Educating Social Entrepreneurs

MIESING • AGGESTAMMIESING THE BUSINESS Educating Social Entrepreneurs Principles for Responsible EXPERT PRESS Management Education Collection DIGITAL LIBRARIES From Business Plan Formulation to Implementation, Volume II Oliver Laasch, Editor EBOOKS FOR Editors BUSINESS STUDENTS Curriculum-oriented, born- Paul Miesing • Maria Aggestam digital books for advanced Educating Social Entrepreneurs: From Idea Generation to Business Plan business students, written Formulation appears at a time of unprecedented environmental by academic thought disasters, natural resources depletion, and significant failure of leaders who translate real- governments and global businesses to attend to worldwide social world business experience problems. In this era of downsizing, restructuring, and social Educating Social into course readings and changes, notions of traditional venture creation and the ways of reference materials for creating social values have been challenged. We draw on examples students expecting to tackle from various parts of the business world and societies to prepare Entrepreneurs students, scholars, and entrepreneurial managers to deal with the management and leadership challenges presented by a new and diverse business environment challenges during their to create business plan for a social venture. Illuminating trouble EDUCATING SOCIAL ENTREPRENEURS, VOLUME II From Business Plan professional careers. some aspects of the global social and business worlds, this POLICIES BUILT workbook comprises two volumes that covers key issues. Students, Formulation to BY LIBRARIANS scholars, and entrepreneurs who want to help a world of multiple disparities by dealing with social entrepreneurship will find this to • Unlimited simultaneous be beneficial reading. Implementation usage • Unrestricted downloading Paul Miesing is the founding director of UAlbany’s Center for and printing Advancement and Understanding of Social Enterprises. He has • Perpetual access for a published dozens of articles in both academic and practitioner Volume II one-time fee journals, including those listed in the Financial Times “top 45” • No platform or journals. He served on several peer review boards, including the maintenance fees Council for International Exchange of Scholars (CIES) and the • Free MARC records National Science Foundation. In 2013, he was the recipient of • No license to execute UAlbany’s inaugural Exemplary Community Engagement Awards for both the Small Enterprise Economic Development and Going Editors The Digital Libraries are a Green Globally programs. comprehensive, cost-effective Paul Miesing way to deliver practical Maria Aggestam studies entrepreneuring processes in various contexts such as in art-related industries, high-tech and biotech treatments of important nology businesses, and entrepreneurs within Swedish gastronomy. Maria Aggestam business issues to every Her research is cross-disciplinary, combining perspectives from student and faculty member. among the social sciences. She is research-affiliated to Sten K. Johnson Centre for Entrepreneurship at the Department of A CRME Publication Business Administration, Lund University, Sweden. She is also affiliated to Nelson Mandela African Institution of Science and For further information, a Technology where she serves on the teaching team on master free trial, or to order, contact: programme in entrepreneurship and innovation and also as an advisor to start-up enterprises. [email protected] Principles for Responsible www.businessexpertpress.com/librarians Management Education Collection Oliver Laasch, Editor ISBN: 978-1-63157-897-7 Educating Social Entrepreneurs

From Business Plan Formulation to Implementation

Volume II

Paul Miesing and Maria Aggestam Educating Social Entrepreneurs: From Business Plan Formulation to Implementation, Volume II

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopy, recording, or any other except for brief quotations, not to exceed 400 words, without the prior permission of the publisher.

First published in 2017 by Business Expert Press, LLC 222 East 46th Street, New York, NY 10017 www.businessexpertpress.com

ISBN-13: 978-1-63157-897-7 (paperback) ISBN-13: 978-1-63157-898-4 (e-book)

Business Expert Press Principles for Responsible Management Education Collection

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Printed in the United States of America. Abstract

Educating Social Entrepreneurs: From Idea Generation to Business Plan Formulation appears at the time of unprecedented environmental disasters, natural resources depletion and significant failure of governments and global business to attend social problems occurring around the globe. In the world of downsizing, restructuring and social changes, notions of traditional venture creation and the ways of creating social values have been challenged. Drawing from contributions by scholars of social entrepreneurship from Europe, North and South America, and Africa, this edited volume reveals interdisciplinarity of entrepreneurship research. To assist the readers, students, and teachers in understanding some dilemmas of our time, the contributors to these collections adopt an array of theoretical frameworks that all examine a multitude of societal and business issues in which the social entrepreneur surfaces. This Social Entrepreneurship book draws examples from various parts of the global business world and various societies and prepares students, scholars, and entrepreneurial managers to deal with the challenges presented by a new and diverse business environment. It is our belief that these two volumes endorse the importance of social entrepreneurship in the competitive business landscape and prepare students of business and other faculties to create their own business plan for a social venture. Illuminating troublesome aspects of the global social and business worlds, this Social Entrepreneurship book comprises two volumes and covers key issues such as defining social entrepreneurship; contexts for social entrepreneurship; pitching and communicating social opportunities; and also implementing social opportunities that covers the areas of organizational structures and hybrid organization for social enterprises; mobilizing resources to fund social ventures; scaling the social ventures; and ecopreneuring as social enterprises. Students, scholars, and entrepreneurs who want to prepare themselves to help the poverty-stricken world and deal with social entrepreneurship will find this to be beneficial reading.

Keywords case studies, entrepreneurship, social business plan, social entrepreneurship

Contents

Introduction ��xi

Part IV Organizational Structures and Hybrid Organizations for Social Enterprises �� 1 Chapter 17 Legal Structures Available to Social Enterprises: An Overview ��3 Helen Takacs Chapter 18 Examining the Ethics of Organizational Legal Forms: Lessons from the Social Enterprise Movement ��19 Rae André Chapter 19 The “Benefit Corporation”: A Viable Option for Social Entrepreneurs? ��33 Raymond Brescia Chapter 20 International Case Studies in Social Entrepreneurship: A Focus on Brazil ��63 Claudia G. Green, Casey Frid, and Imran Chowdhury Chapter 21 Aquamariner Project: A Path for Food Self-Reliance? ��75 Adele Santana and Soren Hultman Chapter 22 ECO Kitchen ��83 Ester Barinaga Chapter 23 Worksheet for “Organizational Structures and Hybrid Organizations for Social Enterprises” ��93 Paul Miesing

Part V Mobilizing Resources to Fund Social Ventures �� 95 Chapter 24 Financing Modes of Social Entrepreneurship ��97 Bogdan Prokopovych and Davis Plotnieks viii CONTENTS

Chapter 25 Microfinance: Models and Implications for Social Entrepreneurship ��117 Wonhyung Lee Chapter 26 Crowdfunding ��131 Stephanie Black and Lynda de La Vina Chapter 27 What’s on the Menu? Feeding Your Social Enterprise ��149 Elizabeth A.M. Searing Chapter 28 How to Crowdfund Your Venture ��159 Stephanie Black Chapter 29 Communicating for Funding ��163 Marie Löwegren Chapter 30 Volu: Validating the Business Case ��169 Chris McCarthy, Anthony Richichi, and Gary E. Shaheen Chapter 31 Worksheet for “Mobilizing Resources to Fund Social Ventures” ��177 Paul Miesing

Part VI Scaling the Social Venture �� 179 Chapter 32 Systems Thinking for the Social Entrepreneur ��181 Eliot Rich Chapter 33 Made in Carcere: Scaling a Social Enterprise Business Model ��203 Luca Mongelli, Pietro Versari, and Luca Giustiniano Chapter 34 Dairy Processing Social Venture among the Maasai in Northern Tanzania ��221 Alexander Tetteh Kwasi Nuer Chapter 35 Worksheet for “Scaling the Social Venture” ��231 Paul Miesing

Part VII Ecopreneuring as Social Enterprises �� 233 Chapter 36 Wholly Frijoles ��235 Linda M. Krzykowski CONTENTS ix

Chapter 37 Creating a Business Model for Recycled Materials ��243 Stephanie A. Fernhaber, Lawrence J. Lad, and Geoff Schoeneck Chapter 38 Gongali Nano Filter for Rural Water Purification ��249 Ahmad Kipacha Chapter 39 Worksheet for “Ecopreneuring as Social Enterprises” ��261 Paul Miesing

Resources ��263 Author the Authors ��267 Additional Readings ��277 Index ��281

Introduction

Maria Aggestam

Sten K. Johnson Centre for Entrepreneurship, Lund University

Paul Miesing

University at Albany, State University of New York

A central assumption in social entrepreneurship venture creation is not only formulating your enterprise business plan but most importantly diligently implementing it. This Volume of our workbook explains the magic of doing so successfully. Both Volumes I and II are dedicated to the subject of social entrepreneurship, no matter where in the world you are and where you will start your plan. It was designed and selected from the outset to appeal to numerous social entrepreneurs targeting national and international audiences. This workbook applauds social entrepreneurs as designers of significant social change processes, a topic that is rapidly becoming a recognized field of practice in its own right. In doing so, we recognize the importance of developing new and sustainable business models and plans and illustrate them with a wide-ranging and internationally focused selection of cases and exercises to help you implement new yet sustainable approaches to community problems. The impact of social entrepreneurs and their new models of social value creation have increased dramatically. It is not always obvious how social entrepreneurs should most effectively implement their socially focused business plans. One way of doing so is to think about how to describe social business plans that address how— as a social entrepreneur—you can effectively scale your plan and ideas xii Introduction to reach as large an audience as possible, thereby benefitting people. To achieve success, think about and how many crucial details are needed. Practical knowledge for scaling is an iterative process that requires detailed information about the resources necessary to execute your plan. Therefore, before going forward on any specific action and fully committing to the plan, social entrepreneurs should persistently imagine how to scale the venture. To do it efficiently, you may think about three fundamental mechanisms known as the three Rs which can serve as control mechanisms of your entrepreneuring work: Resources, Risks, and Returns. The constant exploration of resources combined with a plausible resource plan that considers both the short- and long-term is significant. Also, assessment of risks is a crucial factor in mitigating failure when committing large investments. Understanding and having a clear map of the resources and assessing possible risks may help to calculate potential returns and profits. The success of social entrepreneurs increase if they consider the full range of options for their actions and the three Rs are being continuously refined over the process of implementing the business plan. Volume I is pitched specifically to the social entrepreneur who has an idea and needs to plan for its creation and development; as such, it helped aspiring social entrepreneurs define the outline and nature of their business idea. Having formulated your plan as an individually unique entity, we now discuss and uncover the practical realties of implementing your plan. Volume I contained 16 chapters across three sections covering the formulation steps of “Defining Social Entrepreneurship”; “Contexts for Social Entrepreneurs”; and “Recognizing, Pitching, and Communicating Social Opportunities.” In this Volume, we promote the reality or ways of thinking that consider and examine the myriad forces that influence business plan implementation. As Tiffany and Peterson (1997) wrote:

A business plan takes a good hard look at your company, so that you can honestly and objectively recognize its abilities. A business plan coaxes a financial report, so that you know where you stand today and what the future holds … a business plan prepares you for an uncertain future. Introduction xiii

This means that the magic of implementing your plan requires you to be rational and practical. The aim here is to instill faith and assure results to help aspiring social entrepreneurs in implementing their business plans that were not there before but now may be materialized as a consequence of the knowledge and skill-building included in this Volume. Magical beliefs about an already planned social enterprise may simul- taneously increase the motivation of social entrepreneurs and increase the success ratio of their ideas. All these aspects require a balance, which most often may lead to various compromises. This Volume will help us navigate today’s highly dynamic, competitive global and local environments. This Volume moves to implementation beginning with section four discussing “Organizational Structures and Hybrid Organizations for Social Enter- prises” that provide keys to both theoretical and practical frameworks to increase your plan’s likelihood of success. The purpose of this section is to acquaint you with not only theory but also illustrate how social venture and your business plan may be connected. Section five discusses “Mobi- lizing Resources to Fund Social Ventures,” which include financing models and implication for social entrepreneurship, as well as microfinance and aspects of crowdfunding. We cover issues of how to obtain and how to communicate financial resources as well as some illustrative examples of entrepreneurial personalities and behavior of social enterprises. While those two sections recognize common challenges and problems facing social enterprises, it should also compel you to think of your business as very special that offers you the freedom to show your individuality through the strategic decisions you select. Section six is concerned with “Scaling the Social Venture.” This section includes systems thinking that will get you to think about unintended consequences as well as impacts beyond immediate stakeholders. Finally, section seven is concerned with the special topic of “Ecopreneuring as Social Enterprises.” The underlying theme to the section is to understand and help the poverty-stricken global world and the fight against the abuse of our shared natural environmental reserves through which social entrepreneurial opportunities might be realized. It provides insightful case studies with experiential exercises, illustrating the wider context of doing global good. As in Volume I, every section contains a worksheet that helps you reflect on every step taken to implement your plan. We include the workbook with a Resources section xiv Introduction that might be used during this fascinating pathway of implementing your plan by showing innovative ways of being entrepreneurial. As Descartes (1637) pointed out, “Car ce n’est pas assez d’avoir l’esprit bon, mais le principal est de l’appliquer bien” (It is not enough to have a good mind. The main thing is to use it well). By this, he means that one should use knowledge, apply resources, and act accordingly. The two Volumes of this workbook are intended as a practical primer for the field of social entrepreneurs that provides new ways of thinking and offers illustrative examples of applied models of social value creation for entrepreneurs and other new venture creators. We hope that this workbook provides a conduit for information, knowledge, and practice that will enhance your personal success as well as the survival and sustainability of social enterprises.

References

Descartes, R. 1637. Discourse on the Method of Rightly Conducting One’s Reason and of Seeking Truth in the Sciences translated and edited by S. Haldane & G. R. T. Ross Cambridge University Press, 1911. Tiffany, P. and D. Peterson. 1997. Business Plans for Dummies. Foster City, CA: IDG Books. PART IV Organizational Structures and Hybrid Organizations for Social Enterprises

CHAPTER 17 Legal Structures Available to Social Enterprises: An Overview

Helen Takacs

Dickinson College

Introduction

An early challenge for social entrepreneurs is deciding on the most appropriate legal structure for the venture. The choice of a legal structure is critical for a variety of reasons including issues related to growth, liability, taxation, and longevity. Research has long shown that business planning activities, such as choosing a legal structure for an organization, are challenging for entrepreneurs, who often focus more on the creative nature of their work than on practical aspects (Khandekar and Young 1985). This would seem to hold true for social entrepreneurs. This chapter provides an overview to the various legal structures available to social enterprises and notes the benefits and limitations of choosing one legal form over another. Country-specific and, in several countries, state-specific legal frameworks determine the variety of legal structures available to social entrepreneurs. In a 2011 study of global social entrepreneurship (Terjesen et al. 2011), three broad categories of legal structures were considered: for-profit, not-for-profit, and hybrid. In all regions of the world except the United States, the most common legal structure for social enterprises is a hybrid structure, and the not-for-profit structure is the second most common. This relationship is reversed in the United States where the not- for-profit structure is most common, followed by the hybrid structure. 4 EDUCATING SOCIAL ENTREPRENEURS

This chapter is organized into these same three broad categories: for- profit structures, which include the company model and cooperatives; not-for-profit structures; and hybrid structures. There are several legal forms within each category, and each legal form has a unique mix of characteristics that could present opportunities or challenges to the social entrepreneur. Five characteristics of the legal structures should be considered by social entrepreneurs. The first is the level of complexity and expense to set up the organization. The second characteristic relates to liability issues and the extent to which the organization’s founders are liable for any damages caused by or debts taken on by the organization. The third characteristic concerns the funding options that are available to the organization, which, in turn, affects an organization’s ability to grow and scale up. How taxes are computed on any income earned by the organization constitutes the fourth characteristic. The final characteristic is the possible longevity of the organization and the dispersion of assets upon dissolution. For social enterprises, the choice of a legal structure is also an opportunity to signal to the broader community that the organization has a social mission. Regardless of the legal form that an organization adopts, it is possible in some countries to integrate and signal a social mission by seeking legal status or a mark or certification as a social enterprise. Legal status as a social enterprise is a governmental recognition that an organization has adopted a social purpose. A mark or certification is a third-party, nongovernmental “seal of approval” administered and managed by a not-for-profit-certifying organization. B Corp certification, which is issued by the American not- for-profit B Lab, is sometimes confused with the benefit corporation, a hybrid legal structure. To address this confusion, social enterprise legal status, marks, and certification are included in this chapter on legal structures. The chapter concludes with a set of questions to help readers better understand legal structures that are specific to their jurisdiction.

Legal Structures Available to Social Enterprises

Legal structures available to social enterprises can be organized into three general categories: for-profit structures, not-for-profit structures, and hybrid Legal Structures Available to Social Enterprises 5 structures. Hybrid structures are legal forms of organizing that have been created in several countries and that combine characteristics of for-profit and not-for-profit structures. These hybrid structures have been developed specifically for social enterprises. In addition to legal structures, social entrepreneurs may seek legal status as a social enterprise or a social enterprise mark or certification. This section provides a global overview to assist social entrepreneurs as they navigate the decision regarding legal structure.

1. For-profit structures available to social enterprises

Sole Proprietors

In ventures structured as sole proprietors or sole traders, there is one owner, and the owner and the organization are the same under the law (Nickels et al. 2015). Thus, the owner bears full responsibility and liability for the company. Any profits or losses are taxed as personal income or loss for the owner, which is referred to as pass-through taxation. A sole proprietorship ceases to exist when the owner dies or sells the assets of the company. A sole proprietorship cannot be transferred to another individual or organization. Sole proprietorships are the least complex and least costly form of business to set up. In the United States (U.S. Small Business Adminis- tration undated, a) and Australia (Australian Government undated), for example, the legal process for setting up a sole proprietorship requires just two steps. The first is to choose a business name, which involves searching to ensure that the chosen name is unique and is not already trademarked. If the business name is different from the legal name of the business owner, the business owner must register the name or file a fictitious name form. As an example, if Myra Thompson opens a tax service named Myra Thompson’s Recycling Center, she does not need to file a fictitious name form. She would need to check, though, if there is another business in her state with that name. If Myra Thompson chooses to name her company the Best Tax Service, she would need to both search to ensure that no other company has that name and file a fictitious name form. The second step for setting up a sole proprietorship involves obtaining the necessary permits, licenses, and zoning clearances. 6 EDUCATING SOCIAL ENTREPRENEURS

An optional step for sole proprietorships, but one that may be required if the company has employees, is to obtain an Employer Identification Num- ber (EIN) in the United States or an Australian Business Number (ABN) in Australia. If the company has no employees, a sole proprietor can file taxes under the owner’s social security number or tax file number. The profits or losses of a sole proprietorship are taxed as personal income. There are no annual filing requirements other than the owner’s personal tax return, which is another aspect of simplicity associated with this business form. Funds available to a sole proprietorship are the owner’s personal savings, credit card debt, and money that the owner is able to borrow from banks and from family and friends. A sole proprietor cannot raise funds by selling ownership, or equity, in the firm. Thus, sole proprietorships often have difficulty in raising large sums of money for the business. In a sole proprietorship, the owner has complete control of the business. The owner has the freedom to make all management decisions. Often, though, the owner acts on limited knowledge regarding some business decisions. Returning to our example, Myra Thompson may be highly knowledgeable and able to make competent and informed decisions about recycling processes. But, unless she also has education or experience in the area of marketing, she may not be able to effectively market her company and develop a growing customer base. Because managing a business, even a small one, is complex and requires knowledge in many different areas, sole proprietorships can be at a disadvantage in terms of managerial expertise.

Partnership

A partnership is a legal form of business in which there is more than one owner, or partner (Nickels et al. 2015). There are two basic forms of business partnerships. In the first, the general partnership, all partners share in the liability and decision-making of the company. In the second, limited partnerships, there will be one or more general partners who assume full liability and decision-making authority for the company, and the remaining partners are limited partners. The liability of limited partners is capped at their financial investment in the company, and limited partners usually refrain from participating in day-to-day operations and decisions. Legal Structures Available to Social Enterprises 7

Partnerships are relatively easy to set up (Morrison and Foerster, undated; Gov.UK, undated). The owners draft and sign a partnership agreement that addresses several issues including the management responsibilities and financial contributions of each partner, the term of the partnership, provisions should a partner die or otherwise choose to leave the partnership, and how profits and losses will be shared among the partners. Partnerships, by their very structure in which there are multiple owners, make possible both greater knowledge and greater financial resources for the company than for sole proprietorships. The partnership can be comprised of individuals with different backgrounds and knowledge bases, which improves decision-making in the organization. And, the partnership can use the funding to which all partners have access. The issue of liability, even when it is limited, often precludes investors from getting involved in a partnership when they are scouting investment opportunities. Thus, it may be difficult for partnerships to raise large sums of money. Similar to sole proprietorships, general and limited partnerships have pass-through taxation. Profits or losses are reported and taxed on the individual partner’s tax return.

Corporation

A corporation, or share company, is a legal entity under the law and is distinct from its owners, who are the company’s stockholders (Morrison and Foerster, undated; Nickels et al. 2015). The corporation assumes unlimited liability, and owners’ risk is capped at the amount of their investment in the company’s stocks. Formation of a corporation can be costly, complex, and time-consuming. Articles of incorporation must be filed with the government and stock must be issued. Private corporations sell their shares privately, and public corporations sell their shares to the general public through a stock market exchange. Expenses associated with setting up a corporation include filing fees and attorney fees. Additional, and substantial, expenses are incurred if and when a corporation goes public. In sole proprietorships and most partnerships, the owners are also the managers. In corporations, the owners elect a board of directors to oversee the company. And, the board of directors hires professional managers to 8 EDUCATING SOCIAL ENTREPRENEURS run the company. This separation of ownership and management can lead to agency issues (Jensen and Meckling 1976). Managers are hired to act as agents of the owners, but research shows that managers sometimes prioritize their personal interests over those of the owners and, thus, of the company. This is a fundamental concern with the corporate legal structure. One of the most significant benefits that the corporate form has over other legal forms of organization is the ability to raise substantial financial capital by issuing stock and selling these shares in the corporation. For an organization seeking to grow and operate on a large scale, for which significant funding is required, the opportunity to raise money by selling stock is very attractive. There are various kinds of stocks, and these are characterized by their voting rights, receipt of dividends, and priority in the event of company liquidation. Corporate profits are either held for reinvestment in the company as retained earnings or are distributed to stockholders in the form of dividends. Taxes are calculated and paid by the corporation on its profits before any dividends are paid out. Stockholders are then responsible for paying personal income tax on the dividends they receive. In this way, corporate profits can be taxed twice. Corporate managers and directors have a fiduciary duty to stockholders, meaning that it is their responsibility to maximize profitability at the company. This fiduciary responsibility may be interpreted as prioritizing financial goals over other goals including social or environmental ones. In practice, some corporate boards recognize that social and environmental goals support rather than detract from the company’s financial goals. But, corporate boards are aware that they may be held liable for their fiduciary responsibility. And, the concept of fiduciary duty can raise concerns for some social entrepreneurs who must then weigh the benefits of the corporate form, including unlimited liability and access to large amounts of financial capital, against this financial prioritization. This issue has led to the creation of hybrid legal structures in which social and environmental performance are legally placed on equal footing with financial performance. Hybrid legal structures are discussed in the following. The growth of socially responsible investing has led to increasing use of for-profit structures for social enterprises by creating additional access to capital for these profit-for-purpose corporations (Mendell and Nogales Legal Structures Available to Social Enterprises 9

2011). Socially Responsible Investing (SRI) recognizes that all investment decisions have implications not only for financial performance but also for social and environmental performance. Investors who follow SRI principles aim to achieve a balance between competitive financial returns and establishing a sustainable society. One example of a SRI venture capital fund is the Quebec Federation of Labour Solidarity Fund that focuses on economic development. As such, it takes equity positions in small and medium-sized businesses in Canada that meet the fund’s criteria regarding job creation and training. For-profit corporate structures are also being used creatively for social enterprise. Blake Mycoskie, the founder of TOMS Shoes, Inc., conceived the buy-one give-one model (Marquis and Park 2014). For every pair of shoes purchased, this American corporation donates a pair of shoes to a person in need. The buy-one give-one model has been replicated by several companies including the French company Jimmy Fairly (eye glasses) and the Canadian–Cambodian company One Lucky Fish (cooking utensils). In this business model, the cost of the company’s donation is covered by charging a premium price to the customer, by accepting a lower profit margin, and/or by reducing operating costs. A second creative for-profit structure is to dedicate all of a company’s profits to a social or environmental cause. While many companies may earmark a small percentage of their profits for charity, the Australian company Salvos Legal channels all of its profits to Salvos Legal Humanitarian. The former specializes in commercial and property law, and the latter provides free legal aid to those in need. In this case, the for-profit company exists solely to fund the not-for-profit organization.

Cooperatives

Cooperatives are corporate structures that are owned and operated by their members to fulfill the members’ common needs (Artz and Kim 2011; U.S. Small Business Administration, undated, b). Cooperatives are most commonly a for-profit structure and are, therefore, included in this section. But, in a few jurisdictions, such as Australia, cooperatives can also be a not-for-profit structure (Social Ventures Australia undated). Coop- eratives are often formed to make goods and services available—such as 10 EDUCATING SOCIAL ENTREPRENEURS electric power in remote geographic regions—when it might not be commercially feasible to do so. The priority of cooperatives is member benefits rather than profitability. Goods and services are provided at a reasonable cost that covers operations and generates prudent financial reserves. Any profits or surplus generated above this level are refunded to the members. In a cooperative, decisions are made through democratic vote. The roots of the cooperative movement lie in the United Kingdom during the Industrial Revolution (International Co-operative Alliance undated). The earliest cooperative, the Fenwick Weavers’ Society, was organized in Scotland in 1761. The most significant cooperative historically, because it serves as a model for modern-day cooperatives, is the Rochdale Equitable Pioneers Society. These artisans—weavers, shoe- makers, and cabinet-makers—and small business owners in Rochdale, England, were keen on improving their access to basic foodstuffs and commodities. In 1844, they joined together to open a store that was operated by and for members of the cooperative (Chloupková 2002). Social enterprises that organize as cooperatives today do so in part to reflect the values of democratic management and economic empowerment that are characteristics of cooperatives. Italy’s 1991 enactment of a statute recognizing cooperatives as a form of social enterprise was groundbreaking for Europe (Cafaggi and Iamiceli 2009). This legislation changed the nature of cooperatives such that the benefit of the cooperative could legally extend beyond its members to the local community. Specifically, Italy created social cooperatives to address health and education needs as well as to provide employment opportunities for disadvantaged members of a community. To ensure that the needs of a social cooperative’s stakeholders are met, Italian law requires that the targeted stakeholder groups be represented on the boards of directors of social cooperatives. France, Poland, and Portugal have since enacted similar legislation to create social cooperatives. In Quebec, almost 500 social enterprise cooperatives were founded in the 20 years following the passage of the National Co-operatives Act in 1997 (Girard and Langlois 2009). Services offered through these Que- bec cooperatives include medical care in small communities and basic economic services in rural regions. In the United States, cooperatives are as old as the nation, but the structure is being increasingly used for Legal Structures Available to Social Enterprises 11 social enterprises. As an example, Evergreen Co-operatives was founded in 2008 in Cleveland, Ohio, and includes a laundry business, an urban greenhouse, and a solar power installation company. This cooperative’s mission is to provide jobs that pay a living wage to residents of the city’s low-income neighborhoods. These worker-owned companies are a source of economic growth for both the employees and their communities. To form a cooperative, the entity must file its articles of organization and its bylaws with the appropriate government body. Cooperatives are primarily funded by the investments from member owners, although cooperatives may obtain bank loans. Some types of cooperatives are eligible for government grants. Cooperatives in certain industries and in certain jurisdictions may be tax exempt. Otherwise, cooperatives have pass-through taxation, and the member owners report income or loss on their personal tax returns. Member owners are liable, but only to the extent of their investment in the cooperative. Cooperatives have a perpetual life but can be dissolved by vote of the member owners.

2. Not-for-profit structures as an option for social enterprises

Not-for-profit organizations, including foundations, associations, and charities, vary greatly in size and purpose, and they can sometimes blur the lines with corporate and government entities. Not-for-profit organizations are best defined by the one thing that they do not do, which is to distribute profits to individual owners (Worth 2013). There are no owners in a nonprofit organization. But, there can be profits, which is simply the excess of revenues, that is, funds flowing into the organization, over costs and expenses, that is, funds flowing out of the organization. Indeed, not-for-profits often only survive if they do turn a profit. But, rather than distribute profits to owners, profits realized in a not-for-profit organization are reinvested in the organization for operations and growth. Funding streams, or revenue sources, for not-for-profits include charitable donations, which could be many small amounts from many donors or one or two large amounts from a few individuals or foundations; government grants; corporate philanthropy; and fees for services or products. Research suggests that the latter, fees for services or products, is generally not sufficient for a nonprofit’s survival (Foster et al. 2009). 12 EDUCATING SOCIAL ENTREPRENEURS

Not-for-profits are exempt from paying tax on income earned on exempt activities, which are generally defined as charitable or public benefit activities. In the United Kingdom, scientific research may qualify as tax exempt. The Netherlands has a very broad definition of public benefit but requires that 90 percent of the organization’s activities be connected to public benefit to be eligible for tax-exempt status. The most common not-for-profit structure in the United States is a 501c (3), so named because it is described in Section 501 C(3) of the IRS Tax Code. But, the IRS recognizes at least 30 other forms of nonprofits, and their tax exemption status is specific to the industry, such as culture, health services, or religion, and activities, for example, education or advocacy. Nonprofit organizations are governed by a wide range of jurisdictional regulations regarding operations and reporting requirements. To form, articles of nonprofit incorporation must be filed as well as an application for tax-exempt status. Because nonprofits are incorporated entities, they have an infinite life. Organizational decisions are made by the managers, officers, and directors of the organization.

3. Hybrid structures designed for social enterprises

Hybrid organizational structures have been created specifically for social enterprises in recognition that their focus on a dual mission—financial goals and social or environmental goals—may not easily align with either a for-profit or not-for-profit structure. At the most basic level, hybrid structures acknowledge two arenas of organizational performance: financial and social or environmental (Morrison and Foerster, undated). These profit-with-purpose business structures protect their companies’ officers and directors against legal claims that they may have violated a fiduciary responsibility when making decisions that favor the social mission over the financial mission. Hybrid structures not only enable dual missions; they go a step further and require that a company have dual missions. Hybrid structures brand a company as having a social purpose, which may attract customers and employees. All hybrid organizational structures share characteristics with both for-profit and nonprofit structures. Hybrid corporations are treated as regular corporations in many ways. They provide limited liability to their owners, have access to equity investors, and Legal Structures Available to Social Enterprises 13 are taxed according to the standard corporate tax code. The social or environmental mission of organizations operating within a hybrid structure is a quality they share with nonprofits. Governments around the globe have enacted legislation to create hybrid organizational forms (European Commission 2015; British Council 2012). These include social cooperatives in France, community interest companies in the United Kingdom, social purpose companies in Belgium, and social enterprises in Vietnam. In the United States, and as of early 2015, 30 states, the District of Columbia, and three Indian nations had passed legislation that created hybrid legal structures. Maryland was the first state to do so when it passed legislation to create a benefit corporation in 2010. Other, but less common, hybrid structures in the United States are the social purpose corporation, for example, in California, and the low-profit limited liability (L3C) company, for example, in Vermont and in the Crow Indian Nation.

4. Signaling a social mission through legal status, marks, or certification

For social enterprises, the choice of a legal structure is an opportunity to signal to customers or clients and the broader community that the organization has a social or environmental mission. Another means of signaling a social purpose, regardless of the legal structure the organization adopts, is to seek legal status as a social enterprise or a social enterprise mark or certification. Some governments have enacted legislation that confers legal status as a social enterprise. Social enterprise marks and certifications are awarded by third-party, not-for-profit organizations as a “seal of approval” to verify an organization’s social or environmental mission. While not an organizational form, legal status marks, and certifications are briefly described in this chapter because they are sometimes confused with some of the hybrid organizational structures available to social enterprises. Some countries grant legal status as social enterprises to companies, which is distinct from the legal structure of the company (European Commission 2015). Indeed, in these countries, this legal status is open to companies adopting a wide cross section of legal structures. Italy’s Law on Social Enterprises, passed in 2009, created a legal status for social 14 EDUCATING SOCIAL ENTREPRENEURS enterprises without creating a new organizational structure. Such a company is known as a social enterprise ex lege. Belgium has created the social purpose company as a legal status for social enterprises, and Denmark has created a system of registered social enterprises. As of early 2015, Finland, Slovakia, Slovenia, and Lithuania had all passed similar legislation to accord legal status to social enterprises. The criteria for obtaining this legal status vary across the nations, but having legal status carries few benefits beyond public recognition. For example, legal status as a social enterprise rarely results in any tax breaks or access to new funding sources. Organizations in four European nations offer social enterprise marks to companies in their countries. These marks enable companies with a social mission to differentiate themselves from competitors in their sector that are not social enterprises or that do not meet the mark’s standards. The Wirkt (“It Works”) in Germany is the oldest of these marks and was established in 2009 by a consortium comprising the Deutsche Börse, the Bertelsman Foundation, KPMG, PwC, and the Mercator Founda- tion. The Social Enterprise Mark in the United Kingdom was developed in 2010 by the Social Enterprise Mark Company, a community interest company. The Social Enterprise Mark in Finland and the Social Economy Mark in Poland, overseen respectively by the Association of Finnish Work and the Foundation for Social and Economic Initiatives, were both launched in 2011. Criteria for the mark, ongoing monitoring requirements, and costs vary among the four marks. The marks have been granted to about 600 German companies and 600 British companies, with fewer marks being granted in Finland and Poland. B Lab, an American not-for-profit, offers B Corp certification to companies worldwide (B Lab undated). The requirements to become B Corp certified are fairly rigorous and transparent. Companies must meet certain performance standards connected to environmental and social outcomes; complete a disclosure questionnaire; amend their governing documents, such as their partnership agreement or articles of incorporation in accordance with B Lab guidelines; pass a phone or onsite review; and apply for recertification every two years. The annual cost for certification varies according to the size of the company and ranges from $500 to $25,000. As of early 2015, over 1,000 companies from 33 countries have obtained B Corp certification. Most companies certified as B Corp are American Legal Structures Available to Social Enterprises 15 and include Change.org, a nonprofit, and Etsy, a for-profit corporation. Global examples are Asilia Africa Ltd. in Tanzania, Insight Robotics in China, and 3Vectores Sustainable Design in Uruguay. In addition to certifying companies as B Corp, the B Lab strongly supports the passage of benefit corporation legislation at the state level in the United States. This advocacy regarding legal structures is another reason that a company with B Corp certification could be confused with, or assumed to be, a benefit corporation.

Questions

1. How do the various legal structures compare to one another? Con- sider the many characteristics that include ease and expense to set up, liability issues, funding options, taxation, and longevity. 2. What are some examples of social enterprises that you know, and what legal structures have they adopted? If possible, interview the founder of a social enterprise and discuss the legal structure of that social enterprise. 3. What are the specific legal structures, as well as marks or certifications, available to social enterprises in your home country and, if applicable, state or province?

References and Additional Resources

Australian Government. Sole Trader available at www.business.gov.au/business- topics/business-structures-and-types/business-structures/sole-trader/Pages/ default.aspx accessed June 17, 2015). Artz, G., and Y. Kim. 2011. “Business Ownerships by Workers: Are Worker Co- operatives a Viable Option?” available at www.american.coop/sites/default/ files/businessownership.pdf last updated April, 2011. B Lab available at www.bcorporation.net/ (accessed March 15, 2015). British Council. 2012. Social Enterprise in Vietnam: Concept, Context and Policies. Hanoi: British Council Vietnam available at www.britishcouncil.org/sites/ britishcouncil.uk2/files/vietnam_report.pdf Cafaggi, F., and P. Iamiceli. 2009. “New Frontiers in the Legal Structure and Legislation of Social Enterprises in Europe: A Comparative Analysis.” In The Changing Boundaries of Social Enterprises, ed. A. Noya, 25–88. Paris: OECD Publishing. 16 EDUCATING SOCIAL ENTREPRENEURS

Chloupková, J. 2002. “European Cooperative Movement—Background and Common Denominators” available at http://uwcc.wisc.edu/info/intl/chloup kova.pdf Foster, W.L., P. Kim, and B. Christianson. 2009. “Ten Nonprofit Funding Models.” Stanford Social Innovation Review 7, no. 2, pp. 32–39. Girard, J.-P., and G. Langlois. 2009. “Solidarity Co-operatives (Quebec, Canada): How Social Enterprises can Combine Social and Economic Goals.” In The Changing Boundaries of Social Enterprises, ed. A. Noya, 229–68. Paris: OECD Publishing. European Commission. 2015. A Map of Social Enterprises and Their Eco-systems in Europe. Luxembourg: Publications Office of the European Union available at http://ec.europa.eu/social/BlobServlet?docId=12987&langId=en Gov.UK. Running a Business Partnership available at www.gov.uk/set-up-business- partnership/setting-up (accessed June 17, 2015). International Co-Operative Alliance. History of the Co-operative Movement available at http://ica.coop/en/whats-co-op/history-co-operative-movement (accessed March 29, 2015). Jensen, M.C., and W.H. Meckling. 1976. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics 3, no. 4, pp. 305–60. Khandekar, R.P., and J.E. Young. 1985. “Selecting a Legal Structure: A Strategic Decision.” Journal of Small Business Management 23, no. 1, pp. 47–55. Marquis, C., and A. Park. 2014. “Inside the Buy-One Give-One Model.” Stanford Social Innovation Review 12, no. 4, pp. 28–33. Mendell, M., and R. Nogales. 2009. “Social Enterprises in OECD Member Countries: What are the Financial Streams?” In The Changing Boundaries of Social Enterprises, ed. A. Noya, 89–138. Paris: OECD Publishing. Morrison & Foerster LLP. “Which Legal Structure is Right for My Social Enterprise? A Guide for Establishing a Social Enterprise in the United States” available at http://media.mofo.com/files/Uploads/Images/Guide-to- Establishing-a-Social-Enterprise.pdf (accessed March 14, 2015). Nickels, W., J. McHugh, and S. McHugh. 2015. Understanding Business, 11th ed. New York: McGraw-Hill Education. Social Ventures Australia. A Business Planning Guide for Social Enterprises: Putting the Pieces Together available at http://socialventures.com.au/assets/Business_ Planning_Guide_for_Social_Enterprise.pdf (accessed July 20, 2015). Terjesen, S., J. Lepoutre, R. Justo, and N. Bosma. 2011. Global Entrepreneurship Monitor Report on Social Entrepreneurship. London: Global Entrepreneurship Research Association available at www.academia.edu/3483724/Global_ Entrepreneurship_Monitor_Social_entrepreneurship_study Legal Structures Available to Social Enterprises 17

U.S. Small Business Administration (a). Choose Your Business Structure: Sole Proprietorships available at www.sba.gov/content/sole-proprietorship-0 (accessed March 21, 2015). U.S. Small Business Administration (b). Choose Your Business Structure: Cooperative available at www.sba.gov/content/cooperative (accessed March 29, 2015). Worth, M. 2013. Nonprofit Management: Principles and Practices, 3rd ed. Thousand Oaks, CA: Sage Publications.

CHAPTER 18 Examining the Ethics of Organizational Legal Forms: Lessons from the Social Enterprise Movement

Rae André

Northeastern University

Introduction

By definition, entrepreneurs engaged in social enterprise are concerned with the ethical foundations of their organizations. Believing that traditional organizational legal forms are not adequate to advance their socially responsible missions, these entrepreneurs have created a social enterprise movement that seeks to develop innovative approaches to organizational governance. Previous to the movement, entrepreneurs chose their legal organizational forms from a relatively simple set. They could incorporate as a public or private for-profit corporation, or they could organize themselves into nonprofit organizations. In the latter half of the 20th century, the use of hybrid organizations, namely public–private partnerships, also became popular. Today, however, social entrepreneurs have a much larger set of organizational forms from which to choose. In the United States, the social enterprise movement gained momentum in 2008 when the first social enterprise laws were passed, and at least five types of social enterprises have been introduced there. These include the low-profit limited liability company (L3C), the benefit corporation, the flexible purpose corporation (FPC), the social purpose corporation, and the benefit limited liability company (Frumpkin 2013; Murray 2012). In the Netherlands, a set of 20 EDUCATING SOCIAL ENTREPRENEURS similar organizations includes the public limited liability company, the private limited liability company, and the cooperation, but not the benefit corporation (Kamerbeek 2012). With so many choices, social entrepreneurs may spend precious start-up hours deciding how best to incorporate. The purpose of this article is to assist them by providing some clarity about the ethical and legal issues they face when choosing among the for-profit forms.

1. Which entrepreneurs choose an ethical organizational form? We can start with the premise that social entrepreneurs have a more explicitly ethical bent than the average entrepreneur. However, this is not to say that the mainstream entrepreneur is not equally as interested in ethics as is the social entrepreneur. In fact, a mainstream entrepreneur may intend his or her company to be highly ethical, but probably does not feel the need to publicly identify as such. Her personal narrative about her company’s ethical design might go something like this: “I produce organic milk—the best—and I don’t need to independently make the case that organic milk is a social good.” She might also believe that the traditional corporate legal form allows her to do well by doing good. In contrast, the social entrepreneur wants to be explicit about the social value of his company. He thinks:

I am running my company at a lower profit than I might otherwise because I am pursuing (insert here some social good, such as creating jobs or helping a needy community). This characteristic of my company differentiates it from other companies that are performing similar work, and lets our customers know that we care.

In academic jargon, social entrepreneurs are said to pursue explicitly ethical missions.

2. When is a legal organizational form “ethical”? Who decides whether a business form is ethical? To answer this question, it is necessary to step back from the foregoing discussion of Examining the Ethics of Organizational Legal Forms 21

modern organizational forms to grasp an even broader picture—a picture of the universe of organizations. Historically, the organizational universe originates in the premise that all power devolves from government, for example, from the group of people who make the rules for, and hold accountable, the citizenry. Commerce is a foundation of society, and governments determine what types of commerce, for example, what forms of business, will be permitted. For example, some governments choose to empower primarily private enterprises, while other governments choose to empower primarily public enterprises. We call these systems, respectively, capitalism and communism. Of course, capitalist countries “believe” capitalism to be “ethical,” while communist countries “believe” communism to be “ethical.” Within such general parameters, countries design a universe, or sets, of organizations that further reflect their beliefs. As their beliefs change, so does their organizational universe. Decisions about which overarching system and which sets of organizations within that system are ethical are made by the people in power—by the government. Government designs and empowers organizations and holds them accountable. Of course, the age-old question is who should make decisions for the citizenry? For example, does it matter whether the people in power were elected? Personally, I believe they should be. For reasons that include my understanding of human psychology and the need for human dignity, I believe decisions should be made in the spirit of “of the people, by the people, and for the people” (Lincoln 1863). Such decisions are inherently more ethical than, say, those made by dictators. Furthermore, I endorse democracy and regulated capitalism, and I believe governments should hold businesses to standards that are determined by the democratic process. I believe that demo- cratically determined standards are more valuable than, and should supersede, standards made by the business sector alone. At the same time, I believe that by being ethically intentional, entrepreneurs can add ethical value beyond that promoted by even elected governments. Thinking along these lines, what do you, the entrepreneur—or the social entrepreneur—believe? Entrepreneurs, and certainly all social entrepreneurs who are especially keen to make their values 22 EDUCATING SOCIAL ENTREPRENEURS

explicit to the world, must clarify their own beliefs about the roles of business and government. In short, choosing an organizational form is an ethical matter. The process of choosing requires both information on the organizational universe and reflection on one’s own personal beliefs.

3. Changing values alter the universe of organizations Within the broad parameters suggested by capitalism and communism, the universe of organizational forms can be quite complex. For example, at the middle of the 20th century, the universe of organizations in the United States consisted of government and business, with a growing nonprofit sector (referred to as the third sector). However, by the end of the 20th century, the universe had expanded to include government, business, nonprofits, and a new, fourth sector consisting of hybrid organizations. The introduction of hybrids was important to this discussion because it was a precursor to the introduction of the social enterprise forms. There are two types of hybrids, each based on a different rationale. The first hybrids were created to make government more like business, while more recently hybrids—the social enterprises—were created to make business more like government. We will consider each development in turn. In the United States, as elsewhere, the view that government is overly bureaucratic has been widespread, and has sparked efforts to make government more efficient. Making government more -effi cient has typically been interpreted to mean government should be more like business. However, rather than reforming government itself, sometimes it has been easier to introduce a new organizational form that performs government activities. As a result, both federal and state governments have introduced the so-called hybrid forms—public–private partnerships in the United States, and quan- gos (quasi-autonomous nongovernmental organizations) in the United Kingdom. I insert the word “so-called” because these forms are more like new forms of organization rather than like interactive partnerships of business and government: In fact, often these forms are created explicitly to minimize government involvement. Examining the Ethics of Organizational Legal Forms 23

The introduction of this fourth sector has encouraged some people to imagine that, just as government has been encouraged to move closer to business in order to enhance efficiency, businesses, or at least some businesses, should be encouraged to move closer to government (adopting some of government’s social mission) in order to enhance corporate social responsibility. Thus arose the social enterprise movement and its new organizational forms. Today the fourth sector includes both those organizations that have been designed to move government closer to business and those social enterprises that have been designed to move business closer to government. If this all seems confusing, indeed it is. The introduction of such complexity into the organizational universe has been a major concern for those who want all organizations to be accountable to the public (Moe 2001). The fourth sector, in particular, has been criticized for its lack of transparency and accountability (Stanton 2009). In all other sectors, the laws that govern organizations are standardized. For example, all nonprofits are subject to the same laws and regulations. In contrast, nearly every hybrid is created by a unique piece of legislation, and each is held accountable to government its own unique way. Such diversity makes it challenging for a government to apply stand- ardization to maintain accountability. Because it can neither be clearly observed nor readily managed, some theorists refer to the fourth sector as the gray sector (André 2012). Interested readers can find an entire literature on this issue in publications on public governance (see Stan- ton 2009). Because the fourth sector tends to be less accountable to the public than other sectors, it has even been argued that in the fourth sector citizens’ interests have been “negotiated away” (Messner 2009). This, then, is the organizational universe within which an entrepreneur must select a legal organizational form. Should an ethical entrepreneur, or a socially responsible entrepreneur, choose to incorporate as a traditional business? A nonprofit? A hybrid? In the next sections of this paper, I discuss two key areas of legal concern. The first section examines the widespread but unfounded assumption that traditional legal forms do not allow corporations to pursue social responsibility. The second examines some legal opinions about the utility of the best known social enterprise form, the benefit corporation. 24 EDUCATING SOCIAL ENTREPRENEURS

4. It’s the law: Traditional businesses can be socially responsible To what extent can traditional businesses be socially responsible? Many of today’s entrepreneurs labor under the assumption that businesses must pursue shareholder wealth to the exclusion of all other ethical values. This assumption is often referred to as the “shareholder wealth maximization norm” or “shareholder primacy.” It is widespread. For instance, in an article dismissing the shareholder primacy assumption as false, one legal scholar notes a study in which 31 of 34 experienced board directors said they would release a dangerous, unregulated toxin into the environment in order to increase profits because they believed their duty was to maximize shareholder wealth (Rose 2007, cited in Murray 2012). Yet the shareholder wealth maximization norm is not legally tenable. As one legal scholar says:

United States corporate law does not, and never has, required directors of public corporations to maximize either share price or shareholder wealth. To the contrary, as long as boards do not use their power to enrich themselves, the law gives them a wide range of discretion to run public corporations with other goals in mind, including growing the firm, creating quality products, protecting employees, and serving the public interest (Stout 2012).

Giving corporations such ethical flexibility has long been known to be good business:

Some corporations have long supported social initiatives as a means of enhancing their own profits and long-term viability. Through charitable donations, community programs, or holistic decision-making, corporations have pursued intangible goals, such as improving workforce comfort or engendering customer goodwill, arguing that these actions align with the corporations’ ultimate profit-making interests. There is some evidence that these strategies are successful. Recognizing the potential benefits to shareholders, courts have upheld corporate social actions with even the most tenuous of supposed business purposes (Munch 2012). Examining the Ethics of Organizational Legal Forms 25

To quote yet another American lawyer:

As a practical matter…directors have close to a free hand when considering matters that are most likely to have broader social or environmental implications—how products are manufactured, marketed and sold, corporate investments, fair trade, employment and supplier issues. I am not aware of a single case holding directors liable for a routine business decision because they considered nonshareholder interests or that impose a general duty to maximize profits and short-term shareholder value. (Underberg 2012).

The management literature on stakeholder theory has also critically examined and rejected the doctrine of shareholder primacy (Marens and Wicks 1999). The false assumption of shareholder primacy leads to the false dichotomy that social enterprises are good, while traditional corporations are therefore bad, or certainly not as good. Dichotomizing “good” versus “bad” corporations

…inadvertently create[s] a jointly exhaustive pair in which the very existence of [social enterprises] requires that their coun- terpart, a shareholder wealth maximizing corporation, exist. In other words, [social enterprises like] benefit corporations further reinforce the assumption that corporations exist only to make money for their shareholders… (Chu 2012).

Unfortunately, despite the preeminent legal view, some proponents of social enterprises continue to assert that traditional businesses cannot pursue social responsibility and that, as a result, it is necessary to introduce social enterprise legal forms. Lawyers who understood the prevailing cultural view had anticipated such concerns, however, and in the United States have passed what are known as constituency statutes in the majority of states. These statutes handle any ambiguity in existing law by explicitly allowing traditional corporations to take into account stakeholder interests (Lacovara 2011), and they do not establish new organizational forms. 26 EDUCATING SOCIAL ENTREPRENEURS

5. A critical analysis of the benefit corporation Today the most widely discussed and implemented social enterprise form is the benefit corporation. The benefit corporation form allows a company to define specific or general benefits to society as part of its mission and states that it empowers stakeholders while traditional corporations do not. It also mandates that the company hire an “independent” third party rather than relying on the government to assess its accountability. However, in an analysis of a comprehensive set of law review articles that assess the benefit corporation form, several important concerns have emerged (André 2015). To begin with, a key rationale for adopting the benefit corporation form is the shareholder primacy norm just discussed. Proponents of the benefit corporation argue that the form “…offers entrepreneurs and investors the option to build, and invest in, businesses that operate with a corporate purpose broader than maximizing shareholder value and a responsibility to consider the impact of its decisions on all stakeholders, not just shareholders” (Clark and Vranka undated). As we have seen, most legal scholars argue that this rationale is unsound, and therefore it is not a reasonable justification for the introduction of a new form into the organizational universe. A second concern is that, contrary to the law’s stated goal, benefit corporations do not actually empower stakeholders, and therefore are not different than traditional corporations. As one writer notes, the law fails to empower stakeholders because it “… does not establish a fiduciary relationship between a board of directors and outside stakeholders” (Deskins 2012). A fiduciary relationship is one in which an authorized entity acts solely, and in good faith, on behalf of an entity represented. Under benefit corporation legislation, corporate directors are indeed instructed to consider stakeholders, but stakeholders cannot in any way punish directors who ignore them. Thus, with respect to empowering stakeholders, the benefit corporation does not advance corporate social responsibility. Third, in a benefit corporation, the implementation of social goals is explicitly removed from public, government control and is awarded instead to an unspecified organization that should apply Examining the Ethics of Organizational Legal Forms 27

“a comprehensive, credible, independent and transparent third-party standard” (Benefit Corporation Information Center 2013). Legal scholars expressed concern that citizens do not impact the standard; there is no accountability to the citizenry through a democratic process. Meanwhile, the corporation can claim superiority over traditional corporations because the government itself has labeled it a “benefit” corporation. To the average person, this government branding, however incorrect, can be convincing. Yet instead of being accountable to government, the corporation hires its own evaluator. Theoretically, one could have any rogue organization hiring any other rogue organization to use any standard whatsoever to gain the title of benefit corporation. Therefore, many legal scholars argue that, within the organizational universe, the introduction of the benefit corporation inhibits rather than enhances efforts to build corporate social responsibility. The benefit corporation form actually increases corporate greenwashing, they note, since the possibility of lax standards seriously under- mines the public benefit purpose of the benefit corporation: “The delegation to third-party standard-setters to vet this public benefit and the lack of a statutory floor for what counts as public benefit make low standards and greenwashing particular concerns for the benefit corporation” (Reiser 2011; for an international perspective, see Kamerbeek 2012). Another lawyer puts it this way:

The substantive goal of the benefit corporation...is certainly admirable, but is subject to the same “creative accounting” and lax oversight that plague traditional corporate entities … Nonshareholders may be left with the same kind of “greenwashing” that has plagued traditional notions of corporate social responsibility (Kanig 2012–2013).

In sum, the accountability concerns are that:

The benefit corporation statute is said to be an antidote to “greenwashing” and faux corporate social responsibility (“faux CSR”). But without at least some minimal level of board 28 EDUCATING SOCIAL ENTREPRENEURS

accountability, the benefit corporation statute could be an avenue to greenwashing and faux CSR rather than an antidote to it. In fact, if an appropriate accountability framework is not erected, benefit corporations could allow an unprecedented amount of rent-seeking and could allow greater management entrenchment than permitted in other entity forms (Murray 2012).

One legal scholar has gone so far as to coin a new word for entrepreneurs who use the new social enterprise legislation, referring to them as “contrepreneurs.” He writes, “Because no need for social enterprise legislation—related business organizations exists… Social enterprise legislation is a con in the name of otherwise altruistic and consciously capitalistic entrepreneurial enterprises and investors” (Groshoff 2013). A final concern is that, from a practical standpoint, becoming a benefit corporation may increase both director liability and company costs, thus reducing the corporation’s ability to be socially proactive. Director liability is increased in part because directors’ duties are unclear in the law. As one legal scholar puts it:

While these new statutes are well-intentioned, they create divided loyalties for corporate directors. [They impose on] directors a fiduciary duty in addition to the traditional duties of care and loyalty. However, the statutes fail to identify this duty and provide little guidance to courts called on to adjudi- cate claims for breach (Lacovara 2011).

These are among the reasons why large companies have not adopted the form. In the same vein, benefit corporations incur other expenses that traditional corporations avoid. For instance, some state statutes require benefit corporations to appoint a benefit director to write an annual report on how well the benefit corporation has met its public benefit goals. Such reports may be expensive and time-consuming for a small business to prepare. In addition, some statutes require Examining the Ethics of Organizational Legal Forms 29

that the reports be provided free to shareholders (Murray 2012). The duty to hire a third-party evaluator is another cost. One organization that evaluates benefit corporations charges them for certification on a sliding scale that ranges into the tens of thousands of dollars, for example. Furthermore, the specificity of the benchmarking requirements for benefit corporations may burden as they try to find a suitable third-party evaluator that meets the statute’s requirements. In some instances, a benefit corporation must take on the costly research burden of ensuring that not more than one-third of the directors of the third-party evaluator are active in an industry subject to the standard (Houlihan 2013). These then are legal scholars’ concerns about the benefit corporation in the United States. Other writers have analyzed the strengths and weaknesses of some of the other social enterprise forms there. For example, see the spring 2014 issue of Nonprofit Quarterly. Inter- nationally, each country has its own unique universe of organizations, some are considering the benefit corporation form, and similar issues are being discussed.

Conclusion

What makes an organizational form ethical? In the end, each business owner must search his or her own values to form an opinion. As this article has shown, the universe of organizational forms is complex and value laden. Sometimes we find democracy there, and sometimes we don’t. Sometimes we find accountability there, and sometimes we don’t. I hope this analysis has enhanced your understanding of the organizational universe and its pitfalls, and helped you to gain some insight on choosing an ethical organizational form for your company.

References and Additional Resources

André, R. 2015. “Benefit Corporations at a Crossroads: As Lawyers Weigh in, Companies Weigh their Options.” Business Horizons 58, no. 3, pp. 243–52. André, R. 2012. “Assessing the Accountability of the Benefit Corporation: Will this New Gray Sector Organization Enhance Corporate Social Responsibility?” Journal of Business Ethics 110, no. 1, pp. 133–50. 30 EDUCATING SOCIAL ENTREPRENEURS

Benefit Corporation Information Center. The Model Legislation available at http:// benefitcorp.net/attorneys/model-legislation (accessed February 5, 2014). Chu, J. 2012. “Filling a Non-Existent Gap: Benefit Corporations and the Myth of Shareholder Wealth Maximization.” Southern California Interdisciplinary Law Journal 22, pp. 155–92. Clark, W., Jr, and L. Vranka. n.d. The Need and Rationale for the Benefit Corporation: Why it is the Legal Form that Best Addresses the Needs of Social Entrepreneurs, Investors and, Ultimately, the Public available at http://benefitcorp.net/ policymakers/benefit-corporation-white-paper (accessed October 3, 2013). Deskins, M.R. 2011. “Benefit Corporation Legislation, Version 1.0—A Breakthrough in Stakeholder Rights?” Lewis & Clark Law Review 15, no. 4, pp. 1047–76. Frumpkin, P. 2013. “Between Nonprofit Management and Social Entre preneurship.” Public Administration Review 73, no. 2, pp. 372–76. Groshoff, D. 2013. “Contrepreneurship: Examining Social Enterprise Legislation’s Feel-Good Governance Giveaways.” University of Pennsylvania Journal of Business Law 16, pp. 233–93. Houlihan, D. 2013. “Who Benefits?: Why the Massachusetts Benefit Corporation Falls Short.” Northeastern University Law Journal (Summer) available at http:// northeasternlawjournal.org/extralegalrecent/who-benefits-massachusetts- benefits-corporations-fall-short Kamerbeek, S.P. 2012. “The Social Enterprise Inspired by the U.S. Model? The Benefit Corporation Reviewed.”Tijdschrift Ondernemingsrecht (Journal on Dutch Corporate Law) 57 (May) available at http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=2280267 Kanig, I. 2012–2013. “Sustainable Capitalism through the Benefit Corporation: Enforcing the Procedural Duty of Consideration to Protect Non-Shareholder Interests.” Hastings Law Journal 64, pp. 863–904. Lacovara, C. 2011. “Strange Creatures: A Hybrid Approach to Fiduciary Duty in Benefit Corporations.”Columbia Business Law Review 3, pp. 815–80. Lincoln, A. 1863. The Gettysburg Address. Gettysburg, Pennsylvania. Marens, R., and A. Wicks. 1999. “Getting Real: Stakeholder Theory, Managerial Practice, and the General Irrelevance of Fiduciary Duties Owed to Shareholders.” Business Ethics Quarterly 9, no. 2, pp. 273–93. Messner, M. 2009. “The Limits of Accountability.” Accounting, Organizations and Society 34, no. 8, pp. 918–38. Moe, R.C. 2001. “The Emerging Federal Quasi-Government: Issues of Management and Accountability.” Public Administration Review 61, no. 3, pp. 290–312. Munch, S. 2012. “Improving the Benefit Corporation: How Traditional Governance Mechanisms can Enhance the Innovative New Business Form.” Northwestern Journal of Law & Social Policy 7, no. 1, pp. 170–95. Examining the Ethics of Organizational Legal Forms 31

Murray, J.H. 2012. “‘Choose Your Own Master: Social Enterprise, Certifications, and Benefit Corporation Statutes.’ Symposium on Profits Plus Philanthropy: The Emerging Law of ‘Social Enterprises.”American University Business Law Review 2, no. 1, pp. 1–53. Reiser, D.B. 2011. “Benefit Corporations: A Sustainable Form of Organization?” Wake Forest Law Review 46, pp. 591–625. Rose, J.M. 2007. “Corporate Directors and Social Responsibility: Ethics versus Shareholder Value.” The Journal of Business Ethics 73, pp. 319–31. Stanton, T.H. 2009. “Government-Sponsored Enterprises: Reality Catches Up to Public Administration Theory.” Public Administration Review 69, no. 4, pp. 632–39. Stout, L.A. 2012. The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public. San Francisco: Berrett-Koehler. Underberg, M.A. 2012. “Benefit Corporations vs. ‘Regular’ Corporations: A Harmful Dichotomy.” The Harvard Law School Forum on Corporate Governance and Financial Regulation (May 13) available at https://corpgov. law.harvard.edu/2012/05/13/benefit-corporations-vs-regular-corporations-a- harmful-dichotomy/ (accessed October 3, 2013).

CHAPTER 19 The “Benefit Corporation”: A Viable Option for Social Entrepreneurs?

Raymond Brescia

Albany Law School

Introduction

Choosing the correct corporate form for his or her social venture is a critical decision every social entrepreneur must make. Social entrepreneurs have had the option of pursuing several different potential legal forms: sole proprietorship, not-for-profit corporation, partnership, traditional for-profit corporation, and limited liability corporation. These are just some of the many different legal structures from which a social entrepreneur can choose when deciding on what type of organization to create. Until recently, these different corporate forms fell into two basic categories: for-profit or not-for-profit. Under the category of for-profit, a social entrepreneur could form a traditional, for-profit organization, like a so-called “C Corporation.” That is the corporate form in which there is no individual liability for directors of the organization and the corporation pays corporate taxes on earnings. Most importantly, the officers and directors of the corporation are judged on their financial management of the corporation. Decisions are made on their impact on the short- and long-term financial health of the entity. If the company has a social purpose, as all companies started by social entrepreneurs should have by definition, those social purposes are generally considered subordinate to the goal of shareholder wealth maximization. 34 EDUCATING SOCIAL ENTREPRENEURS

A social entrepreneur could also choose to organize his or her company as a not-for-profit corporation, an entity that pays no traditional corporate taxes (though must still pay employment taxes) and that must pursue a charitable purpose recognized under U.S. law and the law of the state in which the not-for-profit is incorporated. Sticking to the acceptable charitable purposes of the not-for-profit corporation is critical, but the entity has limited means of accessing capital, mostly either through grants from charitable foundations or program-related income that is poured back into pursuing the charitable purposes of the entity. Not-for-profits are just that: not-for-profit. There are strict limits (primarily under U.S. law) that cur- tail the ability of such entities to raise capital and turn a profit. Each option thus presents its own benefits, costs, advantages and disadvantages for the social entrepreneur looking to start a successful, even profitable, business and still pursue a social purpose. Until recently, the social entrepreneur had to choose among these different corporate forms to find one that best fit his or her business plan. In the United States, the binary choice between for-profit and not-for-profit entities has started to give way to a more flexible, hybrid approach to the corporate form, offering social entrepreneurs an exciting new way of creating and forming their ventures, one that offers the social entrepreneur a creative means to not just meet the financial bottom line, but also satisfy her desire to have a social purpose as well. Indeed, recently, many U.S. jurisdictions have begun to offer social entrepreneurs the option of creating a new kind of corporation: the benefit corporation (sometimes referred to as a “B Corp.”). This corporate form blends aspects of the for-profit and not-for-profit forms. This chapter will explore what it means to organize as a benefit corporation and the value a social entrepreneur may realize by doing so. These recent legal developments in the United States in particular have created a number of different options for social entrepreneurs who wish to create a business that might not fit squarely within the “for-profit/not-for-profit” binary. Social entrepreneurs can now form benefit corporations in those U.S. states where they are allowed. Depending on the state of incorporation, those corporations might take different forms, but their main purpose is the same: they allow social entrepreneurs to meet goals other than those that are directed solely at the corporation’s financial strength and health. This commentary will begin with the origins of the creation of the benefit corporation as a legal entity, will describe the different approaches A Viable Option for Social Entrepreneurs? 35 that states in the United States are taking when adopting legislation that enables the formation of benefit corporations within those states, will provide an assessment of one state’s (New York’s) experiment with benefit corporation legislation, and provide a quick glance at what other countries are doing in terms of permitting the creation of benefit corporations or entities like them. Choosing to form as a benefit corporation is not the only approach social entrepreneurs can take when they want to create a company with a social purpose, however. This chapter will also address a nonlegal aspect of benefit corporations: so-called “B Corp certification,” a nonlegal designation offered by a private, not-for-profit organization that recognizes that business entities can have certain social purposes, regardless of their specific corporate form. Formal designation as a benefit corporation under state law could be different from recognition or “certification” as a “B Corp” through a private certifying entity, the B Lab. A social entrepreneur can choose to form as a benefit corporation and not seek B Lab certification, or vice versa: that is, she could seek B Lab certification only, and not form as a benefit corporation at all. After this discussion of benefit corporations and B Lab certification, this chapter will look at the choices made by several of the more prominent companies that pursue profits but also have a social purpose. Com- panies like Patagonia; Warby Parker; and Greyston Bakery in Yonkers, NY, have all chosen to obtain B Corp certification, even though not all of them have formed as benefit corporations. After an overview of benefit corporations, B Lab certification, and the choices made by several public purpose companies, this chapter will conclude by flagging some of the key questions that face social entrepreneurs as they decide whether to pursue benefit corporation status, B Lab certification or both. The first it will explore is the relative benefits and burdens of forming as a benefit corporation and the present state of uncertainty with respect to how some of the obligations imposed on benefit corporations will both promote not only transparency but also accountability and whether this is a tradeoff social entrepreneurs want to embrace. This chapter will also address the issues a social entrepreneur may face when choosing whether to seek B Lab certification, in addition to benefit corporation status or apart from it. 36 EDUCATING SOCIAL ENTREPRENEURS

Origins: The Need for Something Beyond the Profit Motive

In recent years, the binary choice—for-profit as opposed to not-for- profit—has been challenged by companies that wish to pursue a broader “bottom line” than that which simply looks at financial returns. Some- times seen as a “double bottom line” (profits and social purpose) or even “triple bottom line” (financial, social, and environmental returns), companies have sought to produce social returns as well as financial returns for their efforts. Corporate law in the United States has begun to catch up with this movement, and many states have passed, or are considering passing, legislation to permit the formation of benefit corporations that allow companies to pursue financial as well as social goals. Many trace the impetus for the creation of these benefit corporations to the bind that ice-cream producer Ben & Jerry’s found itself in when it faced the prospect of a lucrative takeover attempt from European multinational Unilever. The aftermath of that takeover process has led many states to seek to insulate socially responsible companies from facing similar challenges to their social purposes. The story of that sale helps to illuminate why states have sought to create new corporate forms for socially responsible businesses. Ben & Jerry’s Homemade Inc. was founded in Vermont in 1977 by Ben Cohen and Jerry Greenfield with a $12,000 investment. The company sold what it considered to be “super-premium” ice cream, but also would end up trying to be socially responsible as well. It would take many prosocial stances, like using nongenetically modified ingredients, promoting free-trade practices, incorporating environmentally friendly packaging, and contributing 7.5 percent of earnings toward a charitable foundation through which it would promote progressive organizations. The initial success of the company was staggering, and this small start-up company held its own in its market segment against much larger companies, like Haagen-Dazs. In order to fund its expansion, it went public in the mid-1980s, and was listed on NASDAQ.1

1 Page, A., and R.A. Katz. 2010. “Freezing Out Ben & Jerry: Corporate Law and the Sale of a Social Enterprise Icon.” Vermont Law Review 35 (Fall), p. 211. A Viable Option for Social Entrepreneurs? 37

By the mid-1990s, Ben & Jerry’s exponential growth began to flatten and its stock market price leveled off. It continued to pursue its social mission, but the prospect of a takeover offer from outside interests began to loom. The company received several offers to purchase the company, with European conglomerate Unilever making a strong offer. As a publicly traded, for-profit company, members of the board of directors felt the pressure to maximize shareholder value, even at the cost of sacrificing the social mission of the organization by selling it to a company that might not continue the organization’s public activism and socially responsible practices. According to co-founder Ben Cohen:

The laws required the board of directors of Ben & Jerry’s to take an offer, to sell the company despite the fact that they did not want to sell the company…But the laws required them to sell the company to an entity that was offering an amount of money far in excess of what the stock was currently trading at.2

Some disagree with Cohen’s assessment, that is, that corporate law mandated that Ben & Jerry’s sell to the highest bidder in order for the company’s board to honor its fiduciary duties to the shareholders.3 Regardless of whether the board had other options available to it to allow it to reject the Unilever takeover bid, since the purchase by Ben & Jerry’s by Unilever, the European parent company, while recognizing that the social purpose and goals of the ice-cream company are part of its “brand,” has since retreated from some of the original company’s activities, like donating a portion of its pretax earnings to charity. Because of these and other changes instituted by Unilever, some social entrepreneurs see the Ben & Jerry’s story as a cautionary tale, one that calls into question the viability of companies that choose a traditional

2 Page, A., and R.A. Katz. 2010. “Freezing Out Ben & Jerry: Corporate Law and the Sale of a Social Enterprise Icon.” Vermont Law Review 35 (Fall), p. 211. 3 Page, A., and R.A. Katz. 2012. “The Truth about Ben & Jerry’s: Contrary to Myth, the Sale of Ben & Jerry’s to Corporate Giant Unilever Wasn’t Legally Required.” Stanford Social Innovation Review (Fall) available at http://ssir.org/articles/entry/the_truth_about_ben_and_jerrys 38 EDUCATING SOCIAL ENTREPRENEURS corporate form and yet wish to pursue a public purpose. This tale has prompted advocates in many states to press for a new corporate form, one that would permit social purpose businesses to take into account considerations other than maximizing shareholder value. In the wake of the Ben & Jerry’s sale to Unilever, a movement is now afoot, and has been successful in many states, to create the benefit corporation described earlier, a corporate entity that allows for-profit companies to pursue their double- and even triple-bottom line goals: that is, balancing shareholder interest and value against social goals. The next section explains the main components of the benefit corporation and describes the progress of benefit corporation enabling legislation in the various states where such legislation has been introduced.

What Is a Benefit Corporation?

The issue that Ben & Jerry’s faced was one of state law. That is, under U.S. law, the legal regime that governs how corporations function is generally a product of the laws of individual states. There is no national corporate law in the United States, so, each state has its own body of corporate law that governs corporations that are formed within the state. While all U.S. states have their own body of corporate law, roughly 50 percent of all corporations formed in the United States are incorporated in the state of Delaware. Because of this, Delaware corporate law is extremely important, but each state does have its own body of corporate law. When a corporation is formed in a particular state, it is generally governed by the rules of that state. Because of this, corporate law in the United States is a patchwork of 50 different bodies of corporate law. As a result, when one wants to change corporate law—and the Ben & Jerry’s story helped serve as an impetus to many to want to do just that—one needs to go state by state (see Appendix) and convince the state legislatures in each state to adopt changes to each state’s laws governing the functioning of corporations in that state. That process is often spurred by groups proposing model legislation that states can adopt. When advocacy groups began to press for the adoption of new laws that would permit the creation of benefit corporations—entities that could be for profit yet also have a social A Viable Option for Social Entrepreneurs? 39 purpose—they crafted proposed legislation for state legislatures to consider. What follows is a description of the core components of that model legislation. In the following section, I will provide a brief overview of how different states have adopted these and other components of the model legislation in their own bodies of corporate law. According to the model legislation, in order for a newly forming entity to elect to organize itself as a benefit corporation, it must do so by stating it is forming as such in its incorporating documents. The model legislation permits an existing corporation to convert to a benefit corporation provided that two-thirds of all of the shareholders entitled to vote support the conversion by affirmative vote. And deciding to form as a benefit corporation, or to convert into one, brings with it several important components and obligations. First, Section 201 of the model legislation provides that benefit corporations can form for “general public purposes,” or can specify a particular public purpose for which the corporation is being formed. A subpart to Section 201 says explicitly that the pursuit of the public purpose or purposes of the benefit corporation is in the corporation’s best interests. This is done to protect directors from challenges that, by pursuing the corporation’s public purpose, they are not acting in the corporation’s best interests. Second, Section 301 goes even farther than Section 201 in that it names specific interests a director must take into account when considering what is in the best interests of the corporation, including not just the impact of any action or inaction of the corporation on the shareholders, but also any impact on, among other things, “the employees and work force of the benefit corporation, its subsidiaries, and its suppliers”; “the interests of customers as beneficiaries of the general public benefit or specific public benefit purposes of the benefit corporation”; “community and societal factors, including those of each community in which offices or facilities of the benefit corporation, its subsidiaries, or its suppliers are located”; “the local and global environment”; and “the ability of the benefit corporation to accomplish its general public benefit purpose and any specific public benefit purpose.” These provisions clearly seek to support directors’ efforts to pursue interests other than simply maximizing shareholder values and the model legislation is designed to protect directors when they carry out the public purpose of the corporation. 40 EDUCATING SOCIAL ENTREPRENEURS

The third-most important component of the model legislation is designed to combat the so-called “greenwashing” conducted by some corporations: that is, companies that say they are promoting public purposes by reference to some external validator, one that may, in the end, be a mere creature of a trade lobby that gives some “seal of approval” that is nothing more than a marketing gimmick. Indeed, Sections 401 and 402 lay out what are called the “Transparency” sections of the model legislation, which are some of the more controversial provisions of the proposed law. Those sections begin by requiring benefit corporations to prepare an annual report detailing their efforts at meeting their public purpose. All that seems innocuous enough. But then they require an “assessment of the overall social and environmental performance of the benefit corporation against a third-party standard.” One has to return to the definitions section of the model legislation to understand what is meant by the term “third-party standard,” and that is where the legislation gets complicated, and perhaps a little vague. The model legislation defines third-party standard as the following: a “recognized standard for defining, reporting, and assessing corporate social and environmental performance that is (1) Comprehensive because it assesses the effects of the business and its operations upon” such interests as those of shareholders, employees, and the environment, among other interests; (2) “[d]eveloped by an entity that is not controlled by the benefit corporation”; (3) “[c]redible because it is developed by an entity that … has access to necessary expertise to assess overall corporate social and environmental performance and … uses a balanced multistakeholder approach to develop the standard, including a reasonable public comment period”; and (4) “[t]ransparent” because it makes information available about the standard, the criteria used when measuring the social and environmental impact of the corporation, the overall criteria used when assessing the performance of the business, and any weighting it does of the criteria. The third-party standard must also be transparent about financial support behind the third-party validator, the process by which revisions to the criteria are made, and the personnel involved in creating and revising the criteria. Examples of third-party validators include the Food Alliance’s certification process that promotes social and environmental responsibility in the food industry and Green Seal’s business A Viable Option for Social Entrepreneurs? 41 certification mechanism for measuring the environmental impact of company practices. Each provision of the model legislation is accompanied by comments prepared by the proponents of the legislation. The comments accompany- ing the definition of the third-party standard lay out the rationale behind this requirement. According to the comment, this requirement “provides an important protection against the abuse of benefit corporation status.” Unlike a traditional corporation, the performance of which “is measured by the financial statements that the corporation prepares,” for a benefit corporation, its performance “in creating general or specific public benefit will not be readily apparent from those financial statements.” Because of that, the

annual benefit report is intended to permit an evaluation of that performance so that the shareholders can judge how the directors have discharged their responsibility to manage the corporation and thus whether the directors should be retained in office or the shareholders should take other action to change the way the corporation is managed.

The comment goes farther, and states explicitly that the annual report is “intended to reduce ‘greenwashing’ (the phenomenon of businesses seeking to portray themselves as being more environmentally and socially responsible than they actually are).” It does this “by giving consumers and the general public a means of judging whether a business is living up to its claimed status as a benefit corporation.”

Example: New York’s Experiment with Benefit Corporations and the Surprising Early Results

New York State is home to many entities with social purposes. Indeed, it has a thriving not-for-profit community, with many organizations forming into not-for-profit entities. It is home to many national not-for- profits; foundations, like the Ford Foundation, the Rockefeller Founda- tion, and the Open Society Foundations; educational powerhouses, like Columbia University and New York University; and cultural behemoths 42 EDUCATING SOCIAL ENTREPRENEURS like the Metropolitan Museum of Art. In fact, although New York State is the third-largest state by population, with a population half that of California, it ranks first in the number of not-for-profits in the country, having nearly 100,000 charitable organizations4 out of the nation’s 1.6 million,5 and its not-for-profit sector generates $57 billion in wages annually.6 While this is not quite as dominant in the sector as the role the State of Delaware plays in corporate law, New York plays an important role in policing the nation’s not-for-profit corporations. Presumably, it will also play an important role in regulating benefit corporations as well. New York’s experiment with benefit corporations, which this section explores, raises more questions than it answers, and sheds little light on the reasons why those entities that are choosing to form as benefit corporations in the state are doing so, however. This experiment thus calls into question the extent to which those seeking to form as benefit corporations understand what they are getting into, and why, and encourages deeper reflection about the purposes of the benefit corporation and whether entities that seek to choose their form really understand their obligations under the benefit corporation regime. In late 2011, New York’s Governor Andrew Cuomo signed new provisions into New York State’s Business Corporations Law that allowed for the creation of benefit corporations in New York State. The law took effect in 2012, and, from 2012 through the end of 2014, 61 corporations registered with New York State as benefit corporations. Of these 61 corporations, only four were existing corporations that converted from a different corporate status. Thus, 57 newly created corporations formed in New York State over this 3-year period. Surprisingly, though, as of December 2014, 16 of those corporations, roughly one quarter of

4 New York State Department of Labor Division of Research and Statistics, “New York’s Nonprofit Sector Nation’s Largest,” Employment in New York State (April 2012). 5 Bernasek, A. 2014. “For Nonprofits, a Bigger Share of the Economy,” New York Times (March 8, 2014): BU4. 6 New York State Department of Labor Division of Research and Statistics, “New York’s Nonprofit Sector Nation’s Largest,” Employment in New York State (April 2012). A Viable Option for Social Entrepreneurs? 43 those entities, withdrew their status as benefit corporations within days of forming, which calls into question whether such corporations were cognizant of their obligations as benefit corporations.7 Furthermore, an assessment of the certificates of incorporation for the 61 benefit corporations formed in New York State from February 2012 through December 2014 revealed that only nine such corporations had anything more than boilerplate language in their corporate documents, with roughly half, 31, declaring simply that they were “benefit corporations,” with nothing more: that is, they contained no statement of the public purpose for which they were formed. Another 16 said simply that they were being formed as benefit corporations seeking to have a material public benefit on society, without stating what that benefit was or is. The nine that did state that they had a specific public purpose in their respective certificates of incorporation articulated a range of public purposes. For example, an entity called Academic Evolution, Inc., states that its public purpose is to “enhance and transform the way learning institutions worldwide are able to access and provide data to their program participants, and to give as many as possible access to modern technology and education.” The Green Rabbits Projects, Inc., has as its goal “the preservation of the environment and improvements to public health as a result of the corporation’s work on projects relating to sustainable food production, distribution, and access.” Section II, Inc., strives to “improve the representation of lesbians in popular culture and providing opportunities for more sustainable careers for lesbians in the media.” While some of these certificates of incorporation are specific like this, sometimes, even those corporations that did articulate a public purpose, did so in very limited terms, like the Community Resource Development Corporation, which states that it will “render community related services in the jurisdictions which we serve.” Since fully one quarter of benefit corporations that formed under New York’s law withdrew their designation as benefit corporations within just a few days of forming, and only a handful of benefit corporations of those

7 The information from this section comes from a review of the certificates of incorporation of all benefit corporations that formed in New York State from February 2012 through December 2014. Such information is publically available, for a fee, from the New York State Department of State. 44 EDUCATING SOCIAL ENTREPRENEURS that have remained as this type of entity have articulated a public purpose, it remains to be seen whether there will be more defections in the near future, as groups realize that New York’s law requires them to report on their public purposes within one year of forming. This will require them to state what their public purpose is and set forth the manner in which they are meeting their goals. This reporting requirement may convince some additional groups to withdraw their status as benefit corporations. Furthermore, the fact that so many entities withdrew their status as benefit corporations so soon after registering as such suggests that these entities did not really understand the designation, or its requirements. In addition, the low number of benefit corporations in New York State also raises another important question. At least through the end of Decem- ber 2014, only 45 entities formed as, or converted into, benefit corporations in New York State, a state with nearly 100,000 not-for-profits, and maintained that status. Either, incorporators with a public purpose are not aware of the availability of the benefit corporation as an entity choice, do not understand its requirements, or are scared off by those requirements. More research into why groups are not forming as benefit corporations, and why so many are withdrawing their status so soon after forming, is warranted at this time, but is beyond the scope of this Commentary.

Benefit Corporations on the International Stage

Entities called benefit corporations exist in other countries, including the United Kingdom and Canada. The U.K.’s first benefit corporation legislation appeared in the Health and Social Care (Community Health and Standards) Act 2003, creating National Health Service Foundation Trusts as public benefit corporations.8 These foundation trusts were created to “devolve decision making from central government to local organizations and communities,” and currently provide more than half of the U.K.’s ambulance, hospital, and mental health services.9 There are

8 Health and Social Care (Community Health and Standards) Act 2003, U.K. Statute 2003 c.43, November 20, 2003. 9 “NHS Foundation Trust Directory,” Gov.UK available at www.gov.uk/government/publications/nhs-foundation-trust-directory/nhs-foundation-trust- directory#what-are-foundation-trusts last updated December 4, 2015. A Viable Option for Social Entrepreneurs? 45 many organizations with similar functions to a benefit corporation in the U.K., but they are called “crown corporations” and are state-owned entities incorporated by royal charters, such as the British Broadcasting Corporation (BBC). Similarly, in Canada, the Canadian Broadcasting Corporation is a crown corporation. Just as benefit corporations become established in the United States on a state-by-state basis, some Canadian provinces have implemented legislation similar to that which has authorized the creation of benefit corporations in the United States, including British Columbia, Nova Scotia, and Ontario.10 In Canada, benefit corporations enjoy several names: Community Interest Corporations, Community Contribution Corporations, Benefit Corporations, and B Corps.11 Effective July 29, 2013, British Columbia’s Community Contribution Companies (or C-3 companies) are limited by legislation regarding shareholder distributions and annual reporting.12 In order to be established as a C-3 company, a company’s notice of articles must include a public benefit, known as a “community purpose,” which is defined as:

[A] purpose beneficial to (a) society at large, or (b) a segment of society that is broader than the group of persons who are related to the community contribution company and includes, without limitation, a purpose of providing health, social, environmental, cultural, educational or other services, but does not include any prescribed purpose.13

10 Tobin, D. 2013. “The Evolution of the Corporation: The Public Benefit -Cor poration.” Blaney McMurtry Barristers & Solicitors LLP available at www.blaney. com/articles/evolution-corporation-public-benefit-corporation (accessed August 28, 2013). 11 Ibid. 12 Business Corporations Act [SBC 2002] ch. 57, part 2.2 available at www. bclaws.ca/civix/document/LOC/complete/statreg/--%20B%20--/Business%20 Corporations%20Act%20[SBC%202002]%20c.%2057/00_Act/02057_04. xml#part2.2 last updated July 29, 2015. 13 Ibid. 46 EDUCATING SOCIAL ENTREPRENEURS

In 2012, Nova Scotia passed benefit corporation legislation but it has yet to come into effect. Once it does, the province will have Community Interest Companies (CICs), which share British Columbia’s definition of a “community purpose,” and must produce an annual Community Interest Report that is approved by the directors of the companies and presented at annual shareholder meetings.14 The province of Ontario recently passed legislation reforming nonprofits, and makes a new distinction for the benefit corporation, defining it as

a charitable corporation or non-charitable corporation that receives more than $10,000 a year in (a) donations or gifts from persons who are not members, directors, officers or employees of the corporation; or (b) grants or similar financial assistance from federal, provincial, or municipal governments or a government agency.15

Two benefit corporations are international in nature, spanning the province of Ontario and New York State: The Buffalo and Fort Erie Pub- lic Bridge Authority (also known as the Peace Bridge Authority), and the Niagara Falls Bridge Commission.16 Benefit corporations in Ontario are quite distinct from the purely for-profit benefit corporations in British Columbia and Nova Scotia.

14 An Act Respecting Community Interest Companies [SNS 2012] ch. 38 available at http://canlii.ca/t/51zt7 last updated July 31, 2015; D. Tobin, “The Evolution of the Corporation: The Public Benefit Corporation,” Blaney McMurty Barristers & Solicitors LLP available at www.blaney.com/articles/evolution- corporation-public-benefit-corporation updated August 28, 2013. 15 “About the Not-for-Profit Corporations Act (ONCA),” Ontario Ministry of Government and Consumer Services available at www.sse.gov.on.ca/mcs/en/ Pages/onca1.aspx updated June 4, 2014. 16 Buffalo and Fort Erie Public Bridge Authority, 2014Annual Report, The Peace Bridge, 2015 available at http://pba.z-paper.com/PBA_AnnualReport_2014/#1 (accessed July 9, 2015); Niagara Falls Bridge Commission, 2014 Annual Review, NFBC, 2014 available at www.niagarafallsbridges.com/images/docs/NFBC2014 AnnualReport-Final.pdf (accessed July 9, 2015). A Viable Option for Social Entrepreneurs? 47

Nongovernmental Recognition of Socially Conscious Businesses

There are several independent organizations that promote socially and environmentally responsible business practices through standards and membership, but without governing national or local legislation, and without requiring any change in corporate structure or form. The most notable organizations are the International Standards Organization (ISO), ISEAL, and B Lab. The ISO develops and publishes standards for many different areas of industry, including energy, food safety, occupational health, environmental concerns, and social responsibility.17 These benchmarks are globally recognized and implemented as credible third-party standards, as they are based on international expert opinions in a multistakeholder process.18 Founded as the International Social and Environmental Accreditation and Labeling Alliance, ISEAL Alliance is an international organization that promotes sustainable business practices by offering membership to corporations that meet the ISEAL Codes of Good Practice.19 The organization also offers nonmembers subscriptions to promote interest and interaction between individuals and corporations striving for environmental sustainability. However, membership does not alter the legal status of a participating corporation, but it does indicate sustainable technological abilities and commitment to continuous improvement in these areas.20 B Lab, the leading organization in the benefit corporation movement, provides a method of certification that is accessible and available to all corporations throughout the world interested in improving social and

17 Martinez, J. 2015. “Conformity Assessment and Certification,” ISO available at www.iso.org/iso/home/faqs/faqs_conformity_assessment_and_certification.htm (accessed July 6, 2015). 18 “Standards Development,” ISO (2015) available at www.iso.org/iso/home/ standards_development.htm (accessed July 6, 2015). 19 “An Introduction to ISEAL,” ISEAL Alliance, New Digital Partnership (2012) available at http://issuu.com/isealalliance/docs/an-introduction-to-iseal- oct13/1?e=3335187/8704011 (accessed July 6, 2015). 20 Ibid. 48 EDUCATING SOCIAL ENTREPRENEURS environmental business practices.21 Like the ISO and ISEAL programs, B Lab certification does not change the legal status of the corporation. Since B Lab certification plays a significant role in the functioning of socially responsible companies, or those that want to be seen as socially responsible, the next section provides an overview of B Lab and the B Lab certification process, and differentiates it from an entity’s formation as a benefit corporation. Although benefit corporations can seek B Lab certification, they do not have to, and entities seeking B Lab certification do not need to be benefit corporations.

Third-Party Certification Compared to Benefit Corporation Status

While those states that follow the Model Approach to benefit corporations require third-party validation of a benefit corporation’s success in meeting their public purposes, one approach that some corporations are following—benefit corporation and traditional for-profit/not-for-profit entities—is to seek third-party validation through submitting to an assessment of their activities through an organization called B Lab. This section describes the B Lab certification and then explains how it may be different from an entity choosing to organize as a benefit corporation under a given state’s benefit corporation statute. B Lab is an independent, not-for-profit corporation that has created a certification process that, according to the public information available on its website, uses “a set of transparent, comprehensive and com- parable standards designed to enable the marketplace to identify and support companies that meet rigorous third-party social and environmental performance.”22 Any corporation—benefit corporation, for-profit,

21 “Benefit Corporation vs. Certified B Corp,” Benefit Corporation Informa- tion Center available at http://benefitcorp.net/businesses/benefit-corporation-vs- certified-b-corp (accessed July 1, 2015). 22 Clark, W.H., and L. Vranka. 2013. “The Need and Rationale for the Benefit Corporation: Why It Is the Legal Form That Best Addresses the Needs of Social Entrepreneurs, Investors, and, Ultimately, the Public.” Benefit Corporation White Paper (January 18, 2013): 5. A Viable Option for Social Entrepreneurs? 49

not-for-profit, organized under U.S. law or a non-U.S. body of law—can follow B Lab’s operational guidelines. If it does, it can hold itself out as a “Certified B Corp.” Such certification does not, however, necessarily mean that the entity is a benefit corporation or organized as such under any state’s laws.23 It is a marketing mechanism that any corporation that satisfies the B Lab certification process can use. In order to qualify for B Lab Certification, a company needs to sub- mit to a series of questions about that company’s practices. These questions address such issues as the environmental practices of the company, its governance, how it treats its workers, how it works with suppliers, and so on. Sample questions include the following:

• When evaluating the social and environmental performance of Significant Suppliers, which of the following practices apply? [possible answers include “visited all significant suppliers” and “specific environmental criteria applied”]; and • Based on referenced compensation studies, how does your company’s compensation structure (excluding executive management) compare with the market? [possible answers include “below market” and “at market”]

An “Impact Score” is then generated for the company along a matrix that takes into account the responses to those questions. An Impact Score of above 80 out of 200 available points qualifies a company for B Lab certification. There are three main differences between a Certified B Corp and a benefit corporation: The first of these is the standards that are applied through the B Lab process as opposed to the benefit corporation third- party validation requirement (although these are, admittedly, somewhat similar). The standards of measuring social and environmental impact differ between the Model Approach and the B Lab process. Benefit corporations under the Model Approach are required to use third-party standards to assess annual progress, but legislation neither prescribes the exact

23 “Global Partners,” Certified B Corporations, B Lab, 2015 available at www. bcorporation.net/b-corp-community-0/global-partners (accessed July 6, 2015). 50 EDUCATING SOCIAL ENTREPRENEURS requirements or sources of these standards nor requires verification or auditing by an independent organization.24 For Certified B Corps, however, these must implement the “B Impact Assessment” created by B Lab, and in order to maintain Certified B Corp status, must earn 80 out of 200 available points each year.25 Additionally, test results are available to consumers on the B Lab website, promoting market transparency and accountability.26 The second main difference is the resource support available to B Lab-certified entities as opposed to those that form simply as benefit corporations. Indeed, Certified B Corps have access to B Lab services and materials in “marketing, sales, raising money, saving money, learning from and doing business within the community of Certified B Corps.”27 Generally speaking, states do not make similar resources available to benefit corporations. In order to access such resources, then, benefit corporations would have to certify separately under B Lab’s certification regime. The third main difference between B Corp certification and benefit corporation is the geographic limit on access to the benefit corporation as a corporate option. B Corp certification is available to entities in all 50 states and internationally. Benefit corporations, however, can only form in states where such corporate status is available. In addition, B Corp certification is a wholly independent process, not related to any state’s corporate law. Thus, on its own, such certification cannot alter any corporation’s legal status. At the same time, because it is not geographically bounded, B Corp certification is accessible regardless of whether a corporation finds itself in a jurisdiction that permits it to form as a formal benefit corporation.28 In other words, B Corp certification is available to any corporation that satisfies the B Lab guidelines, regardless of thejurisdiction in

24 “Benefit Corporation vs. Certified B Corp,”Ibid . 25 Ibid. 26 Bingham, G.B. 2015. “Encountering Benefit Corporations,” What’s Working: Purpose + Profit, The Huffington Post Business (June 2, 2015) available at www.huffingtonpost.com/g-benjamin-bingham/encountering-benefit-corp_b_7447466. html?utm_hp_ref=small-business&ir=Small%20Business 27 “Benefit Corporation vs. Certified B Corp,”Ibid . 28 Ibid. A Viable Option for Social Entrepreneurs? 51 which it is formed, and regardless of whether that jurisdiction recognizes B Corps.29 B Lab certification thus allows a business to become a Cer- tified B Corp and to identify itself in the marketplace as a socially and environmentally conscious entity, but it does not require the business to form as a benefit corporation under state law, nor does it transform the business into a benefit corporation. In sum, benefit corporations are only available in the 30 U.S. jurisdictions that authorize their creation. At the same time, any entity, including a benefit corporation, can apply for B Lab certification. So, a benefit -cor poration can opt for B Lab certification, though it is not required. And an entity can be B Lab certified, even if it is not a benefit corporation.

Some Social Entrepreneurs and the Strategic Decisions They Have Made

While benefit corporations and B Lab certification are relatively recent additions to the social entrepreneurship landscape, some prominent organizations have either formed as benefit corporations, converted to such status, or sought B Lab certification. The following companies are three of the more prominent entities that have identified themselves as benefit corporations, sought B Lab certification or both.

1. Patagonia Patagonia was founded in 1973 when Yvon Chouinard began selling hand-forged rock climbing gear out of his car. In January 2012, just as California’s new benefit corporation statute took effect, it became California’s first benefit corporation.30 Even before switching its entity designation to become a benefit corporation, it certified as California’s first B Lab Certified corporation in 2011.

29 Ibid. 30 “Patagonia Road Tests New Sustainability Legal Structure,” Bloomberg Business (January 4, 2012) available at www.bloomberg.com/news/articles/2012-01-04/ patagonia-road-tests-new-sustainability-legal-status (accessed November 12, 2015). 52 EDUCATING SOCIAL ENTREPRENEURS

Although the company started as Chouinard Equipment, Inc., manufacturing and selling climbing gear, it grew into Patagonia and turned its attention to manufacturing and selling outdoor apparel with a focus on social and environmental responsibility. The Worn Wear program is a sustainability initiative that prolongs the life of Patagonia apparel, repairing about 30,000 pieces of gear and items of clothing annually and providing resources for customers to repair items themselves rather than throw them away.31 When items are beyond repair, Patagonia accepts them to recycle or repurpose. Patagonia’s 2011 Black Friday advertisement in the New York Times, “Don’t Buy This Jacket,” urged consumers to do more with what they already have and reduce the environmental impact of what it saw as rampant consumerism. Patagonia publicly monitors its supply chain on its website’s “Footprint Chronicles,” to promote socially and environmentally responsible industrial practices. It tracks corporate responsibility, company Fair Trade Certified sewing program progress, traceable down feather materials, organic cotton materials, and merino wool sourcing.32 The website proclaims a desire to lead by example: “when we can reduce or eliminate a harm, other businesses will be eager to follow suit.”33 Patagonia donates 1 percent of its overall sales or 10 percent of overall profits, whichever is greater, to environmental organizations through the “1 percent for the Planet” initiative that has been in effect since 1985.34 Patagonia initiated this program to encourage businesses to support grassroots environmental groups in the United States and internationally.35

31 “Worn Wear,” Patagonia available at www.patagonia.com/us/worn-wear/ (accessed November 12, 2015). 32 “The Footprint Chronicles,” Patagonia available atwww.patagonia.com/us/ search/The%20Footprint%20Chronicles (accessed November 12, 2015). 33 Ibid. 34 “Becoming a Responsible Company: 1 percent for the Planet,” Patagonia available at www.patagonia.com/us/patagonia.go?assetid=81218&ln=450 (accessed November 12, 2015). 35 Ibid. A Viable Option for Social Entrepreneurs? 53

Patagonia’s mission statement is: “Build the best product, do no unnecessary harm, use business to inspire and implement solutions to the environmental crisis.”36 The company currently has an Overall B impact report score of 116, while the score to maintain B Lab certification status is 80.

2. Warby Parker Although the company does business as Warby Parker, it incorporated as JAND, Inc., as a Delaware Corporation in 2009.37 Warby Parker designs and manufactures eyeglasses and sunglasses. Rather than using the traditional eyewear industry channels (like Lux- ottica, which designs and manufactures 80 percent of the world’s eyewear38), Warby Parker sells directly to consumers through its website and showroom stores. The social mission of Warby Parker centers around its “Buy a Pair Give a Pair” program: for every pair of eyeglasses purchased, another pair is provided to a person in need through partnerships with nonprofits like VisionSpring that train local workforces to perform eye exams and sell affordable eyewear in underdeveloped economies.39 Warby Parker also strives to have a positive effect on the environment. It is one of the only carbon neutral eyewear manufacturers in the world; it annually inventories its carbon emissions, works to reduce them, and purchases carbon offsets to reach neutrality.40 Warby Parker also prioritizes the welfare and success of its employees and pays a living wage to all employees: even those that

36 “Patagonia’s Mission Statement,” Patagonia available at www.patagonia.com/ us/patagonia.go?assetid=2047 (accessed November 12, 2015). 37 “Overview of JAND, Inc.” Bloomberg Business available at www.bloomberg. com/research/stocks/private/snapshot.asp?privcapId=107146021 (accessed November 6, 2015). 38 Stahl, L. 2012. “Sticker Shock: Why are Glasses So Expensive?” CBSnews.com (October 7, 2012) available at www.cbsnews.com/news/sticker-shock-why-are- glasses-so-expensive-07-10-2012/ 39 “Warby Parker—B Corporation,” B Corporation available at www.bcorporation.net/community/warby-parker accessed November 5, 2015. 40 Ibid. 54 EDUCATING SOCIAL ENTREPRENEURS

are part-time. The company awards bonuses to all of its full-time employees and provides health care coverage that covers 80 percent of premiums. All employees participate in professional development programs, monthly feedback sessions, and quarterly 360 degree reviews (where employees review their supervisors and vice versa).41 Warby Parker’s mission statement provides that it was “founded with a rebellious spirit and a lofty objective: to offer designer eyewear at a revolutionary price, while leading the way for socially conscious businesses.” By producing its own eyewear and marketing directly to consumers, the company claims to be “able to provide higher-quality, better-looking prescription eyewear at a fraction of the going price.”42 According to corporate record searches in Delaware and New York State, Warby Parker incorporated in Delaware as a general business corporation in 2009. It has not sought to shift its incorporation status as a benefit corporation, though it has sought, and obtained, B Lab Certification. Indeed, Warby Parker has been B Lab Certified since May 2011. Using B Lab’s “Impact Score,” which gauges the extent to which companies are meeting social purposes, its current Overall Impact Score is 109.43

3. Greyston Bakery, Inc. Founded in 1982, Greyston Bakery was the first New York-based entity to obtain B Lab certification, which it did in 2008. Its current B Impact Report Overall Score is 143. Additionally, Greyston Bak- ery was the first New York entity to register as a benefit corporation in 2012, switching its corporate status when New York’s legislation went into effect.44 The bakery primarily sells brownies (it is Ben & Jerry’s sole supplier of this product). It professes to be driven by a “Triple Bottom

41 Ibid. 42 “History,” Warby Parker available at www.warbyparker.com/history (accessed November 6, 2015). 43 “Warby Parker—B Corporation,” Ibid. 44 “Greyston Bakery,” B Corporation available at www.bcorporation.net/community/greyston-bakery-inc (accessed November 7, 2015). A Viable Option for Social Entrepreneurs? 55

Line” consisting of “job creation and personal development for local residents, financial support for the Greyston Foundation, and miti- gation of environmental impact.”45 Its “Open Hiring” policy looks past traditional barriers to employment, such as histories of homelessness, incarceration, illiteracy, and substance abuse. Job applicants with little or no credentialed work experience can build their skills and enjoy benefits like company profit sharing, health care that covers 80 percent of premiums, and paid maternity leave.46 The company tagline is “We don’t hire people to bake brownies, we bake brownies to hire people.”47 The Greyston Foundation, which is funded by nearly all of the bakery’s profits, underwrites a range of programs, including: those focused on community self-sufficiency, like affordable housing and support for the formerly homeless; affordable childcare services; housing for people living with HIV/AIDS; a technologically focused learning center; and a community garden.48 The company is environmentally conscious and built its factory on redeveloped brownfields: that is, contaminated land that had been rendered previously unusable because of the prohibitive costs associated with its cleanup.49 Furthermore, its facilities are 100 percent LEED certified, an internationally recognized third-party standard for environmentally beneficial building and construction practices.50 According to its mission statement, it is “a force for personal transformation and community economic renewal.” Greyston

45 Ibid. 46 Ibid. 47 Seaver, J. 2012. “Businesses with Impact: The Greyston Foundation and Their Open Hiring Policy,”HuffPost Impact: What’s Working (October 9, 2012) available at www.huffingtonpost.com/jesse-seaver/businesses-non-profit-social- enterprise_b_1948888.html. 48 “Greyston Bakery,” B Corporation, Ibid. 49 “What is a Brownfield?” Brownfield Action available athttp://brownfieldac - tion.org/brownfieldaction/brownfield_basics (accessed November 7, 2015). 50 “LEED Certification Information,” NRDC available atwww.nrdc.org/build - inggreen/leed.asp (accessed November 7, 2015). 56 EDUCATING SOCIAL ENTREPRENEURS

operates “a profitable business, baking high quality products with a commitment to customer satisfaction.” It calls its philosophy “Path- Making.” Through this philosophy, the company creates jobs and provides “integrated programs for individuals and their families to move forward on their path to self-sufficiency.”51 *** These three, well-known companies have chosen somewhat different approaches with respect to corporate form and B Lab certification. While all three have pursued and obtained B Lab certification, only Patago- nia and Greyston have converted to benefit corporation status. Warby Parker is a simple Delaware business corporation, and, as such, has none of the flexibility, or obligations, that benefit corporation status brings. Social entrepreneurs existing in states that offer the benefit corporation as an entity option thus have a choice. They can choose to pursue benefit corporation status, B Lab certification, or both. The next and final section explores some of the issues social entrepreneurs face when choosing between these options.

Some Questions for Social Entrepreneurs: Accountability with Uncertainty

While the benefit corporation is a relatively recent player to enter the social entrepreneurship stage, this corporate form is a potentially viable option for companies with a purpose that want to protect their socially responsible goals from being dominated by shareholders intent on preserving and promoting the entity’s financial bottom line. This choice of corporate form gives social entrepreneurs the option to pursue a bottom line that takes into account concerns other than those directly related to profit maximization. In the states that have the benefit corporation, or something like it, as an option, forming as a benefit corporation is quite simple. Indeed, in states like New York, all one has to do is state that one is forming as a benefit corporation. Companies are doing so and not even

51 “Mission & History,” Greyston Social Enterprise available at http://greyston. com/about-greyston/mission-history/ (accessed November 6, 2015). A Viable Option for Social Entrepreneurs? 57 setting forth a public purpose in their incorporation documents. So, at least forming as a benefit corporation is not onerous. But the choice to form as a benefit corporation, or convert to take that form, brings with it certain risks. As described previously, in many states, there are reporting requirements that impose an additional burden on the benefit corporation that the average corporation does not have to shoulder. It is still early in the life of benefit corporations to tell what the true costs of these reporting requirements will be. Indeed, the reporting requirement itself does not seem that difficult; the question becomes, what are the consequences of failing to satisfy these reporting requirements, or, even if the reporting requirements are satisfied, what are the consequences of a benefit corporation reporting that it is not meeting its social purposes. The biggest problem with the benefit corporation as an entity, because there is, as of yet, no history of litigation or internal corporate battles that would help illuminate the consequences of defective or inadequate reporting, is the degree of uncertainty that surrounds the reporting requirements. Such uncertainty might be enough to give social entrepreneurs pause and make them think twice before choosing to form as a benefit corporation, at least in those states that require annual reporting under benefit corporation legislation. Should a benefit corporation fail to uphold its reporting requirements, it is possible that its corporate status, or even existence, could be challenged by state authorities or shareholders. At a minimum, it might give those authorities and shareholders grounds for pressing for the removal of officers and/or directors in accordance with the personnel powers contained in the corporation’s bylaws. While most benefit corporation legislation indicates that intended third-party beneficiaries of a benefit corporation will not be able to challenge those benefit corporations’ failure to file an annual report, if one is required, state authorities overseeing the functioning of corporations in a particular state and shareholders of the corporation might have grounds to seek the removal of officers and directors if those individuals are not upholding their obligations to com- ply with all legal obligations of the company. A thornier issue is posed by the filing of a report that fails, in format or substance, to meet the reporting requirements. In other words, what happens if a company submits a report that either fails to explain how 58 EDUCATING SOCIAL ENTREPRENEURS that company is meeting its social purposes or indicates that a company is clearly not meeting its social purposes in accordance with some third- party standard? What remedies and recourse would state authorities or shareholders have with respect to officers and directors in that instance? The model legislation itself fails to articulate any clear penalty for a benefit corporation that is not pursuing or furthering its social purpose or purposes. Instead, the reporting requirement is one designed to offer the general public, and, more importantly, shareholders, information about the extent to which the company is meeting its social goals. Presumably, this should give them critical information to determine whether the company’s leadership is upholding its obligations, and they will take such success at meeting such obligations into account when making leadership and strategic decisions about the company where the shareholders play a role in such decisions. But the connection between the report’s contents and shareholder governance is not direct or explicit in benefit corporation legislation generally. As stated earlier, the comments to the model legislation make this connection direct when they state that the annual benefit report is “intended to permit an evaluation of that performance” in order that shareholders “can judge how the directors have discharged their responsibility to manage the corporation and thus whether the directors should be retained in office or the shareholders should take other action to change the way the corporation is managed.” For many social entrepreneurs, this level of transparency and accountability may be welcome. The goal of social entrepreneurs, by definition, is to have a social purpose to their business endeavors, and they have undertaken their business venture with an eye toward having a positive impact on society. The goal of the benefit corporation is to ensure social entrepreneurs that choose to take this form have the flexibility in operating their company to meet their social purposes while maintaining financial health. That flexibility clearly comes with a price: greater transparency through the reporting requirements imposed by the laws that govern benefit corporations and, ultimately, the accountability that transparency might generate. Social entrepreneurs who wish to form a company and are considering benefit corporation status for that company thus face a choice. Do they want to pursue purposes that go beyond maximizing shareholder wealth? Do they want to have bottom lines that go beyond the financial? Do they A Viable Option for Social Entrepreneurs? 59 want to have the flexibility in the functioning of their company that will allow them to pursue social impact, and not just monetary profits? As in many business contexts, setting up a benefit corporation brings with it the obligations of disclosure and a degree of transparency. That disclosure and transparency is supposed to generate accountability. In order for an accountability regime to function well, however, actors within the regime must understand the consequences of their actions. As it stands now, there is a degree of uncertainty that clouds benefit corporations moving forward. What are the consequences of a failure to report on their efforts to meet their social purposes? What if they report, but their reporting reveals a failure to satisfy those purposes? It is possible that these questions may only be answered over time, as corporate battles, and even litigation, sort them out. It would be prefera- ble, however, for state-based actors, like attorneys general and other government entities with authority over corporations in their state, to issue guidance to social entrepreneurs as to the consequences of not meeting the benefit corporation reporting requirements. Better yet, as new states adopt benefit corporation legislation, such legislation could offer clearer guidance to benefit corporations in this area. States with legislation on their books could also amend such legislation to identify the proper range of adverse consequences that flow from inadequate reporting, or the failure to meet a company’s social purposes. Such guidance is clearly necessary to alleviate some of the uncertainty that currently clouds the functioning of benefit corporations across the United States. The burdens associated with choosing the business corporation as the corporate form a social entrepreneur’s venture will take, and the uncertainty of the potential consequences associated with assuming those burdens, might suggest to such actors that forming as a benefit corporation is not worth the risk at this early stage in their existence. If that is the case, social entrepreneurs still have the option of choosing to pursue B Lab certification alone, and may opt for that route, which merely brings with it a marketing function: being able to say one’s entity is B Lab certified. It carries with it no legal requirements or obligations. According to B Lab, a company can determine whether it can hold itself out as B Lab certified by conducting an evaluation of company practices that takes roughly 90 minutes to complete, but the questions do 60 EDUCATING SOCIAL ENTREPRENEURS require some thought and even some research, so, generating an Impact Report may not be as easy as it sounds. Even assuming such a report is relatively easy to generate, one still has to achieve a score of 80 points or above to qualify. Taking a relatively simple test may not seem too onerous for a social entrepreneur, especially if he or she wants to be able to use the B Lab certification as a marketing tool. But one must remember that a marketing tool is all this certification is. In order to obtain the functional flexibility that the benefit corporation has in meeting its corporate and social purposes, one would have to choose benefit corporation status. Again, benefit corporation status comes with its own burdens as well, as outlined earlier. There is certainly nothing stopping a social entrepreneur, if he or she wants to pursue benefit corporation status, from also seeking B Lab certification. Apart from the functional flexibility that the benefit corporation status offers, social entrepreneurs may want to obtain benefit corporation status for marketing purposes only, and the price one has to pay in terms of the reporting burdens imposed on benefit corporations in many states means that the better approach in that instance may be to pursue B Lab certification only. Of course, as is the case with Patagonia and Greyston Bakery, an entity can choose to be both a benefit corporation and to pursue B Lab certification. In that instance, the social entrepreneur achieves both the functional flexibility to pursue social purposes while assuming the additional reporting requirements that come with it (as well as the relative uncertainty of the potential outcomes associated with failing to meet those requirements) as well as the marketing cache that comes with B Lab Certification. Presumably, social entrepreneurs want to trumpet the social purposes behind their ventures, and the B Lab seal of approval is one way to obtain a marketing edge.

***

While the benefit corporation as an entity is designed to give social entrepreneurs flexibility in terms of meeting a range of corporate purposes, that flexibility would appear to come with a price. Social entrepreneurs choosing to form as benefit corporations, or convert to that form, will need to report on their activities in meeting these broader social purposes. Because the benefit corporation is still in its infancy, and there is no A Viable Option for Social Entrepreneurs? 61 real track record yet of benefit corporations facing any consequences for failing to report on, or not meeting, their social purposes, it is too early to tell whether the cost of choosing to form as a benefit corporation will be too high. As in most endeavors involving social entrepreneurship, it will be trial and error, and companies with a social purpose will have to blaze new trails and walk the road less traveled in pursuing a “third way”: creating companies that deliver lasting social value while also surviving and thriving financially.

Appendix: State-by-State Comparison of Benefit Corporation Legislation

State Statute Classification Arizona Ariz. Rev. Stat. Ann. § 10-2401 (2015) Model Approach Arkansas Ark. Code Ann. § 4-36-101 (2015) Model Approach California Cal. Corp. Code § 14600 (2015) Model Approach Colorado Colo. Rev. Stat. Ann. § 7-101-503 Colorado (West 2015) Approach Connecticut Conn. Gen. Stat. Ann. § 33-1350 Model Approach (West 2015) Delaware Del. Code. Ann. tit. 8, § 362 (West 2015) Delaware Approach Florida Fla. Stat. Ann. § 607.601 (West 2015) Model Approach Hawaii Haw. Rev. Stat. § 420D-1 (West 2015) Model Approach Idaho Idaho Code Ann. § 30-2002 (West 2015) Model Approach Illinois 805 Ill. Comp. Stat. 40/1 (West 2015) Model Approach Indiana Ind. Code Ann. § 23-17-2-23 (West 2015) Model Approach Louisiana LA. Rev. Stat. Ann. § 12:1801 (West 2015) Model Approach Maryland Md. Code Ann., Corps & Ass’ns § 5-6C-01 Model Approach (West 2015) Massachusetts Mass. Ann. Laws ch. 156E, § 1 (West 2015) Model Approach Montana Mont. Code Ann. § 35-2-114 (West 2015) Model Approach Nebraska Neb. Rev. Stat. Ann. § 21-403 (West 2015) Model Approach Nevada Nev. Rev. Stat. Ann. § 78B.010 (West 2015) Model Approach New Hampshire N.H. Rev. Stat. Ann. § 293-C:2 (West 2015) Model Approach New Jersey N.J. Stat. Ann. § 14A:18-1 (West 2015) Model Approach New York N.Y. Bus. Corp. Law § 1701 (West 2015) Model Approach

(Continued) 62 EDUCATING SOCIAL ENTREPRENEURS

(Continued) State Statute Classification Oregon Or. Rev. Stat. Ann. § 60.750 (West 2015) Model Approach Pennsylvania 15 PA. Cons. Stat. § 3301 (West 2015) Model Approach Rhode Island R.I. Gen. Laws Ann. § 7-5.3-2 (West 2015) Model Approach South Carolina S.C. Code Ann. § 33-38-110 (West 2015) Model Approach Tennessee S.B. 972, 109th Gen. Assembl., 1st Reg. Sess. Model Approach (Tenn. 2015) Utah Utah Code Ann. § 16-10b-103 (West 2015) Model Approach Vermont VT. Stat. Ann. tit. 11A, § 21.02 (West 2015) Model Approach Virginia VA. Code Ann. § 13.1-782 (West 2015) Model Approach Washington, D.C. D.C. Code § 29-1301.02 (2015) Model Approach CHAPTER 20 International Case Studies in Social Entrepreneurship: A Focus on Brazil*

Claudia G. Green, Casey Frid, and Imran Chowdhury

Pace University

Introduction

The purpose of this activity is to teach students about social entrepreneurship through hands-on experience. This activity can begin before the course starts so that students will have an understanding of social entrepreneurship and discussions can begin during the first class meeting. On the other hand, this activity could be a project carried out for the duration of a semester course. Students will research selected social entrepreneurs and have the opportunity to interview them. Using their research and interview data, they will write a case study of the social entrepreneur. Through this process, they will learn about the motivation, vision, expectations, and goals of entrepreneurs who focus on contributing to the greater good of society.

* Credits: This project was supported by Pace University, Wilson Center for Social Entrepreneurship, 2015. Special thanks to Marcus Cohen, PhD, The Catholic University of Rio de Janeiro, and his students. Thanks to Pace Univer- sity students in the Lubin School of Business enrolled in MGT 347 International Management Field Study March 2015. 64 EDUCATING SOCIAL ENTREPRENEURS

They will also identify some of the challenges faced by these entrepreneurs and propose possible solutions.

Purpose/Learning Objectives

Upon the completion of this activity, students will be able to:

• Define and explain the term “social entrepreneurship.” • Understand that social entrepreneurs must also address business needs and demands for marketing, accounting, management, and fundraising. • Analyze the business challenges faced by social entrepreneurs. • Use critical thinking skills to identify solutions to the challenges. • Summarize the importance of the social entrepreneur to its various stakeholders and suppliers.

Group Size

For the purposes of this project, students should be organized in teams. Number of teams depends on the size of the class and the number of social entrepreneurs who are willing to be interviewed and have a case study written about themselves or their organization.

Time and Materials Required

Time. This project can be one of the preliminary learning experiences for the course in social entrepreneurship or can be the focus of the entire course. Resources. This activity involves the use of various forms of communication and sharing technology such as Skype or other communication technology, and Google Drive, Dropbox, or other file sharing programs. This activity requires that social entrepreneurs who are willing to be interviewed and have a case study written about their social enterprise be identified before the start of the activity. International Case Studies in Social Entrepreneurship 65

Exercise Schedule

Exercise Time Resources Needed Prework: Learn the defi- Preliminary assignment of See related videos, web- nition of social entrepre- social entrepreneurs to stu- sites, and readings neurship dents before the beginning of the course Prework: Research spe- 10 hours outside of class University library data- cific social entrepreneurs; bases; Google Scholar post findings in Dropbox and/or Google Drive Post: Analyze the data and 10 hours outside of class Resources collected and interview materials assembled Post: Develop the case 10 hours outside of class See related videos, study narrative and websites, and readings; presentation use rubrics for evaluation of group case study and presentation

Assignment

This activity outlines an experiential method for teaching students about social entrepreneurship. Student teams research and interview social entrepreneurs with the goal of writing a case study of the social entrepreneurial experience. Students work in collaborative teams to conduct research. There are six steps to this exercise.

1. Prework The instructor will provide a list of social entrepreneurs who are willing to be interviewed and have a case study written on their behalf. The instructor will assign each student to a specific team that is researching a specific social entrepreneur and provide the contact information. 2. Research The students will develop a database of resources, articles, websites, and so on, for each of the selected social entrepreneurs. 3. Network (electronically and in person) Once the students have thoroughly researched the social entrepreneurs, they communicate via Skype, e-mail, and Dropbox to help 66 EDUCATING SOCIAL ENTREPRENEURS

organize and share their research materials, websites, links, articles, reports, and so on, with members of their research team. Next they will make and schedule a face-to-face (or Skype) interview. 4. Develop Questions and Interview Based on their research, the students develop a series of questions for the specific social entrepreneur with whom they were scheduled to meet for a face-to-face interview or via Skype. Student teams will conduct and record the interview. 5. Write and Present Following the interview, the students will write up the case studies using the guidelines provided at www.gttp.org/docs/HowToWrite AGoodCase. Student teams will present their case studies to the other teams and discuss the challenges and opportunities inherent in being a social entrepreneur. 6. Evaluate Their case studies are evaluated using “Evaluation of group case study.” Using a scale of 1 to 4 with 4 being the highest quality, the case studies are evaluated on the following criteria: identification of the main problems/issues; analysis of the problems/issues; effective solutions/strategies proposed; and link to course readings and additional research.

Case

1. Summary Students in International Management Field Study: Brazil enrolled in the course to have an international experience and to learn about social entrepreneurship in Brazil. In this project, U.S. students and faculty collaborated with Brazilian students and faculty at a selected university in Rio de Janeiro. Students enrolled in the course and paid additional fees to cover the cost of travel to Brazil, lodging, and ground transportation. 2. Learning objectives

Learning Objectives Outcomes Define and explain the term Through the videos, websites, readings, and class “social entrepreneurship” discussion, students will be able to define and differentiate social entrepreneurs. International Case Studies in Social Entrepreneurship 67

Learning Objectives Outcomes Understand that social entre- Through the interviews, students will learn preneurs must also address information not readily available in print or online business needs and demands for about the details of the financing and operation of marketing, accounting, manage- the social entrepreneurships. ment, and fundraising Analyze the business challenges Using knowledge gained through their business faced by social entrepreneurs school courses, students will examine and discuss ways to address the business challenges. Use critical thinking skills Students will collaboratively brainstorm and formu- to identify solutions to the late solutions to the challenges. challenges Summarize the importance Through their research and interviews, students will of the social entrepreneur to identify the stakeholders and the supply chain and its various stakeholders and examine the challenges from various perspectives. suppliers Learn more about social entre- Through the case study presentations, the class will preneurship through the case see the similarities and differences between social study writing and presentations entrepreneurs and for-profit entrepreneurs of their classmates

3. Assignment

(a) Prework Before the first class meeting, students were assigned to research specific social entrepreneurs. The class of 25 students was organized into five teams of five students per team. Student teams were assigned one of the five (5) social entrepreneurs for their focus in this activity. The goal was to have five (5) matching teams of Brazil- ian students who would also do preliminary research of Portuguese literature, websites, and news articles on the same five (5) social entrepreneurs.

Step 1: Research Before the course commenced, students developed a database of resources, articles, websites, and so on, for each of the selected social entrepreneurs. The students used Google Drive and Dropbox to collect information on their respective entrepreneurs. The university faculty arrange for student interviews with the selected entrepreneurs: (1) Catalytic Communities, (2) Mario 68 EDUCATING SOCIAL ENTREPRENEURS

Moscatelli, (3) O Sol, (4) Salgueiro Favela, and (5) Center for Digital Inclusion.

Step 2: Network (electronically and in person) The students conducted preliminary research on their specific assigned entrepreneur. Together, they communicated via Skype, e-mail, and use of Dropbox to help organize and share their research materials, websites, links, articles, reports, and so on. Each week, the coordinating U.S. and Brazil student teams would discuss their data collection via Skype. Meanwhile, weekly classes focused on using resources such as videos, websites, and articles to help students learn about the concept of social entrepreneurs.

Step 3: Interview Based on their research, the students developed a series of questions for the specific social entrepreneur with whom they were scheduled to meet for a face-to-face interview in Brazil. Student teams conducted and recorded the interview. There was classroom discussion on what makes a good interview and good interview questions.

Step 4: Write and present Using the resource “How to write a good case study” available at www.gttp.org/docs/HowToWriteAGoodCase.pdf, the students prepared and presented their case studies to the other class teams and discussed the challenges and opportunities inherent in being a social entrepreneur.

Step 5: Evaluate the quality of the case study Their case studies were evaluated using “Evaluation of group case study.” Using a scale of 1 to 4 with 4 being the highest quality, the case studies were evaluated on the following criteria: identification of the main problems/issues; analysis of the problems/issues; effective solutions/strategies proposed; and link to course readings and additional research. The following are excerpts from the case studies and student reflections on the process. International Case Studies in Social Entrepreneurship 69

Background and Student Reflection on Social Entrepreneurs in Brazil

1. Catalytic Communities, Theresa Williamson, PhD

(a) Background Catalytic Communities began in 2000 with the mission of creating models for effective integration between informal and formal settlements in cities across the globe, based on the experience of Rio de Janeiro. Catalytic Communities is dedicated to improving the quality of life for all Rio de Janeiro residents by driving a more creative, inclusive, and empowering integration between the city’s informal and formal communities, in which the city’s favelas are recognized for their heritage status and their residents fully served as equal citizens (Catcomm.org). Founder Theresa Williamson hopes to lessen the divide between the favela-like housing and the formal housing while improving the quality of life for its inhabitants. She also hopes to unite and encourage the inhabitants to stand up for their communities and fight for equal rights. Theresa plans to accomplish this via a mixture of education, research, training, strategic communications, technology, networks, advocacy, and participatory planning (Catcomm.org). CatComm uses technology to link grassroots community groups in Rio and around the world, so they can learn from each other’s successes. They are currently working on transition the organization toward sustainability and a participatory culture.

(b) Student Reflection I was so inspired to meet Theresa Williamson, a Brazilian-American, who had an interest in returning to Brazil after completing her graduate degree in the Department of City and Regional Planning at the University of Pennsylvania. She is a very dedicated and passionate social entrepreneur who is committed to helping empower people in the favelas of Rio. Her work is particularly relevant in Rio’s preparation for the hosting of the World Cup 2014 and the 2016 Olympics 70 EDUCATING SOCIAL ENTREPRENEURS

wherein favela residents in large numbers have been displaced for improvements in the infrastructure and transportation systems in Rio.

2. Mario Moscatelli

(a) Background In 1997, Mario Moscatelli became concerned about the degradation of green spaces in Rio de Janeiro and the impact of this degradation on the local society and culture. He developed a nonprofit organization entitled “Project Green Eye” where he monitored these at-risk green spaces. As a biologist and environmentalist, he is concerned about the pollution in the Lagoa Rodrigo de Freitas in the heart of Rio near Ipanema Beach because it was in this lake that the Olym- pics 2016 rowing regatta took place. At first glance, one sees the majestic city of Rio, a city rich in history and culture with world-famous monuments and breathtak- ing landscapes. Upon a closer examination, however, one can see that city’s sewage and water treatment systems are not fully functioning and are causing environmental degradation and pollution in the ocean, lakes, and rivers around the city. The government officials of Rio are aware of these problems and have received funds to correct them. However, actions to address the problems have not been pri- oritized and addressed effectively by the local government. According to Moscatelli, it is not feasible to continue to flush untreated water and sewage into the ocean, lakes, and rivers. He continues to create awareness of the environmental issues in public forums where he addresses these problems and he continually monitors and documents the process of degradation and pollution.

(b) Student Reflection I was shocked at the videos and photographs of the polluted waters around and in the city of Rio. With Olympics, I would have thought that the environment and health of the city and its citizens would be a priority. It was amazing to meet and talk with Mario Moscatelli, a renowned environmentalist, and to see that he has dedicated his life to trying to increase awareness and take positive steps to address environmental degradation in and around Rio. International Case Studies in Social Entrepreneurship 71

3. O Sol, Nonprofit Art Organization (social, cultural, economic)

(c) Background O Sol, a nonprofit social welfare organization, is preserving the culture and crafts of Brazil by teaching local people various skills and techniques in creating and selling authentic Brazilian arts and crafts. O Sol values cultural preservation, human development, dignity, and the use of hands to achieve autonomy. O Sol, founded in 1965, has the mission is to:

Promote and encourage humanistic development in socially and economically venerable people through the education and training in craft techniques (www.osolartesanato.org.br/english/).

In 1978, O Sol organized the first Meeting of Technical and Crafts Artisans Cooperative representatives from around the country. They have claimed their social responsibility and recognized their mission to empower people to work on their handcrafted techniques and focus on the greater financial and personal investment.

(d) Student Reflection I reveled in our close work with social entrepreneurs who work to improve social and environmental issues. Social entrepreneurship was the primary focus of the field study trip. It was gratifying and interesting to be able to participate in this project and to learn more about the importance of organizations focused on the social good. I am proud to have been involved.

4. ProNatura (NGO) Pilot Study of Community-Based Management in Salgueiro Favela in Rio de Janeiro

(a) Background Pro-Natura, founded in Mexico in 1981, was started in Brazil in 1985. This company, the largest Mexican environmental conserva- tion group, has expanded with offices in six other countries around the world including France, United Kingdom, Nigeria, Ghana, Brazil, and New York. 72 EDUCATING SOCIAL ENTREPRENEURS

With projects in over 58 countries, their main strategy is to have a strong management and hands-on governance in all of their projects. Typically, most of their projects are long-term and require a great deal of attention. Pro-Natura organizes their company by creating socioeconomic models and replicating these models in different regions of the world. In 2013, Pro-Natura began a new pilot project called Se Liga Salgueiro! in Rio De Janeiro, Brazil. The Salgueiro Favela Project is an example of a socioeconomic model where Pro-Natura is taking steps to involve and empower local residents to start their own businesses such as an Internet café, a community garden, and a bakery to benefit the community. The mission of the Salgueiro Favela Project is:

To create, incubate, manage and implement a sustainable socioeconomic development model for communities of Rio de Janeiro and to provide replicable and scalable solutions to the major problems and issues related to the reality of its favelas.

The project manager explained that the best way to have a positive change in a community is to encourage each resident to have a voice in their community and to encourage them to be empowered through entrepreneurial businesses in the favelas.

(b) Student Reflection Experiencing the culture of the Brazilian people was my favorite part of this learning experience. We met with the project representative of Pro-Natura and learned about the favela community, Salguiero. I had the notion that favelas were dangerous slums of Brazil; however, I was exposed to a different perspective through this course. I was impressed and inspired to meet the entrepreneurs who are making a difference in their community by providing access to Internet resources via an Internet café, providing food from a community garden, and providing a meeting place for residents in a local bakery that supports community projects and initiatives. International Case Studies in Social Entrepreneurship 73

5. Center for Digital Inclusion

(a) Background The Center for Digital Inclusion (CDI) is a nonprofit organization that uses technology to address the issue of poverty and stimulate entrepreneurship. CDI and partners create community centers in low-income, rural, indigenous communities, hospitals, prisons, and psychiatric clinics where people have access to information and technologies (CDI website). During the 1990s, the technology revolution in Brazil was not universal, but caused a social divide between the wealthy and the poor Brazilians. At the age of twelve, Rodrigo Baggio was first introduced to and became interested in computers. As a young boy, Rod- rigo was also a volunteer who helped street children in the favelas in Rio. It became Rodrigo’s dream to use his passion for technology to empower poor, less fortunate people. He realized this vision in 1995 with a group of volunteer teachers and a group of second-hand, used computers and created the Center for Digital Inclusion.

(b) Student Reflection My social entrepreneurship assignment was CDI and I can say that I was extremely inspired with meeting Rodrigio Baggio. His passion and dedication was compelling. What was most interesting to me is that he started out in the business world and was successful, but not happy. He knew that he needed to return to his passion—helping people through technology and education. Today he is considered by Time Magazine as one of the 50 leaders in Latin America who will make a difference and he is also partnered with the Bill and Melinda Gates Foundation to improve the availability of technology in Bra- zilian schools. He was truly an inspiration.

CHAPTER 21 Aquamariner Project: A Path for Food Self-Reliance?*

Adele Santana

Sonoma State University

Soren Hultman

University of Northern Iowa

Summary

The Aquamariner Project case is a real-life case of social enterprise initiative with the name of the company and founder disguised. It outlines the challenges and the alternatives Peter Fletcher faced creating his start-up company, Aquamariner. The case ends by inviting students and practitioners to put themselves in Peter Fletcher’s shoes, decide what is important and what organizational form fits, and make their own choices.

Learning Objectives

The following material is an exercise for students of Social Entrepreneur- ship. It aims at creating an opportunity for students to define the main features of a social enterprise venture.

* The authors are thankful to the editors of this volume, Paul Miesing and Maria Aggestam, to Laura Foote and the participants of the UAlbany Workshop, and to Emily Asencio, Kathy Charmaz, Matthew James, and Tom Princen for reviews of previous versions of this manuscript. 76 EDUCATING SOCIAL ENTREPRENEURS

This exercise focuses on (a) social mission/purpose/values, (b) strategy, (c) organizational form, and (d) social entrepreneurs’ motivations. It shows that the combination of the entrepreneur’s “motivation position”1 with the mission of the social enterprise affects the social venture’s choice and their strategy and structure.

Assignment

1. Prework Before reading the case, students research and analyze one of the following issues according to their own interest and related to social entrepreneurship. They should include economic, social, and eco- logical factors in their analysis.

• Hunger, malnutrition • Food availability, food security and insecurity, food self- reliance, food independency • Water availability and quality • Localization, homegrown food

Students read and annotate the case study The case is discussed in class (2 to 3 hours) 2. Postwork Students prepare a response paper defining the ideal organizational model for the Aquamariner Project.

Case

On a sunny mid-May afternoon, Peter Fletcher walks slowly through the well-maintained city park on his way to a meeting with venture capitalists. He feels the cool air on his face, the chirping of birds in the background, and wonders if his business model and value proposition will induce investors to raise the initial funds for his aquaponics business.

1 “Motivation position” is the aggregate of distinct reasons why a company uses practices that benefit stakeholders beyond what is required by law by the economic function of the firm (Santana 2015). Aquamariner Project: A Path for Food Self-Reliance? 77

Suddenly, Peter’s attention shifts. In an instant, he is taken back to the first steps of his journey as an entrepreneur 4 years ago. He recalls the ultimate reason why he has become so deeply involved with this project—his desire to integrate work and a meaningful life.

Only four years ago I wanted a purpose for my work that was more than just earning a living. I also wanted to spend more time with my family. I knew that jobs in my region did not meet these requirements, so I considered creating my own job by becoming an “entrepreneur.” Questions abounded in my mind: “Where to start? How to make money? How to do network marketing? Do I focus on profit or social mission? Which legal form: for-profit, nonprofit, or hybrid? Which business model: doing good and/or doing well? Why do most small businesses fail, run out of money, can’t manage their money, or have flawed plans?” I was inspired and ready to change the world. Was that the right time to get started? Probably not; but I was not convinced that a right time would ever come.

Peter had intensely reflected about his purpose in life and the social causes that were worth his time and energy. He wanted to focus on something he enjoyed doing that could, at the same time, help a cause he felt deeply about—hunger—a passion he had pursued since his teenage years. He concluded that the answer was to build a business growing food. Out of his belief that the food in America had low nutritious value, and of his concern with the high contingent of people going hungry, Peter wanted to find ways to provide food for a growing population without ruining the earth. The lack of access to food by underprivileged groups, and the enormous cost of production and transportation in conventional food systems were key issues that could only be addressed through intentional intervention. Peter wanted to be part of the solution for this problem. Ultimately Peter decided to invest in aquaponics, a combination of conventional aquaculture with hydroponics that produces both fish and produce.2 He would manufacture the aquaponics equipment so that

2 “Aquaponics is a hybrid food growing technology that combines aquaculture (growing fish) and hydroponics (growing veggies in non-soil media and nutrient- laden water)” (Burden, electronic source). See the same webpage for pictures of aquaponics equipment and production. 78 EDUCATING SOCIAL ENTREPRENEURS people could produce good food for themselves, by themselves in their own homes, in diverse habitats throughout the world. He wanted to foster the possibility of food self-reliance, especially for those under the condition of food insecurity. All he needed was a means of disseminating the technology. As Peter thought about the structure for his new social venture, he considered the pros and cons of different business models.

With a major in finance, I had internalized the concept of “value maximization”—“make as much money as possible.” The higher the price of my product and the larger the volume I sold, the higher my profits would be. Incumbent companies in the aquaponics equipment industry used an extremely high markup, making products way more expensive than they needed be. If I built something a little better, and charged a little less, I would sell a lot of equipment and still make a lot of money. People needed food and they would be willing to pay top dollar for organic, safe food. I would incorporate, raise a bunch of money to get my product to market, market it, get rich, and the world would be a better place.

A problem with this model was that consumers who could afford buying the equipment and grow food themselves efficiently were the very people who had enough money to buy good food anyway. Peter would make a large profit, but would not meet societal needs. He thought about the consumers who could not make the sizable initial investment to buy equipment to produce good food at home. Even simple aquaponics systems were not affordable for the majority of the population.3 If his company adopted a different economic logic and produced affordable equipment instead, more people could have access to it—people all over the world who really needed affordable food. In addition, this affordable product could help other social ventures address food insecurity in many regions, including the poorest places in the world. This approach would meet Peter’s financial needs and allow him to give back

3 The Aquaponics Industry produces categories of equipment for “recreation” as well as for large-scale food and fish production. Aquamariner Project: A Path for Food Self-Reliance? 79 to others all that he had been privileged to receive in life. He decided to address this industry segment, rather than cater to markets that already had access to the technology. Peter shared his ideas with a few venture capitalists after formulating a business plan. Their common criticism was that the price point of the equipment was too low, that the company should charge more—just a little under what the competition was charging. The general advice he received was “If you want to help a cause, make a bunch of money doing something else and then donate to the cause; good causes just don’t make money.”

But what if I wanted to make a bunch of money and also advance a cause? Or, while making a modest wage, be actively involved in that cause? Money was not all that matters to entrepreneurs. Busi- nesses should have the same flexibility to generate profits, benefit as many people as possible, and care for the planet, all at the same time.

Every time Peter participated in conversations about nonprofits, he heard the same storyline—a small group of passionate people would start an organization that did great things but then fell apart when the initial entrepreneurs moved on. Peter believed that a social organization, even nonprofit, should be economically sustainable—built on a stable foundation as if it were a business. He believed that what really mattered was to do the largest amount of good over the long haul. That would be economically and socially sustainable. Peter pondered alternative business models for the company. Fortu- nately, there were models with significant social components. He considered a model similar to TOMS Shoes’ One-for-One.4 When TOMS sold a pair of shoes, it donated another pair to a child in need; when Aquama- riner sold a set of aquaponics equipment, it would donate another set to someone else in need for food somewhere in the world. Peter also considered dedicating a certain dollar amount from each sale of aquaponics equipment to a school whose students are hungry.

4 TOMS “One-for-One.” 80 EDUCATING SOCIAL ENTREPRENEURS

Another important decision would be to define the type of legal entity. The classic forms Limited Liability Company (LLC), Corporations, and Nonprofits were well known. Now there were also Benefit Corporations (such as Patagonia (http://www.patagonia.com) and other newer legal forms in the United States and around the world.5

Things were not yet clear in my mind. Some positive cash flows would obviously be nice, but my intention was to make a positive impact on the world. Where was the business model for that? The ideal would be to maximize social impact, make a living wage while I was still actively working in the business, and then pass it on to new hands when I felt ready to move to another project. I did not want to design a business model that could only com- pete in the present. I wanted an organization that was fluid and dynamic, and that could survive and thrive in the future.

As he leaves the park and turns left toward the building where, in a few minutes, he will pitch his idea to venture capitalists, Peter goes once more through the main arguments of his carefully crafted speech. Will investors fully see the business and social potential of his new food production equipment? Will they appreciate the magnitude of the shared value6 created by his enterprise model? Will he, Peter, be able to convey to venture capitalists the importance of such an initiative in a world that faces food insecurity and starvation? After a round of introductions, Peter makes his pitch.

References

“Pro 4,” Stanford Social Entrepreneurship Hub, http://sehub.stanford.edu/pro-4 (accessed June 1, 2016). Burden, D. 2016. “Aquaponics,” Agricultural Market Resource Center, www. agmrc.org/commodities-products/aquaculture/aquaponics/ (accessed June 10, 2016).

5 For newer legal forms see, for example, Stanford Social Entrepreneurship Hub, Pro 4. 6 See Porter (2006, 2011). Aquamariner Project: A Path for Food Self-Reliance? 81

Porter, M.E. and M. Kramer. 2011. “Creating Shared Value: How to Fix Capitalism and Unleash a New Wave of Growth.” Harvard Business Review 89, pp. 62–77. Porter, M., and M. Kramer. 2006. “Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility.” Harvard Business Review 84, pp. 42–56. Santana, A. 2015. “Disentangling the Knot: Variable Mixing of Four Motivations for Firm’s Use of Social Practices.” Business and Society 54, no. 6, pp. 763–93. TOMS. “Improving Lives” www.toms.com/improving-lives (accessed June 10, 2016).

Suggested Readings

Matson, J. 2016. “Angling for a Better Way to Farm Fish—And Vegetables, Too,” Scientific American, http://www.scientificamerican.com/article/aquaponic- plants-and-fish/ (accessed June 10, 2016). USDA National Agricultural Library. 2016. “Aquaponics” https://afsic.nal.usda. gov/aquaculture-and-soilless-farming/aquaponics (accessed June 5, 2016). Whisnant, R. 2016. “Wanted: Truly Innovative Sustainable Business Models.” The Guardian www.theguardian.com/sustainable-business/innovative-sustainable- business-models (accessed June 3, 2016).

CHAPTER 22 ECO Kitchen

Ester Barinaga

Copenhagen Business School

December 2014. Ganesh Kailasam, Project Manager at YRG CARE and ECO Kitchen, and Sethu Lakshmi, Manager of community outreach services at Enhancing Community Opportunities (ECO) Kitchen, a nonprofit organization serving Chennai’s vulnerable communities, were considering ways to increase the nutritional intake of underprivileged children. Whey was a nutritious waste from paneer production. Could this be used for a sustainable initiative? If so, what could be the business model?

YRG Care

Founded in 1993 by Professor Suniti Solomon in Chennai, capital of the Tamil Nadu state of India, Center for AIDS Research and Education (YRG CARE) is one of the country’s pioneering HIV centers. Its overall mission is “to prevent new HIV infections and to assist those living with the infection to live with dignity, by providing care, support and education about HIV and its prevention as well as by conducting cutting-edge research.” Its activities focus on three areas: (1) hospital care for HIV+ patients; (2) Advanced laboratory and clinical trial research; and (3) HIV educational programs to induce safe behavior and challenge the stigma carried by those affected by the disease.1

1 See YRG CARE website www.yrgcare.org/about-us/ 84 EDUCATING SOCIAL ENTREPRENEURS

In 1999, as part of its efforts to improve interventions for HIV prevention in urban India, YRG CARE engaged with the NIMH (National Institutes of Mental Health, United States) in an 8-year-long multi- sited ethnographic research program to understand the networks and health-related behaviors of underprivileged city communities (slums).2 Among others, the program identified “community popular opinion leaders”3 and trained them in HIV transmission paths, health-seeking behavior, communication skills, and behavioral change. Apart from the health-related impact of the program, ethnographic research resulted in the insight that although many women in these communities bore the economic burden of taking care of sick relatives, were sufferers of domestic violence and had to provide for their children, they lacked access to reliable and stable income.4 This was to be the mission of ECO Kitchen: to provide these women with the economic possibilities for a decent and dignified livelihood.

ECO Kitchen

ECO Kitchen is a social entrepreneurial initiative established in 2008 by the YRG Foundation. To Sri Krishnan, Research Manager, and Ganesh Kailasam, Project Manager at YRG CARE, this was a necessary development of the ethnographic research the YRG CARE had conducted during

2 Results from this research program have been published in, among others, Sivaram, S., S. Johnson, M.E. Bentley, A.K. Srikrishnan, C.A. Latkin, V.F. Go, S. Solomon, and D.D. Celentano. 2007. “Exploring ‘Wine Shops’ as a Venue for HIV Prevention Interventions in Urban India.” Journal of Public Health 84, no. 4, pp. 563–76. See also Kalichman, S.C. 2010. “Social and Structural HIV Prevention in Alcohol-Serving Establishments.” Alcohol Research and Health 33, no. 3, pp. 184–94. For a list of academic publications and conference presentations related to the research program on this intervention, see YRG CARE Research Projects 1994–2004, p.23. 3 Evertt R. 2003. Diffusion of Innovation. New York: Free Press. 4 Go V.F., C.J. Sethulakshmi, M.E. Bentley, S. Sivaram, A.K. Srikrishnan, S. Solomon, and D.D. Celentano. 2003. “When HIV-Prevention Messages and Gender Norms Clash: The Impact of Domestic Violence on Women’s HIV Risk in Slums of Chennai, India.” AIDS and Behaviour 7, no. 3, pp. 263–72. ECO Kitchen 85 the previous years. Through a food retail program, ECO Kitchen provides the most socioeconomic vulnerable individuals of underprivileged communities, particularly women, with opportunities to improve their livelihoods.5 Today, ECO Kitchen produces 7,500+ meals a day in its 18,000 square feet green facility, a facility with a capacity to produce 30,000 meals/day. Everything around food production is organized to minimize impact on the environment, from the natural lighting and ventilation of the kitchen to its eco-conscious technologies, including the use of biomass briquettes, solar geysers, a condensation water recovery system, expansive drainage and a waste water treatment plant that irrigates the garden (see pictures in Appendix 1).

1. Kathir Besides employing over 42 women from underprivileged urban communities in its food production facilities, ECO Kitchen runs Kathir, a micro-enterprise opportunities program for disadvantaged women facing domestic abuse or other economic challenges (for instance, responsibility for taking care of sick family members dependent on expensive medicines, such as those tested HIV positive). Through a minimal micro-loan, Kathir helps women to start their own food business in which they sell ECO Kitchen’s prepared meals.6 Women in the Kathir program are first identified and then trained in a range of topics needed to run one’s own food-selling business. These included food safety, nutrition, business and retail practices, communication, numerical literacy, and general health. Subsequently, and once a safe and rewarding location has been established, ECO Kitchen provides the start-up kit, consisting of a cart, food carriers, signboards, eating gear, stackable seating stools for customers, and utensils for hygienic dealing of the food and the cart. Thereafter, these items are restored on a cost basis (see pictures in Appendix 2).

5 See ECO Kitchen’s website www.ecokitchen.org/eco/index.html 6 See Kathir’s website www.ecokitchen.org/eco/kathir.html 86 EDUCATING SOCIAL ENTREPRENEURS

Given the women’s lack of savings, the first meal is provided to some on micro-credit. Following that, the female entrepreneur pays for meals in advance for the following day. By paying for the food in advance and not being able to return any unsold meals, ECO Kitchen wants to give the entrepreneur the autonomy to demand quality, timely delivery, agreed portions, and assured levels of service. In December 2014, some 88 women from 30 underprivileged communities were involved in Kathir, each selling an average of 35 meals a day and making an average revenue of 350 rupees per day, 300 days a year. Usually, for a woman who has two children and a spouse to take care of, this disposable income is more than enough for a month. But we also have to consider the style of living, expenses patterns, housing, educational demand for higher studies, transportation, and so on. In such cases, a second source of income is needed. Apart from providing these women with a stable source of income, ECO Kitchen sets aside one rupee per meal sold for health funds at the HIV/AIDS care and treatment center at YRG CARE. 2. School Noon Meal Scheme First introduced in 1926 in Chennai, soon to be expanded to the state of Tamil Nadu, and to be made compulsory to all Indian states in 2004, the noon meal program is the largest feeding program in the world. Reaching 125 million children all over India, the program is designed to improve the nutritional level of school-age children. It provides free of cost one meal a day to children attending government schools, typically coming from underprivileged families. As parents see the possibility of providing a free meal to their children, the scheme has been praised for contributing to improve regularity in school attendance (especially girls and low caste children) as well as for its nutritional and socialization benefits.7 For many children, the school’s noon meal is the only meal of the day. As well-intentioned and wide-ranging as the school noon meal program is, however, its focus on hunger satiation rather than nutritional content together with the scarce resources given to schools by the Tamil

7 Singh, A., A. Park, and S. Dercon. 2012. “School Meals as a Safety Net: An Evaluation of the Midday Meal Scheme in India.” Economic Development and Cultural Change 62, no. 2, pp. 275–306. ECO Kitchen 87

Nadu state government (an average of six rupees per meal), make the meal predominantly carb dense. White rice and a simple sambar constitute the majority of the meals. It was during the many workshops YRG CARE carries in Chennai’s government schools as part of its HIV educational and prevention efforts that the low nutritional content of the school noon meal came to the ECO Team’s attention. In a joint consultation with the Department of Food Technol- ogy at Anna University (Chennai) and the Department of Sports and Nutrition at the Copenhagen University, ECO Kitchen identified that providing a protein-rich breakfast, even in a small quantity, would significantly contribute to children’s nutrition as well as to their school performance.

Acid Whey

Meanwhile, Ganesh Kailasam came across an article describing how dairy production plants in the United States were paying contractors to get rid of their acid whey. A by-product of the production of paneer, an Indian cottage cheese common in the diet of many families, acid whey has a high content of pro- teins, minerals, and vitamins. Because of its high nutritional content and the quality of whey protein, cheese-making companies in the developed world use it to enrich products such as shakes and bars. Indian dairy plants producing major quantities of paneer do collect the whey they produce and reuse it to enrich other products. Small paneer-producing dairy plants, however, do not have the economic muscle required to invest in the equipment necessary to collect and treat the whey, and thus most often throw it away directly through the drain. This is not only a nutritional loss in a country where many children are undernourished. It is also a big environmental problem as its acidic PH level spoils the soil for agricultural uses. Knowledgeable of the nutritional value of acid whey, Ganesh and Sethu started considering the possibility to collect and use the acid whey that was today being disposed of to increase the nutritional intake of underprivileged children in Chennai. Water could be substituted by acid whey in the sambars, breads, and meals ECO Kitchen cooked. How- ever they did, they also needed to already consider the financial model of the initiative. One alternative could be getting paid for helping plants to 88 EDUCATING SOCIAL ENTREPRENEURS dispose of their whey. Another, they thought, could be India’s new corporate social responsibility (CSR) law.

New Indian CSR Law

As the first country to mandate a minimum expense on CSR initiatives, on April 1, 2014, the Indian government approved a CSR law requiring companies to expend 2 percent of their net profit on social development initiatives. While its implementation was still to be seen, the law was stirring hope and debate among leaders from business, academia, and civil society. Companies had been quick to criticize the law. Not only because they saw 2 percent of net benefits as a large sum, but also because the expense was in principle not tax deductible. Academia looked at it with hope, mainly because the only way to make the 2 percent expense tax deductible for companies was if invested into projects that had some relation to university research. Beyond com- plying with the CSR law, investing in university research would give companies a double tax deduction! Social entrepreneurs, Ganesh and Sethu among them, were expectant as they saw in the 2 percent law a way to fund the testing and scaling up of social innovations.

Starting Up a Social Venture?

Ganesh and Sethu were eating one of ECO Kitchen’s fine vegetarian meals. Given the recent change in India’s CSR law, the momentum was favorable, it seemed to them, to start up a social venture. Both were adamant about focusing the eventual venture on increasing the nutritional level of Chennai’s underprivileged children. But, was the use of acid whey an opportunity? In that case, how could it be added to children’s food intake? And how was it to be collected, treated, and distributed? They took a pen and paper and started scribbling some figures (see Appendix 3). Even if a small venture, what model could make an eventual social venture sustainable? Was it worth to start up or should they drop the whey idea and look for something else? ECO Kitchen 89

Student Assignment

• What kind of information do Ganesh and Sethu need to decide whether to go ahead with the venture or not? • Develop a business model for the eventual social venture. Use the social lean canvas for this purpose. You may want to develop several models in order to consider: • How different organizational forms fit with particular solutions to the social problem? • What revenue streams come with different organizational forms, describe please? • Consider the various missions of YRG CARE, ECO Kitchen, and the eventual social venture. Do the different missions have an implication in how the venture is eventually organized?

Appendix 1: ECO Kitchen Modern Eco-Conscious Facilities

Biomass briquettes heating furnace used by ECO Kitchen

Solar panels and waste water treatment plant that irrigate the garden 90 EDUCATING SOCIAL ENTREPRENEURS

Natural ventilation system

Appendix 2: Kathir Micro-Enterprises

Kathir stalls

Appendix 3: A Few Figures

Number of underprivileged children in Chennai (Figures from Chennai Corporation Schools www.chennaicorporation.gov.in/departments/education/history.htm#history):

• 98,857 children • 4,041 teachers

Chennai’s government schools:

• 32 high secondary schools (for children 16 to 18 years old) • 36 high schools (13 to 15 years) • 92 middle schools (9 to 12 years old) • 122 primary schools (5 to 8 years old) • 30 kindergartens (3 to 5 years old) • 312 schools

Proportion of whey to paneer: Paneer is made out of milk. The solid contents condense into the cottage cheese while its liquid contents ECO Kitchen 91 become part of the acid whey. The proportions in milk are 20 percent solid content, 80 percent liquid content.

• 1 liter whey weighs about 1 kg.

Whey needed: Roti is a type of Indian bread. Instead of throwing it away, many families use the whey resulting from their homemade paneer into the making their own bread. Normally, two pieces of roti would be part of a meal.

• 1 roti = 40 gr., of which 15 gr. is water/whey

CHAPTER 23 Worksheet for “Organizational Structures and Hybrid Organizations for Social Enterprises”

Paul Miesing

University at Albany, State University of New York

How will you structure your social venture? Who will be on your executive team? Can you assure adequate controls will be in place? These are only a few or the organization issues you need to decide.

Ownership

It’s Who You Know: How will this enterprise be governed? What do the key players bring to the organization? How will the organization be accountable to its various constituencies? Create and maintain linkages with stakeholders when resources are scarce, particularly using board interlocks; choose local (or specialty) markets where networking skills are an advantage.

Legal Structure = Explain: �� Board of Directors = Explain: �� Advisors & Consultants = Explain: �� 94 EDUCATING SOCIAL ENTREPRENEURS

Structure

Boxes and Arrows: How will this enterprise be structured—by function, geography, client, or some other criterion? How will you integrate these units for organization coherence and clarity?

Departmentalization and Differentiation= Explain: �� Reporting Relationship = Explain: �� Coordination/Integration = Explain: �� Boundarylessness, Networks, and Self-Governing = Explain: ��

Top Management Team

Hire for Talent, Pay for Performance: Who will serve your clients? What do your executives bring to the organization? Remember to hire people with business skills and experience, then pay them what they deserve!

Executives = Explain: �� Employees = Explain: �� Volunteers = Explain: �� PART V Mobilizing Resources to Fund Social Ventures

CHAPTER 24 Financing Modes of Social Entrepreneurship

Bogdan Prokopovych

University of Massachusetts

Davis Plotnieks

SITE, Stockholm School of Economics

Introduction

As private sector organizations increasingly seek to address social and environmental problems and nonprofits with social missions operate more like businesses, understanding financing mechanisms available to these organizations becomes increasingly salient. Despite the importance of social finance for the success of social ventures and the anticipated growth in social impact investing in the coming years,1 our understanding of it remains limited. A recent claim that social entrepreneurship is a contested cluster concept incorporating insights from multiple constructs supports this argument (Choi and Majumdar 2014). It also points to the fact that research on financing social entrepreneurship remains at a

1 According to recent estimates by J.P. Morgan Global Research, the global investment opportunities in social entrepreneurship until year 2020 are predicted to be between $400 billion and $1 trillion dollars (O’Donohoe, Leijonhufvud, Saltuk, Bugg-Levine, and Brandenburg 2010). Another report by the Boston Consulting Group estimated the demand for social investment in the United Kingdom alone to grow on average 38 percent per year (Brown and Swersky 2012). 98 EDUCATING SOCIAL ENTREPRENEURS nascent stage Organizational scholars have pointed to the epistemological deficiency of the field of social entrepreneurship, and in particular social finance, coupled with insufficient availability of public data that has led existing research to focus on idiosyncratic empirical contexts. Given the fragmented knowledge of social finance among academics, to make sense of the field we undertake this synthesis of the literature and begin with a guiding question—how are social enterprises financed in practice? A recent survey of organizations that are members of the European Venture Philanthropy Association (EVPA) showed that about 50 percent of respondents combined different sources of financing, including grants, equity, and debt. Figure 24.1 shows evidence from another recent large- scale survey of revenue sources of social entrepreneurs from five European countries—Hungary, Romania, Spain, Sweden, and the United Kingdom. Sales of products and services constitute a major financing mode for social ventures in Sweden (73.2 percent), UK (62.7 percent), Spain (61.8 percent), and Hungary (37.6 percent), but more than a half (52 percent) of all income of social entrepreneurs in Romania comes from grants (SELUSI, http://www.selusi.eu/). More minor forms of financing include investors’ capital, private donations, loans, microfinance, and other sources. Driven by the absence of a dominant theoretical view on funding of social enterprises, we undertake this literature review in an attempt to map out the field of social finance with respect to its modes. In order to make sense of the existing modes of financing of social enterprises and to

80% Sale (Fees for services or sales 70% of products) Investor (Investors’ capital 60% (equity)) 50% Grant

40% Private (Private donations) 30% Loan 20%

10% Microfinance

0% Other Hungary Romania Spain Sweden UK (n=102) (n=75) (n=138) (n=84) (n=166) Figure 24.1 Revenue sources of social enterprises

Source: Selusi (2010). Financing Modes of Social Entrepreneurship 99 understand how they fit in a complex epistemological picture, we synthe- size the social finance literature into an integrative framework that outlines dimensions of the existing research. The framework helps us identify linkages between the emergent themes in the literature. This commentary has the following structure. First, we describe our approach in reviewing the social entrepreneurship literature with respect to funding mechanisms. Next, we elaborate on some present typologies regarding social finance and common financing mechanisms available to social entrepreneurs. Then we present our findings.

Methodology

The existing definitions of social entrepreneurship in the organizational literature set the scope of our review of the existing literature. The criteria for the inclusion of published academic and practitioner work in our framework is that the focus of the paper concerns organizations and individuals whose main activity is based on a social mission and involves innovative use of resources to create social value (Austin et al. 2006; Dees 1998; Mair and Marti 2006). To capture the current “state of mind” of the social entrepreneurship field regarding funding mechanisms, we reviewed published academic and practitioner work. Our first step was to screen scholarly databases for articles related to social entrepreneurship and finance, such as Ebsco, JSTOR, ScienceDirect, Springer Link, and so on. using the keywords “social entrepreneurship,” “social finance,” “social investment.” We did not limit our search by a specific time period and sought to track as many relevant papers as possible. Our next step was to expand our reach by tracking references to cited papers in the recent papers that we identified. The papers that we found and used for our analysis came from different scholarly domains, including economics, entrepreneurship, management, and others. In the end, we focused on 166 articles from more than 30 journals, such as Journal of Social Entrepreneurship, Journal of Business Venturing, Public Administration Review, Stanford Social Innovation Review as well as impactful working papers. Our criterion for including a paper into our review was its contribution to the literature on social entrepreneurship and social finance. 100 EDUCATING SOCIAL ENTREPRENEURS

Social Finance Typologies

The social entrepreneurship literature offers a variety of dimensions that one could look at when analyzing modes of financing. Forexample, factors such as types of social entrepreneurs (e.g., social bricoleur, con- structionist, and engineer (Zahra et al. 2009), nonprofit or for-profit status (Dorado 2006), role of capital (e.g., political, human, economic, and social (Mair et al. 2012)), and the rationale of investors and institutional logics (Nicholls 2010b) may influence the choices of funding mechanisms. Recently there has been an influx of new categories and labels that describe social entrepreneurs’ use of financial resources. They range from society-level concepts, such as “philocapitalism” (McGoey 2012) to organization- and value chain-focused ones, such as CSR and shared value (Porter and Kramer 2011), a recently debated topic among academics (Crane et al. 2014). A myriad of terms for funding mechanisms of social entrepreneurship often contain either of two labels—philanthropy or investing. The phenomenon of philanthropy implies efforts directed at creating social benefits, which are sometimes combined with pure business incentives by philanthropy-practicing organizations (Porter and Kramer 2002). Emerging in 1990s in the United States and transferred in the beginning of 2000s to Europe (Buckland, Hehenberger, and Hay 2012), another version, venture philanthropy, has focused on improving of the functioning of organizations engaged in addressing social problems and recommending “an explicit social and often financial return on the investment” (Mair and Hehenberger 2014). In order to understand the other label for financing mechanisms, organizational scholars and practitioners have developed several typologies of investment activities. For example, Nicholls (2010b) juxtaposes institutional logics with investor rationale and identifies nine types of social investing. In their practitioner report, Brown and Swersky (2012) categorize social investment types based on whether they are commercially, socially motivated, or philanthropic with social and commercial motivations of an organization engaged in social entrepreneurship. One of the emerging popular categories is impact investing. Devel- oped in the late 2010s, impact investing targets the activities that generate Financing Modes of Social Entrepreneurship 101 a positive social and/or environmental impact while providing for financial returns (Bugg-Levine and Emerson 2011; O’Donohoe et al. 2010). A similar term, socially responsible investing, which emerged during the late 1970s and early 1980s, implies the incorporation of environmental and ethical considerations into investment decisions as well as shareholders’ activism with respect to a company. Other variations of social investment include mission-related and program-related investments, which are directed at supporting either an overall or individual social program strategy of an investor. Risk capital has also been a part of the funding mix among social enterprises. An extension of the venture capital (VC) industry, developmental VC funds finance “businesses with equity and near-equity in order to achieve both social and financial objectives” (Rubin 2009). In her review of the VC literature, Rubin (2009) suggests an alternative to existing typologies of the developmental funds that classify them based on belonging to four major sectors—public, minority-focused, community development, and social venture capital. She argues that, “[g]iven the fuzzy boundaries that separate the four types,” categorizing developmental funds based on their social objectives offers additional insights, and thus they can be corrective—providing some population segments and geographic areas access to VC funding, and additive—pursuing the advancement of social objectives (Rubin 2009). All these typologies provide a convenient picture that visualizes the use of financial resources by social entrepreneurs. But how do these types of social entrepreneurial activity relate to each other? One of the constructs highly relevant to both philanthropy and investing is the creation of social value. While social entrepreneurship is defined as a “social value creating activity” (Austin et al. 2006) that also provides for economic value (Mair and Marti 2006), social value includes a variety of elements shared by both philanthropists and investors. A social outcome has to be perceived as such by an entire community, and thus being subjective and difficult to measure valuation is subject to continuous negotiations and settlements of interests among stakeholders (Young 2006). Furthermore, researchers argue that social entrepreneurs often engage in creating blended value that incorporates both financial returns and social outcomes without sacrificing one for the other (Nicholls 2009). 102 EDUCATING SOCIAL ENTREPRENEURS

Social value emerges as a result of social innovation that “allows people to achieve more for less, or to solve problems that are otherwise insoluble” (Young 2006). It involves both creating value at the societal level and capturing it by individual organizations. Application of the existing financing mechanisms and creating new ones to address social problems involves challenging the existing assumptions of the financial sector, thus leading to new combinations of resources and institutions, and a positive change through social innovation (Nicholls and Murdock 2012).

Financing Mechanisms Available to Social Entrepreneurs

Social entrepreneurs may tap into a wide range of financial resources that include various intermediary organizations and types of investments. A broad categorization of this spectrum includes two kinds of financing modes—market and non-market (OECD and Commission 2013). These two categories represent the horizontal dimension of our framework (Figure 24.2) and can be subdivided into more concrete financing types. Market mechanisms include revenue-based, debt, and equity types of funding. The nonmarket mechanisms are comprised of grants, donations, donations-in-kind, and voluntary participation. These categories of modern financing tools are neither exhaustive nor mutually exclusive, and often tend to exhibit blurred boundaries, as financial innovations bring about new financing tools (Bugg-Levine et al. 2012) and social entrepreneurs combine multiple sources. One such innovation that has recently captured the attention of researchers and social entrepreneurs is social impact bonds (SIBs). Launched initially in the UK as an experiment to address the reduction of recidivism in a prison, the SIB model involves raising funds from private investors paid by the government once the social impact has been achieved and accounted for (Azemati et al. 2013). Other results of the financial engineering available to social entrepreneurs include loan guarantees used by philanthropic organizations, quasi-equity debt, and loan pooling (Bugg-Levine et al. 2012). A paradigm in economic development, for more than three decades, microfinance has been another source of funding for entrepreneurs Financing Modes of Social Entrepreneurship 103 and socially oriented projects. The proliferation of online crowdfunding platforms, such as Kiva (http://www.kiva.org/) and Kickstarter (https://www.kickstarter.com/), provided social entrepreneurs with an additional source of financing. In light of the “drying up” of public funds and restricted access of social entrepreneurs to traditional lending, crowdfunding can be used as an investment vehicle for SEs that represents dispersed audiences. This unique category of financing helps entrepreneurs with different motivation, for example, social, for-profit, and other, fundraise from a large number of individuals without using traditional financial intermediaries but employing Internet platforms (Mollick 2014). Once a social enterprise matures and considers scaling up, social franchising is becoming one funding mechanism to finance growth (Tracey and Jarvis 2007).

Emerging Themes

Figure 24.2 shows the integrative framework into which we synthesized the reviewed papers. The horizontal dimension represents financing forms divided into market and nonmarket categories. Along the vertical dimension, we have placed the major themes that the social finance literature on funding modes cluster around, which we have captured through our review. We grouped them into individual, organizational, and field levels. We further describe each of the emerging themes.

Social financing modes Market (deals, loans, equity) Non-market (grants, donations)

Individual motivations Micro-level

Social impact and its measurement Organizational forms and operational modes Organizational Social mission and its drift

Impact of institutions and institutional Macro-level complexity (Society, industry, field)

Figure 24.2 Integrative framework of funding modes of social enterprises 104 EDUCATING SOCIAL ENTREPRENEURS

1. Individual motivations Social entrepreneurs are driven by compassion (Miller et al. 2012) and display “traits that go beyond altruistic motivation and reflect a determination to change the whole of society” (Seelos and Mair 2005). But what motivates those who fund social ventures? In the context of corporate philanthropy, funding social initiatives has traditionally been tied to increasing organizations’ competitiveness while providing social benefits (Porter and Kramer 2002). Empirical evidence suggests that managers perceive corporate giving as strategic philanthropy (Saiia et al. 2003). However, recent research assigns emotions a key role for understanding modes of funding of social enterprises. For example, it is argued that empathy for the needs of those outside an organization, when collectively shared by the organization members, can infuse corporate leadership and affect philanthropic decisions (Muller et al. 2013). In the case of large numbers of dispersed individual investors, motivations appear to move away from the strategic argument. Drawing on warm-glow theory, which suggests that individuals give to others out of “impure altruistic” motives that make them feel good (Andreoni 1990), Allison, McK- enny, and Short (2013) provide empirical evidence for “warm-glow” lending among microlenders from Kiva, a crowdfunding organization. They argue that individuals choose their investments based on the language of presented entrepreneurs’ narratives, whether it evokes an anticipation of a warm glow (Allison et al. 2013). Other evidence points to the intrinsic motivations of prosocial investors from Kiva, whose time to fund social initiatives is also related to the language used by entrepreneurs (Allison et al. 2014). A motivated social investor engages in a calculative process that determines his/her choice of a project. To understand whether the investment is directed toward the social investor’s benefit or that of a beneficiary, Nicholls (2010b) draws on Weber’s (1978) typology of rationalities and suggests a typology of rationalities of entrepreneur who would invest in a social or environmental project. Thus, “means-ends calculations” direct the investor toward projects that maximize returns, whereas “values-driven” rationale leads to the choice that is consistent with investor’s personal values. Another Financing Modes of Social Entrepreneurship 105

rationality—systemic—combines both efficiency and value considerations (Nicholls 2010b). Finally, besides emotions, the warm- glow feeling, and investment rationalities, individual characteristics matter in prosocial lending

Social impact and its measurement Social impact measurement is high on the agenda of the social finance community. A recent survey of 125 impact investors with total investment portfolio of $10.6 billion in social ventures revealed that 95 percent of respondents acknowledged the use of some metrics to evaluate their social and environmental impact of their investments, with more than half (56 percent) using the Impact Reporting and Investment Standards (Saltuk et al. 2014). In EVPA’s 2012 survey, 90 percent of their members reported measuring their impact on an annual basis (Buckland et al. 2012). However, the results of our review point to scholars’ overwhelm- ing concern of the inadequacy of the existing measures used to capture the social impact. Since the social component is the critical element that makes finance social, the absence of a paradigmatic measure of a successful social intervention has puzzled both practitioners and researchers. Despite an earlier call to model the measurement of non-profit financing after that of the private sector, the financial and economic measures that emerged do not adequately capture the impact of social finance (Antadze and Westley 2012). First, they fail to provide causal evidence of a positive impact and sometimes conflate funding program outcomes with impacts (Ebra- him and Rangan 2014). Second, they are prone to short-termism, and tend to “undervalue long-term and qualitative assessments.” These deficiencies in social impact measurement are explained by several arguments. “Providers of social finance cannot be well served by metrics that simplify the impact of their investment to a single product, process or behavior, or that attempt to correlate it with single variable outcomes” (Antadze and Westley 2012). As the choice of a specific metric can be requested by a funder, philanthropists and social investors are driven by ethical and emotional forces, and set goals that are not necessarily market based. Finally, 106 EDUCATING SOCIAL ENTREPRENEURS

the issue of scale can be a reason that contributes to the biased selection in measuring the social impact toward more established businesses. Focusing merely on financial returns may be related to underfinancing of “good” organizations (Bugg-Levine et al. 2012). Logically, larger organizations are in a better position to have more and detailed reports. Thus, capturing the intended consequences of social investments requires going beyond the traditional accounting- focused short-term measuring approaches. Recent research has attempted to overcome the fragmented “market” for social impact measurement by providing a theoretical model that allows to compare social value creation of different social entrepreneurship interventions (Kroeger and Weber 2014). It still includes a number of competing approaches, such as Impact Reporting and Investment Standards (IRIS), the Global Impact Investing Rating System (GIIRS) (for discussion see Antadze and Westley 2012), or an EVPA’s roadmap for venture philanthropy organizations. Recently, academic researchers have suggested borrowing measuring mechanisms from policy analysis and the private sector. For example, developmental evaluation, a program evaluation approach, that focuses more on the assessment of a process rather than program outcomes (Patton 1994), can be applied to the process of social innovation (Antadze and Westley 2012). Social entrepreneurs may also adapt the corporate tools Balanced Scorecard and Strategy Maps to measure their social impact (Kaplan and Norton 2000). Despite a variety of available tools, social entrepreneurs find it easier to tie their measurements to venture growth versus the social impact based on their mission (Ormiston and Seymour 2011).

2. Organizational design and operational modes One of the challenges social entrepreneurs face is how to secure financial resources without compromising their social focus. In their pursuit to build a sustainable social enterprise, entrepreneurs develop new approaches and business models (Seelos and Mair 2005). They may choose either nonprofit or for-profit organizational forms (Mair and Marti 2006) or work across sectors (Dorado 2006). To enhance their organizational capacity and financial strength and access a Financing Modes of Social Entrepreneurship 107

wider spectrum of financing modes (Dees and Anderson 2003), social entrepreneurs may blend nonmarket and market sources revenues. Such blending of different sources of financing conveniently accommodates interests of both nonprofit funders and for-profit investors (Bugg-Levine et al. 2012). At the same time, it may cost some operational efficiency, as one study of a large sample of nonprofits indicates that organizations “that depend heavily on a single source of revenue are able to operate at greater levels of administrative efficiency.” Bringing funds onboard of a social enterprise may come with strings attached and organizational consequences. Besides adopting social impact measurement, some sources of funding may affect organizations’ management models—external sources of finance are likely to lead to adoption of a stewardship model (Low 2006). The fragmented nature of the social enterprise sector asks for caution for overgeneralization. For example, it is argued that expenditure patterns of some nonprofits (e.g., museum and performing arts) are not strongly affected by the sources of funding: Hughes and Luksetich (2004) do not find that greater reliance on private funding leads organizations to place less emphasis on program services. Donors and volunteers may also have little interest in the sources of nonprofit organizations’ funds and commercial activities. Emerging financial innovations may also influence the organizational arrangements of social enterprises. The availability of crowdfunding may open doors to new ventures, as recent evidence shows that the crowd is more likely to fund an idea, which expert funders would not (Mollick and Nanda 2014). Being able to harvest funds from a large number of dispersed stakeholders provides managers of social enterprises with a choice of revenue versus equity. A theoretical model by Belleflamme, Lambert, and Schwienbacher (2013) suggests that when attracting crowdfunding financing, entrepreneurs favor preordering product when the capital requirement is relatively small and profit sharing if capital requirement increases. Further- more, organizational practices may change as the result of accessing new funding mechanisms. Similar to crowdsourcing, a strategically important element—financing in crowdfunding—is being taken 108 EDUCATING SOCIAL ENTREPRENEURS

out of managerial control. The interaction with stakeholders over an online interface places more emphasis on how the call for funds is communicated, giving importance to the use of the language (Allison et al. 2013; 2014).

3. Mission drift Providing for impact, maintaining current funding, and accessing new financing sources, as well as adhering to the principles outlined in the mission statement can be quite challenging for social entrepreneurs since mission drift is not an unusual phenomenon either in business or among nonprofit organizations, such as academic institutions (Jones 2007). The institutional environment comprised of the institutions in the form of supporting policies that are designed to help organizations may have an adverse effect on organizations’ abiding by initially stated principles. For example, Korosec and Berman (2006) cite evidence from a national survey of city managers and administrative officers of U.S. cities that about a quarter of respondents claimed to pursue activities that may “dilute their missions” (Korosec and Berman 2006). Responding to Weiss’ argument in his 2004 article in Stanford Social Innovation Review where he claims that NGOs should stay away from commercialization of their activities to avoid mission drift, Jones (2007) provides examples of possible sources of mission drift. These can be zealous pursuits to increase an NGO’s endowment, extending spending to the activities beyond the original mission, and catering to private interests of board members (Jones 2007). In the case of impact investing, a possible reason for organizations’ deviating from their missions is that impact investors may focus on short-term impacts (Milligan and Schöning 2011). The microfinance sector has provided researchers with an empirical context to study mission drift among social entrepreneurs. Inter- estingly, extending larger loans to clients who are wealthier than the initially intended “bottom-of-the-pyramid” segment who are in the process of scaling up, is often used as a proxy for existing mission drift in the microfinance sector (Mersland and Strøm 2010). Fur- thermore, experimental evidence of studies by Karlan and Zinman Financing Modes of Social Entrepreneurship 109

(2011) point to the failure by the microfinance sector to achieve its mission. In their Science article, they describe the results of a randomized experiment in the Philippines, according to which they did not find evidence that microloans contribute to business growth or savings, but were used as risk management options by entrepreneurs (Karlan and Zinman 2011). Some organizations’ responses to possible sources of mission drift include setting up governance mechanisms that monitor the behavior of organizations’ executives and making sure that the focus on a social mission prevails over financial performance.

4. Impact of institutions Variation in institutional contexts resulting from the interaction among actors and institutions affects the way organizational practices, such as socially responsible investing, get adopted. First, it is argued that the perception of the institutional environment with respect to resource acquisition (along with stakeholder alignment and legitimacy) is related to the choice of the organizational form of a social enterprise—nonprofit or for-profit (Townsend and Hart 2008). Second, scholars also claim that the existing institutions, such as regulatory burden and the system of incentives for entrepreneurship, may be an impediment for using the microfinance tool in the West compared to the developing world (for review see Brau and Woller 2004). The literature assigns governments a special role of powerful actors benevolent to the social entrepreneurship sector, as they provide both nonmarket and market support of social enterprises. For example, governments can help establish special organizational forms (e.g., CICs in the UK) and L3Cs in the United States or provide incentives for the private sector players to join using innovative debt instruments, like SIBs. The government’s “soft” support through dissemination of information and awareness building can help attract other sources of funding. Generally, public sector grants may help facilitate idea generation but they need to be of significant scale for successful implementation (Tjornbo and Westley 2012). The flip side of public 110 EDUCATING SOCIAL ENTREPRENEURS

financing is that, depending on the sector, it may crowd out private philanthropy (Andreoni and Payne 2003). While scholars have argued that presence of market supporting institutions is important for designing markets as we understand them in the West (Rodrik 2000), there are plenty of examples from the developing countries when poor economic development is caused by the absence of some institutional elements. As a silver lining to this phenomenon, Mair and Marti (2009) in their analyses of an economic development program for ultra-poor Bangladeshi women argued that the so-called “institutional voids” that can be obstacles for the functioning of markets can be used as “opportunity spaces” by entrepreneurs to reach those who are in need (p. 425). Cognitive institutions also play a role in the adoption of socially responsible investment practices. In the case of microfinance, drawing on the evidence from Karlan and Zinman’s study (2011) mentioned earlier, Morduch (2011) suggests that those who take microcredit loans are “fooling themselves, imagining much bigger gains than they get” (p. 1272). This points to the presence of Hirschman’s (1963) “hiding hand” that limits knowledge of future difficulties used by Dorado and Ventresca (2012: 76) as they introduce “crescive” institutional conditions that support entrepreneurial engagement to solve social problems. When applying for funding, social entrepreneurs are often presented with a choice—act as a business and get access to private capital or present oneself as a nonprofit and access a pool of public resources. In either situation, the entrepreneurs put on distinct hats, that is, subscribe to a particular institutional logic that represents available material practices and symbolic constructions (Thorn- ton and Ocasio 1999). Social enterprises represent an ideal type of hybrids as they often deal with tensions that arise from combining for- and nonprofit organizational forms (Battilana and Lee 2014). Despite challenges of social ventures in navigating the private and nonprofit boundaries of social finance, the hybrid logics that result from the confluence of two institutional logics—investment and charity—contribute to the development of social innovation. Understanding which institutional logic a particular investment Financing Modes of Social Entrepreneurship 111

deals with along with rationale of investors, may help distinguish between types of social investments, as for example, they occur within the spectrum of three institutional logics—social/environmental, blended value, and financial. On the other hand, one of the dangers that social entrepreneurs face is a possibility that a more “impermeable” institutional logic of one field (e.g., banking) can displace the original social entrepreneurship logic (e.g., microfinance) (Kent and Dacin 2013).

Summary

In lieu of the clustered structure and lack of epistemological clarity of the field of social entrepreneurship (Choi and Majumdar 2014), our review is an attempt to gain a better understanding of the phenomenon, often central to solving many social and environmental challenges—social finance. It is not exhaustive, however, as the field of social entrepreneurship is very dynamic and individuals and organizations keep developing new models to fund social ventures. The five major themes that we have identified logically align along the three levels of analysis—micro (individual), organizational, and macro (field) (Figure 24.1). A central question for the individual level is motivations behind investors’ decisions to engage in both microlending to large-scale philanthropy. The literature converges on the argument that social investors are driven by more than an economic profit logic. Instead, emotions and intrinsic motivations determine the decisions of prosocial investors (Allison et al. 2014), which appear to be also drawn to invest in those who are similar to them. In our framework, the studies that represent the organizational level of analysis cluster around the three themes—social impact and its measurement, organizational forms and operational modes, and social mission drift. The unifying idea that brings these three themes together is the integration of for- and nonprofit organizational and institutional elements and their organizational consequences. In their creative pursuits to solve social and environmental problems, social entrepreneurs often blend sources of funding (Bugg-Levine et al. 2012). However, this creative blending may come at cost. Different stakeholders may expect 112 EDUCATING SOCIAL ENTREPRENEURS different measures of social impact. The adoption of “blended” revenue formulas may alienate potential investors. Finally, blending may impede strict abiding by the principles laid out in the mission statements. Similarly, at the field level, actors embedded in their institutional contexts have to reconcile often conflicting demands of public and private funding sources. Trying to create a favorable climate for social entrepreneurs, governments may design policies that crowd out investment from private sources Implementing projects funded by nonprofit or public sources, social entrepreneurs that represent the private sector may experience tensions of conflicting logics of the private and nonprofit sectors, and as the scholars suggest, a more dominant logic can displace the initial one (Kent and Dacin 2013). In summary, while clustering around the categories based on the levels of analysis, all the themes are closely linked and interdependent, and represent promising avenues for forthcoming research.

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Wonhyung Lee

University at Albany, State University of New York

Introduction

The influence of microfinance1 on delivering an array of financial services to low-income people has grown around the globe. Conventionally, microfinance used to refer to “a financial mechanism through which formal or informal financial institutions make very small loans (‘microcredit’) to the entrepreneurial working poor (‘microentrepreneurs’) to start, maintain, or expand small businesses (‘microenterprises’)” (Carr and Tong 2002). More recently, however, the microfinance industry provides broader products and services, including consumer loans, savings, insurance, and money transfers for low-income individuals or those who are considered unbanked or unbankable. Contemporary breakthroughs in the microfinance practice took place in countries such as Bangladesh, India, Indonesia, and Bolivia in the 1970s and early 1980s (Armendariz and Morduch 2010; Roodman 2012). During this period, microfinance institutions such as Accion International, BRAC, BancoSol, Grameen Bank, and SEWA (Self-Employed Women

1 The termmicrofinance is used instead of other terms that may be also familiar to the public such as microcredit or microloan because microfinance is a more comprehensive term that represents a variety of financial services that go beyond just “credit,” which only encompasses borrowing and lending. 118 EDUCATING SOCIAL ENTREPRENEURS

Association) Bank began their operations in Asia and Latin America. Since then, various types of microfinance institutions emerged such as nongov- ernment institutions, private banks, cooperatives, and credit unions. About 1,252 microfinance institutions officially report to the Microfinance Infor- mation Exchange Market by 2012. These institutions serve 91.4 million low-income clients, with 52 percent of the global microfinance consumers located in South Asia, 21 percent in Latin and Caribbean countries, and 14 percent in East Asia and Pacific countries (Knaute 2014). There has been a growing attention in developed countries as well. In Western European countries, for instance, microfinance is perceived as a tool for economic growth and social cohesion for poor and socially marginalized population groups, such as migrants, elderly, youth, and women (“Microfinance in Europe,” 2016). In the United States, microfinance focuses on lending services to support small business. As of 2014, 418 microlenders in the United States disbursed 58,060 microloan, with the total value of $361.7 million, mainly to entrepreneurs who are women or people of traditionally disadvantaged racial or ethnic groups (The Aspen Institute 2014). Microfinance, seemingly a simple money transfer instrument, in fact has a close link to the development of social entrepreneurship. The core idea of social entrepreneurship—creating lasting social impact by using market forces—is embodied in the mechanism of microfinance—providing poor persons with lasting economic self-efficiency by providing financial services. Rosengard (2004) articulates the relationship this way:

These two seemingly separate disciplines, social entrepreneurship and sustainable microfinance, not only have matured dramatically over the past two decades, but they have also converged, so that the latter is actually a dramatic example of the successful application of the former.

One example that is frequently perceived as the convergence of these two disciplines is the Grameen Bank, the microfinance institution that implemented the idea of lending to the poor in Bangladesh in the 1970s and later contributed to the development of microfinance programs in other countries. Microfinance 119

While the intersection between social entrepreneurship and microfinance is confirmed, the majority of literature on microfinance remains disconnected from those on social entrepreneurship. To understand the complexities and subtleties that lie at the intersection between social entrepreneurship and microfinance, we must examine the space in which those two disciplines overlap and explore how microfinance programs operate in their efforts to make social impact using market strategies. Therefore, this chapter aims to articulate the social entrepreneurship principles that are applied to microfinance practice followed by concrete microfinance models.

Microfinance in the Context of Social Entrepreneurship

This section discusses the connection between microfinance and social entrepreneurship based on three commonly recognized characteristics of social entrepreneurship: (1) social impact, (2) market-based solutions, and (3) strategies that connect the first two. The first connection is somewhat apparent; when the mission of microfinance institutions is to alleviate poverty and empower low-income population. This principle is helpful for distinguishing microfinance institutions from other commercial banks that are primarily concerned about profit. The social orientation of microfinance institutions is also reflected in the population they serve. The targeted beneficiaries of microfinance institutions, regardless of their forms and operation styles, are people with economic and social disadvantages. Many institutions have a specific mission to serve economically active low-income people in rural areas, especially women. Based on the survey of 1,400 microfinance institutions, women borrowers represent 73 percent of the microfinance clients on average worldwide (Convergences 2013). Also, in many cases, microfinance institutions combine financial services with social support to make a larger social impact (see, for instance, Shetty 2010; Thomas and Sinha 2009). One example is a combined approach of group-based microfinance with participatory gender and HIV training, which contributed not only to creating efficient enterprises but also to promoting gender equity and HIV prevention in South Africa and Tanzania (Pronyk et al. 120 EDUCATING SOCIAL ENTREPRENEURS

2008; White and Morton 2005). More recently, Banerjee and colleagues (Banerjee, Karlan, and Zinman 2015) summarized evidence from multiple countries that poor people are benefited from a holistic approach in which microfinance is combined with other support for community organizing, financial literacy, business development, or health improvement. Second, another aspect in which microfinance embodies the idea of social entrepreneurship is through the utilization of market-based solutions. In his discussion of the Grameen Bank, Dees (2008) points out that the bank serves a good example of social enterprise because it adopted a market-based strategy. Dees specifically made a distinction between social enterprises and charity; social enterprises figure out ways to generate profit that is reinvested to sustain their programs whereas charity typically implies a one-way and often unpredictable means of offering help. In this regard, being able to build a self-sustaining funding cycle without purely relying on government subsidies or private donations is one of the key features of microfinance programs. Rosengard (2004) notes that various actors—government, commercial banks, nongovernmental organizations (NGOs), and nonprofit organizations—have made efforts to commercialize microfinance over time by realizing that “not only is it possible for both to make money and provide essential financial services for low-income households and microenterprises, but that whenever possible, microfinance should be done in a commercially based, financially sustainable manner (p. 28).” Third, implementing a market-based solution, however, requires innovative strategies to adapt to the new market—the working poor. Rosengard (2004) describes that in order to deliver microfinance to poor people, microfinance institutions must adapt to the new market because the target population has different characteristics from the more traditional notion of bank clients. For example, poor households tend to have family-owned and managed businesses; their business are (irregular) cash based; business records are not tracked well; they do not have credit histories; and they do not have conventional bank collateral or a clear legal title in their name. In order to link these populations to financial services, Rosengard (2004) explains that banks had to scale down while NGOs had to scale up. For example, banks had to change the way they make loans in a way that their loan products meet the unique needs of borrowers while Microfinance 121 ensuring a surplus to cover the operational costs. Some government banks that previously delivered subsidized credit programs became commercial- ized this way. For example, the village units of Bank Rakyat Indonesia (BRI) initially functioned as channeling agents for government-subsidized credit programs but later became commercial and served low-income people in rural areas. Rosengard (2004) also noted BRI as the most successful commercial bank downscaler case. On the other hand, some NGOs became regulated financial institutions such as banks or finance companies to adapt to the new market. BancoSol (BancoSolidario) in Bolivia, SEWA in India, and K-Rep Bank in Kenya are a few examples whereby NGOs were scaled up and transformed into banks.

Models of Delivering Microfinance

Microfinance institutions implement various approaches to sustain their lending programs and to reach new clientele. This section specifically discusses three models: group lending, individual lending, and crowdfunding. Among various services and products that microfinance institutions may provide (i.e., microcredit, flexible savings, insurance, mortgage, emergency loans, or money transfer), the discussion of these models will be centered on microcredits (or microloans) to compare the mechanisms by which money is transferred between the lenders and borrowers. The following subsections provide brief description of each approach and examples of how these approaches are utilized.

1. Group lending A group mechanism to deliver credit is referred to as group lending, peer-group lending, or solidarity lending. Group lending is considered one of the most innovative practices introduced by microfinance institutions (Jaffer 1999). As Carr and Tong (2002) explain, the Grameen model of group lending has been the reference point of most group-lending programs in developing countries and the United States. The essence of the group-lending model lies in the joint-liability rule, whereby the members in a group are expected to monitor each other’s payment. Under this system, borrowers form groups (usual size ranges from three to six) in which group members 122 EDUCATING SOCIAL ENTREPRENEURS

are liable for each other’s loan. If any one member of the group defaults on his or her loan, the other members are required to cover the shortfall. There usually are mandatory weekly or biweekly gather- ings in which group members participate in business training, collect loans, save money, or provide social support (Collins, Morduch, Rutherford, and Ruthven 2009). The specific features of the joint-liability rule, such as group size, the extent of the liability, and whether savings are required, however, vary by countries and institutions. According to a survey of a number of microfinance programs in various countries, the overall trend is that the majority of the developing-country programs use stronger enforcement of the joint-liability rule compared to U.S. programs. For example, many programs in developing countries require group members to repay a fellow borrower’s delinquent loan or use a group’s savings to repay the delinquent loan. In contrast, U.S. programs grant other group members more flexibility and discretion; group members can decide whether they will use a savings fund to repay the delinquent loan (Carr and Tong 2002). The fact that group members share at least some responsibility of loan monitoring and enforcement contributes to reducing the burden for microfinance organizations to manage loans. Ultimately, group lending is arguably advantageous for decreasing the cost of lending and complementing weak financial infrastructures in rural areas (Jaffer 1999). Furthermore, the group setting has proven effective for ensuring high repayment rates and providing peer support. Jaffer (1999), in his article in a Harvard Law School publication series, indicated that the repayment rate of these institutions was between 95 percent and even 100 percent. While group lending is most commonly practiced in developing countries, global microfinance institutions such as Grameen America also use a group-lending model in the United States. Its target populations are typically low-income populations, especially immigrant populations in major cities. In this chapter, two additional examples are included as follows. Example 1-1. UWESO: The UWESO Savings and Credit Scheme in Uganda is aimed at those who bear the brunt of the impact of Microfinance 123

HIV/AIDS. Women-headed households and orphans therefore comprise the majority of beneficiaries. The scheme works through self-selecting groups of five people who guarantee each other’s loans. Ten groups make up a “cluster” with both groups and clusters having elected leaders who hold specific responsibilities. Many clients use the credit provided to expand petty trade activities, often in relation to commodities in high demand such as maize, beans, fruit, general groceries, and charcoal. Other enterprises include hairdressing salons and drink stores. As income is consolidated, clients can use the funds to ensure that orphan dependents are able to stay in school and/or, in some cases, diversify into new business enterprises. By August 2001, over 12,000 households were benefiting from the initiative that has empowered local communities not only by facilitating the generation of income but also through enhancing local leadership skills. In addition, a policy of “breaking the silence” surrounding HIV/AIDS, which is promoted by UWESO staff in their discussions with clients, has resulted in less stigmatization of people living with HIV/AIDs and their families (an excerpt from White and Morton, 2005, p.193). Example 1-2. Mission Asset Fund: The Mission Asset Fund (MAF) is based in the Mission District of San Francisco where the majority of low-income Latino immigrants did not have credit or banking experience. The goal of MAF was to develop financial products and services that cater specifically to low-income populations and eventually help them integrate into the financial mainstream. MAF came up with an idea to utilize lending activity that immigrant communities are already accustomed to (i.e., lending circles, Cestas Populares in Spanish). MAF helps clients get their transactions recognized officially by the credit bureau. At the same time, MAF demystified the misinformation and misperception that clients had on financial institutions and banking systems. MAF encourages clients to open a bank account and transfer loans to their bank accounts as opposed to handling cash. For some clients, MAF also introduces other saving services through which immigrants could save for their naturalization application. In this way, clients circulate and reinvest their money in the community while they are building credit history and assets to access mainstream financial services. Between 2008 and 2012, the 124 EDUCATING SOCIAL ENTREPRENEURS

Mission Asset Fund has facilitated over $2.4 million zero-interest, zero-fee loans to more than 1,800 people of multiracial and ethnic groups. Credit scores increased on average by 168 points for the participants and the average credit score reached 603 points at the end of the lending cycle (Reyes, López, Phillips, and Schroeder 2013). How lending circles work (Description from the MAF website): Lending Circles provides a zero-interest loan to help participants build credit and access an affordable, small dollar loan. Participants take our online financial training class before joining a Lending Cir- cle. Six to ten people come together for an in-person formation and decide on an amount for their group loan, for example 10 participants for a loan of $1000. Each participant can have their own need or goal for the money they borrow, whether it’s paying off debt or paying for tuition. Everyone in the Lending Circle makes the same monthly payment ranging from $50 to $200, which MAF reports to the credit bureaus. The loan rotates each month to a different participant. In the first month, one participant receives $1000 and each month after that a different borrower will receive the loan, until everyone in the Lending Circle has gotten a chance. After completing the program, many participants establish credit scores for the first time or improve damaged ones.

2. Individual lending In addition to group lending, many microfinance institutions use individual lending. As shown in Figure 25.1, which uses diagrams to demonstrate each lending model, the main difference between individual lending and group lending is that under individual lending loans are distributed to borrowers individually, independent of other loans or other borrowers. The loan delinquency and liability is thus not transferrable to others; individual borrowers are responsible for his or her own failure to repay loans. Individual lending often accompanies entrepreneurship training and coaching that can evaluate the individual’s needs and motivation to apply for a loan, business prospect, and his or her capacity to repay the loan. The amount, type, and terms of the loan are thus likely to be tailored to the needs of the individual. Some key microfinance institutions in Microfinance 125

Group lending Individual lending Crowdfunding

Figure 25.1 Integrative framework of funding modes of social enterprises

Source: Author (2016).

developing countries such as SEWA Bank in India or BRI in Indo- nesia provide loan at an individual level. Microfinance institutions in the United States especially have adopted an individual lending model as a more common form of lending to ready borrowers. The example of the following BO$$ program specifically shows a model that is implemented by a small nonprofit microfinance organization in the United States, which could be useful for discussing a number of key components of individual lending such as the role of business counselor, the role of loan decision-making committee, and the role of one-on-one coaching and follow-up before and after the loan decisions. Example 2-1. BO$$: The Washington Heights and Inwood Development Corporation (WHIDC), through its Business Oppor- tunity Success System (BO$$) micro business development program, operates a loan program to service very small business owners. BO$$ Loans are made only to individuals. They may apply for a loan on behalf of their corporation or partnership, but will be personally liable for the loan. The loan evaluation process involves a series of one-on-one sessions with the applicant to develop a relationship that fosters the free exchange of accurate information. Through these sessions, the Business Counselor secures the information necessary to make a good credit decision and makes the applicant aware of the 126 EDUCATING SOCIAL ENTREPRENEURS

strengths and weaknesses of his/her business plan and management capabilities. The Business Counselor and the applicant develop the loan application over a number of sessions that is determined by the needs of the client. Average time spent with a client on a prep loan basis is around 10 hours. Once an application is complete and the Business Counselor approves the application on a preliminary basis, a credit memo is drafted and submitted to our loan committee, which is composed of the WHIDC Executive Director and bankers with experience in small business lending. The committee may approve the loan, request additional information, recommend changes, or turn the loan down. BO$$ provides post-loan assistance to help the business meet its continuing obligations, identify and avoid trouble spots, take actions to prevent problems that may affect their business or take advantage of new opportunities. If the loan is turned down, the Counselor can opt to work with the applicant to make improvements to their credit worthiness and resubmit at a later date. From its first loan in April of 1995 through December 2015, the program has awarded over $6,400,000 to 412 micro-entrepreneurs.

3. Crowdfunding Crowdfunding is another distinguishable model for delivering microfinance. Compared to individual lending that provides individuals with loans based on “one-on-one” loan matching, crowdfunding can be characterized as “one-on-many” loan matching. As shown in Figure 25.1, one or more people (typically multiple people) from the public decide whether to lend money based on the portfolios of borrowers. Under the crowdfunding model, microfinance institutions can play a role of evaluating a borrower’s reliability and connecting borrowers to potential funders. The example of Kiva Microfunds offers key concepts and terms related to the crowdfunding model for microloans. Example 3-1. Kiva Microfunds: Kiva is a nonprofit organization that connects low-income people to potential lenders via Internet. Kiva is one of the largest crowdfunded micro lending organizations. Since 2005, Kiva has crowdfunded $1.5 million to 2.1 million borrowers in 83 countries. In addition to farmers and other types of entrepreneurs, Kiva also provides education loans to students. Since Microfinance 127

2005, Kiva provided more than 24,000 education loans (Kiva website www.kiva.org, 2016). Kiva loans are facilitated through two models: partner and direct. The partner model works with Field Partners, which include microfinance institutions, schools, NGOs, or social enterprises. Kiva’s Field Partners manage the loans, and many of them also provide additional services including entrepreneurial training, financial literacy classes, or health services. Direct loans are not through any intermediary institutions; the purpose of direct loans is to reach borrowers that even microfinance institutions can’t or don’t serve, which may involve higher-risk loans. As of 2016, direct loans are only available in the United States. The comparison of these two models is summarized in Table 25.1 as follows.

Table 25.1 Two Kiva loan models Partner loans Direct loans Application Borrowers apply to a local Field Borrowers apply through the Kiva Partner which manages the loan website. on the ground. Approval Local nonprofits or lending insti- Direct loans are approved through process tutions approve the borrower’s “social underwriting” where loan request. Kiva does due dili- trustworthiness is determined gence and ongoing monitoring for by friends and family lending a each of these Field Partners (list of portion of the loan request, or by Field Partners at http://www.kiva. a Kiva approved Trustee vouching org/partners) for the borrower Intermediary Borrowers apply to a local Field Borrowers may or may not be Partner responsible for screen- endorsed by a Trustee who do not ing borrowers, disbursing loans, handle any financial transactions posting borrowers to the Kiva or have any duty to repay loans on website for funding, collecting behalf of their borrowers. Instead, repayments, and otherwise admin- Trustees take the role of providing istering Kiva loans on the ground support and business advice to to borrowers. their borrowers throughout the term of the loan. Interest Most borrowers on Kiva pay inter- All direct loans are 0 percent est to local Field Partners in some interest loans. form. Kiva and Kiva lenders do not receive interest on Kiva loans. Site More than 80 countries. Only available in the United States.

Source: Kiva website (www.kiva.org), 2016. 128 EDUCATING SOCIAL ENTREPRENEURS

Implications

While the last few decades of the microfinance industry celebrates the multiplication of the microfinance institutions and diversification of lending models, the need for microfinance is still great. The GlobalFindex, the financial inclusion survey run by the World Bank every 3 years, demonstrates that in 2011, 76 percent of the world’s poor adults were unbanked (i.e., do not hold a bank or deposit account) (Knaute 2014). Microfinance institutions in the United States also have potential for continuous growth. In 2013, 7.7 percent of the households (nearly 9.6 million households) in the United States were unbanked. In addition, 20 percent (about 24.8 million) were underbanked, meaning that they hold a bank account but also rely on alternative financial services such as non- bank check cashing, payday loans, or pawn shops in the past 12 months (Federal Deposit Insurance Corporation 2014). Considering that the unbanked populations typically have neither access to formal financial institutions nor formal financial records to pursue further financial services, providing safer and nonexploitative financial options is critical for helping these populations grow their economic and human resources. As microfinance practitioners and policy makers try to expand the industry, however, a couple of issues continue to require further attention. One of the major challenges for social entrepreneurship, which is also applicable to the microfinance industry, is striking a balance between its mission to serve social causes and its mechanism to operate microfinance commercially. Walker (2011) particularly discussed this challenge as operating microfinance both as a nonprofit and as a commercial enterprise: Nonprofit microfinance institutions are more focused on the social mission while commercial microfinance institutions have a risk of mission drift, which can lead to operating microfinance as “pay-lending” or “sub-sub-sub-subprime.” On the other hand, nonprofits are difficult to regulate whereas commercial institutions receive formal regulation. These kinds of tensions between social and entrepreneurial orientations will likely continue in microfinance practice; therefore, discussions on ethics and innovative logistics will need to follow hand in hand. In case of multisector involvement, building trustful relationships among the government, commercial microfinance institutions, and other NGOs Microfinance 129 or nonprofit organizations will be important to sustain the programs (Bédécarrats, Bastiaensen, and Doligez 2012). Most importantly, considering that the target population of microfinance institutions are poor and vulnerable groups, more rigorous measures to monitor potential hazards of lending and borrowing, creditworthiness of microfinance institutions, and transparency of fund management will be critical to ensure the short- term and long-term safety and well-being of the borrowers.

References

Armendariz, B., and J. Morduch. 2010. The Economics of Microfinance. Cambridge, Massachusetts: The MIT Press. Banerjee, A., D. Karlan, and J. Zinman. 2015. “Six Randomized Evaluations of Microcredit: Introduction and Further Steps.” American Economic Journal: Applied Economics 7, no. 1, pp. 1–21. Bédécarrats, F., J. Bastiaensen, and F. Doligez. 2012. “Co-optation, Cooperation or Competition? Microfinance and the New Left in Bolivia, Ecuador and Nicaragua.” Third World Quarterly 33, no. 1, pp. 143–60. Carr, J.H., and Z.Y. Tong. 2002. Replicating Microfinance in the United States. Washington, D.C: Woodrow Wilson Center Press. Collins, D., J. Morduch, S. Rutherford, and O. Ruthven. 2009. Portfolios of the Poor: How the World’s Poor Live on $2 a Day. Princeton: Princeton University Press. Convergences. 2013. Microfinance Barometer 2013. Paris, France. Retrieved from https://docs.google.com/viewerng/viewer?url=http://www.convergences.org/ assets/uploads/BMF-2013-ENG.pdf Dees, J.G. 2008. “Philanthropy and Enterprise: Harnessing the Power of Business and Social Entrepreneurship for Development.” Innovations 3, no. 3, pp. 119–32. FDIC (Federal Deposit Insurance Corporation). 2014. 2013 FDIC National Survey of Unbanked and Underbanked Households. Global Business Guide. 2013. An outlook on Indonesia’s Microfinance Sector. Retrieved from www.gbgindonesia.com/en/finance/article/2013/an_outlook_on_ indonesia_s_microfinance_sector.php Jaffer, J. 1999. “Microfinance and the Mechanics of Solidarity Lending: Improving Access to Credit Through Innovations in Contract Structures.” Economics and Business Discussion Paper Series, Paper 254, Harvard Law School John M. Olin Center for Law. Knaute, M. 2014. “Microfinance Key Figures.” Microfinance Barometer, pp. 2–3. Retrieved from www.convergences.org/wp-content/uploads/2014/10/couv.jpg 130 EDUCATING SOCIAL ENTREPRENEURS

Microfinance in Europe. 2016. Retrieved from www.european-microfinance.org/ index.php?rub=microfinance-in-europe&pg=introduction Pronyk, P.M., T. Harpham, J. Busza, G. Phetla, L.A. Morison, J.R. Hargreaves, J.C. Kim, C.H. Watts, and J.D. Porter. 2008. “Can Social Capital be Intentionally Generated? A Randomized Trial from Rural South Africa.” Social Science & Medicine 6710, pp. 1559–70. Reyes, B., E. López, S. Phillips, and K. Schroeder. 2013. “Building Credit for the Underbanked: Social Lending as a Tool for Credit Improvement.” Retrieved from http://cci.sfsu.edu/sites/sites7.sfsu.edu.cci/files/MAF Evaluation.pdf Roodman, D.M. 2012. Due Diligence: An Impertinent Inquiry into Microfinance. Washington, D.C: Center for Global Development. Rosengard, J.K. 2004. “Banking on Social Entrepreneurship: The Commercialization of Microfinance.”Mondes En Développement 2, pp. 25–36. Schreiner, M., and J. Morduch. 2002. “Opportunities and Challenges for Microfinance in the United States.” InReplicating microfinance in the United States, eds. J.H. Carr and Z.Y. Tong. Washington, D.C: Woodrow Wilson Center Press; Baltimore: Distributed by The Johns Hopkins University Press. Shetty, S. 2010. “Microcredit, Poverty, and Empowerment: Exploring the Connections.” Perspectives on Global Development & Technology 9, nos. 3/4, pp. 356–91. Talen, A.C., M.A. Weiss, and S. Sarkar. 2002. “The Future of Microfinance in the United States: Research, Practice, and Policy Perspectives.” In Replicating Microfinance in the United States, eds. J.H. Carr and Z.Y. Tong, 331–69. Washington, D.C: Woodrow Wilson Center Press; Baltimore: Distributed by The Johns Hopkins University Press. The Aspen Institute. 2014. “U.S. Microenterprise Census Highlights, FY2013.” microTracker.org retrieved from http://microtracker.org/assets/pdf/Census Highlights2013.pdf The World Bank. 2010.Improving Access to Financial Services in Indonesia (No. 52032) (Jakarta: World Bank) retrieved from www.bi.go.id/id/perbankan/ keuanganinklusif/berita/Documents/World Bank Report - Improving Access to Financial Services in Indonesia.pdf Thomas, R., and J.W. Sinha. 2009. “A Critical Look at Microfinance and NGOs in Regard to Poverty Reduction for Women.” Social Development Issues 31, no. 2, pp. 30–42. Walker, O.L. 2011. “The Future of Microlending in the United States: A Shift from Charity To Profits?”Ohio State Entrepreneurial Business Law Journal 6, no. 1, pp. 383–409. White, J., and J. Morton. 2005. “Mitigating Impacts of HIV/AIDS on Rural Livelihoods: NGO Experiences in Sub-Saharan Africa.” Development in Practice 15, no. 2, pp. 186–99. CHAPTER 26 Crowdfunding

Stephanie Black

University at Albany, State University of New York

Lynda de La Vina

University of Texas at San Antonio

Introduction

Over the last few years, crowdfunding has expanded to create dynamic global funding networks. Crowdfunding enables projects to be financed via the Internet through solicitation of small investments in the form of a donation or in exchange for a reward or voting rights from a large base of potential backers (Collins and Pierrakis 2012; Cholakova and Clarysse 2014; Hemer 2011; Zvilichovsky et al. 2015). Bradford (2012) defines crowdfunding as “the use of the Internet to raise money through small contributions from a large number of investors” (p. 1), “rather than professional parties such as banks, venture capitalists or business angels” (Schwienbacher and Larralde 2010). Crowdfunding is a unique mechanism for raising funds because it “uses collective decision making via a social media platform to evaluate and raise financing for new projects or new commercial ventures” (Bruton et al. 2015). The literature discusses three main types of crowdfunding: token investment, equity investment, and lending investment. The first, token investment, is among the most common and refers to when individuals give donations to support a cause without any expectation of receiving a financial return. Instead, investors receive simple affirmation or 132 EDUCATING SOCIAL ENTREPRENEURS nonmonetary rewards based on the level of their contribution. Examples of this can be seen on IndieGoGo, where the “crowd” donates to initiatives such as environmental projects. The second type, equity investment, refers to when investors receive shares or units in a business in exchange for their financial investment in the firm. One of the largest equity crowdfunding sites is CircleUp, which focuses on consumer-based products and raised $14 million from investors last year (Miller 2014). The third type of crowdfunding, lending investment, refers to when investors receive interest on their investment in a company at an established interest rate. An example of this can be seen in LendingClub.com, which is a loan- based peer-to-peer crowdfunding portal and community that connects borrowers with potential investors. Lending crowdfunding allows the “crowd” to play a role as a banker to directly make loans to others at interest rates that range from 7.72 to 21.41 percent depending on the grade of the investment (www.crowdfundingblog.com/site/lendingclub/ 2015). These three types of crowdfunding have begun to provide financing for many new and exciting projects around the world through solicitation of small investments from a large base of potential backers (Zvilichovsky et al. 2015) in exchange for tangible and intangible benefits (Collins and Pierrakis 2012). Equity crowdfunding has garnered more interest with the development of Internet portals for the funding of various ideas or projects (Voo- braak 2011) and for raising significant capital (Bradford 2012) through a large number of individuals via online platforms (Agrawal et al. 2013; Mollick 2014). With the global expansion of these portals, equity crowdfunding has the potential to transform the entire financial system by offering new opportunities for both investors and entrepreneurial ventures (Miller 2013). According to an industry report by Mass Solutions (2015), globally equity crowdfunding raised $11.08 billion in 2014, but it is expected to double in size annually over the next few years and increase to $35 billion by 2020 (Blohm et al. 2014). Also, the equity-based and lending-based crowdfunding models are expected to expand and reach a market share of approximately 60 to 80 percent globally. Overall, equity crowdfunding is expected to overtake venture capital as the largest source of start-up funding by 2020 ($36 billion) (Emmerson 2015). Despite strong markets in other countries, equity crowdfunding has been slow in developing within the United States. This can be primarily Crowdfunding 133 attributed to the U.S. government’s concerns over the potential for fraud and the need to protect investors (Brutan et al. 2015). In particular, in the United States, equity crowdfunding has experienced regulatory road- blocks due to adherence to the regulations of the Securities Act of 1933. With the passing of the Jump Start Our Business Startups (JOBS) Act in 2012, also known as the “crowdfunding bill,” the U.S. legislators established the groundwork for equity crowdfunding in this country. In particular, the new federal and state laws in the United States have the promise to significantly increase the pool of potential investors available in the market, expand the options available to small companies seeking financing, and ultimately have a positive impact on the economy. Although the regulations vary across countries, some projects have already raised funds through international equity-based platforms. For example, in 2013, the World Bank reported 672 crowdfunding sites and estimated a world crowdfunding market of $96 billion. Already no equity-based crowdfunding in the United States has expanded from 1.5 billion in 2011 to approximately 5.1 billion in 2013 (Crowdfunding- statistics.com 2015).

Comparisons

1. Nonequity crowdfunding: token/reward The origins of Internet-based crowdfunding in the United States started in 2003 with Brian Camelio, a Boston musician and computer programmer who created ArtistShare, which was a website used by musicians seeking donations from fans to produce digital recordings. This website developed into a fundraising platform for film, video, and photography projects in addition to music. This platform was successful, and as a result other rewards-based crowdfunding platforms were launched such as Indiegogo in 2008 and Kickstarter in 2009. Since its inception in 2009 through October 2015, Kickstarter has hosted more than 265,000 fundraising campaigns and raised up to $1.76 billion from 9.7 million backers (Freedman and Nutting 2015). Moreover, every day, new rewards-based crowdfunding sites are emerging. Also, many of the newer ones are focusing on particular product categories or niches. For example, Experiment.com focuses on scientific research projects and Teespring focuses on designer t-shirts. 134 EDUCATING SOCIAL ENTREPRENEURS

2. Why use crowdfunding? Belleflamme et al. (2011) have identified three main reasons for engaging in crowdfunding: (1) the financing statement, (2) the public attention, which arises around the project, and (3) the feedback about the product/service offered. Gerber et al. (2011) deepened the analysis by identifying five categories of motivations: fundraising, establishing relationships, receiving legitimacy, replicating successful experiences, increasing awareness about crowdfunders’ work through social media. Research by Kuppuswamy and Bayus (2013) showed that social information (i.e., other crowdfunders’ funding decisions) is a key determinant of the success of a project. An example of this behavior can be seen with projects such as Pebble, which has received two rounds of funding through KickStarter. Pebble used crowdfunding as a platform for financing to produce the first high-tech watch, as well as, gain sensational marketing exposure and expanded distribution channels. Another study by Ahlers et al. (2012) indicated the importance of the entrepreneur providing information to the crowd in the donation crowdfunding process, which is also supported by industry leaders such as Kickstarter.

3. Equity crowdfunding Equity-based crowdfunding has expanded over the last few years to raise funds for various initiatives. Overall, some commonalities that have been identified through the research in both nonequity and equity crowdfunding indicate various factors that should be considered for a successful crowdfunding experience which include:

• the importance of entrepreneurial signaling to small investors regarding the value of the project, • the importance of having efficient public information retrieval via social media, • consideration of the inherent geographical bias that may potentially occur, and • the importance of establishing relationships and legitimacy using the crowdfunding infrastructure. Crowdfunding 135

Traditional Funding Versus Equity Crowdfunding

In order to develop a conceptual model and introduce the implications of equity crowdfunding, it is important to review what traditional funding offers available to start-ups and entrepreneurs. In traditional equity funding of start-up enterprises, a temporal path or continuum has developed (Harrison 2013). “Pre-seed financing” generally emanates from business plan competitions, university assistance, family, friends, and savings (Shane 2008). Second, pre-seed funding is a relatively small amount typically used for proof of concept and prototype development. Third, “seed or start-up financing” expands these funding sources to venture angels, venture angel networks, or debt financing, and is provided to newly formed companies for their use in completing product development and initial marketing (Denis 2004). “Series” financing, encompassing various stages, engages formalized investment pools created by venture capital firms that provide funds for company expansion and may include plant, marketing, and working capital and, for the development of an improved product, the introduction of a new technology or an expanded product line. Lastly, when the firm is mature but still expanding, such financing may also be provided for a company that is expected to “go public.” This element of series financing is called bridge financing (Metrick and Yasuda 2011). These stages of enterprise financing form the equity-financing continuum (see: Cardullo 1999). It is, however, acknowledged that many successful start-ups have “jumped” the continuum path by locating significant venture investors at the initial stages of development. These instances, however, are not exemplary of most start-up companies that are searching for initial funding. Presently, scholars know little about the dynamics of equity crowdfunding. In particular, “we do not know whether crowdfunding efforts reinforce or contradict existing theories about how ventures raise capital and achieve success” (Mollick 2014). However, we know that

Pre-Seed Seed Seriesa Seriesn or IPO

Crowdfunding Traditional sources Figure 26.1 Crowdfunding compared to traditional funding sources 136 EDUCATING SOCIAL ENTREPRENEURS organizations and new ventures often seek financing, and equity crowdfunding is emerging as a means for them to secure funding beyond traditional means. However, it may or may not substitute for traditional financing. In fact, it may also be used to attract larger venture capital as in the case of Pebble and their “smart watch,” which used Kickstarter for its initial funding but later attracted venture funding (Dingman 2013). We anticipate that the financing life cycle that has been disrupted and expanded by the introduction of equity crowdfunding investment. Equity crowdfunding via government legislation has now provided a structural element for start-up funding rather than the continuation of the random- ness of the private equity market. Equity crowdfunding is introduced primarily during the pre-seed and seed elements of the continuum. It is anticipated that the latter series of elements of the continuum may include an equity crowdfunding component but are more likely to be funded by the more traditional and formal investment pools made up of accredited investors. The difference between a traditional venture capital firm and an online venture platform, such as lFundersClub, the first online venture capital platform is that investors get more exposure to pre-vetted opportunities then they did in the past, where such opportunities were only presented to a select group of wealthy investors. Other online start-up investment platforms for accredited investors have also emerged, including Angel- List, Microventures, WeFunder, and Circleup, and the quality of available start-ups and the amount of value provided by them has thus varied by the platform being used. However, as progressive as FundersClub and other venture platforms have been, their focus is still accredited investors. As of yet, in the United States, the “crowd” has not had the opportunity to pursue active investing via these online sites, and accredited investors participating in the sites are not investing in start-ups and small businesses. Presently, there are approximately 8.6 million accredited investors in the United States, but only 3 percent of these investors are currently investing in start-ups and small businesses (Alois 2013). Crowdfunding can assist entrepreneurs by offering more access to capital, especially when traditional financing is not readily available (Bruton et al. 2015). As such, crowdfunding platforms can supplement other aspects of private investing and increase the flow of entrepreneurial Crowdfunding 137 capital (Financial Conduct Authority 2014). For example, by examining the current average size per transaction on Crowdfund platforms, such as CircleUp, and then taking into consideration the expected acceleration to the “repeat purchase” rate, as well as, the addition to the total amount of investable capital, the total market potential for equity crowdfunding today has a tremendous potential that can exceed many times that of any current online marketplace (Conner 2012). Using equity crowdfunding as a new funding platform effectively creates a new asset class wherein shares are issued via SEC registered crowdfunding portals or individual state crowdfunding investment platforms. The number of crowdfunding platforms in the United States is increasing every year (Masssolutions 2015). Currently, there are approximately 191 crowdfunding platforms (Statista.com 2015) and 56 equity crowdfunding platforms in the United States (Neiss 2012); and as of August 2015, 29 states that have either enacted intrastate crowdfunding exemptions or enacted amendments to their existing blue sky laws, which regulate the buying and selling of securities, to permit some type of intrastate crowdfunding (Mihalik and Lawson 2015). These equity crowdfunding platforms substitute for the more traditional intermediaries between supply and demand. We thus argue that crowdfunding can have macro-level implications as proposed by the literature, but it can also have micro- or firm-level implications. Based on commonalities in existing research and government implications from regulation, we contend that equity crowdfunding can have a positive impact on entrepreneurism. The addition of equity crowdfunding increases available sources of capital, can compress the time to fund, and potentially reduce transaction costs for entrepreneurial ventures.

Discussion

With equity crowdfunding being allowed in the United States, we recognize that it has many new implications for small and medium enterprises. At present, we can only make limited statements regarding ECF because we still have many unresolved questions (Burtch et al. 2014), which merit further research. However, we contend that equity crowdfunding in the United States may have both positive micro and macro externalities that 138 EDUCATING SOCIAL ENTREPRENEURS emanate from the promulgation of both state and federal equity crowdfunding legislation. For example, some of the positive influences that equity crowdfunding may have are:

1. Increase the rate of business start-ups. Equity crowdfunding has the potential to be an efficient fundraising vehicle for start-ups and other small companies because it provides a new, relatively inexpensive means to find investors outside of the traditional pre-seed and seed rounds that have traditionally focused on angel investors or multiple friends and family. 2. Encompass a wider range of potential projects and founding goals. (Mollick 2014). Crowdfunding also has the potential to be an attractive fundraising vehicle for start-ups and other small companies because it provides them with a new, relatively inexpensive means to find investors outside of the traditional pre-seed and seed rounds that have traditionally focused on angel investors or multiple friends and family. 3. Decrease the failure rate of small businesses. Many entrepreneurs face accessing capital (Gaskill et al. 1993), and ECF may provide a viable alternative to traditional funding. According to Stemler (2013), crowdfunding is “uniquely positioned to assist two groups of people in securing the money and support their needs: (a) entrepreneurs trying to turn their ideas into viable businesses, and (b) small business owners trying to keep their businesses afloat or get them to grow” (p. 272) thereby increasing the rate of business start-ups and decreasing the rate of small business failures. 4. Develop greater job creation. Increases in employment will likely follow, as start-ups increase their viability and growth in the United States. According to the U.S. Small Business Administration, the largest employment sector in the United States is small business. It accounts for 55 percent of the workforce (SBA.gov 2015), and may allow this sector to expand even further. 5. Increase business funding outside major urban areas or innovation hubs. Crowdfunding allows for funding of projects from all over and not just limited to areas where technology is concentrated. (Agrawal 2011; Lin and Viswanathan 2013; Stuart and Xu 2003). Crowdfunding 139

6. Offers nonfinancial benefits. According to companies such as FUZ Design, the “money-gathering crusade spawned widespread coverage on tech blogs, which led in turn to hundreds of offers of help with marketing, design, manufacturing, and distribution” (Alsever 2015). In fact, most entrepreneurs now rank these other benefits as having higher value than the actual funds that are garnered (Alsever, 2015). Indeed, money tends to rank fourth or fifth in status for most companies (Alsever 2015). Often these firms will gain access to new followers and advisors that then provide valuable feedback on all aspects of their companies.

In addition to the positive externalities, it is also possible that certain negative externalities may arise from equity crowdfunding. For instance:

1. Cause companies to spend more time in educating investors. Compa- nies who are selling securities pursuant to a crowdfunding offering may find themselves with a large base of “crowd” investors that may require them to expend more time and resources on their shareholder communications and investor relations than might otherwise be the case (e.g., additional solicitation efforts when seeking shareholder action and more regular reporting of financial and business results) (Fields 2013). 2. Add institutional costs to the disclosure process. Tier II investments will require both offering and post-offering disclosure requirements that might not be required by companies that are raising private equity capital by other means (including the ongoing annual financial disclosure that will be required) (Cheung 1987). However, at present it is not clear that this change will add much cost to the disclosure process used for other exempt offerings (Fields 2013). However, in addition, companies engaging in an equity crowdfunding offering, pursuant to the Crowdfunding Exemption, will be required by the federal legislation (not necessarily state legislation) to hire intermediaries (portals/platforms) to conduct the transactions, which may also increase transaction costs (Dalhman 1979). 3. Not be attractive to latter stage investors. As companies already engaged in a pre-seed or seed equity crowdfunding offering move along the 140 EDUCATING SOCIAL ENTREPRENEURS

equity financing continuum, they are likely to need or want to attract later round financing. Venture capital, private equity, or institutional financing sources may be reluctant to invest in an entity with a large base of “crowd” investors. They may prefer to deal with a traditionally smaller and more restricted class of accredited investors. Further- more, if the company engages in a merger or acquisition, this action will need shareholder approval from their large base. Although these capital expansions would likely occur at later stages of company development, these transactions will require substantial shareholder communication that may be difficult to manage. This issue could potentially limit some companies from accessing capital at various stages of development unless the venture clearly demonstrates the efficiencies of share/unit holder information conduits via their own well-designed Internet platforms (Stocker 2012).

However, the previous predictions of negative externalities may be substantially mitigated. Crowdfunding is an Internet-based phenomenon, and the Internet will likely solve many of the previously cited issues. For example, start-ups and small businesses that are savvy about the impact of the Internet will likely create websites containing information blogs and other outreach tools to target their market customers. They may also use special login sections to communicate with their stockholders. These mechanisms can also be developed and maintained at a very low cost.

Conclusion

Overall, the new federal and state legislation on equity crowdfunding has the potential to significantly increase the pool of potential investors available in the marketplace, as well as, the options available to small companies that are seeking financing. However, it is yet unde- termined if it will act as a substitute for traditional means of financing or replace it in the near future. What is evident is that in the near future, the funding volume will continue to increase, new platforms Crowdfunding 141 will emerge while others cease to exist, and that a consolidation will ultimately occur in the market. Moreover, the federal and state legislation regarding ECF will provide for more expansive total investments by developing a more efficient crowdfunding architecture and leveraging the geographic biases examined by Agrawal (2011). Some early-stage start-up companies may also use crowdfunding companies such as Kickstarter to fund presales of their products (Wortham 2012), test their business ideas (Mollick 2014), get feedback about their product from the crowd awareness (Blohm et al. 2013; Giercak et al. 2016), while others may use equity crowdfunding as an alternative to their more conventional sources of funding (Stemler 2013; Yoichiro 2012). Especially for early-stage companies that may not have sufficient availability of equity capital, the new U.S. legislation may allow them access to other useful sources. Rather than using an investment banker or other financial intermediary, they will be able to use equity crowdfunding portals (Miller 2014) and potentially decrease time to fund and increase initial capital. Further, the investment banking community and the financial intermediary communities will likely make changes to meet the growth of crowdfunding as more new innovations in interest rates, instruments, and offerings are developed (Heming- way 2012). Crowdfunding is a dilated model of what disintermediated investment banking could look like (Rubinton 2011). Some organizations may choose to participate in this new venue by creating “clearing house” websites that enable investors to choose from a selection of offerings, or they may want to create restricted access portals for a particular level of investor. Existing entities that have offered access to prequalified accredited investors through restricted access Internet portals will likely need to revise their vetting procedures if they wish to attract equity crowdfunders (Cifrino et al. 2013). Particularly for entrepreneurs, small businesses, and project-based initiatives, equity crowdfunding has the potential to become a viable fundraising vehicle and a major alternative to traditional financing methods, such as banks loans, business angels, or venture capitalists, all of which are not always accessible to these entities. 142 EDUCATING SOCIAL ENTREPRENEURS

References

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Burton, D.R. 2012. “NSBA Comments to FINRA.” retrieved from http://www. nsba.biz/wp-content/uploads/2013/01/NSBA-Comments-to-FINRA-re- Crowdfunding-083012-Final.pdf Bygrave, W. 2009. “The Entrepreneurship Paradigm Revised: 20 Years Later.” Babson College Entrepreneurship Research Conference Doctoral Consortium Babson Park, MA: Babson College. Cardullo, M. 1999. Technological Entrepreneurism: Enterprise Formation, Financing, and Growth. Victoria, Canada: Abe Books. Cheung, N.S. 1987. “Economic Organization and Transaction Cost.” The New Palgrave: A Dictionary of Economics 2, pp. 55–58. Cholakova, M., and B. Clarysse. 2014. “Does the Possibility to Make Equity Investments in Crowdfunding Projects Crowd Out Reward‐Based Investments?” Entrepreneurship Theory and Practice 39, no. 1, pp. 145–172. Cifrino, D.A., T.P. Conaghan, E.C. Laurenson, A. Leder, T.J. Murphy, E. Orsic, J.P. Rochwarger, and Z.A. Swartz,. 2013. “United States: SEC Approves Changes to Private Offering Rules and Adopts New ‘bad actor’ Prohibitions; proposes additional changes to better monitor private offering market.” Mondag retrieved from www.mondaq.com/unitedstates/x/253824/ Securities/SEC+Approves+Changes+To+Private+Offering+Rules+And+ Adopts+New+Bad+Actor+Prohibitions+Proposes+Additional+Changes+ To+Better+Monitor+Private+Offering+Market. Collins, L., and Y. Pierrakis. 2012. The Venture Crowd: Crowdfunding Equity Investment into Business retrieved from www.nesta.org.uk/sites/default/files/ the_venture_crowd.pdf Crowdfunding Conference and Seminars. 2013. retrieved from http://www. crowdfundingconferenceseminar.com/ Dahlman, C. 1979. “The Problem of Externality.”Journal of Law and Economics 22, no. 1, pp. 141–62. Denis, D.J. 2004. “Entrepreneurial Finance: An Overview of the Issues and Evidence.” Journal of Corporate Finance 10, no. 2, pp. 301–26. Dingman, S. 2013. “Canadian’s Smartwatch Startup Matches Record $15-million in vc Funding.” The Globe and Mail May 16. FCA (Financial Conduct Authority). 2014. “The FCA’s Regulatory Approach to Crowdfunding Over the Internet, and the Promotion of Non-Readily Realizable Securities by Other Media—Feedback Back to CP13/3 and Final Rules” Policy Statement (PS) 14/4. London: Financial Conduct Authority retrieved from www.fca.org.uk/static/documents/policy-statements/ps14-04.pdf Fowler, B. 2015. “New Equity Crowdfunding Rules.” Legal I0 Retrieved from http:// www.lawgives.net/blog/equity-crowdfunding-what-does-regulation-a-mean- Freedman, D.M., and M.R. Nutting. 2015. “A Brief History of Crowdfunding Including Rewards, Donation, Debt, and Equity Platforms in the USA.” Retrieved from www.freedman-chicago.com/ec4i/History-of-Crowdfunding.pdf 144 EDUCATING SOCIAL ENTREPRENEURS

Gage, D. 2012. “The Venture Capital Secret: 3 Out of 4 Start-Ups Fail.”The Wall Street Journal. Retrieved from http://online.wsj.com/news/articles/SB100008 72396390443720204578004980476429190 Gaskill, L.R., H.E. Van Auken, and R.A. Manning. 1993. “A Factor Analytic Study of the Perceived Causes of Small Business Failure.” Journal of Small Business Management 31, no. 4, pp. 18–31. Gierczak, M.M., U. Bretschneider, P. Haas, I. Blohm, and J.M. Leimeister. 2015. “Crowdfunding: Outlining the New era of Fundraising.” In Crowdfunding in Europe: State of The Art in Theory and Practice, eds. D. Brüntje and O. Gajda, 7–23. FGF Studies in Small Business and Entrepreneurship. Verlag: Springer International Publishing. Harrison, R. 2013. “Crowdfunding and the Revitalization of the Early Stage Risk Capital Market: Catalyst or Chimera?” Venture Capital 1, no. 4, pp. 283–87. Hemer, J. 2011. A Snapshot on Crowdfunding (No. R2/2011). Working papers firms and region. Retrieved fromhttps://search.yahoo.com/yhs/search;_ylt= A0LEVif37ipVekYARqcnnIlQ?ei=UTF-8&fr=ytff1-&hsimp=yhs-002&hsp art=mozilla&p=%2BHemer%2C+J.+%282011%29.+A+snapshot+on+crow dfunding&fr2=sp-qrw-orig-top&norw=1 Hemingway, J.M. 2012. “What Is a Security in the Crowdfunding Era?” Ohio State Entrepreneurial Business Law Journal 7, no. 2, pp. 335–71. Lambert, T., and A. Schwienbacher. 2014. “Crowdfunding: Tapping the Right Crowd.” Journal of Business Venturing 29, no. 5, pp. 585–609. Mass Solutions. 2015. Crowdfunding Industry Report. Retrieved from www. crowdsourcing.org/editorial/global-crowdfunding-market-to-reach-344b-in- 2015-predicts-massolutions-2015cf-industry-report/45376 Metrick, A., and A. Yasuda. 2011. Venture Capital and the Finance of Innovation. Hoboken, NJ: John Wiley & Sons. Miller, B. 2013. “Crowdfunding Will Transform Finance Forever.” The Fundrise Blog. Retrieved from http://blog.fundrise.com/post/51571350796/crowd funding-will-transform-finance-forever Miller, Z. 2014. “Crowdbuilding: The Real Story Behind Crowdfunding that No One’s Telling.” Forbes. Retrieved January 13 from www.forbes.com/sites/ zackmiller/2014/01/13/crowdbuilding-the-real-story-behind-crowdfunding- that-no-ones-telling/#5f8ef9d94de4 Mollick, E. 2014. “The Dynamics of Crowdfunding: An Exploratory Study.” Journal of Business Venturing 29, no. 1, pp. 1–16. Moss, T.W., D.O. Neubaum, and M. Meyskens. 2014. “The Effect of Virtuous and Entrepreneurial Orientations on Microfinance Lending and Repayment: A Signaling Theory Perspective.” Entrepreneurship Theory and Practice 39, no. 1, pp. 27–52. Crowdfunding 145

Neiss, S. 2012. “Crowdfunding is the Real Deal: A Report from the Crowdfunding Bootcamp.” retrieved from www.crowdsourcing.org/editorial/crowdfunding- is-the-real-deal---a-report-from-the-crowdfunding-bootcamp/20362 Parker, S.C. 2014. “Crowdfunding, Cascades and Informed Investors.” Economics Letters 125, no. 3, pp. 432–35. Registered Crowdfunding Portals. 2015. Retrieved November 12, 2015 from www.ssb.texas.gov/texas-securities-act-board-rules/texas-intrastate- crowdfunding/registered-crowdfunding-portals Regulation D Resources. 2015. “Raise Capital with Regulation D.” Retrieved from http://regdresources.com/ Rubinton, B. 2011. “Crowdfunding: Disintermediated Investment Banking” Retrieved April 11from https://mpra.ub.uni-muenchen.de/31649/1/paper.pdf Schwartz, A.A. 2013. “Crowdfunding Securities.” The Notre Dame Law Review 88, no. 3, pp. 1457–90. Schwienbacher, A., and B. Larralde. 2010. “Crowdfunding of Small Entrepreneurial Ventures.” In Handbook of Entrepreneurial Finance. Oxford University Press. Retrieved September 28 from www.w-t-w.org/en/wp-content/ uploads/2014/03/Schweinbacher-Larralde-2010.pdf Senate Bill No. 3008, State of New Jersey, 215th Legislature 2013. Retrieved from www.njleg.state.nj.us/2012/Bills/S3500/3008_I1.PDF Shane, S. 2008. Angel Groups: An Examination of the Angel Capital Association survey. Cleveland, Ohio: Case Western Reserve University. Statista. 2015. “Statistics and Facts about Crowdfunding.” Retrieved from www. statista.com/topics/1283/crowdfunding/ Stemler, A.R. 2013. “The Jobs Act and Crowdfunding: Harnessing the Power— and Money—of the masses.” Business Horizons 56, no. 3, pp. 271–75. Stocker, M. 2012. “Start-Ups, Raising Money by Crowdfunding may Scare Off Other Investors.”Business Insider. Retrieved August 22 from www. businessinsider.com/too-much-crowdfunding-can-scare-off-investors-2012-8 Stuart, T.W., and X. Xu. 2003. “Liquidity Events and the Geographic Distribution of Entrepreneurship Activity.” Administrative Science Quarterly 48, no. 2, pp. 175–201. Tysiac, K. 2014. “Crowdfunding Poses Benefits, Risks.” Journal of Accountancy. Retrieved February 5 from www.journalofaccountancy.com/News/20149550.htm U.S. Securities and Exchange Commission 2013. “SEC Issues Proposal on Crowdfunding.” Retrieved from www.sec.gov/News/PressRelease/Detail/ PressRelease/1370540017677 U.S. Securities and Exchange Commission 2015. “Exemptions to Facilitate Intrastate and Regional Securities Offerings.” Retrieved October 1 from http://ftp.sec.gov/rules/proposed/2015/33-9973.pdf 146 EDUCATING SOCIAL ENTREPRENEURS

U.S. Securities and Exchange Commission 2015. “Jumpstart Our Business Startups (JOBS) Act.” Retrieved from www.sec.gov/spotlight/jobs-act.shtml Voorbraak, K.J.M. 2011. Crowdfunding for Financing New Ventures: Consequences of the Financial Model on Operational Decisions. In Partial Fulfillment of the Requirements for the Degree of Master of Science in Operations Management and Logistics, Eindhoven Technical University, Belgium retrieved from http://alexandria.tue.nl/extra2/afstversl/tm/Voorbraak_2011.pdf World Bank. 2013. Crowdfunding’s Potential for the Developing World. Washington, DC: World Bank. Wortham, J. 2012. “Success of Crowdfunding Puts Pressure on Entrepreneurs.” The New York Times retrieved from http://www.nytimes.com/2012/09/18/ technology/success-of-crowdfunding-puts-pressure-on-entrepreneurs.html Yoichiro, T. 2012. “Crowdfunding: Its Practical Effect may be Unclear Until SEC Rulemaking Is Complete.” Business Law Today. Retrieved May 25 from http:// apps.americanbar.org/buslaw/blt/content/2012/05/article-03-taku.shtml Zeoli, A. 2015. “State of the States: List of Current Active and Proposed Intrastate Crowdfunding Exemptions (updated).” Retrieved from http:// crowdfundinglegalhub.com/2015/01/16/state-of-the-states-list-of-current- active-and-proposed-intrastate-exemptions/ Zvilichovsky, D., Y. Inbar, and O. Barzilay. 2015. “Playing Both Sides of the Market: Success and Reciprocity on Crowdfunding Platforms.” Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2304101

Appendix: Examples of Some Crowdfunding Sites

Crowdfunding sites What they do Financing structure Causes.com Platform designed for campaigns Tends to have low fee structure on issues that impact the com- and all donors on the site munity. Designed specifically for understand that all of the 501(c)(3) registered nonprofits contributions will be tax to raise money. deductible. Crowdrise.com Caters to charitable and Anyone can sign up to volun- personal causes. It is a site for teer to launch a fundraising 501(c)(3) charities to raise campaign for a charity already money registered on the site, and everyone can become a social entrepreneur by picking a cause. Indiegogo.com Allows entrepreneurs to raise Uses an optional “keep what money for relatively anything. you raise” model with higher fees or pay less to use an all-or- nothing funding approach. Crowdfunding 147

Crowdfunding sites What they do Financing structure Kickstarter.com Helps artists, musicians, film- Entrepreneur sets a financial makers, designers, and other goal for amount to raise; if more creators find resources and funds are raised, entrepreneur support to make their ideas a keeps all the money; if the goal reality. is not met the supporters don’t pay and entrepreneur doesn’t get anything. Razoo.com This site is designed exclusively Using a keep-what-you-raise for social good causes but is not model, charges just 2.9% of limited to 501(c)(3), money raised. Rockethub.com A broad platform targeting Uses a keep-what-you-raise artists, scientists, entrepreneurs, model that rewards entrepre- and social leaders on their site. neur for hitting funding goal but penalizes if the target goal is not met. StartSomeGood. Caters exclusively to social Allows entrepreneur to set com change initiatives and helping a funding goal and a lower social entrepreneurs, nonprofits, “tipping point” at which your and community groups to raise project can minimally proceed the funds they need to make a and where you will collect the difference. money you raise. Designed especially for early- stage social good projects that are not (yet) 501(c)(3) registered nonprofits.

CHAPTER 27 What’s on the Menu? Feeding Your Social Enterprise

Elizabeth A.M. Searing

University at Albany, State University of New York

Introduction

In this exercise, you will have the opportunity to apply your knowledge of different financial resources to different hypothetical social ventures. Using a handy menu of potential sources of operating revenues and longer-term financing, you can design or augment the revenue portfolio or financial approach of a social venture through the familiar process of ordering dinner at a restaurant.

Learning Objectives

• To familiarize participants with types of revenues and their attributes • To provide experience in the evaluation and construction of revenue portfolios • To move beyond the solo entrepreneur model and into the more valid team model • Optional: To develop a foundation for an actual client project

Group Size

This exercise can utilize any number of groups of three to five members each. There should be enough members to encourage healthy discussion, 150 EDUCATING SOCIAL ENTREPRENEURS but not enough that individual members of the group are not heard. This number also closely approximates the founding leadership or core consulting team.

Time Required

About 60 to 75 minutes, depending on length of discussions. The discussion can be broken into two sessions, depending on normal session or class length and whether the final case is assigned as homework. Reading of previous chapters and materials on finance should ideally be conducted prior to class in order to maximize the usefulness of the time available for interaction, but such reading can be conducted in class as part of a two- or three-session experience. If there are any questions regarding the selection of appropriate pre-class reading materials, please check with your facilitator or instructor. If you are engaging in self-directed study, please read the chapters in this workbook on both finance and corporate form, plus the recommended readings included at the end of this exercise. Since the appropriateness of many types of finance is heavily dependent on corporate form, a working knowledge of corporate forms is a prerequisite for this exercise in addition to a working knowledge of financing types.

Exercise Schedule

Following reading preparation, this exercise has four major sections. The first two discuss the more structured Case 1 included in this chapter, with discussion occurring at the more interactive small group level before the group advocates as part of a larger class discussion. The third and fourth sections follow the same pattern using the more open-ended sample case included in this exercise. If necessary, additional time can also be added to the beginning of the exercise for in-class reading of the material. You should read Case 1 after you read the background materials on finance and corporate form. Be mindful of this if you were assigned Case 1 for pre-class reading with the other background selections. Ask your instructor whether additional materials for the second case study should be included in the discussion (if such materials have not been distributed already), especially if this exercise is being conducted What’s on the Menu? Feeding Your Social Enterprise 151 within a single session. If there are additional materials being provided in class, additional time for individual reading should be given between the class discussion of the structured Case 1 and the small group discussion of the second case.

Unit time Total time 1. Small Group Discussion: 10 min 10 min Case 1 (Solar Ovens) 2. Class/Large Group Discussion: 10 min 20 min Case 1 (Solar Ovens) 3. Small Group Discussion: 20 min 40 min Case 2 (TCM) 4. Class/Large Group Discussion: 20 min 60 min Case 2 (TCM)

Assignment

1. Background and Preparation Though many social ventures rely primarily on revenues earned through market transactions, this is not always the case. Start-ups of any form often utilize individual contributions from the founding team or their inner circle, while angels (whether investors, philanthropists, or a combination) provide funds in exchange for a wide variety of benefits such as financial profits, simple repayment, or control. The type of benefits possible is heavily influenced by the corporate form of the social venture. Also, social ventures with a for- profit form can qualify for some foundation grants that traditional ventures could not qualify for. Finally, there is a very broad range of finance options for social ventures that have received a tax-exempt designation, and the type of finance is often tied to the type of good provided by the venture (Wilsker and Young 2010). As a part of this exercise, you should have a literal “menu” of different financing options. This is only a concise listing of potential resources that you have previously learned, and you should feel free to use your notes and, if possible and permitted, outside resources to refresh your memory or clarify a concept. The types of finance have been grouped according to usage, which can be used as a guide for 152 EDUCATING SOCIAL ENTREPRENEURS

approaching the different types of financing requested in the case studies. Case 1 will provide the content for the initial discussions in your group and class. The description is short, and the case handout contains a list of questions that can be used to guide your thinking as you consider different financing options. Be sure to write down your thoughts so that you can refer to them later. Remember as you consider these options that questions of finance are also questions of corporate form and of operations. With regards to corporate form, tax-exempt ventures will be far more attractive to donors than a for- profit; additionally, foundations need to take extra caution when providing funds to a for-profit venture, often through a program- related investment (PRI). With regards to operations, no amount of “appropriateness” will be able to overcome a poor business plan. Having a venture that clearly should rely on market transactions does not guarantee that such transactions will happen, so the plan and audiences are an integral part of financial portfolio decisions. Also, as a unique trait of social ventures, be mindful that the recipients of social goods and the market goods may not be the same group, and neither is obligated to behave in the way you would hope or expect.

2. Analysis and Discussion

Unit time Total time 1. Small Group Discussion: 10 min 10 min Case 1 (Solar Ovens)

The initial case study is hypothetical and designed to expand your thinking. In your group, share your written thoughts on potential financing for this social venture. Think about and discuss the different elements that would impact the answers to the questions following the case description. Try to make sure that everyone in your group is heard: remember, teams are often made of very different skills and personalities. Since there is a limited amount of information, be sure and explicitly state any assumptions you may be depending on, such as the degree of cost savings from larger orders or particular market conditions. It’s often these assumptions that prove What’s on the Menu? Feeding Your Social Enterprise 153

to be the road bumps in business deployment! After the initial discussion, try to come to a general consensus on the revenue portfolio of your solar oven venture. List the three most important factors which that support that decision, such as corporate form, location, cross-subsidization, or other considerations.

Unit time Total time 2. Class/Large Group Discussion: 10 min 20 min Case 1 (Solar Ovens)

Continue the discussion of the case as a class by pooling the recommendations of the Small Groups. You may want to find a way to concisely show your portfolio, such as a pie chart. Be sure to employ a method of recording that allows everyone to retain and revisit the information later. This can be either an instructor-led recording of the salient factors on a white board or electronic device, group members providing pie charts through white boards or handouts (given appropriate time and tools), or groups can nominate members to verbally communicate the ideas of the small group. Consensus is not necessary, especially since questions regarding both whether a revenue source should be considered in addition to how much of the portfolio it should have are in play. Also, depending on the wishes of your instructor, you can concentrate on a particular funding need, such as operational funds, capital financing, or the start-up needs of your solar oven venture.

Unit time Total time 3. Small Group Discussion: 20 min 40 min Case 2 (TCM)

The second case study is an example of an actual nonprofit social enterprise that was presented with a series of funding challenges. At each of these junctures where a new program was created, your group should discuss the financial situation, any financial concerns, any actions taken, and any additional potential solutions for the predica- ment, if there is one. A large amount of additional material is available due to the publicly available financial records for this and other benchmark nonprofit organizations. Teams should be able to reference the information they rely on in addition to any assumptions 154 EDUCATING SOCIAL ENTREPRENEURS

which are needed to make their suggestions viable. As with the first case, teams should be prepared to share their thoughts and findings with the other small groups.

Unit time Total time 4. Class/Large Group Discussion: 20 min 60 min Case 2 (TCM)

As with the first case, the discussion of the second case study as a large group should concentrate on the exploration of potential issues and solutions rather than a litmus right or wrong. If time permits, focus on each juncture where a new program was introduced. If time is short, concentrate on the current financial situation and offer a recommendation on the funding portfolio moving forward. In addition to public resources such as websites and annual reports, the Form 990s would be especially helpful in developing quality prognoses. At the conclusion of this exercise, you should have a thorough and organized method of evaluating a social venture’s revenue sources and portfolio that can be applied to various corporate forms and situations.

References and Additional Resources

Bowman, W. 2011. Finance Fundamentals for Nonprofits: Building Capacity and Sustainability. Hoboken, NJ: Wiley. Hebb, T., A. Wortsman, M. Mendell, N. Neimtan, and R. Rouzier. 2006. Financing Social Economy Enterprises. Ottawa: Carleton Centre for Community Innovation. Justis, C.T. 2012. “Current Issues in Social Entrepreneurship Funding and Finance.” In Social Entrepreneurship: How Businesses Can Transform Society, ed. T.S. Lyons, 1–22. Santa Barbara, Calif: Praeger. Wilsker, A.L., and D.R. Young. 2010. “How Does Program Composition Affect the Revenues of Nonprofit Organizations?: Investigating a Bbenefits Theory of Nonprofit Finance.”Public Finance Review 38, no. 2, pp. 193–216. Young, D.R. 2007. Financing Nonprofits: Putting Theory into Practice. Lanham, MD: Rowman Altamira. Young, D.R., E.A.M. Searing, and C.V. Brewer, eds. 2016. The Social Enterprise Zoo: A Guide for Perplexed Scholars, Entrepreneurs, Philanthropists, Leaders, Investors and Policymakers. Cheltenham, UK: Edward Elgar. What’s on the Menu? Feeding Your Social Enterprise 155

Social Enterprise Finance Menu

Classic Dishes: Types of Operating Funds

• Earned income • Government contracts • Foundation grants • Federated gifts and grants • Resources from affiliates • Individual contributions (large/few) • Individual contributions (small/many) • Membership • Endowment/Investment income

Kids’ Menu: Special Start-up Needs

• Start-up costs • “Burn” money

Heartier Portions: Capital Financing

• Grants • Internal sources • Equity • Equity-equivalent or quasi-equity • Debt

Chef’s Specials: Innovative Financing

• Crowdfunding • Loan guarantees • Pooling • Program-related investments • Social impact bonds 156 EDUCATING SOCIAL ENTREPRENEURS

What’s on the Menu? Feeding Your Social Enterprise Case 1: Solar Ovens

While you were camping, you tried a new type of solar oven that really impressed you. You ask yourself whether people with a serious daily need for solar cooking would benefit from this model. When you returned from your trip, you looked into how it was manufactured, how easily it was repaired, and how easy it was to ship. After contacting the manufacturer and then some of your own friends in Malawi, you decide that there is an opportunity here not only to sell these ovens in Malawi, but also to set up a system of micro-franchises based on selling the ovens. Though you think this could definitely work, you have already identified a few problems. First, your market research indicates that the price the ovens will get is about even with the cost, but this excludes any margin taken by the franchise owner or you. Second, the neediest Malawians are in the rural areas, but they are likely able to pay even less of the price. There are economies of scale in the production of the ovens, and you are indifferent between living in the United States or in Malawi. In the discussion about the viability of this business, use these questions to guide your thinking:

• What are your initial thoughts about the venture? • What role does corporate form play in potential revenue sources? • How many enterprises would be involved, and which country or countries would they be involved in? • How would you secure start-up capital? • Can you cross-subsidize the ovens sales with anything? • What are the benefits and complications of wanting to involve microfranchisees? • What are the biggest complications about this taking place in potentially two countries? How would answers change if you were entirely located in Malawi? In the United States? • What is “success”? What’s on the Menu? Feeding Your Social Enterprise 157

What’s on the Menu? Feeding Your Social Enterprise Case 2: Trinity Community Ministries

Trinity Community Ministries (TCM) began as a soup kitchen operated by a local church in 1988, but has since expanded into several different programs. For example, “Trinity House-Big Bethel” formed in 2005 as a transitional housing center for homeless men. Recently, a program specifically dedicated to serving the needs of the homeless which are veterans has also begun. Despite deep community ties and respected programming, however, TCM is currently operating at a loss. Using publicly available documents such as the Form 990s (available at www.guidestar.com, among other places), websites, and informational materials, develop an assessment of and recommendations for their revenue portfolio. Use the social enterprise menu as a way to guide your thinking on potential options.

CHAPTER 28 How to Crowdfund Your Venture

Stephanie Black

University at Albany, State University of New York

Introduction

In this exercise, you will have the opportunity to apply your knowledge learned about crowdfunding to develop and fund a social venture.

Learning Objectives

• To familiarize participants with how to raise capital via crowdfunding • To learn how to develop a business on the Internet • Optional: To actually fund a real project via a crowdfunding portal

Group Size

This exercise can utilize any number of groups of three to five members each. There should be enough members to encourage to help develop the business idea and learn how to launch it via a portal. The class may want to be divided based on interest level in different types of ventures.

Time Required

Ideally this project should be used as a team-based project through the entire semester. However, a shorter version could be implemented in 160 EDUCATING SOCIAL ENTREPRENEURS two or three class sessions of 60 to 75 minutes, depending on length of discussions.

Assignment

• In the first class session, each team should choose a business that they want to launch on Kickstarter. Each team should refer to the www.kickstarter.com/learn link to walk them through the first part of the project and register online. After choosing a company idea, each team will register and then build their project on the Kickstarter portal. • The group is also responsible for developing a PowerPoint pitch deck of their business, which they can use to get feedback from the crowd before the next session. Please refer to various free sources online for recommendations on pitch decks. For example, http://articles.bplans.com/what-to- include-in-your-pitch-deck/ provides tips on creating a pitch deck. • In the second scheduled session, students will then present their pitch decks in class, as well as give the feedback they received from the crowd from Kickstarter. • Note, at this time the project will not be launched. It is expected that each team only provide the initial prelaunch feedback on their project. The results should be summarized by the team in a three-page summary, and a copy of the pitch deck should also be remitted at this time.

Guidelines for Instruction and Facilitation

Background and Student Preparation: The purpose of this project is twofold. One, it will give students insight on how to actually develop a venture and the process of how to fund it using a crowdfunding portal. Second, it will allow them to gain experience working with a team. It is suggested that each team develop a rubric of what each team member is expected to achieve and how they will evaluate each other in the process. How to Crowdfund Your Venture 161

If the learning outcome is extended, it would be suggested that the instructor can add a third part by having each team attempt to fund their project on Kickstarter. Then, the progress of the funding campaign should be tracked over a fixed period of time, and the results summarized in a three-page summary. The proceeds of the project should be then donated to the charity. In this case, it is recommended that the project be oriented around a social venture, with profits donated to the organization. This would require prior approval from the Institution, but would also be a good way of actually showing the students that their efforts can actually be applied and raise funds for a community initiative.

Discussions

Class discussions should be oriented around the entrepreneurial process of crowdfunding their project and comparing each team’s initiatives. The instructor may provide input and suggestions as needed or merely let the other students provide all the feedback, which is another method of sim- ulating the wisdom of the crowd.

CHAPTER 29 Communicating for Funding

Marie Löwegren

Lund University

Introduction

In this exercise, you will plan, develop, and discuss how to communicate with different individuals in or outside of organizations with the purpose to secure funding for social enterprises. Social entrepreneurs often raise funds from different kinds of stakeholders like the municipality, private donors, organizations, companies, people in general, and so on. You will, in teams, analyze your target group of individuals/organization, plan your communication strategy, discuss and refine it, and (if possible) implement and evaluate it. The exercise covers a set of dimensions:

• Communication. In communicating, you need to consider that different stakeholders/audiences are triggered by different messages and thus need to be “talked to” in different ways and with different sets of communication tools. • Fundraising. This is ultimately an exercise in fundraising, which is fundamental for some projects in social entrepreneurship. • Project management. This is teamwork that needs to be managed. Project management therefore becomes part of the learning package.

Purpose/Learning Objectives

1. Learning objectives • To understand the necessity and impact of communication • To learn to analyze target groups from a communication perspective 164 EDUCATING SOCIAL ENTREPRENEURS

• To understand that there are different ways to communicate • To adopt communication to different target groups • To develop a communication plan • To practice teamwork

Optional—If Implementing

• To practice communication, and adapt to situation • To experience the unforeseen • To develop self-confidence through action

2. Key takeaways • Realization that there are many ways to communicate • Realization that different individuals/organizations need to be approached in different ways • Realization that successful fundraising often needs a well thought through strategy

Optional—If Implementing

• Realization that plans often needs adjustments when they are implemented • Experience in coping with unforeseen situations • Increased self-confidence

Group Size

A class of 10 to 50 students divided into teams of preferably three to five members in each.

Time Required

Full time prework for one week and a group and class discussion for approximately 2 hours. Optional implementation work for one additional week, followed by a report and class discussion for approximately 2 hours. Prework and the optional implementation work could be scheduled part-time for a longer period of time. Communicating for Funding 165

Exercise Schedule

The following schedule is approximate. Time frames are dependent on the number of teams and if the exercise is scheduled full time or part time.

• Day 1 to 5: Prework • Day 6: Prepare for group discussion • Day 7, approximately 2 hours: Group discussion and class discussion • Optional Day 8 to 12: Implementation • Optional Day 13, approximately 2 hours: Report and class discussion

Assignment

Communication skills are necessary for social entrepreneurs in many situations and toward many kinds of stakeholders given its nature of constructing new value chains and business models. For a social entrepreneur, communication is not needed to get customers as much as to create positive social behaviors, educate stakeholders, attract peoples interest for a cause, and appeal to their motives to help others. The driver of communication in social entrepreneurship is often not financial returns, but rather some kind of social benefits. This implies that the arguments toward stakeholders often are different too. In every case of communication, it needs to be thought through and adapted to the stakeholder in question. A central task for many social entrepreneurs is fundraising, which is why this exercise focuses on that particular mode of communication.

1. Prework You will work in teams of three to five students. Your team’s task is to create a communication plan to raise funds for a specific organization. Your instructor will give you the name of an organization developed by social entrepreneurs, and a particular target group to approach to raise funding for a project that the organization is currently running. Possible target groups are: 166 EDUCATING SOCIAL ENTREPRENEURS

• Companies • Foundations • Retired people • Working people • Students

Your instructor will let you know which target group to pursue, but you are allowed to specify the target group in order to narrow it down. For example: Companies in the xx industry located within xx miles from xx, or working people who are interested in xx, and so on. Your team will need to do the following:

(a) Individually read the three articles listed under VII in the following. The articles will show you different perspectives of communication, which in turn will inform your planning. (b) Collect information about the organization’s (for which you are fundraising) activities, goals, strong and weak points, and so on. Your instructor will tell you if you are allowed to contact the organization or if you should use other sources of information only. (Alternatively the instructor may give you information about the organization and its activities.) (c) Collect information about your target group, that is, what are their interests, what do they think and feel about things, and so on—get to know them! (d) Design a message that will help reach the organization’s goals and attract your target group. Use the information obtained in A to C. What could you say that will interest your target group? Who should say it? (e) Decide how you should communicate your message: Face to face, e-mail, ad, poster, telephone, Facebook, and so on. Think about a combination of different channels. Remember your target group’s habits and interests. (f) Create an action plan. What needs to be done first, second, and so on, and who should do it? (g) Summarize all of the aforementioned in a written communication plan. The structure of a communication plan could vary—see links Communicating for Funding 167

to some examples and templates under VII in the following. The important thing is that you include B to F which are mentioned previously, and that your plan is well thought through. It must be likely that your target group will be attracted to your message, and that they will be reached through your action plan.

2. Prepare for group discussion You should now send your finished Communication plan to other groups (your instructor will tell you which), and in return you will receive a number of communication plans from other groups. Your task is to read them through and comment on them. You may find ways to improve the message, the combination of channels, additional or other channels, the action plan, and so on. Note your comments. All members of the team must read and comment on all the communication plans assigned to your team.

3. Conduct group discussion You will be placed in groups with those (all or some) whose communication plans you have read. They will have read your communication plan. Your task is to give each other feedback on your work. Approximately 15 to 20 minutes per plan will be needed.

4. Class discussion After giving each other feedback, each group will be asked to summarize the discussions and in particular tell:

• The most significant learning outcome from the session • The differences in approaches in the communication plans • Why there are differences • What seems to be most difficult with planning for communication • How these difficulties could be overcome.

5. Optional: Implementation With the approval of the institution and the organization for which fundraising should take place, your team’s task is to implement your communication plan (after consideration of the feedback you got 168 EDUCATING SOCIAL ENTREPRENEURS

in Step 3) and raise as much funds as possible for the organization. During implementation, you are to take notes of what went according to plan and what did not. Reflect on why some things did not go according to plan and how you coped with that.

6. Optional: Report and class discussion Your team should make a short presentation (approx. 10 minutes) of your plan and your implementation work, highlighting your reflections. The presentation should contain: target group information, clearly motivated communication approach, the process, the outcome, and a discussion about why you reached your result. If possible, a representative for the organization receiving the funds should be present. After the presentation, questions from the class are encouraged.

References and Additional Resources

Castronovo, C., and Huang, L. 2012. “Social Media in an Alternative Marketing Communication Model.” Journal of Marketing Development and Competitiveness 6, no. 1, pp. 117–31. Community Tool Box’s “Section 1. Developing a Plan for Communication” available at http://ctb.ku.edu/en/table-of-contents/participation/promoting- interest/communication-plan/main Korosec, R.L., and E.M. Berman. (2006. “Municipal Support for Social Entrepreneurship.” Public Administration Review 66, no. 3, pp. 448–62. Maak, T. 2007. “Responsible Leadership, Stakeholder Engagement, and the Emergence of Social Capital.” Journal of Business Ethics 74, no. 4, pp. 329–43. Patterson, S.J., and J.M. Radtke. 2009. Strategic Communications for Nonprofit Organizations: Seven Steps to Creating a Successful Plan. Hoboken, NJ: John Wiley & Sons. WWF International Communications Department Programme/Project Communications Strategy Template available at http://wwf.panda.org/what_ we_do/how_we_work/programme_standards/ CHAPTER 30 Volu: Validating the Business Case

Chris McCarthy, Anthony Richichi, and Gary E. Shaheen

Social Dynamics, LLC

Summary

This case provides an example of the methods used by a team of two entrepreneurs in testing and financing their social venture. Aspiring social entrepreneurs must often search for seed capital to start their social ventures. “Angel Investors” are often sought to provide a one-time investment to help a company during start-up or through its early, difficult stages. Another widely used method for acquiring seed capital that can be used as collateral and for leveraging other funds are business planning competitions. Business planning competitions have been popularized by television shows like “Shark Tank” in the United States. Perhaps other countries have similar types of shows that pit entrepreneurs against each other for cash prizes awarded for the best business plans. But what can aspiring social entrepreneurs learn from business plan competitions that help them improve the viability of their social ventures other than from the cash award and recognition that they can provide? Chris McCarthy and Anthony Richichi (“AJ”) describe how winning business planning competitions also provided valuable learning experiences that helped them to reposition their venture to improve its chances for success. Their process of refining their social venture, “Volu,” provides a case example for instructors to use in the classroom as they teach aspiring social entrepreneurs how to start and manage the early stage development of their social ventures. 170 EDUCATING SOCIAL ENTREPRENEURS

Learning Objectives

By the end of the case discussion, students will develop improved awareness and knowledge of the preparation required to take a social venture from the conceptual stage to financing of the implementation stage and to successful implementation and the importance of continuous research to improve viability. Terms used within the example are described as follows:

• Conceptual viability: The extent to which the social venture concept mirrors the dual social and business goals that define social ventures (Often called “the double-bottom-line”). • Market viability: The extent to which the social venture concept conforms to research that indicates that it is a needed service by its targeted constituencies. • Business viability: Estimates of financial return on investment validate that the social venture can secure sufficient income to maintain operations. • Target market: Those who will benefit directly or indirectly from the social venture. • Seed capital: Early investment in business start-up operations that help it to demonstrate Conceptual, Market and Business Viability. • Business Plan Competitions: Often organized by universities, where prospective entrepreneurs present their business ventures and panels of judges determine financial awards based upon the strength of their “venture pitches.” • Venture Pitch: The presentation to business plan competition judges or other investors meant to secure investment in the venture.

Case Example—“Volu”

1. Conceptual Viability After witnessing the unsuccessful implementation of a volunteer drive in Syracuse, New York, Chris McCarthy and Anthony Richichi (AJ) were asked by a nonprofit organization for a quote to develop a new, more user-friendly tool to connect volunteers to organizations Volu: Validating the Business Case 171

that are addressing social causes. The nonprofit staff they talked with offered that many nonprofits cannot afford salaried staff and must rely on volunteers. However, with few staff, managing volunteer schedules and assignments the traditional phone call, and paper and pen methods was too time-consuming and inefficient. Chris and AJ used this initial feedback in developing the concept for creating a nonprofit organization responsible for the development and maintenance of an open-source application that would manage the recruitment, selection, assignment and scheduling of volunteers, particularly in small nonprofits that lack the human resources to manage volunteers effectively. This new venture was described con- ceptually as a simple tool that pulls volunteer events from Event- brite, Google calendar, and Facebook. When people who wanted to give their time as volunteers accessed the application, they would be shown a list of nearby events so they could easily apply and help. The product was deemed to have initial conceptual viability because it filled an apparent need among nonprofits to increase their volunteer base efficiently, and among prospective volunteers because it provided a single point of access to events that they could match to their talents and interests as volunteers. Like many early-stage start- up social entrepreneurs, Chris and AJ looked for sources of start-up capital, beginning with local business plan competitions.

2. Market Viability Chris and AJ, through their connections at Syracuse University, looked for business competitions posted on university websites where they could pitch their venture. The volunteer App was presented to two business competitions in New York State. In the first, smaller and regionally defined competition, Volu garnered second place. Chris and AJ were diligent in learning from the experience and improving their venture pitch for a second, larger New York State Business Plan Competition (NYBC) open to all regions in the state. In reviewing a recording of their second-place presentation, they found that Chris took twice as much time explaining how Volu made volunteer management easier than he did on why volunteer management was important to the nonprofit market to begin with. 172 EDUCATING SOCIAL ENTREPRENEURS

The presentation scores on market viability reflected that disparity, with low marks from the judges on the question of whether the venture was really needed in the marketplace. Once Chris and AJ had identified the most critical points that needed to be conveyed and the improvements they needed to make for the next venture pitch, they went through the presentation and adjusted the structure to emphasize them. They knew the judges would have the most energy in the beginning of the presentation and would be more likely to remember points made at the end. Acting on this knowledge, they decided to put the most important points, like the problem statement, emphasizing the market need that the product would fill, toward the beginning of the presentation and the points that were most compelling, like Volu’s market penetration strategy, toward the end. They also learned quite a bit from the experience, particularly the importance of connecting concept to market viability to pitch their venture successfully. For example, after presenting Volu’s competitors, and the ways in which they failed and created a gap in the marketplace for a volunteer organizing tool, specific points were laid out that described how Volu addressed those gaps. Instead of seeing just potential competition, the judges were instead shown why the competition wasn’t effective and how Volu would address their shortcomings. This disciplined structure not only helped judges stay engaged and follow the presentation, but made it easier for Chris to memorize the slide ordering and focus on their receptiveness and reactions when presenting.

3. Business Viability The Volu venture concept won first place at the NYBC and the entire Social and Nonprofit category and a $10,000 prize. Without the validation and initial funding provided by the NYBPC, it is unlikely that Chris and AJ would have secured an additional $40,000 in grants and investments. Now they were ready to test its business viability. Shortly after NYBPC, Chris set off on a 100-day journey across the country to learn more about the volunteering market as experienced by nonprofits, market the platform, and develop a more widely usable product based on customer feedback. During Volu: Validating the Business Case 173

the 3 plus months that Chris spent traveling, he gathered information about the potential business viability of the App. By meeting with nonprofits and their volunteers, he obtained the information necessary to fully understand the problems that they were facing and better identify the market need that the product could fill. Upon Chris’ return and after consulting with attorneys and potential investors in the project, Chris and AJ discovered the costs and challenges associated with becoming a nonprofit organization made producing and marketing the App cost-prohibitive and not business-viable. In essence, although their concept was to create a product through a social venture, operated by a nonprofit, the nonprofit corporation model was not conducive to their business idea. They reviewed the information they obtained during the trip with their attorneys and investors, and based upon their comments, Chris and AJ decided their best chance of building a successful enterprise was as a for- profit corporation. They developed a test version of their App that was sufficiently functional for presentation to investors and formally incorporated Volu as a C-Corporation (a for-profit corporation legal designation in the United States) in January 2015. As with any start-up company, Volu involved its target users from an early stage, using their feedback on the test-marketed App to direct development and minimize wasted time. Chris and AJ solicited a group of staff from various nonprofit organizations that used volunteers to test the product in their agencies. It was important to test the product initially before it went into full-scale production to uncover any hid- den challenges. During testing, they discovered that without a contract, wage statements, and a formal hierarchy to help with monitoring, a volunteer’s involvement in an organization is very hard to track and organize by the nonprofit. It was also difficult to determine how many paid staff hours could be required to manage volunteer recruitment, training, scheduling, and so on. For example, before someone even decides to get involved in an organization, a staff or volunteer coordinator needs to interview them, train them, and invest time so that the volunteer can contribute to an organization. During the process, the volunteer could lose interest and decide not to fulfill their original commitment, and that significant time investment is lost. Even for 174 EDUCATING SOCIAL ENTREPRENEURS

larger nonprofits, the time that a staff might spend in processing and managing volunteers could be extensive and consequently, they may not be able to recruit and manage as many volunteers that they need in support of their mission. After speaking with the test group, it appeared that the original product’s conceptual and market viability could be improved and they decided that Volu should refine the focus of their product to include features that would help nonprofit organizations and volunteer connect as efficiently as possible.

4. Bringing the Social Venture to Fruition In order to develop the features to accommodate their venture’s shift improved focus, Volu interviewed dozens of organizations, seeking to understand how they administer volunteers and use them in support of their mission. Three common themes emerged in how successful nonprofits recruited, supervised, assigned, and organized their volunteers:

• Organizations that rewarded volunteers commensurate with their commitment were able to increase the amount of time volunteers stayed involved. This was independent from the size of the organization, and the field that the organization operated in. • Organizations using volunteers in their daily operations were able to keep costs low and provide a more rewarding and enriching experience for volunteers, increasing the likeliness of the volunteers continued involvement. • Organizations that made a large initial investment for a customized database tool to facilitate volunteer management had a more thorough understanding of the impact of each opportunity they offered, which lead to greater success.

This led the development of the next iteration of Volu’s App platform, that would offer a streamlined alternative to traditional methods to meet the needs of organizations seeking to recruit and utilize volunteers efficiently and volunteers themselves that would avoid the often lengthy and time-consuming onboarding process. Volu: Validating the Business Case 175

5. Conclusion Volu went on to win tens of thousands of dollars in business plan competitions and built a small user base even before launching the beta version of their platform in July 2015. For Volu, hearing directly from their targeted market (nonprofit organizations that use volunteers) was crucial in validating their assumptions about the conceptual, market, and business viability of their product, and help them in refining their future business plans. The considerable time and effort that Chris and AJ invested in conceptual, market, and business research were key factors in presenting their venture pitch to competition judges and other investors; securing new investment; and establishing their target market’s commitment to purchase their product.

Assignment

The Volu case example provides powerful anecdotal evidence that social venture start-up is as much “art as science.” When introducing the Volu case to generate class discussion, instructors should provide discussion questions like these that help students understand how a social venture’s business viability is dependent upon adequate planning and preparation. The instructor is free to include questions based upon their own experience or offer questions related to their university’s business plan competition guidelines, or questions like these:

• Identify three particular advantages that the Volu creators derived from researching conceptual, market, and business viability? • If not participating in a competition, what are some ways that a social entrepreneur can get feedback on their presentation? • Why is it important to structure a presentation before outlining how each point will be addressed? • Think about presenting a social venture, what important points should be introduced early? What points should be presented last? Does this differ if you are presenting to: business plan competition judges, investors, or potential buyers? 176 EDUCATING SOCIAL ENTREPRENEURS

• What are some potential questions that judges might ask a social entrepreneur about their venture? How can these questions be addressed proactively during the presentation and with what advance preparation? • Outside of fund raising, how else can a social entrepreneur validate their venture? CHAPTER 31 Worksheet for “Mobilizing Resources to Fund Social Ventures”

Paul Miesing

University at Albany, State University of New York

Operations

Manage Risk Carefully: What will be your processes, policies, and procedures? A start-up should require little start-up capital and low over- head, as well as a limited amount of technical skills to operate unless the employees already possess the knowledge and skills to be successful.

Internal Controls = �� Personnel Relations = �� Technologies = �� Regulations = �� Milestones = ��

Finances

Establish Financial Oversight: How will you make money to cover expenses? Make certain you have sufficient capital to see the venture through the first few years. 178 EDUCATING SOCIAL ENTREPRENEURS

Financial Statements = �� Initial Investment Required = �� Funding Sources and Amounts = �� Forecasts and Pro Formas = �� CEO and Board Members = �� PART VI Scaling the Social Venture

CHAPTER 32 Systems Thinking for the Social Entrepreneur

Eliot Rich

University at Albany, State University of New York

Introduction

Creating and maintaining a social enterprise is a challenge, even to experienced managers. Recognizing the need for action, deciding the course to take, obtaining resources, and putting them into place take determination and vigor, commitment, and good fortune. Yet these are not sufficient to ensure continued success. The actions may require adjustment, the resources get used up and require replenishment, and the determination and vigor of the participants may wane. This chapter argues that the application of systemic thinking techniques helps the social enterprise identify the factors that strengthen or weaken its ability to provide services over time successfully. Enterprises and actions are embedded in their environment, and this environment exerts pressures that act on the enterprise in ways that may support its goals or in ways that counter the desired results. Systems thinking is a strategic approach to planning and implementation that looks to improve the achievement of the enterprise’s goals by recognizing the enterprise, its customers and suppliers, and its environment as a single unit that develops and changes over time. Implicit in this discussion is the idea that a social enterprise may be distinguished by its intent to help alleviate a social problem by providing an economic solution. While the ideas developed in the following depict this problem-oriented view, the same 182 EDUCATING SOCIAL ENTREPRENEURS model can easily be seen as its dual: an opportunity to provide positive social consequences as an intended primary or side effect. There are at least three good reasons to make the effort to understand your social enterprise in its context, and how it interacts with other organizations:

1. The underlying problem is always more complex than you think. Imag- ine you are developing an enterprise that provides high-technology job training for those supporting homeless or marginally housed families. The immediate need for this activity is based, perhaps, upon a personal appeal within the community for assistance. A simple and direct solution is to organize a program of technology, teachers, and texts. Over a period of months, some funds are obtained, a program is executed, and the target families are better positioned to support themselves. The literature on homelessness makes clear that education and business skills are just one factor solving homelessness. Your program may not address the individual’s family needs, their mental and physical health, or incidents of violence. Scholars argue that there are structural factors as well, including the societal pressures of economic cycles, housing costs, poverty, and deinstitutionaliza- tion (Cronley 2010; Main 1998; Nooe and Patterson 2010; Sommer 2000). The debate continues over how these factors come together to perpetuate homelessness in times of relative prosperity. So, if you want to solve this problem, ask yourself if your plans to take direct action against homelessness make sense. It certainly can make a difference to the participants, but it may not be a complete long-term answer. The effectiveness and sustainability of your program will last longer once you understand the underlying causes of homelessness. Your strategy will improve when you take a step back and examine the personal context in which your program exists. 2. Robust solutions to complex situations require openness to multiple perspectives and stakeholders. The South Asian parable of “blind men and an elephant” is instructive. A group of blind men approach an elephant, wondering about the true nature of the creature. One touches the tail, and believes the elephant is like a snake. Another grasps a leg, and declares that the elephant is most like a stout and rough-barked Systems Thinking for the Social Entrepreneur 183

tree. A third holds an ear, and reflects on the nature of the beast as a type of sail. Each man’s observation holds merit, but a single point of view does not reflect the true nature of the underlying animal, how it moves, and how it grows. The decomposition of the system into discrete features detracts from an understanding and appreciation of its wholeness and the result of the interactions of its components. The leadership of successful enterprises benefit from understanding both their own requirements and those of their stakeholders: those who have power to influence the organization through power or resources, have a legitimate formal or informal relationship with the organization, or who otherwise have some kind of claim on its attention (Mitchell, Agle, and Wood 1997). Social enterprises, with their combined business and societal agendas, have a broad set of stakeholder demands who may differ on which aspects of a problem are the most urgent, how to approach solutions, or how their own interests are affected by the enterprise’s activities. Returning to our previous example of homelessness, a new job training program should reflect not just the capabilities of the enterprise but also the needs of its stakeholders. For example, are we training for jobs that meet the needs of the local economy? Are the jobs permanent enough to help move the families to stable housing? Are we collecting the right data to demonstrate our effectiveness so that funders recognize our value and will help us grow? All of these require an understanding of the environment as seen from multiple perspectives. 3. Growth and success bring their own challenges to the social enterprise. As the social enterprise grows to serve a larger population, it inevitably needs to spend more time soliciting funds to sustain its programs and innovate new ones. Unless more stakeholders and funding sources are engaged, it runs the risk of donor fatigue and loss of interest (van Leeuwen and Wiepking 2013). Will your wonderful, motivated, reliable staff be able to cope with the stresses and opportunities growth provides? Is there a natural limit to your capacity to serve? As tempting as growth is to the social enterprise, it may have natural limits, or if stressed to go beyond them the organization may overreach its ability and lose its reputation and support. Understand- ing the existence of these limits and how they affect the future path of the organization is crucial to sustainable effects on a community. 184 EDUCATING SOCIAL ENTREPRENEURS

Systems models work better when considering strategy questions than when considering tactical ones. Strategic questions are ones that define the future direction of the enterprise, whereas tactical ones look to the delivery of short-term problems. The skills of systems thinking help managers think broadly and anticipate and act before problems occur. The skills may be developed through practice and experience, and systemic insights provide a bridge between the rational and quantitative demands of operations with the intuitive and instinctual processes that play such an important role in decision-making (Kahneman 2011; Sadler-Smith and Shefy 2004). Indeed, the tacit biases that arise from reliance on individual instinctual and intuitive processes (such as those in Kahneman’s fast, instinctive, and emotional “System 1” mode of thinking) become explicit and open to discussion once articulated and considered from multiple perspectives.

Systems Thinking Principles

The nature of systems as an organizing principle for identifying problems and solutions can be traced through the fields of psychology, economics, theology, politics, cybernetics, and biology among (many) others. Rich- ardson (1991) traces systems thinking and feedback thought through prehistory, biology, economics, political science, and simple machines through the emergence of cybernetics and servomechanisms, the basic constructs of automation and control. This brief discussion of systems highlights three elements that are common to many of these principles.

1. Look for endogenous causes for problems The first systems element—and arguably most important one—is the recognition of endogeneity as a fundamental construct, and feedback as its instrumental form. The endogenous view of systems encapsulates the forces that create, dissipate, or sustain problems within the problem boundary. In contrast, an exogenous view attributes problems to forces of nature or scope that are outside the ability of the stakeholders to control. These statements are a causal hypothesis about what the social entrepreneur’s program can do to reduce Systems Thinking for the Social Entrepreneur 185

homelessness. What it does not say is how homelessness became an issue for the families and, in turn, for the community. Was there a plant closing and subsequent job losses? Were people displaced because of an imbalance between housing supply and demand? Could migration from other cities be factored into the problem? Figure 32.1 captures an exogenously driven perspective on the role of education and homelessness. Across the middle of the diagram is a problem boundary. Inside it is a causal map of what might be seen as the problem being addressed in our homeless program. To see the implicit causal assumptions within it, walk back from the right side to the left:

• Homelessness is present in our community; • If employment options were improved, then there would be fewer homeless families; • If educational levels were improved, then there would be more employment options; and • With sufficient funds, the social entrepreneur could perform new job training, increase educational levels, and provide more employment options for families and employers.

These statements are a causal hypothesis about what the social entrepreneur’s program can do to reduce homelessness. What it does

Social entre- Families preneur Available housing

Effect of educational New job training Educational Employment Homeless level on employment effort level options families options Problem boundary

Funds to support job training State of the economy Employers

Govern- ment

Figure 32.1 Exogenous view of educational level and homelessness 186 EDUCATING SOCIAL ENTREPRENEURS

not say is how homelessness became an issue for the families and, in turn, for the community. Was there a plant closing and subsequent job losses? Were people displaced because of an imbalance between housing supply and demand? Could migration from other cities be factored into the problem? In contrast, the exogenous perspective focuses on the things we may control directly and draws the entrepreneur’s attention to outputs of their program. Things outside of our control or influence are forces that we must contend with but have no influence over. For instance, look at the various elements outside the problem definition box: How important are the actions of Government, Employers, Families, and Health Providers to homelessness? When these exogenous forces work in ways that counteract our desired goals, they blunt or reverse the results of our intention. Homelessness is present in our community because of unemployment, inadequate health care, and limited housing resources:

• If employment options were improved, and their family health levels were supported, then there would be fewer homeless families; • If educational levels were improved, and families were healthy enough to allow for the completion of job training, then there would be more employment options; • With sufficient funds, the social entrepreneur could perform new job training, and health providers could improve the health of families, which increase educational levels, and provide more employment options for families and employers; and • More employment options could reduce unemployment, which in turn will reduce homelessness if this makes the existing housing stock more affordable or other housing is available.

Figure 32.2 extends the problem boundary beyond things in our direct control and depicts how our efforts work in concert with others to create common success. When we bring them into the definition of the problem (in italics), we can see the complexity in which the training program is situated: Systems Thinking for the Social Entrepreneur 187

Health providers

Funds to support New health Training effort health training Health level Social Ability to enter- Available Families maintain health preneur housing Effect of health on job training

Effect of educational Funds to support New job training Educational Employment Homeless level on employment job training effort level options families options Effect of Employee homelessness on job demand training Employee supply Employers Employment taxes Pressure to reduce homelessness Govern- ment Unemployment Problem boundary

State of the Economy Figure 32.2 Endogenous view of educational level and homelessness

• Homelessness is present in our community because of unemployment, inadequate health care, and limited housing resources; • If employment options were improved, and their family health levels were supported, then there would be fewer homeless families; • If educational levels were improved, and families were healthy enough to allow for the completion of job training, then there would be more employment options; • With sufficient funds, the social entrepreneur could perform new job training, and health providers could improve the health of families, which increase educational levels, and provide more employment options for families and employers; and • More employment options could reduce unemployment, which in turn will reduce homelessness if this makes the existing housing stock more affordable or other housing is available.

What’s different? The diagram is certainly more complex, and this complexity reflects some of the reasons lasting change resists 188 EDUCATING SOCIAL ENTREPRENEURS

good efforts. But now our actions and the effects they have on other parts of the problem are endogenous and integrated. In this new figure, the role of contributing factors and forces is explicit. Rather than assume that the effects of housing and health are out of our hands, the endogenous view reminds us that effects can be multi- plied or nullified when misaligned. Training may not have an effect if we don’t consult potential employers and ensure that curricula meet their needs. Employment options are important, but if housing options are limited, our trainees may not be able to obtain residences close enough to their places of employment. Even if social entrepreneurial programs are able to achieve their short-term performance objectives, they may not have a lasting effect on the underlying problem. When multiple effects influence an outcome, as in our case with health care, housing availability, and education, neglecting one factor may reduce the effectiveness of another and thereby limit the overall result. Indeed, recent literature on homelessness indicates that comprehensive programs are important to the well-being of the community (Tsui 2013; Zlotnick, Zerger, and Wolfe 2013), while others have noted that competing government actions, such as performance measures, may discourage interventions with hard-to-serve clients thereby creating a long-term population of homeless families. Once we grow the problem boundary of our homelessness example, we discover new opportunities for leverage. Employers may affect the demand for new employees, and perhaps can help pay for or influence governments to fund training. We also see that employment options are influenced by the relative health level of families, which may provide a new opportunity to affect outcomes. Endogeneity is rarely an absolute state of affairs, particularly when one focuses on a single event. For a single family, homelessness may be the result of an exogenous event, such as a fire, that was outside their reasonable control. When the state of homelessness for a population persists over time, however, more endogenous considerations of how economic and social forces interact should become dominant. In addition, there is a limit to which the broad view of endogeneity provides clarity. In general, the breadth of a problem Systems Thinking for the Social Entrepreneur 189

definition should consider the factors that are known or likely to have an effect on the desired outcome within the time frame under view. Causal feedback becomes apparent when we introduce endogeneity. The systems perspective blurs the distinction between cause and effect when they are linked over time. Job training can reduce homelessness, but homelessness also reduces the effectiveness of job training. The question is no longer unidirectional; we now see how one feeds into the other: Homelessness limits the effectiveness of training, which is meant to reduce homelessness. More generally, past effects that were observed cause current changes and adaptations, which in turn have more effects in the future that cause more changes. Rather than a linear, one-directional flow, system behaviors are determined by feedback over time. Figure 32.3 presents two examples of feedback loops. The left loop posits that employability and health are related. The arrows have an explicit polarity that depicts the nature of the relationship. The positive sign indicates that as employability increases, the health of the individual increases. There are numerous plausible reasons this could happen, such as a reduction in stress or more regular work habits. In turn, improved health increases employability as there are fewer days of illness keeping the client from working, which further increases health. Note here that a change in one variable in the loop reinforces its effect as it moves thorough the loop. If the change improves employability, then reinforcement improves the overall situation creating a “virtuous cycle.” If the change reduces

Other policy Homeless concerns + families

– Employability R Health B – + Funds for Pressure to reduce homelessness homelessness + + programs Reinforcing (R) Balancing (B) Figure 32.3 Reinforcing and balancing loops 190 EDUCATING SOCIAL ENTREPRENEURS

employability, however, the reinforcement moves to decrease health, which further reduces employability, creating a “vicious cycle” that may trap people in a perpetual state of poverty. The right hand side of Figure 32.3 shows a different causal structure. Here the assumption starting from the top of the loop is that an increase in homeless families increases the pressure to reduce homelessness, which in turn may cause more funds to be provided, which is expected to reduce the number of homeless families. Thus the initial change produces a reaction that attempts to compensate the characteristic of a balancing loop. Note as well that this structure includes the notion of competing pressures for funding. As the problems of homelessness are weighed by policy makers against other policy concerns, the effect of changes in homelessness may be attenuated or accelerated. Now we can see how real-world complexity can be mapped to reinforcing and balancing feedback structures within the endogenous perspective. In Figure 32.1, employment options affect homelessness, a one-way relationship of cause and effect. In Figure 32.2, the endogenous model posits that homelessness, acting through health and training, affect employment, which then influences future homelessness in a predictable way. Rather than a solely unidirectional causal relationship, we now have loops of influence that interact over time. For example, we can see how an emphasis on “housing first,” getting recently homeless families back into housing, followed by health and training support could be a plausible alternative to an emphasis on training. According to the United States Interagency Council on Homelessness (2015).

One of the most important developments over the past several years is the application of systems and “collective impact” approaches to ending homelessness. Whereas homeless services previously operated as a set of independent and uncoor- dinated programs, communities are now coordinating across organizations and programs to work toward common goals.

A lively debate continues on the best place to start interventions to reduce homelessness in the long term (da Costa Nunez, Anderson, and Bazerjian 2013). Systems Thinking for the Social Entrepreneur 191

2. Root causes come from the system’s structure The second principle directs us to look for the causes of unanticipated events in the underpinning system. The challenges of social entrepreneurship can be perceived as random or unrelated, caused by a combination of unpredictable circumstances. While the resignation of a key employee, for example, might be happenstance, continued turnover in the position is more likely the result of pressures and stresses created by the organization itself or through its activities. Organization leaders may choose to accept turnover as a side effect of the enterprise, or attempt to look more deeply into the forces among stakeholders that generate the pressures and thereby attempt to mitigate them. Looking below surface events to delve into causes is an application of the systems thinking iceberg in Figure 32.4 (Goodman 1997). Events, the disruptions to routine daily activity, can often be traced back to patterns of behavior that occur over and over again. These patterns can be diagnostic of problematic beliefs or actions that may not be obvious to the casual observer. When surfaced, patterns can lead to understanding their cause and provide opportunities to change the direction of the organization before more unanticipated events occur. Systems thinking practitioners learn to look for the causes behind problematic situations by looking for common patterns, or behavior modes, among key outcome measures or resources over time. Sterman (2000) characterizes six basic patterns depicted in Figure 32.5. These patterns occur over and over again because the problems organizations face and the way decision makers react to solve them are remarkably consistent.

• Exponential Growth, where a key measure or a resource’s growth pattern is reinforced over time. This pattern is seen when a virtuous or vicious cycle exists.

Events

Patterns

Structure

Figure 32.4 The systems thinking iceberg 192 EDUCATING SOCIAL ENTREPRENEURS

Exponential growth Goal seeking S-shaped growth

Time Time Time

Oscillation Growth and overshoot Growth and collapse

Time Time Time Figure 32.5 Common modes of behavior in dynamic systems

• Goal Seeking, where the measure is approaching a limit or a goal. The limit may itself be determined by the enterprise, or it may come from another element in the system. Think of diminishing returns over time. • S-Shaped Growth, where a growth phase switches to goal seeking as a factor grows and then saturates. This pattern is often seen when innovative programs become more commonplace over time or where there is an inherent constraint that limits further growth. This could be a limit on market size, facility space, or some other factor. • Oscillation, where a problem recurs cyclically. Here there may be factors that are linked tightly, such as the relationship between levels of employment and demand for public assistance. • Growth and Overshoot starts with a growth phase but then shifts into what appears to be stagnation. Aggressive attempts to solve a problem may succeed for a while, but then seem to lose their effectiveness and fall back to a previous level. Unlike S-shaped growth, the effects of the limiting factors may be somewhat delayed in time. • Growth and Collapse is a variant of growth with overshoot. Collapse happens when the growth phase has a side effect that Systems Thinking for the Social Entrepreneur 193

severely diminishes the future. If an organization grows fast without monitoring the quality of its programs, their reputation may fall quickly and that will jeopardize future funding.

3. The role of accumulations There is a principle in Western common law, Nerno“ dat quod non habet,” which translates roughly as “no one can give what they do not possess.” This philosophical principle corresponds to the idea that an organization’s ability to create and implement a strategy relies on its ability to gather and use physical and human resources. This concept has been captured in the resource-based view of strategy (Barney, Wright, and Ketchen 2001). A sustainable organization anticipates and replenishes the resources it consumes over time. Social enterprises spend a great deal of their effort gathering the financial and human resources they need, as they rely on contributions rather than markets. People provide hours of their time, supporters provide capital and physical goods, and these are all depleted as they are transformed and fill the needs of the population being served. For the organization to flourish, these resources must be replenished. The system’s view explicitly recognizes the effects of accumulation and depletion of resources over time on the trajectory of the organization. Perceptions and attitudes are another type of stock crucial to models of successful entrepreneurship. For example, employee morale is often considered a soft and difficult to measure construct, but it is widely accepted that it affects productivity. While many studies look to tease out the individual factors and their contributions (e.g., Rousseau 1977), it can be construed that morale is some mix of an individual’s personal historical experience as well as current influences upon their thinking. In other words, this hard-to-measure concept behaves as an accumulation that changes over time. Organi- zations do not turn on a dime, and accumulations of soft factors are one reason they resist change. Any model of an organization that purports to capture reality must consider how intangibles accumulate into reputations, expectations, and projections of the future, and the levers available to change their relative values. 194 EDUCATING SOCIAL ENTREPRENEURS

Accumulations also affect how well other resources are used. Returning to our running example, an increase in the number of homeless families needing services adds to the pressure on program staff, affecting their morale and their productivity, which in turn affects program outcomes and, in turn, the measures of success that are vital for future funding. Accumulations and how they change over time are the key indicators of the state of a system. A shelter cannot provide more beds than it has in place, and it cannot provide more meals than it has the ability to prepare. When changes to the capacity of the shelter occur over time, whether they are infrastructure, supplies, or staff, they affect the future. When the systems thinker accounts for the processes by which these changes occur, the structure of the system and the problem emerges.

Applying Systems Thinking to a Social Enterprise

Let’s apply the systems thinking model to a problem of social enterprise growth. Imagine that the organization in question has successfully negotiated its start-up and has the ability to meet some of its target population’s needs. Now there are opportunities to apply for additional grants and other means of support that would increase the enterprise’s capacity for service. Should it attempt to do so, and what are the risks in growth? Some managers rely on their intuition and have strong instincts about what generates success. These instincts are often based on their personal experience (Sadler-Smith and Shefy 2004) and, while are a very useful approach, may not help when facing new situations. Can a systems-based model help us identify and communicate our options within the enterprise’s leadership, persuade its funders, and bring the firm to a new level of operations? A sound plan requires consideration of the opportunities provided to serve the public good while avoiding traps that could degrade or jeopardize the program’s reputation and sustainability. A systems thinker would advance this generalized concern by examining the available measures of success and how those measures might perform under successful and less-successful growth plans. Following the modeling methodology of Rich- ardson (Richardson and Andersen 1995), we would proceed in several steps. Systems Thinking for the Social Entrepreneur 195

1. Possible behaviors over time The first step is to identify the measures of growth, success, and failures important to the organization and its stakeholders. An economic operating model suggests that revenues and services provided are two important metrics. Successful growth would see these metrics increase. A resource focus would add consideration of the enterprise’s staffing as services in this environment are likely to depend on the ability to retain skilled staff and add positions over time to meet increasing service levels. Finally, a softer but equally important measure of success is reputation as a valuable and efficient provider of quality services to ensure ongoing support. Figure 32.6 captures the behavior over time of these key measures for a hypothetical social enterprise under three scenarios with 2 years of past performance and 5 years of modeled data. The first few entries are historical data and are not mutable. From “now” and the next few years, we can imagine different possible futures. The first future, “hoped for” [long dashes] captures our aspirations for growth and so we see service levels rise followed by revenues after a slight lag. As change is often accompanied with some staff stress, there’s also a time where there may be turnover. The “hoped for” scenario also brings with it a stability and slow growth in the enterprise’s reputation.

Services provided Revenues (000s) 30000 6000 25000 5000 20000 4000 15000 3000 10000 2000 5000 1000 0 0 –2 –1 Now 12345 –2 –1 Now1 2 345 Years Years History Hoped forStatus quo Feared History Hoped for Status quo Feared

Staffing (Persons) Reputation (relative) 20 High

10 Avg 5

0 –2 –1 Now 123 4 5 –2 –1 Now1 2 345 Years Low Years

History Hoped for Status quo Feared History Hoped forStatus quo Feared Figure 32.6 History and three possible futures for a social enterprise*

*Note: Projections for hoped for, status quo, and feared alternatives. 196 EDUCATING SOCIAL ENTREPRENEURS

Another plausible scenario for the social enterprise’s future is the “status quo” [short dashes]. Here, all the measures of success are about the same, with a future that is certainly positive but may be inadequate for changes in population needs. The third depicted scenario, “feared” [dots], captures how overshooting the service capabilities of the social enterprise might occur. There are elements of the “growth and overshoot” patterns described earlier, where staffing and reputation fall below their historical values and drop in a way that may not be recoverable. Sadly, this is an all-too-common consequence of growing faster than is sustainable for the system context.

2. The hypothesized causal model The systems thinking model is advanced as we identify the feedback structure behind these four measures of success and how they influence each other. Figure 32.7 presents the operating model of the social enterprise. There is a service population that presents a demand for the organization’s activities. The enterprise’s staff (along with capital resources, which are not depicted) provide a capacity for service that attempts to match this demand. As programs operate, they provide some revenue stream (or are paid against grants), which compensate the program staff. Note the presence of a feedback loop here: R1—Program Operations. As operations continue, more revenue is generated, more capacity may be obtained from the market, which permits more services and revenue generation. This is an intentional simplification as we assume that operations contribute to the ability to build staff, and we ignore the market for other resources or costs. A second feedback loop, R2—Learning, links the productivity of staff to the services provided. All else held

Productivity +

R2-Learning + Service Demand for Services Capacity for + Program + Market for + + population + service Provided service staff staff R1-Program operations + + Revenue Figure 32.7 System structures of program operations in a social enterprise Systems Thinking for the Social Entrepreneur 197

equal, this means that the staff become more productive with experience. The combined effect of these two loops reinforces the idea that as the enterprise operates it gains revenue and experience that can help it maintain its operations. The accumulations in the model are depicted with boxes, while measures that are usually measured based on time are not (e.g., services provided per month). Figure 32.8 adds two loops having longer term effects. Loop R3—Service Demand, reflects the notion that as the socialenterprise performs more services, its reputation will grow thereby increasing demand for services from the population. There is another implicit assumption that the size of the service population is outside the boundary of the problem. Reputation, in turn, is linked through Loop R4—Program Expansion as increasing levels of service increases the enterprises reputation, its sponsorships, external funding, and its ability to attract staff from the market, which is also outside the problem boundary. We can imagine how these loops working in concert would produce the “hoped for” behaviors shown in Figure 32.6: Successful and profitable operations in the enterprise builds reputation and funding for growth of service capacity. What then might hold growth back, or even reverse the social enterprise’s progress to date? Figure 32.9 adds two new structures to the system that anticipate a side effect of programmatic growth. B1—Fatigue identifies the effects that an increase in services might have on the existing program staff. If insufficient new staff are brought on board with increasing service delivery, then it is likely that some fatigue occurs. Short-term increases in caseload can often be managed by overtime, but productivity (or quality) will drop in

Service Demand for Services + Capacity for + Program + Market for population + service + Provided service staff staff + + R3-Service demand

R4-Program External + expansion + funding Reputation + Sponsors

Figure 32.8 System structures supporting longer-term growth in a social enterprise 198 EDUCATING SOCIAL ENTREPRENEURS

Caseload – per staff

+ + Staff fatigue B1- R5-Staff fatigue turnover – Staff Productivity – quits +

+ – Services + Program + Market for + Capacity for provided service staff staff Figure 32.9 System structures of staffing dynamics in a social enterprise

the long term thereby reducing the capacity for service. If high caseloads continue, then R5—Staff Turnover engages where experienced staff leave requiring even more hiring to bring service capacity up to its previous level. Both loops are by themselves balancing loops that resist change from the rest of the system. Figure 32.10 presents the combined model and an explanation for the “feared” behavior. If program growth is not balanced against staff levels and caseloads, productivity and turnover work against growth. The more serious this imbalance and the longer it exists, current revenues will be driven down and then work against the enterprise’s reputation. Instead of program growth generating sustained success, imbalanced growth can overshoot the capacity of the staff, causing frustration and resignations and damage the reputation of the enterprise so that funders will stop their support and staff will not join the organization. What’s learned from this systems depiction? First, it captures the pathways that a strategic decision might take over time. It’s an endogenous perspective as the outcomes of growth are in a large part based on forces and changes created by the enterprise, its ability to muster support and resources, and the effects of changes over time. The systems perspective provides a mechanism to link these elements together over time. Finally, it indicates leverage points for success and failure: Ask yourself: What do your stakeholders expect regarding your service rates over time? Should you set your growth goals based Systems Thinking for the Social Entrepreneur 199

Caseload – + per staff

+ Staff fatigue + B1- R1-Staff Fatigue turnover – Staff Productivity – quits + R2- + Learning – Service Demand for Services + Capacity for + Program +Market for population + service + provided service staff staff + R1-Program operations + + R3-Service Revenue demand +

R4-Program External + expansion funding + + Reputation Sponsors

Figure 32.10 Combined service and staffing model of a social enterprise

on the ability to obtain resources rather than just on the opportunity to get funds? How are your staff coping with their caseloads and possible changes? What can be done to keep communications channels open about pressures, demands for service, and changes to markets? There’s no one correct answer. As noted earlier, systems are complex and our own decisions are based on the environment in which we are embedded. Systems thinking and systems models bring together more of the challenge and illuminate the way forward.

Learning More About Systems Thinking and Modeling

This chapter concludes with a couple of final thoughts.

1. Systems Thinking: In The Fifth Discipline, Senge (1990) provides a set of simplified models of organizational problems that he calls “system archetypes.” The archetypes provide pithy wisdom and can help grow an appreciation of a systems perspective. In Thinking in Systems, D.H. Meadows (2008) grounds the systems perspective in a thoughtful and holistic approach to problem solving. Sweeney and D.L. Meadows (Sweeney and Meadows 1995) provide a useful set of example activities to help organizations build their systems visions. 200 EDUCATING SOCIAL ENTREPRENEURS

2. System Dynamics Modeling: While the systems thinking approach provides great value as a communication and analytic framework, it remains a descriptive technique rather than one that allows for experimentation and prediction. System dynamics models, a combination of computer simulation and systems methodology, is a second approach to uncover root causes in complex problems. Unlike archetypes, system dynamics models capture the specific forces in a problem domain though causal loop diagrams and multiple feedback structures. More advanced discussions and investigations employ formal simulations where causal structures matched with mathematics portray how managerial actions (or inactions) will generate possible futures (Sterman 2001). This predictive quality comes at some cost as formal models require some training to develop. The reward for this effort is an explicit presentation of the assumptions and relationships embedded in the model, adding to the confidence of its users. Hovmand (2014) presents his work on community engagement through systems techniques. Through a combination of the methods of social work and systems thinking, he has helped multiple communities achieve lasting change and mutually supportive social action. Others have used visualization and group facilitation approaches to begin the dialogue among stakeholders required to gain an endogenous perspective. Another work by Senge (2006) and his colleagues at the Society for Organizational Learning links community engagement with systems thinking. Strohhecker and Größler (2012) and Repenning and Sterman (2001) provide system dynamics models that discuss the challenges of service delivery, quality, and capability traps, all relevant to developing sustainable organizations.

References

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Sterman, J.D. 2001. “System Dynamics Modeling: Tools for Learning in a Complex World.” California Management Review 43, no. 4, pp. 8–25. Strohhecker, J., and A. Größler. 2012. “Implementing Sustainable Business Strategies.” Systems Research and Behavioral Science 29, no. 6, pp. 547–70. Sweeney, L.B., and D.L. Meadows. 1995. The Systems Thinking Playbook: Exercises to Stretch and Build Learning and Systems Thinking Capabilities. Vermont: Chelsea Green. Tsui, E.K. 2013. “Say ‘Trouble’s Gone’: Chronic Illness and Employability in Job Training Programmes.” Sociology of Health & Illness 35, no. 1, pp. 82–96. United States Interagency Council on Homelessness. 2015. Opening Doors: Federal Strategic Plan to Prevent and End Homelessness. Washington, D.C. van Leeuwen, M.H.D. and P. Wiepking. 2012. “National Campaigns for Charitable Causes: A Literature Review.” Nonprofit and Voluntary Sector Quarterly 42, no. 2, pp. 219–40. Zlotnick, C., S. Zerger, and P.B. Wolfe. 2013. “Health Care for the Homeless: What We Have Learned in the Past 30 Years and What’s Next.” American Journal of Public Health 103, no. Suppl 2, pp. S199–S205. CHAPTER 33 Made in Carcere: Scaling a Social Enterprise Business Model

Luca Mongelli, Pietro Versari, and Luca Giustiniano

LUISS Guido Carli University

Introduction

The train was crossing the green Apulia landscape. Luciana Delle Donne was reviewing her day so far: the morning started in Rome where she had lectured at an MBA class on how to develop a social entrepreneurial venture. Later, she was interviewed for three hours by a couple of management researchers/scholars; they were trying to understand the success of “Officina Creativa” (Creative Work- shop) and its “Made in Carcere” (made in jail) initiative she runs. Finally, her organization was starting to attract the growing interest. Considering the major social problem she tried to tackle, she was secretly hoping for such a kind of popularity. In fact, she was aiming at reintegrating female convicts. In managerial terms, she was attempting to give a second life to women convicted in the Italian prison system, via socially, economically, and environmentally sustainable means. The business is about the production of different types of eco-friendly gadgets (mainly bags and accessories) made by female convicts. Luciana was proving them a job and helping them develop some skills when out of prison. At the same time, these female prisoners were able to generate 204 EDUCATING SOCIAL ENTREPRENEURS an income during their time in custody. Luciana was very proud of her business. Although it was not a typical for-profit business, the organization was economically sustainable and needed no kind of external help, such as public funding or philanthropy. However, despite its economic sustainability, the business was having trouble in scaling up its scope. In short: The business has a great potential, the organization was gathering major attention from the media and legitimation by important layers of the Italian society, but the question about the fact that her main resources (the convicts) were able to face an increase in the orders was really troubling her sleep. The situation could be summarized as follows. In the last year, Luciana had spent a substantial amount of time and effort making the organization to be known at a national level and trying to create new opportunities to enlarge the scope and the volume of the business. On the one hand (demand), thanks to the investments she made in the image of the organization, she had succeeded in creating numerous accounts in her main business-to-business niches: public entities, academic communities, and other major Italian entities organizing events (e.g., the “Venice Biennale”). The business was about manufacturing gadget bags and bracelets to be used as image widgets or part of the events’ packages. On the other hand (supply), the output had not increased much over the last years and the organization had actually found itself turning down several orders for not being able to process them. This mismatch between (potential) demand and (actual) supply was given to the business model of Officina Creativa. In fact, the core business (made-in-jail manufacturing) is strongly conditioned by the actual workforce, which is made by the (number of) convicts that the organization can effectively employ. That actual workforce was out of Luciana’s control. Whilst she wanted to hire as many as female convicts as possible, their actual availability (e.g., permanence in conviction was out of here control) and their commitment (read it as productivity, managerial terms) were out of her control. All the opportunities and preconditions to scale up seemed to be present for the current size of the business, but somehow they could not move up to the next level. So, the scalability of the business was her main concern. While the Italian society was truly appreciating her effort to give these women a Made in Carcere 205 second chance in life, the success of the initiative could have represented her main threat. For the cruel low of business, declined customers would not have shown up the second time. So these questions were tearing her thoughts: Was it really possible to further scale up the organization’s operations and impact? And if so, how? and why were they stuck in the same dimension as the past? Perhaps the company was not correctly exploiting the opportunities it had so far … Or maybe they had already reached the maximum possible expansion permitted by the business. If the former was the case, maybe the causes lay in the organization itself and thus some internal changes in the way they did things were necessary. Indeed, there still seemed to be plenty of opportunities to further improve the current organizational model (see later Organizational Problems). In the latter case instead, a major revision of the future strategy was necessary. Interestingly enough, as she hadn’t enough thoughts already, a new opportunity had arisen recently: The Italian Department of Penitentiary Organization had just promoted the “Sigillo” project. The project itself could have been a way to circumvent the limits to the growth of a single organization, via the creation of several similar organizations. Luciana problems were many: one was to enlarge the scope of a single organization through an improvement of the current internal processes (Officina Creativa and its “Made in Carcere” project, via further investments in innovation)? Other, was to multiply the overall social impact by creating several organizations similar to Made in Carcere in its current form (e.g., to invest more in the replication of the “Sigillo project”)? Still struggling with her internal versus external growth dilemma, Luciana went back to gazing at the gently rolling hills moving past the train’s win- dow. Her organization had to move forward too, but she wondered what the best course of action was.

Understanding the Environment

1. Officina Creativa Officina Creativa is a “social cooperative” (ex legis n. 381, Disci- plina delle cooperative sociali, 11/08/1991, Italy) established in Lecce (Italy) in 2007 by Luciana Delle Donne with the aim of promoting inclusion of marginalized individuals and respect for the environment. 206 EDUCATING SOCIAL ENTREPRENEURS

Officina Creativa tries to achieve this by using an innovative business model able to grant its economic sustainability without relying on charity or donations. Officina Creativa contains and runs several projects, the primary one being “Made in Carcere,” in collaboration with the Italian prison system, whose goal is to produce fashion goods made by convicted women from “nonused” materials discarded by other firms. The project was born in the nineties when, after returning to her hometown of Lecce, Luciana decided for a major change in her career/life. She was a brilliant bank division manager: she had created and developed the first online banking platform in Italy, the Telematics Multichannel Virtual Bank 121. By chance, here she hap- pened to be involved in a project with convicted women in the local prison, which changed her perspective about the world. Thanks to this experience, she realized that the Italian conviction was not able to provide prisoners any incentive for rehabilitation. At the point, she thought that convicted people could be successfully engaged but they needed concrete proposals and challenges to face: they needed to see how they could make a difference and become productive. Hence, she left her job and her successful managerial career and decided to set up a business to help these people.

A human being needs to do something concrete in his own life. We wanted to make them know the dignity, the happiness and fatigue that come from working. They were people that had never worked and had never known the joy that comes from working (Luciana Delle Donne).

At the same time, she also saw that convicted women had a substantial potential, even in business terms, which was somehow blocked by their condition as convicts. With this in mind, she imagined a way to give them a new chance, and developed an idea that could leverage their potential. Day by day, the idea of “second chance” emerged from Luciana Delle Donne’s mind as the core of the social cooperative “Officina Creativa.” This idea is based on the exclusive involvement of production factors considered no longer useful for traditional economic organizations or society. Thus a Made in Carcere 207

“second chance” may be still offered both to scrap (but still nonused) materials and people rejected by society. In Luciana’s mind, this could have dramatic implications in terms of both social and environmental impact. So this philosophy became a concrete innovative business idea that took form in the “Made in Carcere” project, where convicted women and recycled materials have been involved respectively as work force and main raw materials. In practice, this project, on the one hand, brings new life to products or scrap materials discarded by other fashion firms, using them as raw materials. On the other hand, it educates (through special training programs) and rehabilitates (through their work experience) convicted women, with the final goal of reintegrating them into society so that they might acquire a normal working life. During this experience, Luciana realized the three main areas where her social cooperative should root its mission.

2. Social impact Officina Creativa’s goal is to assist marginalized individuals and rein- tegrate them into society by giving them a second chance. It focuses mainly on those who have more difficulties in accessing the labor market (prisoners, people with disabilities, immigrants), but also on those living in new forms of poverty and that the current crisis places in increasingly unfavorable conditions.

3. Environmental impact Officina Creativa develops initiatives to promote an environmentally sustainable action and culture by raising awareness among the different actors it can reach, such as companies, associations, and institutions. It is deeply rooted in the local environment (geographic area), and actively invests in building local ties through events, exhibitions, and seminars. It also promotes respect for the typical Lecce landscape and for the local culture.

4. Growth and innovation Officina Creativa plans its actions within the analysis of the socioeconomic phenomena it tackles. In doing this, it fully embraces 208 EDUCATING SOCIAL ENTREPRENEURS

creativity and innovation, promoting new development models for social enterprises and supporting these newly born firms and projects throughout their growth.

5. Context of Italian prison system According to the most recent data provided by the Italian Depart- ment of Penitentiary Administration (DAP), the Italian penitentiary system hosts 54,252 convicts [up to August 31, 2014] distributed in 204 correctional facilities. Women account for a low percentage of the whole Italian convict population: At the end of August 2014, there were 2,308 women (4.25 percent of the whole population) and 51,944 men in confinement. Foreigners account for 32.18 percent of the convict population. The age of the convicts is generally low, with 39.5 percent of the convicts being younger than 35, and 9 percent younger than 25 (Ital- ian Department of Penitentiary Administration, August 2014). The majority have a low level of education, with only 0.9 percent having an undergraduate degree, 5.9 percent a high school or professional school diploma, and 32.5 percent a secondary school diploma. The remaining 15 percent have only a primary school certificate or none at all (Italian Department of Penitentiary Administration, December 2013). Women are usually convicted for theft and drug-related crimes, and the majority of them had already been socially marginalized, prior to conviction. A significant portion of them are convicted for omertà (conspiracy of silence) for loyalty to their husbands/ family members. Moreover, in their specific case, the level of education is low: 34 percent received secondary school education and 15.5 percent only primary school education (Italian Department of Penitentiary Administration, August 2014). Although the final aim of the Italian confinement system is to reeducate and eventually reintroduce the convicted individual into society, the Italian conviction system shows systemic deficiencies that seriously undermine its effectiveness toward such goal. The primary issue regarding the Italian prison system is the high level of overcrowding. Recent official data show an average of 109.82 Made in Carcere 209

convicts every 100 housing units, where each housing unit consists of 9 square meters per inmate. The situation varies greatly from region to region, with peaks of 130.29 convicts every 100 housing units, and 141.13 convicts every 100 housing units in Apulia (Italian Department of Penitentiary Administration, August 2014). Furthermore, some sources report a systemic overestimation of the real capacity of the Italian penitentiary, thus implying that the overcrowding rate is even higher than reported by official data (Osserva- torio Antigone). Indeed, overcrowding seriously worsens the living conditions of convicts, inhibiting many activities of a dignified life. Serious overcrowding forces convicts to spend most of their time in bed, as in the cell there might not be sufficient physical space to move around. In addition, many cells are not adequately furnished or not furnishable at all due to the large number of inhabitants, thus resulting in lower health conditions, less privacy, and generally poor living standards. Moreover, given the high numbers of convicted foreigners, it often happens that convicts in the same cells do not speak the same language, causing even more isolation and distress. Relief is not even granted by the allotted time out of cell—usually the main moment of socialization in prison—as the overcrowding also makes it impossible to guarantee the necessary amount of out-of-cell time to all convicts. Overcrowding also makes it impossible for the penitentiary institutions to separate convicts pending trial (thus still presumed innocent). Not surprisingly, overcrowding also impacts the convicts’ health, with increasing cases of infectious and parasitic diseases. A second major problem found in the Italian penitentiary system is the lack of specific education and rehabilitation programs. Although it is very important for the final aim of reinserting/resocial- izing convicts into society to offer both vocational and education- related programs, the number of enrolments in such programs is extremely low. At the end of June 2012, only 23.9 percent of the convicts were enrolled in education courses, and only 42.9 percent of these actually passed the final evaluation (Italian Department of Peni- tentiary Administration, June 2012). In December 2012, only 3 percent of the convicts successfully completed some form of vocational 210 EDUCATING SOCIAL ENTREPRENEURS

training, and 21 percent had work under the penitentiary administration (Italian Department of Penitentiary Administration, December 2012). This data shows that the average convict hardly spends very little time trying to achieve useful goals of self-improvement that would later facilitate finding a role in society. This is particularly critical if we think that the majority of convicts is relatively young, and are thus wasting remarkable potential learning opportunities. This difficult situation seriously hampers the future opportunities of convicts in terms of social reinclusion. Indeed, recidivism rates—68.5 percent in 2007—for convicts are notably higher than those for people serving alternative sentences to imprisonment— 19 percent in 2007 (Italian Department of Penitentiary Administra- tion). Yet another example of the critical social, psychological, and physical situation in which Italian convicts live, can be seen in the fact that the number of suicides inside the penitentiary system is disproportionately higher than in the Italian population as a whole. In 2009, 5.9 suicides every 100,000 people were reported for the entire population. That number increases to 40 per 100,000 among convicts (Italian National Institute of Statistics, 2011).

Officina Creativa’s Projects

1. The business model of Officina Creativa: “MADE IN CARCERE”

The primary project ofOfficina Creativa is the range of products traded under the “Made in Carcere” brand. The brand was registered in 2007 and produces multipurpose accessories that Luciana Delle Donne defines as “differently useful”: handbags, accessories, original and colorful. The “useful and futile” products are packaged by convicted women whose situation has set them at the margins of society. Made in Carcere 211

In her project, Luciana Delle Donne decided to involve women with different backgrounds, all imprisoned at the penitentiary of Lecce, and offered them a training program. This program gave them some basic tailoring skills needed to produce “Made in Carcere” products, as well as continue working in this field once released. The greater chance of finding a job clearly strengthens their chances of successfully reintegrating into society. Today the production is carried out by around 7 prisoners in the penitentiary of Lecce, two former prisoners, and a prisoner under house-arrest in the Laboratory in Lequile (LE). Moreover, the project is meant to have a very “light” environmental footprint: only raw materials recycled from fashion products donated by other companies are used. Otherwise doomed to be scrapped, these products are instead donated to Made in Carcere by those firms who take an interest in its mission and activity: Cos- tume National, Borsalino, Meltin Pot, Masre Consortium of Fash- ion, Altana and Miroglio, Barbetta, Textra, Confidence, Brugnoli, Carvico, Jersey Lomellina Piave Maitex, Textiles, Wegal & Tricotel, Knitwear Ripa are just some of the contributors to the “Experimen- tal Texture Bank,” as Luciana Delle Donne describes the raw materials warehouse of Made in Carcere. The raw material is then used to generate new lines of products created from scratch employing the creativity of the workers.

We sell ethical gadgets that are bought by a number of organizations: Action Aid, Libera, Slowfood, Ant, etc. and this association does fundraising using our products. So we directly help convicted women…in the final value chain we indirectly support several projects with a social impact. (Luciana Delle Donne)

Creating Made in Carcere was no easy task, as three different goals needed to be merged: social inclusion, reduction of environment impact, and economic sustainability. However, Luciana Delle Donne had been always dedicated to the pursuit of new business models and ideas, and Made in Carcere was no exception: while, on the one hand, it pays attention to rehabilitating convicted women and the use of reemployed, non-used materials, on the other it is 212 EDUCATING SOCIAL ENTREPRENEURS

a sound economic project, with a significant economic outcome. Luciana Delle Donne had to bring together these three worlds, with their diverse needs, demands and contradictions, and manage them on a daily basis. The 2013 financial report puts the total revenues of the company at around € 220,000, out of which about £13,000 from sales abroad.

2. Activities

Though the raw materials are donated, and therefore do not incur costs, they differ widely in terms of quality and quantity. Therefore, R&D plays a critical role, because the products must be designed and developed each time on the basis of what (quality) and how much (quantity) raw material is available at a certain moment (i.e., it is not predetermined). On the basis of the amount and type of donations, new products are developed, requiring a high level of flexibility from the company, and the need to be continually engaged in the proactive search for possible donors of textiles and other fashion products. Given the great flexibility required, the production process needs to be kept as simple as possible. Indeed, it is a very basic sequence of simple tailoring activities. This same flexibility is needed for the extremely high and unpredictable employee turnover: In fact, convicted might be released for custody and, even if they wanted, they cannot be reemployed by Officina Creativa. Employing convicts means relying on a workforce that will become unavailable at a certain point in time (i.e., when the prisoner is released), and will thus need to be replaced. The detrition in terms of economies of learning is high: Skills picked up by the former will be lost, and the new worker will need to learn her tasks from scratch. Furthermore, given Made in Carcere 213

the complexity of Italian penal law, it is extremely difficult to foresee when convicts will finish their term, thus making it very difficult to plan turnover efficiently (e.g., a general “grace” or “pardon” might be issued at the national level, terminating convictions with immediate effect). Basing production on simple tasks thus minimizes the loss of know-how and increases the speed at which the newcomer can be integrated in the production process. There are also other related critical points: The production process is not under the total control of Luciana Delle Donne as it is heavily regulated by the bureaucracy of the prison. Neither is the physical capital directly controlled by Luciana Delle Donne, because it is purchased and provided by the Ministry of Justice (e.g., the supply of scissors to cut cloth needs to be regulated and controlled). While working, convicted workers are constantly monitored, and must continually ask permission for each operation they have to perform (e.g., using the scissors, picking them up from the ground when they fall, etc.). Finally, Luciana Delle Donne cannot really choose her workers. Instead they are assigned by the authorities. This is to avoid discrimi- nation. On the flipside though, it also impedes any programming on the basis of the expected duration of the prison term. The market in which Made in Carcere operates is mainly Business-to-Business, and Luciana Delle Donne has an instrumental role in finding clients such as the Biennale of Venice, Intesa San Paolo (Italian bank), Conad (Great Organized Distribution), and the Apulia Regional Government (Apulia, Puglia, is one of the Ital- ian Regions). However, the company has also recently been active in the Business-to-Consumer markets: Its website allows individuals to buy products via an e-commerce platform, and recently vending machines have been placed at the Italian airports of Bari and Salento. Made in Carcere does not yet have its own outlets. However, through specific agreements with local producers, it has been able to leverage a larger distribution network. Its products can be found in stores in the Apulia region in touristic places like Lecce and Ostuni, as well in the Italian financial capital, Milan. Further, products are com- mercialized in shops owned by its partners. Outside Italy, the brand is present in New York City (in collaboration with Eataly), Paris 214 EDUCATING SOCIAL ENTREPRENEURS

(by Librairie du Parc/Actes Sud Paris), and London (via MyBnk). In addition, on December 5, 2013, the well-known company Talco opened its doors to Made in Carcere, hosting a display containing the bracelets in its stores. The price of these products is competitive and aligned with the price ranges of ethical accessories. External communication takes place mainly through word-of- mouth, social networks, and the use of labels explaining the meaning of the project. The communication is however unstructured, and rotates mainly around Luciana Delle Donne’s effort to make the brand known and to spread the core values of the project.

3. Organization design The organizational complexity of the business model is increased by the fact that these operations need to be merged with the usual operations such as management of personnel contracts, donation management, order management, organization of internal accounting, and report processing. All the activities undertaken within Made in Carcere are organized in a functional organizational structure, structured around the main core activities. Decision making is centralized as functions are coordinated and controlled by Luciana Delle Donne. A final point should be raised about the process of selection and recruitment of female prisoners. Respect for diversity in a context of confinement is the key value guiding this activity. In this regard, particular attention is given to cultural diversity, different habits, and religious beliefs that need to coexist in an extremely narrow environment. Once workers are selected, they are trained for about 4 months, a period during which they learn how to cut and sew through the use of simple machines and applying the “straight stitching” technique, among the easiest sewing techniques to handle. Those who work within the cooperative attribute a philosophical value to this technique: Luciana Delle Donne said in an interview she wants to “straighten the crooked seams” of her workers’ lives.

4. Critical success factors • Customization: Made in Carcere sells its products primarily on demand, thus customization is key. For the BTB market, for Made in Carcere 215

example, the acquiring company is allowed to place its own label in a specific area of the product; • Design: The design of each product comes directly from the creative mind of Luciana Delle Donne who, in addition to creating “useful and futile” products, gives them special evoc- ative names (for example, “the third hand” that is, an iPad cover made from scrap fabric by Melting Pot); • Made in Carcere as a good deed: The visibility, clarity, and transparency of the social role of the activity of the company is certainly a positive factor; and • Creativity: Creating using colorful texture is a great motiva- tor for convicted workers. In a dark environment, where the individual is often invisible and forgotten, such production becomes the opportunity for living more colorful and joyful moments.

5. SIGILLO project Officina Creativa aims at scaling up the idea behind Made in Carcere by spreading it to other national prisons. The Sigillo Project is meant to reach this goal. “Sigillo” is a national-level organization formed by several entrepreneurial projects all having the participation of convicted women in common. In practice, the “Sigillo” project consists thus in a network of sustainable businesses operating in the Italian penitentiary context, all with the key characteristics of employing convicted women as primary human resource in the production of several types of articles. However, the scope of the project is broader: In participation with the DAP, it is also in charge of officially cer- tificating the quality and ethical content of the manufactured goods produced by prison-based businesses. It is handled by a special agency that handles the product strategies, market positioning, and communication.

If we really want to create jobs and facilitate rehabilitation for women in prison, we need to provide new tools to professional social enterprises—says Luisa Della Morte, director of Sigillo—so that they can consolidate and grow within the 216 EDUCATING SOCIAL ENTREPRENEURS

market. To do this, however, we must abandon the logic of welfare and be innovative in our proposals by identifying forms of dialogue between for-profit and non-profit.

Indeed, it took more than three and a half years of research to understand and complete this complex project. Currently, the ventures taking active part in the project are:

• The social cooperative “Alice,” active in the prisons of San Vittore and Bollate together with the social cooperative Camelot; • The social cooperative “Uno di Due” owned by Papili Factory, which operates in the former prison of Vallette, now Lorusso—Cotugno in Turin; • The social cooperative “Officina Creativa” with the brand Made in Carcere, operating in penitentiary institutions in Lecce and Trani (Puglia); and • These are supported by Consortium Sir Milan and Banca Prossima.

The “Sigillo” certification has been granted to textile brands of eight other prison-based ventures, in addition to Made In Carcere: Gatti Galeotti; Papili Factory; Rio Terà dei Pensieri; Filodritto; Impronte di Libertà; Oikos; Al Revés; Ora d’Aria (see references for links to the certified brands). We have, 2,847 female prisoners that are currently reported in Italy (data source www.giustizia.it as of March 31, 2013). More than half knows how to sew but only 5 percent can count on real job opportunities offered by companies and social enterprises. Hence the birth of a brand characterized by a clear gender identity.

6. Other project: Orti Verticali Officina Creativa has recently begun a new project, proposed as an experiment for the time being, and undertaken in the women’s prison in Borgo San Nicola in Lecce. The idea is to allow prisoners to culti- vate a series of “vertical gardens” of the type in the following picture. Made in Carcere 217

With this project they consume what they produce and the objective is both to reduce the costs for the prison, but also to increase the quality of life for the inmates … for sure the food we produce is of higher quality … and at the same time their upkeep is less expensive for the community. Also teaching them how to work the land means to facilitating their integration to the work world. (Luciana Delle Donne)

In such physical platforms, women convicts can grow small plantations of seasonal vegetables and spices even in the narrow spaces of a prison. The purpose of the project for now is to make prisoners responsible for the maintenance of the gardens assigned to them (one garden per cell) and to be able to enjoy the fruits of their labor.

It moved me a lot the other day when I heard a convict say that for the first time in three years she was going to smell again the perfume of mint—they promised me two leaves of mint!—she said. (Luciana Delle Donne)

Moreover, it is possible to imagine an expansion in the future into the business of ethical food, if the project is successful. Par- ticipation in the project will soon be extended to the prison for male prisoners in the heart of Lecce. The cooperative is already considering expanding the project to include several other Italian prisons (see the video at www.la7.it/content/il-progetto-sugli-orti- verticali). 218 EDUCATING SOCIAL ENTREPRENEURS

Organizational Problems

Before considering the opportunity to scale the operations of MIC (Made In Carcere) to the national level, Luciana was conscious that there were also several problems inside the organizations to tackle in order to improve performance without resorting to replication through the Sigillo project. There were three groups of problems that particularly seemed to affect the organization. The first was the high turnover of the employees, both among convicts working on production and among the other employees of the organization; people frequently left (in the case of convicts because of changes in their sentences) to be replaced by new unskilled individuals. With the exception of the administrative and logistic part of the organization, several different people followed the sales department over time, and in the development of satellite projects, numerous different subjects collaborated over time for only short stints. This phenomenon, initially over- looked, was actually starting to take a strain on the organization as several their negative impact soon became clear: On the production side, the loss of skilled workers in favor of new unskilled convicts obviously implied an initial loss in productivity until time and resources could be deployed to train the new employees. At the same time, the turnover in the rest of the organization prevented the stabilization of a team with positions fixed on specific organizational processes, especially in the sales department and in the development of new projects. This forced the employees, particularly Luciana, to play different roles depending on the needs. The frequent overlaps caused confusion. Another negative consequence of this unstructured arrangement was that it was difficult to build up expertise inside the organization, thus keeping the presence of Luciana necessary for virtually all crucial nodes of the organization, and making it impossible for her to focus on and thus better exploit the most value-creative activities of the organization. All of this still made the organization far too dependent on Luciana for its own good. A second set of problems derived from the difficulties in communication between the management and production of the organization. As might be expected, the communication with the production located inside the prison was made difficult by the high security standards of the prison, and the routines followed by the organization until that moment Made in Carcere 219 had not been able to implement a stable way of promptly communicating with the people working inside the prison. Except for the sporadic phone calls that could be routed through the prison systems, communications were usually limited to before and after the day of production. The employees would arrive at the prison in the morning with the production program for the day, but if any change had been made to the order during the day, or some kind of problem had incurred during production, the communication between the inside and the outside of the prison was difficult, reducing the productivity of the work. This problem was particularly serious given the high flexibility required to work on the different types of material for the “Made in Carcere” products, which had to be adapted to the order requests, thus calling for continuous communication between sales and production. This was unfortunately not possible. Finally, another problem worrying Luciana was the low performance of the business-to-consumer channels that they had tried to open earlier that year and was channeled throughout. website (http://www.store- madeincarcere.it/), which was performing well behind initial expectations. Furthermore, despite being a potentially interesting opportunity for sales growth, demand from single customers implied an even more flexible productive process, able to quickly create and deliver the requested products even when in low numbers. This was clearly at odds with the current lack of flexibility marring the whole “Made in Carcere” supply chain.

Two Options

In this situation, there were two main courses of action open to Luciana in order to scale the social impact of her organization and better the situation of convicted Italian women. On the one hand, she could keep investing in the Made in Carcere project, that is trying to scale up social impact by increasing the scope and size of its activities, and also increasing the economic impact by tackling the problems present in the organization. If such problems could be solved, this course of action promised an initial higher return in the short run. This course of action would have in fact meant investing in a context and operations already known to Luciana, and also with which her organization was more comfortable. However, it was also true that the growth momentum of the organization seemed to 220 EDUCATING SOCIAL ENTREPRENEURS have slowed down, and the reasons for this decreasing growth rate might be due to the fact that an intrinsic threshold had been reached in terms of the breadth of scope achievable by Made in Carcere. On the other hand, especially if the internal problems of the organization proved to be insurmountable, investing in the “Sigillo” project was an alternative route that promised potentially higher challenges in the short run but also potentially higher returns in the long one. This is because scaling up the social impact on the Italian female convict population through the “Sigillo” project meant trying to replicate the Made in Carcere business model in several new organizations, thus forcing Luciana and her organization to face new and relatively unknown contexts. Fur- thermore, the arrangements taken with the other ventures would imply the risk of partially losing control of all the processes. On the other hand, however, the replication of the Made in Carcere business model in other ventures could make it possible to circumvent the potential development boundaries of a single organization. Luciana was indeed torn between the two options. Not long ago, the growth of Made in Carcere was the only option on the table, but now the “Sigillo” project added a whole new series of opportunities to be reckoned with. The only thing that was clear to her now was that the time had arrived to thoroughly weigh up all the potential pros and cons of the two courses of action. This was a decision of the uttermost importance.

References and Additional Resources

Al Revés available at www.coopalreves.it/home/ Filodritto available at www.filodritto.com/entra.html Gatti Galeotti available at www.cooperativalice.it/ Impronte di Libertà available at www.improntediliberta.com/ Italian Department of Penitentiary Administration available at www.giustizia. it/giustizia/it/mg_1_14.wp;jsessionid=CEA2CDE2C4A58886A79CD4044 DC7C016.ajpAL03 Italian National Institute of Statistics available at www.istat.it/en/ Oikos available at www.coopoikos.it/ Osservatorio Antigone available at www.osservatorioantigone.it/new/ Papili Factory available at http://www.papili.it/ Rio Terà dei Pensieri available at www.rioteradeipensieri.org/it/ CHAPTER 34 Dairy Processing Social Venture among the Maasai in Northern Tanzania

Alexander Tetteh Kwasi Nuer

Wageningen University of Research (The Netherlands)

Summary

Social Entrepreneurship has become an important field of enquiry in the last decade. The business model of social entrepreneurs (SEs) seeks to build social venture businesses that can become self-sustainable in challenging environments. By challenging environments, SEs invest in business settings that have inadequate structures and institutions that drive normal businesses. Scale-up or exit from established social ventures businesses is important to the business model of many SEs. This case study looks at how an SE planned its exit strategy, as well as challenges it encountered. A Dutch SE, in the form of a social venture investor foundation, identifies a local Maasai nongovernmental organization (NGO) that advocates on the rights of Maasai communities in the northern part of Tanzania. The Dutch SE and its local NGO partner agree to establish a social venture that will help empower Maasai women. Since the Maasai are seminomadic pastoralists, the SE established a dairy (milk)-related social venture with its head office located in Arusha, Tanzania. Interestingly, the Dutch SE had thought of “exit” as the transfer of assets and liability of the social venture to new owners. In principle, the communities and local partners were to make financial commitment to acquire the social venture. The local partner and the Maasai communities 222 EDUCATING SOCIAL ENTREPRENEURS however understood exit to mean that the Dutch SE will “hand over” the social venture to them “as an inheritance.” The good intention of establishing the social venture therefore seems to have been challenged by the business model and approach of the Dutch SE. This is so because different business cultural meanings of the Dutch SE (Western Philosophy) and the local Maasai (Traditional Maasai Philosophy) of exit emerged.

Learning Objectives

• To develop a set of exit criteria for SEs that will consider local conditions and cross-cultural contexts; • To present alternative forms and meanings of exit based on different cultural business practices; and • To enable students to critically incorporate different mindset of exit strategies into their social enterprise business plans.

Case Description

A Dutch SE locates a local Tanzania-based Maasai social development NGO that lobbies, advocates, and solicits for economic development initiatives among the Maasai tribe in the northern part of Tanzania. The SE in collaboration with the local government, traditional authorities, and selected local communities (represented by the local NGO) establishes a dairy supply chain to purchase, process, and market finished products (such as cheese, yoghurt, and UHT milk) to supermarkets within the bigger cities in and around the tourist city of Arusha, northern Tanzania. The following ownership and exit strategy was initiated by the Dutch SE that has a business model as well as is registered as a foundation in the Netherlands (The Dutch SE’s exit strategy is summarized in Table 34.1). Interestingly, a field research revealed that local partners and stakeholders (both Maasai and expat managers of the social venture) were of a different understanding of how the social venture will be transferred to “them.” The exit strategy adopted by the SE was therefore misrep- resented and misunderstood by local partners. Results of analyzed data from respondents associated with the social venture in northern Tanzania revealed that the meaning of “exit” is the same as transfer of ownership dAIRY Processing Social Venture among the Maasai 223

Table 34.1 Extract from the business plan of the Dutch SE

Transfer of Ownership, that is, exit strategy of the social venture is intertwined with the financing (discussion) of the social venture. In the first stage, the venture is financed by the SE in the form of equity, debt, and grants. Later on, other forms of financing should start to play a role. As the social venture develops, other means of financing can become available and can play a role in the Transfer of Ownership strategy. This can be in a direct manner (e.g., someone acquires the shares) or more indirect (e.g., the disciplining role of bank financing can be a first step in transfer of ownership and later on finance part of the exit). Other sources of financing from financial institutions are also essential to sustain and grow the business. Such a financial institution is essential to make funds available for growth, maintenance, and replacements of equipment and infrastructure, unforeseen costs, and even running costs. But also, as important as the aforementioned reasons, a financial institution will implement (financial banking) discipline by forcing repayments. Various sources of finance can be used to finance the social venture (or parts of a social venture). The main ones are listed in the following:

• Equity (provided by the [SE] or one of above listed parties) • Bank financing (mortgage loan, working capital facility) • Micro credit financing (coop or commercial) • Debt financing (long-term) by the SE • Debt, equity, or hybrid financing provided by (social) investment fund

at the superficial level. However, further analysis of what “exit” means revealed deeper understandings within the context of particular stakeholders. Smaller milk processing units had been established in five Maasai communities, where the women bring their milk in the morning and sometimes in the evenings. The Dutch SE and its local partner got a waiver from the Tanza- nian government to import all its milk-related machinery because of the impact-related motive of the social venture. Other tax reliefs such as tax holidays on certain income of staff remuneration and assets were also granted the social venture. A joint partnership agreement was signed between the SE and the local NGO, with the SE owning 70 percent and 30 percent belonging to the NGO that is to be held in trust on behalf of the Maasai women, as well as the local Maasai communities. The ownership structure was to be held until a time that the social venture has become financially self-sustainable, and then the SE will exit and offload its equity shares to local entrepreneurs, local staff, and the local communities. 224 EDUCATING SOCIAL ENTREPRENEURS

Maasai women delivering milk at the factory of the social venture enterprise

The SE and its local partner did not agree on a strict mode or form of exit or process by which they will exit from the social venture. However, the SE had thought of staying in the venture for at least 15 years. They had also proposed a “learning by doing” approach in their partnership and engagement within similar business initiatives in sub-Saharan Africa, and more specifically among the Maasai tribe in northern Tanzania. In principle, the SE intends to expand their business portfolio to other developing economies elsewhere. As was noted, respondents in communities, referred to as “local stakeholders,” had varied understanding and perceptions of the meaning of “exit.” These types of respondents understood “exit” as “handing over property or inheritance to the next of kin.” The meaning of “exit” was, dAIRY Processing Social Venture among the Maasai 225

Local Maasai women admiring end product from the processing unit of the social venture enterprise

Local Maasai women admiring end product from the processing unit of the social venture enterprise 226 EDUCATING SOCIAL ENTREPRENEURS

Maasai women delivering milk at the factory of the social venture enterprise

therefore, contextualized in the case of the social venture to mean handing over of the social venture to the communities without necessarily thinking of equity transfer or acquisition. The following quotes serve a summary of analyzed data.

…In this sense, if the investors will like to go, there are so many things to do; that is, to improve purchasing, now they should improve the cattle, they should help with those type of cattle that can produce a lot of milk…for the factory… [A Maasai Director of the SE 2012] …If the social entrepreneur dies, and we know before hand, then we can have some strategies in place. If this is not there, then it will be difficult to run the factory. The company cannot -con tinue if the factory is not there... If the social entrepreneur is not there, then we cannot work. The social entrepreneur should have a strategy in place and it should be explained to us. This is not there now... [Traditional Maasai Elder 2012] dAIRY Processing Social Venture among the Maasai 227

Primary and secondary data analyzed from the perspective of the SE explained “exit” to mean transfer of equity and assets. Interestingly, data analyzed from the perspectives of directors, management, and staff of the social venture and the partner showed a mixture of meanings. For example, while some directors and management saw “exit” as “handing over” a project initiative per many NGO models that follow similar community interventions, others mentioned “exit” to mean the transfer of equity as related to normal business models.

Key Takeaways

Business exits are unavoidable tenets of any business plan. The type of exit strategy to be adopted however needs to incorporate innovative and local contexts especially when the social venture is located in different cultural settings of the SE. Students, at the end of reviewing this case study, should be able to think beyond traditional business plan canvas when developing business plans. They should be able to develop comprehensive social enterprise business plans that incorporate cultural and local institutional structures.

Assignment

1. Prework: Required by students • Identify different forms of business exit strategies that are common to business setups. Write down an exit plan for a social venture you intend to establish. Suggest conditions under which you will opt for a particular exit strategy for your social venture enterprise. • Write down how you intend to exit from your social venture enterprise, after a certain period of time when you have made a return on your investment. • Should it always be the case that all SE need to exit from their social venture? That is, after they have met their vision, mission, and objective for establishing the social venture enterprise? Justify your answer within the basic theoretical principles of social entrepreneurship. 228 EDUCATING SOCIAL ENTREPRENEURS

2. Postwork: Follow-up by students after first two class sessions • Set up an exit strategy in your business plan that has an element of cultural differences for your social venture enterprise. • What will be your topmost and ultimate concern that such an exit strategy must be addressed? • What other forms of “plan B” will you anticipate to include in your social venture enterprise business plan? • Write a proposition paper to an SE who has requested your opinion on a social venture enterprise he/she intends to establish in another country in Africa, Asia, or Latin America. What considerations will you give to such an enterprise, considering our case study?

Theoretical Foundations of “Exit” Strategies

1. A social entrepreneurship view For SEs, an “exit” strategy is largely driven by continuation considerations (Boeker and Karichachil 2002; Emerson 2001; Mair and Marti 2009; Van Dijk 2011; Zahra et al. 2009). SEs are likely not to fare well should they adopt any of the traditional business “exit” strategies, forms, or criteria found in most business literature. The- oretically, we explore a set of “exit” strategies, forms, and criteria that could enhance the decision-making processes of an SE both in theory and practice. It is argued that SEs do not have to stay on as an entrepreneur, investor, stakeholder, or partner in business chains they have established for too long or too short a period of time. It is necessary for SEs to make explicit what key plans and steps they intend to take to realize their proposed “exit” from businesses they establish. SEs see their established business as a mission-based investment, and therefore expect the established businesses to be owned by local stakeholders, with preference given to producers of raw materials, local entrepreneurs, investors, and communities, as a whole or in part.

2. A normative view In recent times, the term has gained popularity within business circles (Gardner et al. 2005; Middleton 1999). In this case, “exit strategy” dAIRY Processing Social Venture among the Maasai 229

is defined to mean “an advice” in developing one or more strategies at the commencement of a business venture for a sustainable “exit” (Alter et al. 2001). The term is contextualized as “a plan to get out of a venture for another ‘entity’ to own and take over the venture for continuation” (Van Dijk 2011). An “entity” is operationalized to comprise an individual, a group, an institution, an organization, a firm, a community, or a combination of the aforementioned stakeholders that have legal backing of relevant authorities and within a communal context. Most business’ “exit” criteria involve the sale of a business or part of it. A product or service provided by an investor could be “sold” to willing investors who have interest in said business. A business may be merged with another firm based on shareholders’ or owners’ agreement within the laws of the country concerned. Manage- ment takeover of a business, its assets, and liabilities, or part of it are related “exit” forms identified in the management, business, and entrepreneurship literature. Another business “exit” strategy could be completely or partially withdrawing from or abandoning a business. These are the “exit” strategies that are applied by traditional business owners, be they corporate entities or individuals. A SE is also likely to stay somewhat longer than planned or continue with the venture even when the mission for the venture has been realized. Venture age, founder experience, and the organizational form of the established venture play an important role in the choice of a particular “exit” decision path taken by a founder.

3. A project-based view Rogers and Macias (2004) define “exit” from a project-development paradigm perspective as “the withdrawal of all externally provided resources from the entire program area.” The authors suggest that “exit” could be synonymous with “graduation” which, in the context of development intervention, is referred to as “the withdrawal of resources from selected communities, program sites, and program activities” (Rogers and Macias 2004). The term is based on intervention (philanthropy) and impact philosophy, as “a plan describing how the program intends to withdraw its resources while assuring 230 EDUCATING SOCIAL ENTREPRENEURS

that the achievement of development goals is not jeopardized and that progress toward these goals continues” (Van Dijk 2011; Rogers and Macias 2004). Graduation could be used as the starting point to “exit” from an intervention or project. The intentions of SEs to “exit” from their established businesses connote a “progress toward continuous goals” (Van Dijk 2011). The work of SEs is to ignite and invest in sponsored supply chains with a dual mission. Exiting solely from “a project development” point of view will defeat the core competence and business of such an entity. The financial return component of the “exit,” however, is not adequately catered for by the project-based view on “exit.” SEs base their “exit” strategies on their business models embedded within their mission, visions, and objectives. An SE that follows the aforementioned traditional “exit” strategies, thus, stands the chance of failing to realize the mission for establishing their business. CHAPTER 35 Worksheet for “Scaling the Social Venture”

Paul Miesing

University at Albany, State University of New York

Theory of Change

Metrics Matter: Measure overall expected added value to the community rather than only one performance dimension (e.g., number of jobs created, increased self-esteem of workers, etc.). Will your social enterprise be worth the effort—to you? To whom? Begin by estimating the desirable impacts you would like your enterprise to have in the future. Then, work your way to the present using the following “The Program Logic Model” to determine your resource requirements. 232 EDUCATING SOCIAL ENTREPRENEURS

change: Impacts Sustained significant ______ ______ ______ ______

Æ 1) 2) 3) 4) ultimately have ultimately

Outcomes term results: Medium- and long- ______ ______ ______ ______

Æ 1) 2) 3) 4) resulting in resulting

Outputs Immediate results: ______ ______ ______ ______

1) 2) 3) 4) to generate to

Activities What happens: ______ ______ ______ ______

Æ 1) 2) 3) 4) feed into feed

Resources What goes in: ______ ______ ______ ______1) 2) 3) 4) PART VII Ecopreneuring as Social Enterprises

CHAPTER 36 Wholly Frijoles*

Linda M. Krzykowski

University at Albany, State University of New York

Wholly Frijoles is a class exercise designed to engage students in an interactive way to explore the Tragedy of the Commons. There are numerous ways to use this as an in-class exercise around sustainability issues and for discussions of the long-term effects of competition (versus cooperation) for natural resources and social values. It can also be used to exemplify long-term versus short-term thinking, tactical and reactionary action versus strategic planning for social venture creation. A large tub filled with a variety of different (dried) beans and rice is used. The beans represent the scarce natural resources needed to manufacture products and the rice represents waste within the World of Wholly Frijoles. Different kitchen utensils represent different extraction technologies used to secure vital natural resources. Teams acquire their needed natural resource (and accumulate waste) during timed rounds.

Introduction

Welcome to Wholly Frijoles! In this exercise, each student is a different generation in family-owned businesses that live and operate in the World

* This is based on an exercise created jointly by the Waters Foundation Systems Thinking in Schools project and the University of Arizona’s Residence Life and Engineering departments. It was originally designed to help undergraduates understand systems thinking, sustainability, social justice, and the intersections between those concepts. It has been used to introduce systems thinking with executive MBA students in an “Organizations, Environments, and Sustainability” class. 236 EDUCATING SOCIAL ENTREPRENEURS of Frijoles. In this world, there are only family organizations—represented by the teams in the class. Each family business makes only one product, primarily from one natural resource. Without this natural resource, the organization cannot produce its product. There are no substitutes for this resource. All of the natural resources of the World of Frijoles are contained in the resource tub. During each round, one team member will be given 10 seconds to collect all the resources that are needed to produce the product for the upcoming season.

Learning Objectives

• To understand basic concepts of systems thinking, social values, and the Tragedy of the Commons • To consider long-term implications of short-term actions • To consider the sustainability, viability, and depletion of natural resources

Group Size

Any number of groups of four members each. Each member of the team represents a generation. If possible, all teams should have the same number of members.

Time

One class session of approximately 60 to 75 minutes, depending on the complexity of the discussion. Optional pre-readings and videos are suggested but not required. Optional ideas for exercise variations and/or repeating this exercise are included at the end of this exercise.

Materials Required

The following materials will need to be purchased and brought to class. (See photos for examples of setup and materials used.) Wholly Frijoles 237

• Large tub filled with a variety of beans and rice—enough different types of beans for each group to have a unique type of bean to collect. One type of bean will be the required resource for each team. Various extraction tools • “Extraction tools” (kitchen utensils)—one for each round of the exercise (i.e., each “generation” within the organization) and enough of the same tool for the number of teams in the class. Extraction tools should present a variety of challenges in accumulating natural resources (beans). Examples include potato masher, large tongs, spatula, and so on. Extraction technology (utensils) should become more efficient (hold more materials) with each round, increasing the teams’ ability to acquire valuable natural resources but also accumulate more waste (rice) and with the effect that all resources will be depleted more quickly. • Extraction bowl to hold all extracted materials and used to measure what is extracted in each round. Need one per team. • Cup to hold each team’s natural resource (designated bean type). Need one per team. • Waste bowl to hold all the material extracted from the “world” that is not needed by each team. Need one per team. • Ruler for each team. • Graph paper—two sheets for each team: 33Sheet 1: Teams will count and graph their beans at the end of each round 33Sheet 2: Teams will measure and graph the total amount of waste material at the end of each round

Exercise Schedule

The following schedule is approximate. 238 EDUCATING SOCIAL ENTREPRENEURS

Unit time Total time Read exercise description; assign roles within each 10 minutes 10 minutes team; assign each team one natural resource (one specific type of bean) that their organization needs Play game: Each round should take 10 seconds for 25 minutes 35 minutes resource extraction/collection and 5 minutes for counting, planning, and preparing for next round Debrief: Up to 40 60 to 75 Team Discussion: 10 minutes minutes minutes Class Discussion: 15 to 30 minutes

Assignment

1. Step 1: Prework (optional) Instructor’s Note: Different materials can be used as pre- or post- exercise supplements. Since this exercise can also be used with different types of students, the level of student (undergraduate, graduate, executive MBA) should be considered. These materials can be assigned prior to class, or can be assigned after the exercise as part of analysis and reaction assignments. Some supplemental readings and videos include:

Videos: • Tragedy of the Commons by StoneHill Professor Sean Mulholland (approximately 3 minutes). www.youtube.com/ watch?v=MLirNeu-A8I • The Tragedy of the Commons Explained (approximately 4 minutes)—a short, but well-done cartoon video. www. youtube.com/watch?v=4RE9PMwwaFc • TED Talk: The Power of Collaboration by Howard Rheingold (approximately 20 minutes). Short discussion of the Prisoner’s Dilemma and Tragedy of the Commons and then discussion of cooperation in technology and business (approximately 20 minutes). www.ted.com/talks/howard_rheingold_on_ collaboration

Readings: • Hardin, G. 1968. “The Tragedy of the Commons.”Science December 13 Wholly Frijoles 239

• Kim, D. 1999. “Introduction to Systems Thinking.” (Pegasus Communications) • Nguyen, H., et al. 2014. “Remaking the Industrial Economy.” McKinsey Quarterly February • Heck, S., and M. Rogers. 2014. “Are You Ready for the Resource Revolution?” McKinsey Quarterly April Step 2: Team formation and preparation

2. The instructor will form groups of four students. Each group will receive the exercise and read it individually. Team roles should be assigned.

3. Step 3: Begin the exercise Play one round for each member of the team. Wholly Frijoles Rules: • Each person on the team represents a generation and each generation will be in charge of acquiring the needed natural resources. • Each person will be given an extraction tool and can use only that tool to gather their raw material. • Each resource collection bowl is fixed to the ground. They cannot be moved closer to the resource tub and cannot be picked up during the collection period. • The instructor will give a signal to start and a signal to stop. If participants start too soon or continue past the stop signal,

Teams extracting their raw materials during 10-second timed resource collection round 240 EDUCATING SOCIAL ENTREPRENEURS

the team’s entire collection bowl will be emptied back into the resource tub. • At the end of the collection period, teams will have 5 minutes to sort raw materials and track their progress. 33Count assigned beans and graph by round 33Measure the height of waste material and graph by round • There will be four rounds. During each round, the person acquiring the resources is the current president of the company (genders are arbitrary). 33Round 1 = founder and great-grandfather 33Round 2 = grandfather 33Round 3 = mother 33Round 4 = daughter • At the end of round four, teams total and graph number of your raw materials (assigned bean type), and total waste (by height).

The winning team is the one that collected the most of their assigned natural resource (their assigned bean type). (Note: You can omit having an explicit goal to allow teams to set their own goals. In this case, provide some additional time in the beginning to allow teams to discuss their strategy. Alternative goals can be used (see variation suggestions in the next section.)

4. Step 4: Group discussion Distribute discussion questions. Give teams 10 minutes to discuss as a team. It is recommended that discussion questions be distributed

Team sorting, counting, and graphing results during 5-minute timed analysis and planning sessions Wholly Frijoles 241

to teams after the completion of all rounds. See Exhibit 1 for group/ team discussion questions.

5. Step 5: Class discussion Have teams share their answers to the discussion questions. Intro- duce discussion questions about the effect of teams on the system as a whole. See Exhibit 2 for class discussion questions.

CHAPTER 37 Creating a Business Model for Recycled Materials

Stephanie A. Fernhaber, Lawrence J. Lad, and Geoff Schoeneck

Butler University

Introduction

In this exercise, you will work in teams to develop an idea for a new product using recycled materials and develop a viable business model for bringing the product to market. At the end of the exercise, time will be spent debriefing and determining what (perhaps unsuspecting) takeaways emerged from the process. The primary focus is on the transition from brainstorming a new idea to developing and testing a business model.

Purpose/Learning Objectives

The learning objectives for this exercise include the following:

• To experience brainstorming with a focus on reusing existing materials • To understand how to utilize the business model canvas within the context of social enterprise • To realize the importance of assumption testing with a low- cost approach • To build awareness of the range of materials (glass, cardboard, aluminum, plastic) that can be repurposed if thoughtful planning is utilized 244 EDUCATING SOCIAL ENTREPRENEURS

Group Size

Any number of groups of preferably three to five members could work for this exercise.

Time Required

A minimum of 75 minutes is required to complete the exercise (Steps 1 to 3). This would require a take-home reflection and debrief the following class period. Alternatively, a time period of 90 minutes is needed to include the debrief in the same class period.

Exercise Schedule

The following schedule is approximate:

• Step 1: The Challenge (15 minutes) • Step 2: Business Model Canvas (40 minutes) • Step 3: Assumption Testing (20 minutes) • Debrief (15 to 20 minutes)

Assignment

Optional pre-work includes reading pertaining to the business model canvas. Several resources that are available at no charge on the Internet include:

• Osterwalder, A., Y. Pigneur. 2013. Business Model Generation. Hoboken, NJ: Wiley. (72-page preview available at: http:// businessmodelgeneration.com/book) • Ingrid Burkett Knode. Application of the Business Model Canvas to Social Enterprise. Retrieved on August 10, 2016 from: http://knode.com.au/wp-content/uploads/Knode_Bus- ModCanv4SocEntDesign_E1LR_30p.pdf

1. Step 1: The challenge The People for Urban Progress (PUP) organization is well known in Indianapolis for their ability to leverage salvaged materials into Creating a Business Model for Recycled Materials 245

designer-quality products. The roof of the RCA dome has been turned into wallets, purses, and messenger bags, and sold in boutique retailers around Indianapolis. Seats from the former Bush Stadium are installed at bus stops. Also, with the help of PUP, the former city hall has been converted into a design center for urban planning and community engagement. Much of the furniture in this space is from repurposed material. PUP would like your help in figuring out how to repurpose any of the following items:

• Small rectangular recycling bins: A community has decided to upgrade from the small, rectangular recycling bins to larger bins that can be wheeled to the curb. How can the smaller recycling bins be salvaged or repurposed in some ways? • 25000 VHS tapes—the Central Library has converted to DVDs and no longer plans to store and lend VHS tapes. Plastic recy- clers cannot use the tapes as the materials leave a toxic residue as they are processed. What could be done with these tapes? • Cardboard inserts in wine boxes—two of the major liquor dis- tributors in the state have discovered the cardboard inserts add an extra step in bundling and processing cardboard. What can be done to improve the process or utilize the cardboard inserts?

Each group of students should select an item and will have 15 minutes to develop a new use and draw a series of pictures on a whiteboard to demonstrate how it would be used.

Variation: You can bring in items that can be discarded for students to work with, or you can ask students to bring in items to make it more “hands on.”

2. Step 2: Business model canvas Now that you have come up with a new way to use the salvaged materials, the next step is to develop a viable business model. Use the first 10 minutes to ensure that all students are familiar and comfortable with the concept of the business model canvas. A popular choice is: 246 EDUCATING SOCIAL ENTREPRENEURS

Strategyzer. 2011, September 1. Business Model Canvas Explained [video file]. Retrieved from www.youtube.com/watch?v= QoAOzMTLP5s Please print a hard copy of the business model canvas (see the end of the book) to hand out to each group. Students will be given 20 minutes to complete the canvas for their new idea. At this point, each team should briefly share their business model with the class. Depending on the number of teams, this should take over 10 minutes.

3. Step 3: Assumption testing Next, have the students develop a list of the assumptions that this business model is based on. For example, an assumption may be that customers will pay $10 for the product or that customers will value the product enough to purchase it or that middle-age women living in rural areas are the target customer segment. Students should then identify the top two to three assumptions that would make or break the business model and develop a cost-effective way to gauge the answer. This segment would take approximately 20 minutes.

Variation: Have the teams rotate to identify the key assumptions for a different team.

Debrief Questions

If planned well, this exercise can be done in a single class period including time to debrief. The debrief portion is critical to the learning objectives, and could consist of an in-class discussion immediately following the exercise (20 minutes) and/or a writing assignment with a discussion the following class time (20 minutes). Typical questions include: What did you discover about the recycling industry? What did you see happen to your idea as you developed the business model? What did you notice as other groups examined your assumptions? How useful was the Business Model Canvas in capturing critical components of your idea? We find giving students time to reflect on their experience in this exercise adds another dimension to the activity. One approach simply is Creating a Business Model for Recycled Materials 247 an open-ended written assignment that asks—what did you learn from the exercise? Another approach provides a rubric that includes learning objectives (e.g., creativity, teamwork, social enterprise business model, assumption testing, brainstorming process) and asks students to weigh in on what they noticed/learned on each element. A discussion in a following class can help tease out what students discovered. A variation in questioning can also inquire about what is an “unexpected” take away from the activity. While some might focus on an insight about recycling in general, others might see themselves differently based on the role they played in a group.

Appendix: Business Model Canvas

CHAPTER 38 Gongali Nano Filter for Rural Water Purification

Ahmad Kipacha

Nelson Mandela Institute of Science and Technology

Overview

This case narrates a story of a young rural dweller turned mechanical engineering innovator, Askwar Hilonga from Gongali village in Karatu district, an inventor of customizable low-cost water nanofilters for puri- fying drinking water at point of use for an underserved community in northern Tanzania. His community and family regularly suffered from preventable waterborne diseases at Gongali village in rural Tanzania. Thus, having obtained a PhD in nanotechnology in South Korea with the potential to create a sustainable and affordable nonofilter business for water purification, Hilonga and his wife Ruth, an MBA graduate in business administration, decided to establish a Gongali Model Company Ltd in 2010 and among service they offer to their rural community is water purification through Nanofilter*TM. According to Hilonga, this invention could help the 70 percent of households in Tanzania that do not have clean drinking water. And from the words of Malcolm Brinded of Africa Prize for Engineering Innovation, Hilonga’s innovation “could change the lives of many Africans, and people all over the world.” Hilonga’s success story has passed through myriad terrain. Hilonga, as the owner of the idea, has undergone rigorous lean start-up and pitch training, soliciting strategic partnership with grant organizations, interested institutions, and local industry to support production of the filter at affordable local price; constantly engaged in community outreach initiatives to “rub shoulders” 250 EDUCATING SOCIAL ENTREPRENEURS with would-be customers at village levels; commuted to and fro between the city and his rural village that centers Gongali Model Company Ltd.; frequently travelling abroad to pitch his invention to venture capitalists and fellow researchers in dire such for seed funding; flooding his website with YouTube presentations; making school visitations; and participating in national/international exhibitions and international poster presentations, a necessary step to offset the needed operational cost and company visibility. Finally, like any other technical innovation, he had to formally register his start-up company and trademark his invention. The final hur- dle that is now engulfing him was how to scale up production beyond local confinement. His next, but not last, move is to untangle the jinx of “valley of death” to which many of his peer start-ups have fallen prey. Unshakable, Hilonga now at the prime age of 38, has shown a bold standpoint in spite being showered by awards and prize money: “I want to become a MILLIONAIRE … not by amassing millions of money BUT by IMPACTING millions of lives!”

Learning Objectives

• To analyze Gongali’s nanofilter water purification start-up as an innovative social enterprise. • To evaluate how the social lean canvas applies to Askwar’s Nanofilter* TM production. • To discuss the possibility of the Hilonga’s invention to effect change in the local communities and across the entire globe.

Assignment

• Prework: Students review social lean canvas (at http://socialleancanvas.com/) and Hilonga’s YouTube presentations (www. youtube.com/user/Hilonga) to get familiar with the local environment. • Postwork: Find a similar case of engineering innovation from your community or country and diagnose similarities and differences with that of the Nanofiltration case. One page only. Gongali Nano Filter for Rural Water Purification 251

Case

1. Introduction: Profile of the inventor and idea invention

I grew up in a remote village called Gongali in rural Tanzania. I struggled a lot with waterborne diseases when I was young. I can still recall seeing worms in my poo. Due to poverty and ignorance my parents did not afford to handle the challenge easily. I wish there was someone that would have helped me with clean drinking water. I saw my fellow kids dying from waterborne diseases such as typhoid, diarrhea, cholera, dysen- tery, and so on. It was so painful! Now, after graduating from my PhD, I am looking for a way to give back to my community, which is still suffering from waterborne diseases even in this twenty-first century. Imagine, 9 out of 10 children who die in Tanzania die from waterborne diseases. This is not fair because waterborne diseases are preventable.

It has now become a mantra to him wherever he got the audience to pose the ethical question, “What does my PhD mean to my community in Tanzania which is still suffering from waterborne diseases?” Ever since he obtained his doctorate in nanotechnology and master’s degree in public health at Hanyang University in South Korea in 2010, Dr. Hilonga has focused his gained expertise to address the problem of contamination of water in his own community that culminated in his five-year invention of a low-cost Nanofilter culminated with commercializing the product through his registered company Gongali Model Company Ltd. (named after his village). The sand-based water filter that purifies contaminated water based on nanomaterial is harmless to human consumption, yet ingredients are locally available, and customers are rural poor. The filter has an efficacy rate of 99.99 percent in disinfecting and decontaminating drinking water. “I am seeing a commercial feasibility for this venture,” he earnestly projected. When asked about his value proposition and threat from his well-established competitors, Dr. Hilonga confidently remarked that “no one in my village has escaped the 252 EDUCATING SOCIAL ENTREPRENEURS

scorch of typhoid or diarrhea, few can afford bottle waters, and none of my competitors are targeting these rural poor as prime consumers of the purified water.” The Gongali company targets local schools and hospitals with plans to expand to prisons, barracks, and other bulk audience. They have strategically installed filters to provide safe and clean water at local schools to provide clean drinking water. To date, more than 20 local businesses in Karatu are selling the nanofilters. “My goal is to develop an entire independent system, from filter case to water bottles.” The complex nanotechnology has eventually trickled down to the village level and now sustainably serving rural community that have been sufferings from years waterborne diseases and untreated drinking water. Dr. Hilonga was born and raised at Gangoli village.

My wife and our two children both spent years in South Korea where she also obtained her Master’s degrees in Business Man- agement and Accounting. What do these combined scholar- ships mean to our people at Gongali? We had a choice to enjoy after-schooling life in Arusha city alone, but we were haunted by guilty consciousness that majority of our primary classmates, children and villagers are still living in horrible subsistence life fully of uncertainties and in constant life threatening health dangers (Kievit and van Dijk 2008).

Dr.Hilonga is seen visiting his former primary school and prac- tically showcasing his invention to primary school pupils. He demonstrated how instantly dirty water is becoming drinkable without boiling or use of chemicals but only through the filter he invented. On another occasion, Hilonga captivated the attention of the public at the bus station in Karatu town to demonstrate the “magic” of the nanofilter ending with a public approval and congratulation. Very few scholars of his level can take their lab invention to the street. He has continued to influence his students and has employed some of them in his start-up company, Gongali Model Co Ltd Dr. Hilonga has accumulated working experience of employing nanotechnologies desired for providing social solutions through the Gongali Nano Filter for Rural Water Purification 253

production of affordable commercial/industrial nanomaterials by an R&D Company, E&B Nanotech Co. Ltd., in conjunction with the Hanyang University between 2007 and 2012. The ever-smiling Dr. Hilonga has developed a sense of multi-culturalism and multi- disciplinarianism through his many visits and contacts with various personalities of all ages, races, and inclinations inside and outside his country of birth. Academically he outperformed others with outstanding patented publications in international peer-reviewed journals. But as always said, behind any successful man there is the dependable wife: Ruth has been his business associate and the cofounder of Gongali Model; she is the brain behind the managerial and entrepreneurial skills that Gongali Model Co. Ltd. relies on. She has a wealth of experience on attracting loans and grant. Ruth has eyes on impacting and empowering young Tanzanian elites, youth, and women, through the Gongali Model (www.gongalimodel.com/). She has recently visited Finland to acquire firsthand experience of handling a business start-up and developing social enterprise. The pair is a formidable force to reckon and they are highly motivated to achieve their goals. They have developed their home village Gongali and improve holistically the well-being of the people.

2. Socioeconomic context of the innovation Gongali Village is found in the Karatu district in northern Tanzania. It has a total of 800 households with almost 6,000 people. Educa- tionally the picture is still incomplete. Only four primary schools exist and the nearest secondary school is about 8 km of walking dis- tance. The village is proud to have Dr. Hilonga and his wife Ruth as exemplary graduate scholars but the majority (95 percent) of their primary classmates failed to cross the 7 years of primary schooling and most work in the fields or keep few livestock for subsistence living. The rate of environmental degradation is high as trees are the major source of fuel to majority. There is no electricity or permanent passable road to town or nearest cities. To light the village, small solar gadgets have started lighting few households after being introduced by the Gongali Model company but not to the extent of supporting small businesses that depend on energy sources. The village has 254 EDUCATING SOCIAL ENTREPRENEURS

urgent needs for utilization of urban solar energy to powering homes and schools while still waiting for the national rural electrification project to reach Gongali. There is no bank or micro-loan facilities available. Health-wise, the villagers are served by only one dispensary while the nearest referral hospital is almost 10 km away with no reliable transport for emergency cases. The village has a semiarid climate with periodic rainfall. The villagers have lived for years consuming water from unsafe and contaminated water sources. So far, the support from the DongSoong Church of South Korea has helped to drill some water wells. All too often, both surface water and groundwater sources are contaminated with toxic heavy metals, bacteria, viruses, and other pollutants from mining and lack of sewage systems. As majority of the villagers, like most Tanzanians, live under the threshold level of one dollar a day, they have no choice but to resign to the available contaminated water sources for drinking and cooking. Dr. Hilonga and his family have experienced this situation and are often caught in the web of waterborne diseases like other families in the village. His decision to embark unflinchingly on finding the everlast- ing solution of unsafe and clean water among his people is rather “a do or die” mission. Dr. Hilonga is aware of the magnitude of the problem. It is a national disaster, in which 70 percent of the 45 million people are living without access to safe domestic water. He pursues the solution as a matter of necessity to ensure that the goal of provision of sustainable access to safe drinking water in his village of Gongali and the like of it in his country is achieved. But to achieve this objective, and, like any other engineering innovator, Dr. Hilonga has to abide to the subjective and risky route of product commercialization.

From ideation to Nanofilter*TM From ideation of local solutions to developing business ventures is indeed a winding road. To introduce innovation is one way to ease production of the product but to produce on the scale for the country is another. Will Dr. Hilonga’s innovation reach the zenith of regional and global scalability? The first obstacle that Hilonga faced Gongali Nano Filter for Rural Water Purification 255

during the initial stage of his innovation development was how to solicit a start-up capital to develop a prototype for a nanofilter. The advice to seek seed capital from his own institution, the NM-AIST, was provided by his mentors Prof. Richard Williams of Birmingham University, UK, and Dr. David Sarphie of Bio-Nano-Consulting, UK. Charity begins at home, and therefore, his employer, the NM- AIST, came to the rescue with an interest-free loan of $7,000 on Feb- ruary 12, 2015. The support helped Gongali Model Co. Ltd build 100 filters to face the maiden market. To outwit his competitors, his design avoided the duplication of initiatives and added patented, more cost-effective nano-based customizable filter with underserved customers in mind. Nanofilter is described as affordable, sustainable, and highly relevant in rural settings across Africa where access to clean water remains a huge challenge. Unlike the “Nanoscavenger” developed at Stanford University, and the “LifeStraw” developed by the Swiss company Vestergaard, his Nanofilter can be calibrated to suit and decontaminate any water conditions. He said: “I began work on the filter in 2010. It has taken me about five years to develop it. Developing and refining the nanomaterial used was the trickiest part. I have developed my first prototype in late 2014, just in time before attending a comprehensive business idea development training and pitch coaching camp in South Africa.” Dr. Hilonga seized the opportunity to attend a 6-month training and mentoring support from business development and engineering experts in South Africa, in late 2014, He found the training at the academy as a boost to develop a win-win social lean business model. He learnt the art of how to commercialize the product amidst much competition, the branding and pricing strategies, and approach to customer’s segmentation.

Now I have even changed my way of introducing my product to customers: I realize the importance of learning customer behavior based on past, fact, and specific responses—this works more amazingly, than I ever imagined. Thanks to step- by-step guidance and support from my mentors in the Africa Prize, I was able to approach funders, 256 EDUCATING SOCIAL ENTREPRENEURS

Dr. Hilonga said: “The many insights gained from my training are opening doors for the project.” However, what can be regarded as technical push was initiated by Prof. Chad Jafvert of Purdue Uni- versity, USA. Prof. Jafvert and students in his Global Engineering course at Purdue donated filter components for 100 slow sand filters to be integrated with disinfection filters that Dr. Hilonga has developed. This first “slow-sand-filter” component is for removal of water turbidity, and up to 97 percent removal of microorganisms: bacteria, virus, and protozoa. The component that Dr. Hilonga has designed and tested is for final and complete disinfection. Prof. Chad’s support provided for the creation of the integrated nonofilter. The price of the complete integrated filter became Tanzanian shilling (Tsh) 250,000 ($150). Soon after rolling up his first prototype of the product few awards followed him: the Nanofilter innovation earned him a UK £25,000 (Tsh 79 million) in the first Africa Prize for Engineering Innovation. He went further to win the Royal Academy of Engineering, and The Global African Investment Summit (TGAIS) award of cash money equivalent to $39,000 (Tsh 80 million) in London on December 1, 2015. He was crowned as “the Most TALENTED African Entrepre- neur for developing a scalable solution to local challenges that has potential to become a sustainable business.” But of all assistance and strategic partnership, Dr Hilonga will not forget the role the Global Sustainable Partnerships (GSP) directed by Kimberly L. Fogg and Mary Barth played in uplifting Gongali’s prowess to provide clean and safe drinking water to children in rural schools at a subsidized price. On April 17, 2015, Gongali Model Co. Ltd. signed a contract with GSP, an American charity (www.gspartnerships.org/), to allow Gongali Model to supply 100 filters to schools in the rural Karatu District at subsidized prices. It was at first difficult for local schools to purchase the complete set of filters at a price of Tsh 250,000, but assistance from GSP made it possible. E-mailing CleanLeap, Dr Hilonga boosted the competitive advantage of his invention; it is environmentally friendly and affordable at the grassroots level, thus addressing incumbent social needs and has commercial viability while technically the product does not Gongali Nano Filter for Rural Water Purification 257

need any kind of electrical or solar power, UV treatment, or chemical treatments. “We have demonstrated we can fabricate up to 20 filters a week.” His filter can produce up to 60 liters of water per day and costs only $130 per piece (around Tsh 284,000). According to him, the solution removes 99.999 percent of all contaminants and pollutants in drinking and cooking water, making it free from waterborne viruses and bacteria. A local water entrepreneur sells water at Tsh 750 per 20 liters (below $1).

While we do sell them directly to households, there are many who cannot afford to buy them, so we are also working with local entrepreneurs to establish water stations. At present we are renting filters to around 23 entrepreneurs who filter the water and sell it to their communities at a very affordable price. After 800 liters of water have been filtered, the nanomaterials generally need to replaced, although this varies in accordance with local water quality. For a household, this means the nanomaterial need to be changed every three months or so at a cost of around USD5. It’s very cheap.

Dr Hilonga admitted that “at the beginning I was wondering if I can ever enter my products in the market due to financial limitations. I was always looking for external sources of support at least for seed capital.” The product has been embraced by 10 local entrepreneurs who are operating water stations while Gongali Company rents filters to them. These produce water and in return pay his company Tsh 1,000 ($0.5) per day. Five schools among the nine schools are using the filter sponsored by a Canadian charity. According to him, nine households are already using filters. Orders from neigh- boring countries such as Uganda and Ethiopia are coming on

3. Trademarking Nanofilter Gongali Model Co. Ltd complies with the policies, standards, rules, and regulations relating to products and services as set by the company, government, and other regulating bodies both at national and international levels including that of Tanzania Bureau of Standards 258 EDUCATING SOCIAL ENTREPRENEURS

(V 05, HS:X-07) and World Health Organization’s standards as stipu- lated in WHO’s Drinking Water Standards 1993, Geneva. On trademarking and patenting his innovation, Dr. Hilonga had this to say:

During the six-month business training course in South Africa, I learned about the importance of protecting an innovative technology. If you don’t protect it, anyone can copy and use your name, come up with a low-quality product, and undermine your business interests. So, as part of my intellec- tual property (IP) strategy, I decided to register Nanofilter as a trademark. This enables me to protect and maintain the quality of our brand. When I began this venture, my market was Arusha; now there is interest from across sub-Saharan Africa and beyond. Countries like Ethiopia and Uganda share the same challenges with respect to water quality. Fluoride tox- icity is a problem all around the Rift Valley. In this context, it is really important to have an effective IP strategy in place. A number of investors have approached me, but I have to be sure of their motivation. Before I start thinking about making a profit, my first priority is to solve the problem. People need this filter so it needs to be affordable. So ideally, I am looking for investors who share the same goals and who can help to subsidize the price of the filters or reduce distribution costs. That is our goal.

4. Future prospects One day in early January 2015, during his market tour to increase his customer base in Arusha, he came across the following:

I met people, struggling with real life! This was at Nguru- doto, near the University of Arusha. These people have low income BUT they desperately need my filter! I see myself and my company attempting to open “a Pandora’s box.” About 1.2 billion people have no access to clean and safe drinking water and water borne diseases are number killer of the children Gongali Nano Filter for Rural Water Purification 259

under 14 worldwide (WHO/UNICEF 2012), Sub-Saharan Africa has a share of rural inhabitants with myriad problems of unsafe and contaminated water. Time is now!

In this case, Dr. Hilonga has demonstrated how a local scholar can use his/her expertise to serve the needy and focused solely on improving his/her people’s life as well as creating a lucrative local business. This case followed Dr. Hilonga’s path to address the issue of safe and clean water in particular for his own community and the whole of Africa in general. He is currently cherished as a role model and is a successful social entrepreneur in Africa with several national and international awards and grants conferred to him and his start- up company Gongali Model Co. Ltd.

Discussion Questions

• How could a community and country balance perpetuation of innovation against solving social problems with limited resources? • The case tells us that Dr. Hilonga aims to partner with grassroots stakeholders at the village level; what challenges is he bound to face from your perspective? • To what extent is the Gongali Model Company tied to its local business environment? • How does the organization structure of the Gongali Model Company fit the characteristics of social enterprise? • Has Dr.Hilonga’s Nanofilter business potential for African local communities and if so how should they approached developing their business? • To what extent has Askwar achieved his social goals and to what extent has networking supported Askwar’s venture? • What are the major challenges and prospects that the Gongali Model Company exhibit? • How these innovations help people in the area? Is this a “do good” example? 260 EDUCATING SOCIAL ENTREPRENEURS

References and Additional Resources

Africa Prize—Royal Academy of Engineering available at www.raeng.org.uk/ AfricaPrize Business Registrations and Licensing Agency available at www. brela.go.tz Cowan, A.2012. Starting A Tech Business. Hoboken, NJ: John Wiley & Sons. “Dr. Hilonga wins Africa Prize for Engineering Innovation” available at www. nm-aist.ac.tz/dr_hilonga.pdf Drucker, P. 1998. “The Discipline of Innovation.”Harvard Business Review 76, no. 6, pp. 149–57. The Global African Investment Summit available at www.tgais.com/press-release/ his-royal-highness-prince-andrew-duke-of-york-mr-aliko-dangote-presi Global Sustainable Partnerships available at www.gspartnerships.org/ Gongali Model Co. Ltd. available at www.gongalimodel.com Heath, C. and D. Heath. 2010. Switch: How to Change Things When Change is Hard. (New York: Random House. Hydraid BioSand Water Filters available at www.hydraid.org/ Leischow, S.J., A. Best, W.M. Trochim, P.I. Clark, R.S. Gallagher, S.E. Marcus, and E. Matthews. 2008. “Systems Thinking to Improve the Public’s Health.” American Journal of Preventive Medicine 35, no. 2, pp. 196–203. The National Institute for Medical Research available atwww.nimr.or.tz/ The Nelson Mandela African Institution of Science and Technology available at www. nm-aist.ac.tz/Preston, S.L. (2007). Angel Financing for Entrepreneurs: Early Stage Funding for Long-Term Success. San Francisco, CA: Jossey-Bass. Social Lean Canvas available at http://socialleancanvas.com/ Steps. 2010. Innovation, Sustainability, Development: A New Manifesto http:// steps-centre.org/anewmanifesto/ CHAPTER 39 Worksheet for “Ecopreneuring as Social Enterprises”

Paul Miesing

University at Albany, State University of New York

How Green Are my Values?

Reflect on your own environmental values. What do you really do about protecting the environment? Based on your answers, why do you think good people (such as you) can make bad decisions? How will you prevent falling into that trap? What sort of conflicting values might you experience, and how would you reconcile them? Is there anything you will change or at least “think about”? Are there three to five action items you can commit to (either personally or professionally) as a result of your reflection? What else would you like to know about environmental issues before committing to any significant changes? Based on your reflections:

• If your social business plan has an environmental component: What is your purpose? Is it based on “green values” or a business case? How does this workbook help your business plan? Was there any “unexpected” takeaway? Is your business plan replicable? What are the major challenges and prospects you are bound to face? • If your social business plan does not have an environmental component: Is there a business opportunity based on solving social 262 EDUCATING SOCIAL ENTREPRENEURS

problems with limited resources; for instance, preventing environmental degradation (e.g., upcycling waste)? How can you structure the supply chain and market? What is the recycling industry’s business model? What are the major challenges and prospects you are bound to face? Resources

Writing A (Social) Business Plan

Woody Allen once quipped that “If show business wasn’t a business, it would be called show show.” The same can be said of social enterprises: If there was no business component, it would be called “social social.” Review the various worksheets you completed for the different topics—these can comprise the basis of your social business plan. Consider the following outline for presenting and writing it; these merely suggest topics—use discretion in applying them to your specific analysis.

Preliminary Sections • Cover page • Table of contents • Executive summary: 33Who is the social entrepreneur and what unique skill, service, or background does he/she/they bring to the venture? 33What is the venture and where is it now? Is it truly new and important? Who will benefit from it? How? 33Where do you want to go—What will constitute success? 33How you will get there—How (in general terms) will the idea be executed? 33What kind of support for the enterprise do you need? What resources are required?

The Business Model • Social purpose/mission statement/aims: 33Why is there a need for this social enterprise? Who will benefit? How will you meet the need? 264 Resources

• Products, services, activities, and so on. • Key innovations or adaptations • Financial and social goals and objectives: 33Definition of success and “value” 33How you will measure progress toward “social impact”? • Ownership/organization: 33Legal structure, equity positions, financial deal • Potential partners and stakeholders • Starting the enterprise: 33Acquiring staff, space, and equipment 33When will you deliver services? • Achieving financial sustainability: 33Key milestones/timelines and associated activities 33Short term (can be achieved in less than a year), interme- diate (1 to 3 years), long term (often require 3 to 5 years to achieve) 33Realistic assessment of chances for success • Exit strategy (how and when investors will recoup their money): 33Sell? Merge with another social venture? Dissolution— mission accomplished?

The Market • Industry description (“five forces”?) • The competition (e.g., similar social enterprises) and competitive advantage • Target segment: 33Who will buy your goods/services? Why from you? 33Market research (including trends) 33Expected position and share

The People • Key figures: 33Leader(s)/founder(s)—Background, education, experience, accomplishments, reputation, skills, character/integrity, motivations/personal drive Resources 265

33Others—Board of Directors, Advisors/Counselors, Consul- tants • Human resource management strategy: 33The team—from top management to first-line 33Key staff (skills, experience, knowledge)

The Marketing Plan • Revenue model: 33Demand management (e.g., pricing and expected surplus) 33Income from for-profit activities vs. noncommercial 33Communications (e.g., direct mail, media, social networking) 33Publicity and showcases 33Marketing “the brand” • E-commerce strategy

The Finance Plan • Financial needs for 3 to 5 years • Source(s) for resources • Methods of fundraising (investment capital, donors, philan- thropist/angel, grants, IPO) • Returns: 33Projected income, expenditure, cash flow 33Balance sheet; profit and loss • Financial management systems • When venture will become financially self-supporting

Risk/Reward Assessment • Critical risks and contingencies (potential impact of failures, problems, unforeseen events and trends): 33Financial, Legal, Talent, Technological, Environmental, Other • Scenario planning—Best case to worst case

Concluding Sections • Summary • Scheduling and milestones (calendar of expected dates and events) 266 Resources

Appendixes • Supporting documents: 33Résumés for founders and key enterprise participants 33References/letters of recommendation (e.g., banker, lawyer, accountant) 33Sources of data used in the plan, including professional advisers’ reports if used 33References for literature cited in the plan, if any 33Other (e.g., photographs/drawings, market surveys, Web page mock-up, product prototype(s), video, sample press release, etc.)

Overall Appeal • Feasibility of the plan (e.g., attractiveness of the market opportunity; realistic) • Alignment of social and financial returns on investment • Market, operational, and technological viability (e.g., value created by the new product or service; competitive advantage of the proposed venture) • Keep it simple but clarify, clarify, clarify 33Is the plan … comprehensive? sufficiently analytical? reasonable? • Physical appearance (well-written and presented, easy to read, crisp, clean): 33Check spelling and grammar 33Have someone else read to check for omissions and weakness About the Authors

Maria Aggestam’s research revolves around such themes as entrepreneurship, social entrepreneurship, environmental jolts, gender, teaching and learning, and include broad spectrum of entrepreneurship related issues. In addition, she is writing about entrepreneuring processes in various industries such as in art-related industries, high-tech industry, biotechnol- ogy, social entrepreneurship and recently entrepreneurs within Swedish gastronomy. Her research is cross-disciplinary, combining perspectives from among the social sciences. Her most recent interests include, for example, the relations between language and entrepreneurial achievement within gastronomic domain and also relations between business and society, namely social entrepreneurship. She is research affiliated to Sten K. Johnson Centre for Entrepreneurship at the Department of Business Administration, Lund University but also affiliated to Nelson Mandela African Institution of Science and Technology where she is going to serve on the teaching team on master programme in entrepreneurship and innovation and also as an advisor to start-up enterprises.

Rae André is management and sustainability researcher in the D’Amore- McKim School of Business, Northeastern University, Boston, Massachu- setts, USA. Her research articles on gray sector and hybrid organizations including social enterprises have appeared in Business Horizons, Non-Profit Quarterly, and the Journal of Business Ethics. In 2016, her debate exercise entitled “Who Should Define the ‘Social’ in ‘Social Enterprise’—Elected Governments or Partnered Corporations?” appeared in the Management Teaching Review. She was awarded the Fritz Roethlisberger Memorial Award for the Best Paper in the Journal of Management Education in 2011. She is a member of the Academy of Management and a member and past president of the Management and Organizational Behavior Teaching Society.

Ester Barinaga is entrepreneurship scholar in Social Entrepreneurship at the Dpt. of Management, Politics and Philosophy at the Copenhagen 268 About the Authors

Business School. She has published articles in, among others, Organi- zation Studies, Geoforum, Human Relations, Ethnicities, and Journal of Social Entrepreneurship. Her recent book, Social Entrepreneurship: Cases and Concepts. Her current work focuses on concepts, tools, and strategies that may help us better design organizations and initiatives aiming at social change in general, and the dissolution of the immigrant condition in particular. To engage with the field, Ester founded Förorten i Centrum (FiC), a social venture based in Stockholm that uses collective mural art processes to nuance the stigmatized image of the suburbs and their residents. (www.forortenicentrum.org).

Raymond Brescia combines his experience as a public interest attorney in New York City with his scholarly interests to address economic and social inequality, the legal and policy implications of financial crises, how innovative legal and regulatory approaches can improve economic and community development efforts, and the need to expand access to justice for people of low- and moderate-income. He helps promote student and faculty engagement in the community in the areas of economic development, social innovation and social entrepreneurship, and public service. Before coming to Albany Law, he was working at the Urban Justice Center in New York, N.Y., where he coordinated legal representation for community-based institutions in areas such as housing, economic justice, workers’ rights, civil rights and environmental justice. He also served as a teacher at New York Law School from 1997 through 2006. As a lawyer he also served as Law Clerk to the pathbreaking Civil Rights attorney-turned-federal judge, the Honorable Constance Baker Motley, Senior U.S. District Court Judge for the Southern District of New York. While a student Yale Law School, he was co-recipient of the Charles Albom Prize for Appellate Advocacy; and involved in several clinics, including the Allard K. Lowenstein International Human Rights Law Clinic and the Homelessness Clinic.

Imran Chowdhury is social entrepreneurship scholar at the Lubin School of Business, Pace University. His current research focuses on social entrepreneurship, social responsibility, and communities and organizational action, and has been published in Academy of Management Learning & About the Authors 269

Education, Social Networks, Academy of Management Best Papers Proceed- ings, and in several edited volumes. He received his PhD from ESSEC Business School, an M.Sc. from INSEAD, and a BA in Anthropology and Geography from Hunter College (CUNY).

Stephanie A. Fernhaber is an entrepreneurship scholar within the Lacy School of Business at Butler University. Her research focuses on international entrepreneurship, networks and new venture strategy, and has been published in various academic journals including the Journal of Interna- tional Business Studies, Strategic Management Journal, Journal of Business Venturing, Strategic Entrepreneurship Journal and Entrepreneurship, Theory & Practice. Stephanie teaches a variety of entrepreneurial courses at the undergraduate and graduate levels including The Entrepreneurial Mind- set, First-Year Business Experience, Real Business Experience, and Social Entrepreneurship.

Casey Frid is working with Management at the Lubin School of Busi- ness at Pace University. His research focuses on the earliest stages of the venture creation process—how actions undertaken by nascent entrepreneurs impact the formation of new firms, and how role and community identity interact during the creation and development of entrepreneurial ecosystems. Casey received his PhD from Clemson University. Prior to his PhD, Casey lived in Juiz de Fora, Brazil, where he assisted a number of entrepreneurs with their startup while running his own.

Luca Giustiniano is an organization studies researcher at the LUISS Guido Carli University (Rome, Italy). During his career, he has been visiting scholar at several universities and business schools. This paper has been written when he was visiting professor at the Nova School of Business and Economics, Lisbon (Portugal). His papers have been published in various outlets such as British Journal of Management, Journal of Knowledge Management, Journal of Organization Design, Journal of Organizational Change Management, Journal of Change Management, Business Horizons. His research interests are focused on organization design and change management in different industries and sectors. 270 About the Authors

Claudia G. Green is entrepreneurship researcher, a Fulbright Specialist and a Wilson Center for Social Entrepreneurship Fellow at Lubin School of Business at Pace University. As a Fulbright Specialist (2014–2019), she is collaborating with universities in Brazil on curriculum design and research in sustainable development and social entrepreneurship with an emphasis on tourism organizations. Over a period of 15 consecutive years, she led more than 500 business school students to Brazil for international management field study. These field studies provide the students with hands-on experience working with sustainable enterprises and social entrepreneurs in the Brazilian Atlantic Rainforest. She has presented published research in Brazil, Peru, Mexico, Portugal, Italy, Greece, Spain, Thailand, Hong Kong, and Dubai. She earned a PhD at Virginia Tech and is a former entrepreneur.

Soren Hultman is a senior pursuing degree in finance and real estate as well as a certificate in Entrepreneurship. Soren bores easily, so he particularly enjoys the challenges created by the constantly changing nature of entrepreneurship. Every day is something different and something new. Greens.Blue was born out of Soren’s desire to “do good by doing well.” Aquaponics is a method of growing food that combines aquaculture (raising fish or other aquatic life for food) and hydroponics (growing plants in water). Aquaponics systems are set up either indoors or in greenhouses. As a result, they can be built just about anywhere and are not limited to traditional growing seasons. This means fresh, safe, and healthful produce year-round. It is also very easy and much more efficient than traditional farming practices. As an inventor he sees that Aquaponics can also be great for schools. Children learn better by doing than by listening. An aquaponics system at school could be an excellent way to teach students valuable lessons in Biology, Agriculture, Entrepreneurship, and more. It also could provide healthful, organic food to the school itself, as well as for the community. Greens.Blue is currently working on a plug and play kit than can be used for a variety of applications, making aquaponics much more accessible to beginners.

Linda M. Krzykowski has been at the University at Albany since 1993. She teaches in areas of Human Resource Management, Organizational About the Authors 271

Behavior and Business Communication. Currently, she is responsible for developing programs to support the high academic achievement and engaged learning of UAlbany’s 13,000 undergraduate students. She also co-teaches the School of Business’ award-winning MBA capstone class, G3: Going Green Globally and Business Presentation Skills at the graduate level. She is a consultant to many organizations on communication and leadership issues. Dr. Krzykowski was named one of the Women’s Business Council’s Capital Region Women of Excellence and received the President’s Award for Excellence at the University at Albany. She is a member of Phi Beta Kappa, Beta Gamma Sigma (national business honorary fraternity), Omicron Delta Kappa (national leadership fraternity), the Capital Region Human Resource Association, and the American Society for Training and Development among others. She is past chair of the Board of Visitors for Allegheny College and is past Vice-Chair for Junior Achievement. She is a frequent speaker on executive communication skills.

Wonhyung Lee is a community developer scholar at the School of Social Welfare of the University at Albany, State University of New York. With her background in social work and urban planning, her research centers on community development and engagement, with an emphasis on the improvement of commercial areas in low-income neighborhoods. She is also interested in the role of the business community in delivering human services. Some of her current projects concern homelessness, food access, and microlending in a neighborhood context.

Marie Löwegren is an entrepreneurship scholar at the School of Eco- nomics and Management at Lund University, Sweden. She is affiliated to Sten K. Johnson Centre for Entrepreneurship and serves also a member of the Executive Committee of the School of Economics and Management, and member of the Board of Education at the Department of Business Administration. Her extensive experience from entrepreneurship education made her develop an interest in pedagogical issues resulting in research projects concerning amongst other things the interface between action and reflection in entrepreneurship education. She has an extensive teaching experience with courses on all levels in the higher education system, including thesis supervision and adult learners. She is member a of 272 About the Authors the Steering Committee and the Executive Committee of Lund Univer- sity Venture Lab, an initiative that aims at developing the entrepreneurial potential of students and at the same time making possible research on early phases of venture development. She has also served as a jury member at several business plan competitions.

Paul Miesing is a management and social entrepreneurship scholar. He conducts research and training in various strategic management areas. His current research interests are in social entrepreneurship, environmental sustainability, and corporate governance. He has published dozens of articles and papers in both academic and practitioner journals, including the following Financial Times “top 45” journals: Academy of Management Journal, California Management Review, Journal of Business Ethics, Journal of Marketing (among numerous others), and has received a Distinguished Research Award. Prof. Miesing was a Fulbright lecturer at Fudan University in Shanghai and was a Visiting Professor at several other universities around the world. He is in various Who’s Who directo- ries and was an Outstanding Young Man of America, past a recipient of American Assembly of Collegiate Schools of Business (AACSB) Federal Faculty Fellowship. He served on several peer review boards, including the Council for International Exchange of Scholars (CIES) and the National Science Foundation. In 2013, he was the recipient of UAlbany’s inaugural Exemplary Community Engagement Awards for both Small Enterprise Economic Development and Going Green Globally programs.

Luca Mongelli is social entrepreneurship scholar at the LUISS Guido Carli University (Rome, Italy), where he was involved in the launch, and now in the coordination, of the ERSHub (Ethics, Responsibility and Sustainability Hub). He currently runs the program “Social Start-up Impact Contest”. He has two main research streams on technological innovation and social entrepreneurship: the former focuses on firms’ reactions to discontinuous technological shifts; the latter deals with the business models of social enterprises. During his career, he has been visiting at the Royal School of Technology in Stockholm, and at the Stern Business School of New York University. About the Authors 273

Alexander Tetteh Kwasi Nuer is an entrepreneurship scholar at the Wageningen University, The Netherlands, relocated to Ghana, West Africa. Alex’s PhD thesis is entitled Exit Strategies for Social Venture Entrepreneurs with a case study from among the Maasai Tribe in northern Tanzania. He has served on many socially related entrepreneurship bodies, NGOs, Non-for-profits, and academic groups in Ghana and the Netherlands. A Ghanaian by birth, he worked with both the government’s ministry of Trade and Industry, moved to the private sector and not-for-profit domain. He has volunteering for social entrepreneurship and agribusiness organizations that share his core value of creating impact through entrepreneurship and business mentorship. He founded a group called Alamnyaki Social Initiative (www.alamnyakigroup.org ); he is also the coordinator (Africa) for Africa in Motion Netherlands (www.africain- motion.nl/en ).

Bogdan Prokopovych is a lecturer at the Isenberg School of Manage- ment, University of Massachusetts Amherst. He holds a PhD in Manage- ment from the College of Business at the University of Rhode Island His research focuses on the role of entrepreneurs and organizations in foster- ing market-based responses to environmental and societal challenges in both emerging and developed economies. Previously, he was a researcher in the “Social Entrepreneurship as a Force for more Inclusive and Inno- vative Societies” (Seforїs) program with the SITE team at the Stockholm School of Economics. Bogdan’s professional work experience includes managing a non-profit media advocacy organization and working at the International Finance Corporation of the World Bank Group in Ukraine.

Eliot Rich is a researcher in the Department of Information Technol- ogy and Management, School of Business, University at Albany, State University of New York. His research includes applications of modeling and simulation to problems of sustainability, information security, critical infrastructures, organizational change, innovation, knowledge management, and project management. He was awarded a BA in Economics from Brooklyn College, an M.P.P. from Harvard University, and earned his PhD in Information Science from the University at Albany. 274 About the Authors

Elizabeth A.M. Searing is a researcher at the Rockefeller School of Public Affairs and Policy at the University of Albany (SUNY). Her primary research focus is in nonprofit and social enterprise ecology, but she also conducts work in financial management, evidence-based policy, the role of social and psychological factors in economic development and policy effectiveness, and applied ethics for the social sciences. She has served as editor on two books, and her articles have been published in peer-reviewed journals such as the Journal of Economic Behavior and Organization, Nonprofit and Voluntary Sector Quarterly, and Social Science & Medicine. Elisabeth is active in professional societies, including as co-founder of the Nonprofit Finance and Financial Management common interest group of the Association for Research on Nonprofit Organizations and Voluntary Action (ARNOVA).

Gary E. Shaheen is working with evidence based employment practices including supported and customized employment, social entrepreneurship in both the public and private sectors that help people with mental illnesses, co-occurring substance abuse disorders and those who are homeless including veterans fully integrate into their communities. Gary is the author of publications such as the Substance Abuse and Mental Health Administration (SAMHSA)’s “Work as a Priority: A Training Program for Employing People with Psychiatric Disabilities who are Homeless”. Gary is a member of the EI Lilly “Community Conversations” national training team, who develops and delivers training on principles, practices and partnerships supporting employment for people with mental illnesses. He also provides training internationally on these topics including projects in Israel, the Netherlands, St. Maarten’s, Russia. He is currently working with the Cornell University Program on Employment and Disability.

Helen Takacs is a management scholar at the International Business and Management at Dickinson College in Carlisle, PA. Her research centers on strategy and organizational performance, considering both financial and nonfinancial performance. Her recent scholarship delves into the relationship between sustainable business practices and performance. She works with the social entrepreneurship curriculum at Dickinson College. Her work has been presented internationally and published in Long Range About the Authors 275

Planning, International Journal of Strategic Change Management, Journal of Education for Business, and other journals.

Pietro Versari is a management researcher at IESE Business School (Barcelona, Spain), and a lecturer at Catolica Lisbon School of Business & Economics (Lisbon, Portugal). He received his PhD in Management from Luiss Guido Carli University (Rome, Italy). His research focuses on business models for social enterprises, management of hybrid organizations, and mechanisms facilitating collaboration between non-profit and for-profit sectors. He is among the founders of the Ethics, Responsibility and Sustainability Hub (ERSHub) at Luiss Business School (Rome, Italy).

Additional Readings

Boluk, K.A., and Z. Mottiar. 2014. “Motivations of Social Entrepreneurs: Blurring the Social Contribution and Profits Dichotomy.”Social Enterprise Journal 10, no. 1, pp. 53–68. Cornforth, C. 2014. “Understanding and Combating Mission Drift in Social Enterprises.” Social Enterprise Journal 10, no. 1, pp. 3–20. Dees, J. 1996. Social Enterprise Spectrum: Philanthropy to Commerce. Cambridge, MA: Harvard Business School Press. Dees, J. 1998. “Enterprising Nonprofits.”Harvard Business Review 76, no. 1, pp. 54–66. Fletcher, D. 2006. “Entrepreneurial Processes and the Social Construction of Opportunity.” Entrepreneurship and Regional Development: An International Journal 18, no. 5, pp. 421–40. Harding, R. 2004. “Social Enterprise: The New Economic Engine?” Business Strategy Review 15, no. 4, pp. 39–43. Hockerts, K. 2015. “The Social Entrepreneurial Antecedents Scale (SEAS): A Validation Study.” Social Enterprise Journal 11, no. 3, pp. 260–80. Krippendorff, K. 2012. “Fast Exercises To Find Your Purpose And Passion For Work.” Fast Company September 26 available at www. fastcompany.com/3001583/fast-exercises-find-your-purpose-and-passion- work?partner=newsletter Roberts, D., and C. Woods. 2005. “Changing the World on a Shoestring: The Concept of Social Entrepreneurship.” Business Review (Autumn) 7, no. 1, pp. 45–51. Sahlman, W.A. 1997. “How to Write a Great Business Plan.” Harvard Business Review 75, no. 4, pp. 98–108. Santos, F., A.-C. Pache, and C. Birkholtz. 2015. “Making Hybrids Work: An Analysis of Key Success Factors.” California Management Review 57, no. 3, pp. 36–58. Smith, R., R. Bell, and H. Watts. 2014. “Personality Trait Differences Between raditional and Social Entrepreneurs.” Social Enterprise Journal 10, no. 3, pp. 200–21. Young, D.R., and C. Kim. 2015. “Can Social Enterprises Remain Sustainable and Mission-Focused? Applying Resiliency Theory.”Social Enterprise Journal 11, no. 3, pp. 233–59. 278 Additional Readings

Videos

A. Organizational Structures and Hybrid Organizations for Social Enterprises

California Management Review. “Understanding Hybrid Organizations,” YouTube https://youtu.be/9poHaUkPQ-Y (accessed Jun 2015).

B. Mobilizing Resources to Fund Social Ventures

Indiegogo. “5 Rookie Crowdfunding Mistakes,” YouTube https://youtu.be/ cjnXMwe0KxY (accessed Nov 28, 2014). California Management Review. “The 4 Types of Crowdfunding,” YouTube https:// youtu.be/Vqvomrib6x0 (accessed Feb 16, 2016). Katherine Fulton. “You are the Future of Philanthropy,” TEDTalk www.ted. com/talks/katherine_fulton_you_are_the_future_of_philanthropy (accessed March 2007)

C. Scaling the Social Venture

Stanford Seminar. “Impact Investing & Scaling Social Ventures in South Asia,” YouTube www.youtube.com/watch?v=-LaX99OnStA (accessed May 2014). Lane, M. 2015. “Designing, Building, and Scaling the Multi-Stakeholder Social Venture,” YouTube www.youtube.com/watch?v=MwQTp8LLFDw (accessed Oct 2015).

D. Ecopreneuring as Social Enterprises

Carter, M. 2010. “3 Stories of Local Eco-Entrepreneurship,” TEDTalk http:// go.ted.com/rVIr0w (accessed Sep 2010). Idachaba, A. 2015. “How I Turned a Deadly Plant into a Thriving Business” TEDTalk www.ted.com/talks/achenyo_idachaba_how_i_turned_a_deadly_ plant_into_a_thriving_business (accessed May 2015)

E. Business Models and Plans

Saul, J. 2012. “Measuring Social Impact: Challenges and Opportunities,” YouTube www.youtube.com/watch?v=4DZ7D4FsJ4Q (accessed Jun 2012) Additional Readings 279

Web Pages

“30 under 30: Social Entrepreneurs.” Forbes available at www.forbes.com/special- report/2012/30-under-30/30-under-30_social.html (accessed December 17, 2012). “Entrepreneurship Learning Activities” available at www.curriki.org/xwiki/bin/ view/Coll_Entrepreneurship1/EntrepreneurshipLearningActivities “List of social enterprises.” Wikipedia available at https://en.wikipedia.org/wiki/ List_of_social_enterprises MacMillan, I.C., and J.D. Thompson.Worksheet Companion: The Social Entre preneur’s Playbook available at http://wdp.wharton.upenn.edu/worksheet- companion-the-social-entrepreneurs-playbook/ Skoll Foundation social enterprise awardees at www.skollfoundation.org/skoll- awardees/

Index

Accountability, 27 CDI. See Center for Digital Inclusion Aquamariner Project Center for Digital Inclusion (CDI), assignment, 76 73 case description, 76–80 Communicating for funding learning objectives, 75–76 assignment, 165–168 exercise schedule, 165 B Corp certification, 35, 49–51 group size, 164 Benefit corporation learning objectives, 163–164 accountability with uncertainty, time required, 164 56–60 Conceptual viability, 170–171 case study, 41–44 Contrepreneurs, 28 critical analysis, 26–29 Cooperatives, 9–11 definition of, 38–41 Corporate social responsibility (CSR) Greyston Bakery, Inc., 54–56 law, 88 on international stage, 44–46 Corporation, 7–9 nongovernmental recognition, Crowdfunding socially conscious businesses, definition of, 131 47–48 equity, 132, 134 origin of, 36–38 Internet-based phenomenon, 140 Patagonia, 51–53 in microfinance, 126–127 State-by-State comparative negative externalities, 139–140 legislation, 61–62 nonequity, 133 third-party certification, 48–51 positive influences, 138–139 Warby Parker company, 53–54 traditional funding vs. equity, B Lab certification, 35, 48–51 135–137 Brazil, case study types of, 131–132 Catalytic Communities, 69–70 Crowdfunding bill, 133 Center for Digital Inclusion, 73 Crownfunding social venture exercise schedule, 65 assignment, 160 group size, 64 discussions, 161 Mario Moscatelli, 70 group size, 159 objectives and outcomes, 66–67 guidelines for instruction and O Sol, 71 facilitation, 160–161 Pro-Natura, 71–72 learning objectives, 159 purpose/learning objectives, 64 time required, 159–160 steps for assignment, 65–68 time and materials required, 64 Dairy processing social venture Business plan competitions, 170 assignment, 227–228 Business plan writing, 263–266 case description, 222–227 Business viability, 170, 172–174 learning objectives, 222 normative view, 228–229 Catalytic Communities, 69–70 project-based view, 229–230 C Corporation, 33 social entrepreneurship view, 228 282 Index

Director liability, 28 socioeconomic context of Double-bottom-line. See Conceptual innovation, 253–254 viability trademarking Nanofilter, 257–258 Greenwashing, 40–41 Enhancing Community Greyston Bakery, Inc., 54–56 Opportunities (ECO) Kitchen Group lending, 121–124 corporate social responsibility Growth and collapse, 192–193 (CSR) law, 88 Growth and overshoot, 192 Kathir-case study, 85–86 modern eco-conscious facilities, Hybrid structures, 12–13 89–90 Hypothesized causal model, 196–199 School Noon Meal Scheme, 86 social entrepreneurial initiative, Individual lending, 124–126 84–85 social venture, 88 Legal organizational form student assignment, 89 critical analysis, 26–29 Equity crowdfunding, 132, 134 ethical, 20–22 Equity-financing continuum, 135 organizational universe, 22–23 Equity investment, 132 traditional business, 24–25 Ethical organizational form, 20 Legal structures Exponential growth, 191 characteristics of, 4 to social enterprises, 4–15 Financing mechanisms, 102–103 Lending investment, 132 For-profit-structures cooperatives, 9–11 Made in Carcere project corporation, 7–9 description, 203–205 partnership, 6–7 Officina CreativaSee ( Officina sole proprietors, 5–6 Creativa) Funding modes options, 219–220 impact of institutions, 109–111 organizational problems, 218–219 individual motivations, 104–105 Mario Moscatelli, 70 mission drift, 108–109 Market viability, 170–172 organizational design and Menu in restaurant operational modes, 106–108 analysis and discussion, 152–154 social impact measurement, background and preparation, 105–106 151–152 exercise schedule, 150–151 Goal seeking, 192 group size, 149–150 Gongali nano filter rural water learning objectives, 149 purification social enterprise finance menu, 155 assignment, 250 Solar Ovens, 156 future prospects, 258–259 time required, 150 from ideation to NanofilterTM, Trinity Community Ministries 254–257 (TCM), 157 learning objectives, 250 Microfinance overview of, 249–250 in context of social profile of inventor and idea entrepreneurship, 119–121 invention, 251–253 crowdfunding, 126–127 Index 283

definition of, 117–119 hybrid structures, 12–13 delivering models, 121–127 not-for-profit structures, 11–12 group lending, 121–124 signaling social mission, 13–15 implications, 128–129 Social entrepreneurs individual lending, 124–126 finance in practice, 97–99 methodology, 99 Nonequity crowdfunding, 133 Social finance typologies, 100–102 Not-for-profit structures, 11–12 Social impact bonds (SIBs), 102 Social impact measurement, 105–106 Socially conscious businesses, 47–48 Officina Creativa Social value creating activity, 101 activities, 212–214 Social venture, 88 business model of, 210–212 Solar Ovens, 156 critical success factors, 214–215 Sole proprietors, 5–6 environmental impact, 207 S-shaped growth, 192 growth and innovation, 207–208 Start-up financing, 135 Italian prison system, 208–210 System dynamics modeling, 200 organization design, 214 Systems thinking model Orti Verticali project, 216–217 description of, 181–182 Sigillo project, 215–216 endogenous causes for problems, social cooperative, 205–207 184–190 social impact, 207 good reasons, 182–184 Orti Verticali project, 216–217 hypothesized causal model, Oscillation, 192 196–199 O Sol, 71 possible behaviors over time, 195–196 Partnership, 6–7 principles, 184–194 Patagonia, 51–53 role of accumulations, 193–194 Philocapitalism, 100 root causes, 191–193 Pre-seed financing, 135 Pro-Natura, 71–72 Target market, 170 Third-party certification, 48–51 Recycled materials business model Token investment, 131–132 assignment, 244–246 Traditional funding vs. equity debrief questions, 246–247 crowdfunding, 135–137 exercise schedule, 244 Transparency, 40 group size, 244 Trinity Community Ministries learning objectives, 243 (TCM), 157 time required, 244 Risk capital, 101 Volu, social venture assignment, 175–176 Seed capital, 170 bringing to fruition, 174 Seed financing, 135 business viability, 172–174 Series financing, 135 conceptual viability, 170–171 Sigillo project, 215–216 learning objectives, 170 Signaling social mission, 13–15 market viability, 171–172 Social enterprise finance menu, 155 Social enterprises Warby Parker company, 53–54 for-profit structures, 5–11 Wholly Frijoles 284 Index

assignment, 238–241 mobilizing resources to fund social description, 235–236 ventures, 177–178 exercise schedule, 237–238 organizational structures and group size, 236 hybrid organizations, learning objectives, 236 93–94 materials required, 236–237 scaling the social venture, time, 236 231–232 Worksheet Writing business plan, 263–266 ecopreneuring as social enterprises, 261–262 YRG Care, 83–84 This book is a publication in support of the United Nations Principles for Responsible Management Education (PRME), housed in the UN Global Compact Office. The mission of the PRME initiative is to inspire and champion responsible management education, research and thought leadership globally. Please visit www.unprme.org for more information. The Principles for Responsible Management Education Book Collection is edited through the Center for Responsible Management Education (CRME), a global facilitator for responsible management education and for the individuals and organizations educating responsible managers. Please visit www.responsiblemanagement.net for more information. —Oliver Laasch, University of Manchester, Collection Editor

• Personal and Organizational Transformation Towards Sustainability: Walking a Twin Path by Dorothea Ernst • Stop Teaching: Principles and Practices for Responsible Management Education by Isabel Rimanoczy • Teaching Ethics Across the Management Curriculum: Principles and Applications, Volume II by Kemi Ogunyemi • Dark Sides of Business and Higher Education Management, Volume I by Agata Stachowicz- Stanusch and Gianluigi Mangia • Dark Sides of Business and Higher Education Management, Volume II by Agata Stachowicz- Stanusch and Gianluigi Mangia • Teaching Ethics Across the Management Curriculum: Contributing to a Global Paradigm Shift, Volume III by Kemi Ogunyemi • Managing for Responsibility: A Sourcebook for an Alternative Paradigm by Radha R. Sharma, Merrill Csuri, and Kemi Ogunyemi

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MIESING • AGGESTAMMIESING THE BUSINESS Educating Social Entrepreneurs Principles for Responsible EXPERT PRESS Management Education Collection DIGITAL LIBRARIES From Business Plan Formulation to Implementation, Volume II Oliver Laasch, Editor EBOOKS FOR Editors BUSINESS STUDENTS Curriculum-oriented, born- Paul Miesing • Maria Aggestam digital books for advanced Educating Social Entrepreneurs: From Business Plan Formulation to business students, written Implementation appears at a time of unprecedented environmental by academic thought disasters, natural resources depletion, and significant failure of leaders who translate real- governments and global businesses to attend to worldwide social world business experience problems. In this era of downsizing, restructuring, and social Educating Social into course readings and changes, notions of traditional venture creation and the ways of reference materials for creating social values have been challenged. We draw on examples students expecting to tackle from various parts of the business world and societies to prepare Entrepreneurs students, scholars, and entrepreneurial managers to deal with the management and leadership challenges presented by a new and diverse business environment challenges during their to create business plan for a social venture. Illuminating trouble EDUCATING SOCIAL ENTREPRENEURS, VOLUME II From Business Plan professional careers. some aspects of the global social and business worlds, this POLICIES BUILT workbook comprises two volumes that covers key issues. Students, Formulation to BY LIBRARIANS scholars, and entrepreneurs who want to help a world of multiple disparities by dealing with social entrepreneurship will find this to • Unlimited simultaneous be beneficial reading. Implementation usage • Unrestricted downloading Paul Miesing is the founding director of UAlbany’s Center for and printing Advancement and Understanding of Social Enterprises. He has • Perpetual access for a published dozens of articles in both academic and practitioner Volume II one-time fee journals, including those listed in the Financial Times “top 45” • No platform or journals. He served on several peer review boards, including the maintenance fees Council for International Exchange of Scholars (CIES) and the • Free MARC records National Science Foundation. In 2013, he was the recipient of • No license to execute UAlbany’s inaugural Exemplary Community Engagement Awards for both the Small Enterprise Economic Development and Going Editors The Digital Libraries are a Green Globally programs. comprehensive, cost-effective Paul Miesing way to deliver practical Maria Aggestam studies entrepreneuring processes in various contexts such as in art-related industries, high-tech and biotech treatments of important nology businesses, and entrepreneurs within Sw edish gastronomy. Maria Aggestam business issues to every Her research is cross-disciplinary, combining perspectives from student and faculty member. among the social sciences. She is research-affiliated to Sten K. Johnson Centre for Entrepreneurship at the Department of A CRME Publication Business Administration, Lund University, Sweden. She is also affiliated to Nelson Mandela African Institution of Science and For further information, a Technology where she serves on the teaching team on master free trial, or to order, contact: programme in entrepreneurship and innovation and also as an advisor to start-up enterprises. [email protected] Principles for Responsible www.businessexpertpress.com/librarians Management Education Collection Oliver Laasch, Editor ISBN: 978-1-63157-897-7