By Julie Battilana & Matthew Lee | May 24,2012 | Harvard Business Review
Social entrepreneurship has evolved a great deal since the late 1980s, when pioneers like City Year’s Alan Khazei and Teach for America’s Wendy Kopp took great risks to prove that innovative organizations could produce transformative social change. For the last two years, we have studied this evolution with our partners at Echoing Green, a fellowship-granting organization that provides seed funding to emerging social entrepreneurs. We’ve extensively analyzed the applications to the Echoing Green fellowship between 2006 and 2011, and built a rich dataset that allows us to rigorously study trends in the field of social enterprise.
The most striking pattern we found in the data is the recent growth of “hybrid” organizations that integrate aspects of business to address long-standing social problems. These hybrids pursue a social mission while engaging in commercial activities that generate revenues that help them sustain their operations. Take, for example, the issue of economic development. For decades, the dominant model was based on charitable gifts of cash and infrastructure through non-profit and governmental aid organizations. A hybrid approach is exemplified by startup Frogtek, which develops software for local shopkeepers in emerging markets to more efficiently track their inventory, leading to better purchasing decisions and greater profits. Frogtek and many other hybrids sell goods and services, and rely on revenues to sustain and scale their operations. In 2010 and 2011, almost 50% of the applicants to Echoing Green relied on hybrid models, versus 37% in 2006. Commercial microfinance organizations are perhaps the best-known hybrid organizations, but social entrepreneurs now use hybrid models to address a diverse set of social issues that includes hunger, healthcare, economic development, environment, education, housing, culture, law, and politics.
Because hybrid organizations generate their own revenue, many believe that they will grow to a large scale more easily than traditional non-profits that rely solely on donations. However, our research reveals that hybrid entrepreneurs are fighting an uphill battle to launch and scale their ventures. This month we wrote about the challenges they face in In Search of the Hybrid Ideal in the Stanford Social Innovation Review. The problem, in short, is that although we often think of entrepreneurship as an individual, heroic endeavor, it takes a village to raise an entrepreneur. For mainstream for-profit entrepreneurship, and to a lesser extent for pure non-profit social entrepreneurship that relies mostly on donations and subsidies, a relatively high-functioning “village” of funders, potential employees, and customers or beneficiaries already exists, waiting for the next great idea to come along. But for hybrid organizations, that village has yet to fully form, leaving a set of barriers to overcome:
- In terms of legal status, hybrids currently still must choose between being either a non-profit that cannot distribute returns, or a for-profit that must pay corporate taxes and receives no subsidy in recognition of the social benefit it creates. Recently, states have begun to adopt new legislation that would allow for hybrid forms, but these need significant refinement.
- In terms of funding, most capital is still looking to optimize either social value or financial returns, not both. The situation is particularly dire at the very early stages. Recently, many have promoted the role of social impact investment funds whose strategies don’t just avoid negative impact, but explicitly aim to create positive social impact. A recent Monitor Institute report estimates that the size of the global impact investing market will be at least $500 billion in the next decade. Yet a shared language and measures means that most hybrid entrepreneurs do not yet have access to this capital. Impact investing has promise, but will require new funding structures and approaches catered specifically to hybrid entrepreneurs before its benefits can be fully realized.
- In dealing with customers and beneficiaries, hybrids face difficult tradeoffs in determining the best ways to price goods. Often there is a mismatch between the people who would most benefit from the product or service and those who are able to pay. Hybrids thus risk mission drift, as they may over time start targeting wealthier and more profitable market segments.
- Finally, hybrid entrepreneurs face huge managerial challenges in hiring and building balanced organizational cultures. Although young people increasingly have a hybrid orientation, new employees often require extra training to prepare them for hybrid work environments. Multiple pressures to perform on both social and operational dimensions require extra attention to building a sustainable culture.
Hybrid organizations have great potential to be building blocks for a more sustainable, just economic system. But if we want to create an economy where companies that integrate social and economic value creation are the norm, we will need to build a “village” capable of incubating hybrid entrepreneurs – not only a new generation of hybrid entrepreneurs, but a new generation of employees, regulators, and consumers to support and grow along with these ventures.
This article originally appeared on the Harvard Business Review Blog.
Image courtesy: Harvard Business Review blog.