Needed: a new social financial services industry

William Drayton

The dramatic expansion of the citizen sector over the last two decades – and in particular the explosive emergence of social entrepreneurship – has come about because of a profound change in the sector’s underlying culture. Social beings that we are, humans have always supported one another. That is not new.

What is new is that the social sector has now become structurally as entrepreneurial and competitive as business. Increasingly the world will be defined by the unstoppable dynamic of more and more citizen groups competing to solve social problems at whatever level is needed – be it local or global.

Because social entrepreneurship and, following closely behind, the increasingly entrepreneurial and competitive citizen sector have grown with such extraordinary speed, the field now faces myriad organizational challenges. Probably the most urgent is financing: the sector critically needs new resource underpinnings. While the financial ‘industry’ serving the social sector has changed, it has changed far less than the field itself.

Social entrepreneurship – the driving force

Society has long understood that it is the top business entrepreneurs who create or redefine industries. Top social entrepreneurs similarly redefine health, the environment, youth development, and other areas of human need. Florence Nightingale’s creation of modern nursing, public health and even building codes changed the world as much as Carnegie or Rockefeller.

Leading entrepreneurs, the Nightingales as much as the Carnegies, both break up the old patterns (and the idea that patterns are unchanging) and enable everyone to become local changemakers by showing them new ways. Each successful entrepreneur and local changemaker in turn becomes a role model encouraging many others. Beginning around 1700, this enormously empowering virtuous cycle enabled business to free the West from the preceding many centuries of stagnation.

Over the last several decades the same entrepreneurial/competitive dynamic has swept through the citizen sector – creating an extraordinary catch-up surge in productivity, which, in turn, is multiplying the sector’s resources, size and influence.[1] The impact of the field has also expanded rapidly from the local to the national and now to the global stage.[2]

The social investing shortfall

Business could not have succeeded as it has without the highly responsive, creative, diverse financial institutions that serve it. Angel investing developed over the last 15 years. Then there are venture capitalists, investment bankers and commercial bankers, leasing firms and other specialists, advisers and brokers, and a host of others. Some firms specialize by risk level, others by industry. Institutions evolve quickly to meet the ever-changing needs of the business sector. GE and other new actors, for example, stole much of the commercial banks’ business lending core services over the last decades.

Little like this exists to serve social entrepreneurs, and citizen organizations more widely. Despite the explosively growing citizen sector with its changing needs, there has been little change in the institutions of social investing. Citizen sector organizations remain overwhelmingly dependent on two sources of institutional support: governments and foundations.

The resulting gap, which is growing wider as accelerating change on the operating side outpaces innovations in social investment, is probably the biggest single threat to the successful maturation of the citizen sector.

What social entrepreneurs need

As currently constituted, foundations and government grant agencies cannot serve social entrepreneurs or much of the competitive citizen sector well. The problem lies not with the good will or motivation of government or foundation officials, but with the structure of these institutions:

§ Social entrepreneurs need social investors who will bet on new ideas. Foundations and governments are committed to internally developed ‘strategies’. And to organizational and disciplinary boundaries created to serve earlier approaches.

§ Social entrepreneurs need medium- to long-term investments to test and refine the idea, learn how to market it, and build an institution and movement. Foundations and governments typically provide one-year grants.

§ Social entrepreneurs need investments in building a significant institution. Foundations and governments avoid ‘overhead’.

Social entrepreneurs end up spending most of their time chasing many small, short-term, partial grants from institutions that usually want them to pursue the institutions’ (often conflicting) goals and visions. There is neither an adequate supply nor a healthy diversity of investors to whom they can turn.

The problem is not limited to leading social entrepreneurs. At the other end of the spectrum, where can a 16-year-old who wants to start a tutoring service or a teen-to-teen confidential hotline go for the $900 in seed money he/she needs?

This limited response has created a tremendously important need, and entrepreneurial opportunity – to build a new financial services ‘industry’ that will serve the world’s newly entrepreneurial/competitive citizen sector as well and as adaptively as business financial institutions serve their diverse, fast-changing clients. The opportunity for entrepreneurial breakthroughs could hardly be more enormous given the size of the current service gap, the fact that the citizen sector is evolving faster than business during this catch-up period, and the ready availability of so many suggestive if not exact models in the far more advanced business financial industry.

How this can come about

Ashoka has identified three primary strategic components to encourage investment innovation.

Identify, support and link leading social finance entrepreneurs. A wave of entrepreneurship in social investing has begun to build. The rapid spread of the Social Venture Partners model to 22 US cities illustrates hunger on the investor side for new, better models. A growing number of individuals are pressing the frontiers.[3] One of Ashoka’s goals now is to expand and institutionalize its work to encourage social investing as well as operating social entrepreneurship.

Encourage leading for-profit financial institutions to enter the market, bringing with them their entrenched competitive habits. As the social sector becomes rapidly more effective, it offers increasingly attractive opportunities, with varying mixes of economic, social, and personal engagement returns.

Build new business/social bridges. One such ‘bridge’ involves 400 leading Ashoka social entrepreneurs, who are working to try to ensure full economic citizenship – from jobs to access to capital to success for small-scale producers. Many of them have discovered that getting business and citizen groups to work together, overcoming centuries of barely talking, produces great value for both and for the ultimate clients/customers. Ashoka has taken this proven insight and is demonstrating it on a large scale in three very different parts of the economy – slums, forests and health care. To take the slums example, working with two leading building product companies and large citizen groups with broad reach in major urban slums, we are catalysing the creation of a ‘hybrid business/social value added chain’, drawing on the strengths of both to deliver new rooms to slum families in nine months rather than five years, with higher quality and much less wasted effort, and at substantial savings. The company gains new markets and profits, while the citizen groups learn new skills, make their clients happy, and earn substantial new, secure and growing revenues that will allow them to escape government and foundation dependence. Once the benefits become clear, competing building product firms and competing citizen groups will not long stand idle. Ashoka will feed this competitive response vigorously by working with the press, professional groups and consulting firms (a new practice area!).

There are, of course, many other strategies, especially those yet to be conceived by entrepreneurs who have not yet begun. Stimulating and supporting this coming wave of social finance entrepreneurship and building a broad awareness that it is coming may well be the single most important strategy.

A modern competitive citizen sector, supported by a modern competitive social financial services ‘industry’, makes the future hopeful. As each entrepreneur ploughs up existing patterns and provides new options that others can plant and grow, he/she both solves a problem and sets an example that encourages everyone to become a changemaker. As the number of changemakers multiplies, more and more problems at all levels are solved – and yet more people give themselves permission to innovate and organize. In parallel, society’s arrangements and expectations become steadily more supportive. The ultimate result is a society transformed: when everyone is a changemaker, solutions far outpace problems.

William Drayton is CEO and Founder of Ashoka: Innovators for the Public.

See http://www.ashoka.org

See David Bornstein (February 2004) How to Change the World: Social Entrepreneurship and the Power of New Ideas Oxford University Press.

1 The rate of job creation in the citizen sector is two and a half times greater than in the rest of society. The number of citizen groups in the US has doubled since 1990. In Brazil the number grew from 5,000 in 1980 to over 1 million in 2000. Slovakia’s citizen sector grew from 11 citizen groups in 1989 to more than 10,000 in the first ten years after the Berlin Wall came down.

2 The number of registered international citizen groups grew 650 per cent during the 1990s.

3 Sir Ronald Cohen, Stephan Schmidheiny, Billy Shore, Jacqueline Novogratz, Mario Marino, Paul Shoemaker, Pamela Hartigan, and Vanessa Kirsch are some of these.


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