage tank that is seven meters above the ground. As children spin the merry-go-around, PlayPump pumps water up from the borehole to the tank. The idea of providing playground equipment for children that also provides clean water to the community generated over $60 million in support from the US Government, the Case Foundation, and other agencies. By 2008, more than 1,000 PlayPumps had been installed in five countries across southern Africa. Unfortunately, the PlayPumps failed miserably. Among the problems:
- Unreliable equipment and exorbitant costs for installation and maintenance. The pumps failed frequently and needed both specialized repair workers and specialized replacement parts. Both were difficult to find and very expensive for rural villages.
- Inefficient water supply alternative. While PlayPumps had initial successes in helping the poor to gain access to clean water in countries such as Malawi, they became increasingly ineffective as more and more pumps were installed in adjacent communities. In Mozambique, the large number of pumps began draining the supply of groundwater to the point that some of them could not meet demand.
- Unhappy children. When the installed pumps could not generate enough water, there were reports that children in some communities were being required to spin the merry-go-around 24 hours a day. Far from providing an opportunity for children to play, the pumps raised concerns about forced child labor.
Economic development requires sustainable efforts exerted by the poor: effective screening is essential. We often try too hard to help the poor by providing resources to them for free, hoping that they will utilize these resources in a responsible and sustainable manner. The problem is that providing resources for free can create moral hazard: you cannot screen out which poor beneficiary is truly committed for the long term. Therefore, aligning compatible incentives between the social business and the poor is critical.
For example, to enable Afghan women weavers and their families break the cycle of poverty, Connie Duckworth founded an online portal called Arzu that sells the weavers’ traditional and custom-designed rugs. By providing a market for the women, and by offering them a fair price, Arzu creates jobs in rural Afghanistan and provides the women with steady income and access to education and healthcare. However, to screen out those weavers who are not truly committed, Arzu imposes certain direct and indirect costs for those who join the program. First, to provide an incentive for the weavers to stay with the program over an extended period of time, Arzu provides looms on a rent-to-own basis. Second, to enable weavers to improve their skills and their future earnings, Arzu provides a 50% incentive bonus for those weavers who attend Arzu literacy classes and send their children to school full-time. As recognition of the impact that Arzu has made, former President Jimmy Carter presented Connie Duckworth with the Skoll Award for Social Entrepreneurship in 2008.
The network effect has enabled firms such as AirBnB, Alibaba, e-Bay, e-Harmony, and Uber to scale up their operations without incurring major increases in operating costs. This concept of network effect is powerful, and it can certainly enable social businesses to make bigger impact. Matt and Jessica Flannery, for example, co-founded an online person-to-person (P2P) social micro-lending platform called Kiva in 2005. Kiva is an online portal that enables ordinary people in the developed world to lend money (as little as $25) to individual borrowers or groups in the developing world who want to start or sustain businesses. By 2008, Kiva had over 350,000 lenders and had made more than 37 million Euros in loans to 67,000 borrowers in rural Africa.
There are many surprises and setbacks when developing a sustainable, scalable and impactful social business. The above three lessons may ease some pains for bigger gains!