What is your Double Bottom Line?

Social entrepreneurs can change the world with limited resources

Published: July 01, 2013 in Knowledge@Wharton

In their ebook, The Social Entrepreneur's Playbook, , a Wharton management professor, and James Thompson, director of the Wharton Social Enterprise Program, offer specific suggestions to strengthen the effectiveness of social enterprises. In the second of a two-part interview, the authors discuss how two African social enterprises -- one in the chicken feeds business and the other in the sanitation industry -- used a five-step process to maximize the social and business impact of their operations.

Knowledge@Wharton: I would like to talk through some of the chapters in your book and some of the things that social entrepreneurs should be thinking about. To begin with, you recommend that social entrepreneurs need to articulate the problem that they are trying to solve, as well as a solution that they propose to offer. Could you take us through some of the steps that they should go through to do that?

Ian (Mac) MacMillan: What we tried to do is push people into thinking beyond high-level problems -- there's a problem of nutrition or there's a problem of education -- and begin to think about what the so-called beneficiaries of this program are going to actually receive, what the problem is from their perspective and whether they recognize that they have a problem. For instance, one of the projects in India was the concept of taking sachets of disinfectant and distributing them in villages where the water was unhygienic and people were subject to all sorts of dysentery-type diseases, high death rates and so on.

When you arrive in the village, it's not evident to the people in that village, who have very little education, of the connection between the diseases and the water. If you tell them that the water is bad and they can't see the microbes or bacteria in that, they just don't believe you. It's really important to understand the problem, not just from a point of view of the benefactor, but also from the point of view of the beneficiary. What we do in the book is we give people very systematic ways of beginning to unfold what the problem is in the eyes of the person who is supposed to benefit.

Knowledge@Wharton: One chapter in your book refers to the need to segment the target population. Jim, I wonder if you could help explain how this process should work.

James D. Thompson: To your question, Mac mentioned this idea of finding a group of these beneficiaries or a segment of them that has a higher likelihood of early adoption of what it is that you are trying to do than others. We spend an entire chapter framing a method for segmenting the beneficiaries. It includes some of the typical segmentation instruments -- geographic location, gender, all of that -- but then there are also behavioral segmentation issues.

We then have a framework for people to use to segment their beneficiaries, which can be used to select one with which to start. We articulate the characteristics of a good wedge, if you will: a segment that is most likely to adopt in the shortest space of time at the lowest cost and provides a high rate of learning.

Knowledge@Wharton: Mac, as you have said before, sometimes a seemingly wonderful idea leaves the beneficiaries cold and unresponsive. Why does that happen? What could social entrepreneurs do to prevent their enterprises from falling into that trap?

MacMillan: The fundamental problem is that people come in with what I call the wild-eyed, Western solution to a problem where you are expecting behaviors to take place in defiance of deep-seated cultural behaviors. There are some things that you just don't do. One of the projects that we looked at when I was in Cape Town a couple of years ago was the whole idea of beginning to distribute tricycles, three-wheeled bicycles, so that women, instead of having to carry their crops to the market, could actually peddle their crops to the market. That sounds like a wonderful idea. But when you arrive with the bicycles, you find out that the men have decided that women should not ride bicycles; it's something only a man is allowed to do. By not paying attention to what the cultural factors are, they just wasted their time.

Going into an African country with condoms to try and prevent AIDS, you [must] take into account the fact that, in many of the African societies, fertility is extremely well regarded. A woman must be fertile. Secondly, sexual behavior [must be] taken into account. [If a] woman goes to her husband and says, "I expect you to use a condom," ... she can get thrown out of that house. She can get sent back to her original family and live the rest of her life in disgrace because her husband has banned her from his home. This lack of cultural sensitivity is often a huge problem.

Knowledge@Wharton: Why is it important for social entrepreneurs to identify the most competitive alternatives to the idea that they are trying to propose? How can they use this information that they gather to make their own offering more valuable?

Thompson: There's always a competitor, even if it is what they are doing today. We stress this because it forces people to spend time with the beneficiaries they have in mind and the communities at large. By mapping out what the nearest alternative is to what the team has in mind, in effect, we're forcing them to build insight into the realities of that sector of the population on the ground as it exists. That's the first thing.

The second thing is it gives a methodical manner with which to compare, step by step, the idea that a team has for a social entrepreneurship activity versus what exists on the ground or could exist on the ground. We use that to force people to get the kind of information that they should have. Then they need to have a fairly hard look at what it is they propose and how it compares from the beneficiary's perspective with what they are already doing.

Knowledge@Wharton: Mac, what operational issues do social entrepreneurs need to address before they can deliver their product or service?

MacMillan: This is so important that we actually have the would-be social entrepreneur develop what we call a deliverables table where you need to be very clearly focused on articulating everything that the beneficiary must go through in order to receive the benefit. Then, think a little bit about what it's going to take for that benefit to take place. Let's say you have got a program in which you are distributing product to village communities out in the boonies, as they say. You can't just assume that there's going to be a transportation system that will deliver that stuff. You have to think a little bit about not just how the product is going to be sold, but how is the product going to be transported to where you want it sold? How are we going to know that we need to send more? Do we have a logistical system in place?

In many of these situations, there just isn't the infrastructure to do it. What we are looking at here is what specific operations -- from the time that the beneficiary first becomes aware that they have a need and you can fix it, through the final delivery and consumption of that benefit -- have to be documented. Then you have to sit down and say, what must happen physically? Because if the system isn't there, it just isn't going to happen.

To illustrate this, there was a program in Lesotho in which they were going to deliver medicines by motorbike, because Lesotho has very bad roads, but you can go on motorbikes to many of these places. They built this whole program with dozens of motorbike riders taking samples and medicines out to remote areas. Everything went fine until the motorbikes started breaking down. Then they suddenly found out that there was no one there to repair the motorbikes. What you now have is a mountain of unused motorbikes that have basically just gone to waste.

Knowledge@Wharton: The next question is for both of you. One of the things I found most fascinating about your book is the examples that you give of two companies, Zambia Feeds and Ecotact, and how they went through the different steps that you have just outlined. Could you tell us about these two companies and what are the main lessons that other social entrepreneurs can learn from their experience?

Thompson: Zambia Feeds is a company in the northwestern part of Zambia that produces fairly high quality animal feed at relatively good prices. The company started back in 2000 and has systematically built an alternative production system for poultry rearing in that region. At the end of last year, they had nearly 2,000 customers producing really high-quality poultry fairly efficiently. Of course, this had to scale over more than a decade.

The first thing that we did, when we learned of this, was to sit down with the entrepreneur and say, "Alright, what is success for you? And how do you know when you are there?" As simple as that sounds, it turns out that a lot of folks don't really think like that. The reason we did it was because of the huge uncertainty in the area.

We put in place a few parameters that the team needed to commit to in order for us to continue working with them. We didn't want to commit ourselves to a team of people that was going to use the conventional "let's come up with a great idea, raise the money and go and build it" approach. Fortunately, the team over there [committed to our parameters]. We can't take all of the credit. We were working with a social entrepreneur from that environment, and she had been in commerce before.

They started small: picked segments, geographic location, accessibility, etc.; didn't buy used equipment; didn't buy buildings; and attended to the sociopolitics by starting it as an entrepreneurial venture within an existing company, a big company that could provide some defense from interference.

They then spent the better part of nearly seven years building an organization that systematically developed these new segments. In keeping with the philosophy of the book, they only began to accrue production assets when they needed to accrue those assets to produce higher volumes at higher quality. Fortunately for us, that case was the first one we took on and it has been very, very successful. In fact, they have impacted the whole industry in the country to the degree where the entrepreneur, when she retired last year, was on the national poultry association board. We use that case throughout the book as the golden thread from the beginning through the end as a way to show what was done. It's the applicability of each of the tools and frameworks to the case.

Knowledge@Wharton: The other really interesting case you have is of a company called Ecotact. Can you tell us about that one, too?

MacMillan: Ecotact was not something that Jim or I actually worked on. This was a project that a Wharton student was involved in. When she took the course that we were teaching on entrepreneurship here, she [focused on] sanitation facilities for people [in East Africa] who were using the streets. The interesting thing there is the segmentation of the markets, because inadequate sanitation is a huge problem. Millions of people under the age of five die every year because of diseases caused by inadequate sanitation. Part of the challenge in the beginning was what we wanted to try to do was build toilets which were functional and were sanitary. But people were used to just using the streets and things like that. The entrepreneur's problem was he had to charge money for people to use these toilets, and people were basically thinking to themselves, why should I pay when I can do it for nothing? So the perceptual breakthrough was enormous.

As he started to segment, he had to think a little bit about making a distinction between the many, many people in what they call the estates, which are basically the slums in the East African towns where there were hundreds of thousands of people who were exposed to unsanitary conditions; people in the towns where you had municipal toilets, but which were very, very badly maintained and just basically not kept clean; and then people who could not just avail themselves of facilities at night where nobody could see them.

The segment he chose was the markets, because people come to the markets and they are there all day. The people who come to markets tend either to sell or to buy, and that means they have some money. He got the whole thing started by building in markets.

Now the interesting thing about that particular project is that there were two unexpected outcomes. The first one was that these facilities that he built near the markets became attractive to women who were going to give birth to children because it was clean and it was sanitary....

The other thing that they found is that the places where there were congregations of people with money were not only just markets but also bus shelters, places where buses congregated, because large numbers of people go back and forth all the time, catching buses to and from the town. They, in a way, discovered what the true segment was for that particular form of enterprise, neither of which had been anticipated in the beginning. But fortunately, he didn't go and build a huge network of toilets which no one was going to use.

Knowledge@Wharton: That's a great example. To end, what would you like our readers and viewers to do to participate in your project, The Social Entrepreneur's Playbook ebook, so that you can move it onto the next phase?

Thompson: Firstly, to read it. We have taken a slightly different approach in the publication of this book.... What we are trying to do is use the ebook in the spirit of the approach of the ideas in the book: start small and change fast. We would like to get responses from readers out there. We are going to use those responses [to shape the expanded edition of the book, which publishes in November 2013.]

If any of our readers are in the social entrepreneurship space, use the book to spread the word. If any of our readers know people in this space, please get the book out to them. We think it will be useful, and everybody we have tested it with has found it very, very useful in the field, nonprofit or for profit.

Knowledge@Wharton: Mac, any final words?

MacMillan: Our ebook is a free book. We want to give everybody access to it. [The first edition covers the first of three phases in a social enterprise start-up], which will help people really think through if they want to do something that's going to do some good out there. Increasingly, people want to do that, particularly the younger generation. The idea is that if you know anybody who might be interested, just send them the ebook and they can download it. We don't want to make money out of this. What we want to do is have impact.

Anybody who you know who's making charitable contributions and may be a little concerned about how well those contributions are being spent and dispersed, send them the ebook and they can have a look at it. If I make donations, I want to be able to think that my donations are being spent well, rather than just being squandered. The idea would be that anybody who is making donations today might want to have a look at it and challenge the people to whom they are making the donations to see whether they are in fact following the disciplines we suggest. To me, this is not a popularity contest. We are not there to be popular, but rather to have impact.

Social entrepreneurs use business ventures as a means to solve the world's most complex problems.

These days, a growing number of social entrepreneurs are building for-profit business models, bypassing government association and the confining structure of the nonprofit classification. In a number of states, including California and New York, entrepreneurs can now form so-called B Corporations, which allow company directors to weigh social missions over financial returns.

As a result, more tools are popping up to aid the socially conscious business owner. Here are five resources designed to help do-good entrepreneurs get their enterprises off the ground and into the black.

1. B Lab's "Impact Assessment Tool"
The nonprofit B Lab, founded in 2009, provides a host of information on its site and certifies companies as B Corps for an annual fee (the amount varies, based on a company's revenue). Its free Impact Assessment Tool helps companies assess their social or environmental impact and improve their performance, regardless of whether they ultimately seek certification. Examples of completed B-Reports are accessible on B Labs's site to help guide you in the creation of your own socially sustainable business. To date, there are 488 certified B Corps in existence.

2. Ashoka.org
Ashoka, founded in 1980, strives to make social entrepreneurs competitive in the global marketplace by granting fellowships to business leaders focused on social and environmental progress. Ashoka Fellows receive a living stipend, allowing them to work full time on their social enterprise. In recent years, Ashoka's budget has grown to $30 million, and the nonprofit has granted more than 2,000 fellowships. Along with its active work, Ashoka's site supplies free information and aggregates media from blogs to radio feeds.

3. New York University's speaker series
NYU's Catherine B. Reynolds Speaker Series focuses specifically on social entrepreneurs, and hosts some of the most successful public and private sector "change-makers" from around the world. If you're in the New York City area, the series is free and open to the public; if you're not able to make the event in person, past series are accessible via video download on iTunes free of charge. Past speakers include Seth Goldman of Honest Tea, John Mackey of Whole Foods Market, and acclaimed writer and Nobel laureate Elie Wiesel, representing the Elie Wiesel Foundation for Humanity. A number of universities host similar programs for entrepreneurs, including Northeastern, Cornell, and Stanford universities.

4. Skoll Foundation's SocialEdge.org
The Social Edge, founded in 2003, is a global online community for social entrepreneurs and is sponsored by the Skoll Foundation, which invests in social entrepreneurs. The site is an information hub featuring live discussions, blogs, forums, job listings, expert advice and other resources helpful to social entrepreneurs in all stages of development. For those ready to take their social enterprise to the next level visit the site's "opportunities" section for information on fellowships, competitions and incubation programs.

5. UnreasonableInstitute.org
The Unreasonable Institute, founded in 2009, partners with more than 20 impact-investment funds and foundations. The institute picks 25 entrepreneurs through a rigorous screening progress and puts them through a six-week training and mentoring program, designed to take their ideas from the concept phase to operation. Check the Institute's site for " Unreasonable.TV," currently in its second season, which follows participants as they develop their social enterprises. There's also a video interview section, profiling experts in the social business world, including Hewlett-Packard's Phil McKinney, social venture capital firm Ennovent's Charly Kleissner and investment firm Good Capital's Jane Anderson.

Read more stories about: Social entrepreneurship

"Do good" business owners seeking funding should target investors looking to put their money to work to make positive social or environmental change. But how to get on their radar?

One new way to make your company known to these "social investors" is through a new online searchable database for social entrepreneurs. It's called GIIRS, short for Global Impact Investing Rating System. It analyzes a company's social and environmental performance and rates it against peers. The initial analysis costs between $2,500 and $15,000, depending on your business size. Companies with less than $500,000 in revenue may be able to negotiate special pricing, according to the GIIRS website.

Less than a year old, the database is being used by an initial group of about 20 investors and 60 private equity and debt funds. In 2013, any investor will be able to buy a subscription. The database is the product of B Lab, a Berwyn, Pa.-based nonprofit behind the B Corporation certification for benefit corporations, a class of corporation that has a general benefit for society as well as for shareholders.

There are other ratings services for particular industries, like Planet Rating for global microfinance organizations, but what makes GIIRS unique is that it includes ratings of the social and environmental impact of companies across all sectors, geographies and sizes.

Curious? Here's a GIIRS FAQ for entrepreneurs.

How does GIIRS work? Interested investors can search through the online profiles of companies seeking capital to find those that fit their criteria. Also, GIIRS partner organizations work to raise awareness of and capital for socially and environmentally beneficial companies.

GIIRS investor subscribers range from large institutional investors to foundations to wealthy individuals -- and search the network of registered companies for those that fit their specifications. Currently, the GIIRS rating system includes about 250 companies. So far, GIIRS investors have been primarily interested in buying equity in early to growth stage companies, not startups seeking seed funding.

How do I get a GIIRS rating? To be rated, you have to complete the GIIRS assessment, a test to measure your company's social and environmental impact. The initial assessment, completed by filing out an online form, should take between an hour and an hour and a half. Then you will have to spend about an hour on the phone with a GIIRS representative to go over your assessment.

You will have to pay for the rating before it can be finalized. And before you are sent a copy of your GIIRS Impact Report you'll have to deliver a slew of documents for verification. Randomly, one in 10 companies that obtain a GIIRS rating will be selected for a more thorough review, where a third party will look at your facilities, talk to employees, and go over extra paperwork.

How will GIIRS help me get capital? Clarity and visibility. There is a growing interest in sustainable or impact investing. U.S. investors would be willing to put up to $650 billion into sustainable investing today if there were more reliable research on the niche and clients demanded it, according to a recent report from Hope Consulting, a boutique firm in San Francisco. However, financial advisors aren't always confident on how to make recommendations about what kinds of social enterprises to invest in, the report notes.

Financial services firms are spending a lot on their own research on social entrepreneurs and impact investing. "If we can help make investing in these companies less expensive, then it is another way we can facilitate a greater amount of capital flowing to these companies," says Beth Richardson, director of the GIIRS program.

Read more stories about: Financing, Raising capital, Social capital, Social Entrepreneurs, Social entrepreneurship

Catherine Clifford is a staff writer at Entrepreneur.com.

For-profit executives use business models-such as "low-cost provider" or "the razor and the razor blade"-as a shorthand way to describe and understand the way companies are built and sustained. Nonprofit executives, to their detriment, are not as explicit about their funding models and have not had an equivalent lexicon-until now.

Money is a constant topic of conversation among nonprofit leaders: How much do we need? Where can we find it? Why isn't there more of it? In tough economic times, these types of questions become more frequent and pressing. Unfortunately, the answers are not readily available. That's because nonprofit leaders are much more sophisticated about creating programs than they are about funding their organizations, and philanthropists often struggle to understand the impact (and limitations) of their donations.

There are consequences to this financial fuzziness. When nonprofits and funding sources are not well matched, money doesn't flow to the areas where it will do the greatest good. Too often, the result is that promising programs are cut, curtailed, or never launched. And when dollars become tight, a chaotic fundraising scramble is all the more likely to ensue. ¹

In the for-profit world, by contrast, there is a much higher degree of clarity on financial issues. This is particularly true when it comes to understanding how different businesses operate, which can be encapsulated in a set of principles known as business models. Although there is no definitive list of corporate business models, ² there is enough agreement about what they mean that investors and executives alike can engage in sophisticated conversations about any given company's strategy. When a person says that a company is a "low-cost provider" or a "fast follower," the main outlines of how that company operates are pretty clear. Similarly, stating that a company is using "the razor and the razor blade" model describes a type of ongoing customer relationship that applies far beyond shaving products.

The value of such shorthand is that it allows business leaders to articulate quickly and clearly how they will succeed in the marketplace, and it allows investors to quiz executives more easily about how they intend to make money. This back-and-forth increases the odds that businesses will succeed, investors will make money, and everyone will learn more from their experiences.

The nonprofit world rarely engages in equally clear and succinct conversations about an organization's long- term funding strategy. That is because the different types of funding that fuel nonprofits have never been clearly defined. ³ More than a poverty of language, this represents-and results in-a poverty of understanding and clear thinking.

Through our research, we have identified 10 nonprofit models that are commonly used by the largest nonprofits in the United States. (See "Funding Models" on page 37.) Our intent is not to prescribe a single approach for a given nonprofit to pursue. Instead, we hope to help nonprofit leaders articulate more clearly the models that they believe could support the growth of their organizations, and use that insight to examine the potential and constraints associated with those models.

BENEFICIARIES ARE NOT CUSTOMERS One reason why the nonprofit sector has not developed its own lexicon of funding models is that running a nonprofit is generally more complicated than running a comparable size for-profit business. When a for-profit business finds a way to create value for a customer, it has generally found its source of revenue; the customer pays for the value. With rare exceptions, that is not true in the nonprofit sector. When a nonprofit finds a way to create value for a beneficiary (for example, integrating a prisoner back into society or saving an endangered species), it has not identified its economic engine. That is a separate step.

Duke University business professor J. Gregory Dees, in his work on social entrepreneurship, describes the need to understand both the donor value proposition and the recipient value proposition. Clara Miller, CEO of the Nonprofit Finance Fund, who has also written wonderfully about this dilemma, talks about all nonprofits being in two "businesses"-one related to their program activities and the other related to raising charitable "subsidies."

As a result of this distinction between beneficiary and funder, the critical aspects (and accompanying vocabulary) of nonprofit funding models need to be understood separately from those of the for-profit world. It is also why we use the term funding model rather than business model to describe the framework. A business model incorporates choices about the cost structure and value proposition to the beneficiary. A funding model, however, focuses only on the funding, not on the programs and services offered to the beneficiary.

All nonprofit executives can use our 10 funding models to improve their fundraising and management, but the usefulness of these models becomes particularly important as nonprofits get bigger. There are many ways to raise as much as $1 million a year, some of which can be improvised during the process. Once organizations try to raise $25 million to $50 million or more each year, however, there are fewer possible paths. The number of potential decision makers who can authorize spending such large amounts of money decreases (or you need to get them en masse), and the factors that motivate these decision makers to say "yes" are more established (or cannot be as thoroughly influenced by one charismatic nonprofit leader).

Our research of large nonprofi ts confi rms this. In a recent study, we identified 144 nonprofit organizations-created since 1970-that had grown to $50 million a year or more in size. ⁴ We found that each of these organizations grew large by pursuing specific sources of funding-often concentrated in one particular source of funds-that were a good match to support their particular types of work. Each had also built up highly professional internal fundraising capabilities targeted at those sources. In other words, each of the largest nonprofits had a well-developed funding model.

The larger the amount of funding needed, the more important it is to follow preexisting funding markets where there are particular decision makers with established motivations. Large groups of individual donors, for example, are already joined by common concerns about various issues, such as breast cancer research. And major government funding pools, to cite another example, already have specific objectives, such as foster care. Although a nonprofit that needs a few million dollars annually may convince a handful of foundations or wealthy individuals to support an issue that they had not previously prioritized, a nonprofit trying to raise tens of millions of dollars per year can rarely do so.

This is not to say that funding markets are static; they aren't. The first Earth Day in 1970 coincided with a major expansion in giving to environmental causes; the Ethiopian famine of 1984-85 led to a dramatic increase in support for international relief; and awareness of the U.S. educational crisis in the late 1980s laid the groundwork for charter school funding. Changes cannot be foreseen, however, and, hence, can not be depended on as a source of funding. In addition, these changes were the product or culmination of complex national and international events, not the result of a single nonprofit's work.

Earl Martin Phalen, cofounder of BELL, an after-school and summer educational organization, captured the benefits of such intentionality well, summing up his experience for a group of nonprofit leaders in 2007. "Our fundraising strategy used to be 'let's raise more money this year than last' and we always were unsure of where we'd be. Then we got serious in thinking about our model and identified an ongoing type of government funding that was a good match for our work. While it required some program changes to work, we now predictably cover 70 percent of our costs in any locality through this approach."

TEN FUNDING MODELS Devising a framework for nonprofit funding presents challenges. To be useful, the models cannot be too general or too specific. For example, a community health clinic serving patients covered by Medicaid and a nonprofit doing development work supported by the U.S. Agency for International Development are both government funded, yet the type of funding they get, and the decision makers controlling the funding, are very different. Lumping the two together in the same model would not be useful. At the same time, designating a separate model for nonprofits that receive Title I SES funds, for example, is too narrow to be useful.

In the end, we settled on three parameters to define our funding models-the source of funds, the types of decision makers, and the motivations of the decision makers. (See "Identifying the Models" below.) This allowed us to identify 10 distinct funding models at level that is broadly relevant yet defi nes real choices.

It is interesting to note that there were several funding models we thought we might fi nd, but didn't. One possible model was nonprofits supported by earned-income ventures distinct and separate from their core mission-related activities. Another possible model was nonprofits that operated on a strictly fee-for-service model in either a business-tobusiness or direct-to-consumer fashion, without important supplementary fundraising (from members or prior beneficiaries) or underlying government support. Although there are some nonprofits supporting themselves with such funding approaches, they were not present among the large nonprofits that we studied. It is our belief that these types of approaches do not lend themselves to large-scale, sustained nonprofit advantage over for-profit entities.

What follows are descriptions of the 10 funding models, along with profiles of representative nonprofits for each model. The models are ordered by the dominant type of funder. The first three models (Heartfelt Connector, Beneficiary Builder, and Member Motivator) are funded largely by many individual donations. The next model (Big Bettor) is funded largely by a single person or by a few individuals or foundations. The next three models (Public Provider, Policy Innovator, and Beneficiary Broker) are funded largely by the government. The next model (Resource Recycler) is supported largely by corporate funding. And the last two models (Market Maker and Local Nationalizer) have a mix of funders.

1. RESOURCE RECYCLER Some nonprofits, such as AmeriCares Foundation, have grown large by collecting in-kind donations from corporations and individuals, and then distributing these donated goods to needy recipients who could not have purchased them on the market. Nonprofits that operate these types of programs use a funding model we call Resource Recycler. Businesses are willing to donate goods because they would otherwise go to waste (for example, foods with an expiration date), or because the marginal cost of making the goods is low and they will not be distributed in markets that would compete with the producer (for example, medications in developing countries). In kind donations typically account for the majority of revenues, but Resource Recyclers must raise additional funds to support their operating costs. The vast majority of Resource Recyclers are involved in food, agriculture, medical, and nutrition programs and often are internationally focused. The Greater Boston Food Bank (TGBFB), the largest hunger relief organization in New England, is an example of a nonprofit that uses the Resource Recycler funding model. This organization distributes nearly 30 million pounds of food annually to more than 600 local organizations, including food pantries, soup kitchens, day care centers, senior centers, and homeless shelters. TGBFB acquires goods in many ways. The dominant sources of goods are retailers and manufacturers. It also receives surplus food from restaurants and hotels. In 2006, corporate in-kind support accounted for 52 percent of TGBFB's revenues. Federal and state government programs provide TGBFB with in-kind goods and money, accounting for 23 percent of its annual budget, which TGBFB uses to purchase food for distribution. Cash donations from individuals make up the remaining 25 percent of revenues, covering overhead and capital improvements. Nonprofit leaders considering the Resource Recycler funding model should ask themselves the following questions:


2. MARKET MAKER Some nonprofits, such as the Trust for Public Land, provide a service that straddles an altruistic donor and a pay or motivated by market forces. Even though there is money available to pay for the service, it would be unseemly or unlawful for a for-profit to do so. Nonprofits that provide these services use a funding model we call Market Maker. Organ donation is one example where Market Makers operate. There is a demand for human organs, but it is illegal to sell them. These nonprofits generate the majority of their revenues from fees or donations that are directly linked to their activities. Most Market Makers operate in the area of health and disease, but some also operate in the environmental protection area (for example, land conservation). The American Kidney Fund (AKF) is an example of a nonprofit that uses the Market Maker funding model. AKF was founded in 1971 to help low-income people with kidney failure pay for dialysis. It is now the country's leading source of financial aid to kidney dialysis patients, providing (in 2006) $82 million in annual grants to 63,500 kidney patients (about 19 percent of all dialysis patients). Before 1996, health care providers were allowed to pay Medicare Part B and Medigap premiums (approximately 20 percent of total costs) for needy dialysis patients. In 1996, the federal government made it illegal for providers to do this because it might trap the patient into receiving dialysis from a particular provider. The new law left thousands of kidney patients unable to afford kidney treatment. AKF noticed this gap and established a program to fill it. AKF now pays these premiums, allowing patients to continue their treatment. AKF is funded primarily by health care providers and other corporations. AKF is now applying the same principles used in its kidney dialysis program for pharmaceuticals used to treat bone loss. Nonprofit leaders considering the Market Maker funding model should ask themselves the following questions:

IMPLICATIONS FOR NONPROFITS In the current economic climate it is tempting for nonprofit leaders to seek money wherever they can find it, causing some nonprofits to veer off course. That would be a mistake. During tough times it is more important than ever for nonprofit leaders to examine their funding strategy closely and to be disciplined about the way that they raise money. We hope that this article provides a framework for nonprofit leaders to do just that.

The funding paths that nonprofits take will vary, and not all will find models that support large-scale programs. The good news is that all nonprofits can benefit from greater clarity about their most effective funding model, and it is possible for some nonprofits to develop models that raise large amounts of money. As mentioned earlier, almost 150 new nonprofits (not counting universities and hospitals), surpassed $50 million in annual revenues between 1970 and 2003.

On the other side of the equation, philanthropists are becoming more disciplined about their nonprofit investing. A growing number of foundations, such as the Edna McConnell Clark Foundation and New Profit Inc., are investing in their grantees to improve both program and funding models. We hope that this article helps philanthropists become clearer about their funding strategy so that they can support their programs more effectively.

As society looks to the nonprofit sector and philanthropy to solve important problems, a realistic understanding of funding models is increasingly important to realizing those aspirations.

Notes 1 In a November 2008 Bridgespan survey of more than 1001 nonprofits, leaders were asked which of eight different and often conflicting fundraising tactics would play some role or a major role in their approach to addressing the downturn. Nearly half (48 percent) of respondents said that six or more would. 2 For example, see Thomas Malone, Peter Weill, Richard Lai, et al., "Do Some Business Models Perform Better Than Others?" MIT Sloan Research Paper No. 4615-06, May 2006. 3 For an early framework looking at "donative" vs. "commercial" nonprofits, see Henry Hansmann, "The Role of Nonprofit Enterprise," Yale Law Journal, 89, 5, April 1980. 4 William Foster and Gail Fine, "How Nonprofits Get Really Big," Stanford Social Innovation Review

William Landes Foster is a partner at the Bridgespan Group, where he advises direct service nonprofits and foundations and leads research on social sector funding. He is a coauthor of "Should Nonprofits Seek Profits?" (Harvard Business Review, February 2005), "How Nonprofits Get Really Big" ( Stanford Social Innovation Review, spring 2007), and "Money to Grow On" ( Stanford Social Innovation Review, fall 2008).

Peter Kim is a consultant in Bridgespan's Boston office, where he focuses on growth strategies for nonprofits in the education and youth development sectors. Before joining Bridgespan, Kim worked for Goldman Sachs.

Barbara Christiansen is a consultant in Bridgespan's Boston office, where she focuses on helping organizations plan for expansion. Before joining Bridgespan, Christiansen was a strategy consultant at the Monitor Group, working with pharmaceutical, biotech, and energy companies.

Entrepreneurship isn't about selling things -- it's about finding innovative ways to improve people's lives. Until recently, most people in business focused on products and services that would appeal to consumers, and this resulted in the creation of many great companies and a lot of jobs. But attitudes are changing. A new generation of entrepreneurs is using approaches from the commercial world and employing technology to tackle social and environmental problems -- these areas used to be the exclusive territory of government agencies and charitable organizations.

The British Cabinet Office says that there are 70,000 social enterprises helping people, communities and the environment in this country alone. These businesses and organizations contributed more than 54.9 billion pounds to the economy in 2012 and they employ almost 1 million people, yet we have only scratched the surface.

No matter what the structure of the company -- whether it is for-profit, nonprofit or a creative melding of the two -- entrepreneurial solutions are offering engagement, jobs and hope in areas where we had none. The example set by Econet Wireless, which is led by Strive Masiyiwa, is one of my favorites. A couple of years ago, Econet, a telecom company based in South Africa, started to develop and distribute solar charging stations in the region, providing power for cellphones, lights and other devices. These stations are helping to transform the lives of people living in rural areas where the supply of electricity is erratic.

Econet shifted its business model to drive change for people and the planet, and at the same time it created a lucrative new revenue stream. This shift has opened up new avenues for the company, which is using its charging stations to power refrigerators that store vaccines for the community.

Business and government must encourage established entrepreneurs and young talent to focus on problem areas like health, education, climate change and social care. How can we speed up this process and make even more of an impact? There seem to be three key obstacles facing entrepreneurs who want to get social enterprises off the ground.

Funding: Where's the money?
Entrepreneurs often struggle to raise seed money for such ventures, as it is far tougher to get funding for social enterprises than commercial counterparts, despite the fact that the financial returns can be just as big. If a startup team is proposing to launch a social enterprise with the potential to radically change the U.K.'s 87 billion pounds social care sector, they deserve a serious listen from people who can provide substantial funding, not just a little grant money.

We need to encourage more initiatives and competitions such as Google's Global Impact Challenge, which set out to find four nonprofits in the U.K. that would be awarded 500,000 pounds each to help them tackle some of the world's toughest problems through technology. The quality of the entrants was amazing, and the winners ranged from CDI Apps for Good, which teaches children how to code, to the Zoological Society of London, which uses tracking devices to monitor and protect endangered wildlife.

Others are following. The Founders Forum, a community for entrepreneurs started by Brent Hoberman and Jonnie Goodwin, has partnered with the social investor Nominet Trust to put up 1 million pounds in order to encourage the best and brightest to apply their technological talents to social problems. Called Social Tech, Social Change, the program will provide seed funding for startups. These sorts of initiatives will help to shine the light on the social enterprise sector and will encourage more funding and more good ideas to come to life.

Networking: It's who you know.
It is tough for the leaders of a social enterprise to know who to speak to within tech businesses and vice versa, so it's important for government and business to create links between technology entrepreneurs and those leading social change. It simply makes financial sense to encourage collaboration between those skilled in tech and those working in the social sector, since it will spark new ideas -- everything from online giving platforms to education analytics businesses -- and result in the creation of jobs.

The solutions to this problem don't have to be costly or elaborate. Online forums, networking events and conferences would all help to forge ties between the two sectors.

Mentoring: Advice from those who've been there.
Every startup team needs a mentor: someone to help team members to understand and overcome those tricky early situations and, later, to coach them through the process of expansion. Using business skills to grow a social enterprise is a fairly new idea, and so the teams that found such startups need help solving problems and getting the job done.

Successful tech entrepreneurs should be encouraged to mentor entrepreneurs who work in the social space. Again, the solutions can be very simple, and might build on networking tools.

If you'd like to get involved in the social business sector, take a look at your own business or the company you work for: Do you and your team have skills and energy that would be valuable for helping others? If so, should you find new partners and take on a new sector? And do you have spare time to help a young nonprofit tackle its tough first few years?

The author is an Entrepreneur contributor. The opinions expressed are those of the writer.

Jacqueline Novogratz began her career as an international banker but soon, aspiring to change the world, joined a nonprofit women's microfinance group that dispatched her to Africa. At the request of an official in Rwanda's Ministry of Family and Social Affairs, she visited that country, at first to investigate the possibility of starting a credit program for women. A remarkable experience there inspired the title of her book, The Blue Sweater: Bridging the Gap between Rich and Poor in an Interconnected World, which tells the story of her work as an entrepreneur in the social sector. As a child in the 1970s, she had given the charity Goodwill Industries an old, blue sweater. In 1987, jogging through Rwanda's capital, Kigali, she thought she saw a boy wearing it. She was right-it still had her name on the tag. For Jacqueline Novogratz, this encounter symbolized the idea that humanity's "collective future rests upon our embracing a vision of a single world in which we are all connected," just as the blue sweater connected her, an American, with a kid in Rwanda.

Jacqueline Novogratz is now CEO of Acumen Fund, a nonprofit venture capital firm she founded in 2001 to invest in sustainable businesses that bring health care, safe water, alternative energy, and housing to the developing world's low-income people. The excerpt below comes from Chapter 5 of The Blue Sweater.

Video

An excerpt from The Blue Sweater

I wanted to see what it would take to make a business work in Rwanda. Honorata [a social worker] told me about a project she'd helped create for single mothers in Nyamirambo, the section of Kigali where lower-income people lived. Prudence [one of three women in Rwanda's 60-member Parliament] whispered in my ear that the women were prostitutes. I shrugged, as it seemed to me the word was used too easily in Rwanda. Women who danced late at the same nightclubs I did could be labeled wanton or worse. "I've worked with them for years," Honorata told me. "The women have such good intentions, and you will like them."

The group, known as the Femmes Seules-or single women, code for unwed mothers-was one of many organized in part by Honorata's Ministry for Family and Social Affairs. The women, among the city's poorest, would gather for training and income generation. This group focused on a baking project and sewing dresses. In a moment, it was clear to me that "income generation" was a misnomer. Only one woman was sewing, the rest were sitting and waiting.

Podcast

There were about 20 of them, identically dressed in green smocks. Bowing my head, I said hello: " Amakuru." Faces lit up. In unison, the women responded " Imeza," meaning "fine." When one or two began talking to me in Kinyarwanda, I looked at Honorata and felt great relief when she began to translate. Any small effort to communicate on my part elicited gracious appreciation. The women applauded when I used some Swahili, for at least most of the Muslim women spoke that language.

A solid, affable-looking woman named Prisca stood in front of the group. While Prisca and I spoke French, the women stared. In Rwanda, children of the elites were taught French, but the poor learned only Kinyarwanda. Most of these women had spent only a year or two in school at most and couldn't speak a word of French. They seemed to range in age from 18 to their late 20s and carried themselves with an air of innocence and simplicity. Their dresses could have passed for prison attire.

I asked Prisca to help me understand the baked-goods project. "It's simple," she said. "Each morning, several women come very early to prepare the day's selection. It is always the same." I would come to know that selection better than I wanted to: beignets (fried lumps of dough), batonnets (the same dough molded into sticks and fried), samosas, tiny waffles, and hot tea. The women would take the goods to the government offices in the middle of the morning and sell them for 10 francs each. They'd then come back with whatever cash they'd earned and give it to Prisca.

In concept, I liked the idea. I knew from experience at UNICEF that people would get hungry by 10:30 or 11:00 in the morning because everyone arrived at work at 7:30 and didn't have a break until lunchtime. There were no little stores selling snack foods, and people rarely brought treats from home. "How can I be of help?" I asked. Prisca answered, "The women are too poor. They earn too little money. They work every day, but the project is losing money."

"How much do the women earn?" I asked. "Fifty francs a day," Prisca responded-50 cents. "And most are raising multiple children." "How much do you lose?" Prisca took out the ledger in which she recorded every franc spent, earned, and paid to the women. On average, the project was losing about $650 a month. "Who covers the losses?" I asked. "Two charities," Prisca said. "But I don't know how long they will renew our funding."

Six hundred and fifty dollars a month to keep 20 women earning 50 cents a day. You could triple their incomes if you gave them the money. It was a perfect illustration of why traditional charity too often fails: well-intentioned people gave poor women something "nice" to do and subsidized the project until there was no money left. This is a no-fail way to keep people in poverty. I wondered aloud why the charities didn't get tired of keeping the enterprise going. How would this survive in the long term? How would the women change their circumstances? Prisca shrugged. "People get by."

"Prisca, that's not enough," I said. "No," she said, visibly embarrassed, "it isn't." I was foolish to start with criticism. This is where so many Westerners fail: after a quick appraisal, we're ready to tell people in low-income communities not only what's wrong with what they're doing but also how to fix it. I apologized and tried again: "Could you be selling more? Could you cut costs?" They already had, Prisca explained; "it is easier to find more people to buy than to cut costs." "I'll make a deal with you," I said. "If we drop the charity and run this as a business, I'll help make it work." I held out my hand. "Are you OK with this?"

Prisca lifted her left eyebrow. When she took my hand, she emphatically responded " Sana," meaning "very much" in Swahili. Our goals would be those of any business: to increase sales and cut costs. We'd start tomorrow and turn this project into a real enterprise.

I started early next morning. The women greeted me warmly. Without a common language, we communicated through gestures and sprinkled words of French or Swahili. While the women prepared for the morning, I reviewed the books more thoroughly than I had the previous afternoon. The bakery had a long way to go, but the feeling of starting something that had a chance of changing people's lives invigorated me. The world had written off this little group, yet they had a chance to do something important for themselves, and maybe they would change perceptions of what the poorest women are capable of accomplishing.

Because we started with 20 women, it made sense to expand our revenues quickly to cover costs. Rather than convince our few current customers to buy more doughnuts, we needed to increase the number of people we served. The only way I could think of achieving this was to target agencies and institutions with enough employees to make it worth our while to visit.

I asked Prisca to translate: "who will volunteer to come with me and speak with ambassadors and agency directors to see if they will offer our bakery services to their employees?" Twenty faces turned downward. "Don't worry," I said. "I'll do the talking, but you need to learn to market." No movement. Consolata made the mistake of glancing up. I chose her. "What do you normally say to people in the offices when you want to sell to them?" I asked her. "Normally, I don't say anything," she nearly whispered. "I just walk through the government agencies and everyone knows what I'm carrying."

We visited five embassies and most UN agencies that first long day. Though Consolata said little, we made progress. After the French Embassy agreed to invite the women to their offices the next morning, I gave her a strong hug and, after a moment of shock, she hugged me back. We arrived at Nyamirambo exhausted, both of us content; we had doubled the number of customers.

The next morning, I found the women hard at work, cooking doughnuts in a traditional wok-like pot over an open fire, producing a lovely melody to accompany the crackle of hot oil shimmying as the lumps of dough hit the pan. By 8:00 AM, others began arriving to clean, help with cooking, and organize the freshly made goods. I watched Josepha and the others choose their selections. They would walk into the street and disappear into a crowded minibus. For at least some, the new day took courage, for they were going to embassies and other places they'd never been before.

Sales jumped in the first week, but not as much as they should have. Something was wrong with our inventory accounting. We didn't make enough money in relation to what had been prepared. When the women returned and gave us the cash they'd earned, Prisca and I couldn't account for more than a third of the goods produced. My heart sank with the knowledge that women were stealing. We were putting so much goodwill into this-into them. Didn't they owe us accountability?

Not from their perspective. One woman had told us she'd sold 10 products, but by our calculations she had taken 23. She was eating a lot of doughnuts or selling them and keeping the money. I was crushed; Prisca was more sanguine, reminding me that a number of women were being completely honest.

The women were testing my mettle. We couldn't count on their being honest out of appreciation alone-they'd seen too many like me come and go. The bigger question was how to fix the immediate problem and then create the right incentives for the business to sustain itself long after I'd left. The existing bookkeeping system lacked accountability. No one noted how many goods each woman took in the morning.

Prisca and I stayed up late crafting a simple system that would ensure accountability and reward individual behavior as well as group success. In the morning, we delivered a stern talk about how we were all in this together. If there were profits, everyone would share in them. If there were losses, everyone's pay would be reduced. The women would be paid a base wage and earn a commission on sales. The success of this venture would become the responsibility of the women themselves.

We still had work to do in breaking the charitable-project mentality. Every Friday we gathered for a combination of Business 101 and pep talk. Often I would ask the women to play roles. "Consolata, I'm sitting next to you on the minibus, feeling hungry. Can you sell me something before I get off the bus?" When Prisca translated, the room erupted with giggles. Prisca smiled her oh-poor-you-who-have-so-much-to-learn smile. "Why?" I asked. "Because women do not just ask strangers to buy things on buses," she said with an air of exasperation. "Why not?" The women burst out laughing again. Prisca explained, "Because it is not polite"-a euphemism for "it is not done here."

Prisca said kindly, softly, "Jacqueline, you are so American. Here, women won't look someone in the eye, won't talk to someone they don't know. You have to accept it." "I know that, Prisca, I do," I said, exasperated. "I just want to give the women a chance. I have never unquestioningly accepted the status quo, so why should we do that in Rwanda, where change can be good?" "I understand you," Prisca said, "but change is slow here. You have to give the women time."

"OK, watch this," I said. Grabbing a bucket filled with little doughnuts and waffles and samosas, I marched up to the street. Standing out front, I talked to the people passing by and in no time sold ten doughnuts, more than some women sold all day. Then I turned around with a flourish, marched into the room, and took a bow. The women clapped and chortled. Prisca held her face in her hands and shook her head. "Jacqueline, no one will say no to a tall American girl selling them things on the streets of Nyamirambo!"

But I would not acquiesce. To increase sales, I ran competitions to see who could sell the most (no one would participate). I held training sessions on how to treat customers (the response was tepid at best). I continued the pep talks every Friday and reminded the women that we were going to create a real bakery. Prisca would translate and the women would smile patiently and sales began to improve. Finally, something was working.

Within several months, the project was profitable. The women were coming to work on time and, though they still weren't enthusiastic salespeople, more and more institutions signed up for deliveries. The women began to see-for the first time in their lives-a correlation between the effort they put into work and the income they earned. They began to believe the organization could succeed and that they would play a key part in that success.

Still, for every two steps forward, there was often one back. One afternoon, I received a call from a friend who had expected the women to deliver an order for a party; nothing had arrived. Prisca informed me that none of the women on duty had shown up. We learned they'd all gone to the funeral of a friend. That Friday, we called a meeting. We talked about promises made and kept. "We're not telling you not to go to the funeral," Prisca told the women, "but there are enough of us here that you can find a replacement for yourself if you can't work. This is your business."

One morning I walked into the offices at UNICEF and was told by a frantic office assistant that "everyone in the city is suffering from eating the baked goods." "What do you mean by 'suffering'?" I asked. "You know," he said, "they are having pains in their stomach." I called the embassies and government offices to apologize and promised to take care of the problem.

I approached the women cooking. "Everyone is sick with the runs," I said. "Did you do anything differently?" They shook their heads. I asked to see what they were preparing. The smell was stale, sour, rancid. "When did you last change the cooking oil?" I asked. "Oh, never," Josepha answered gleefully. "We have been adding just a little more each day. We are keeping costs low so we can have more profit." Next lesson: quality control.

Despite the bumps, within a few months we had cornered the snack market in Kigali, expanding beyond fried dough. I still did too much of the marketing, but in time the women gained the confidence to venture into stores to replenish orders. Within eight months or so, the women were earning $2 a day. Few people earned that kind of money in Rwanda, certainly not women. For the first time, their incomes allowed them to decide when to say yes and no. Despite the failures and setbacks, the little bakery continued to flourish under Prisca's leadership. It operated for a long time after I left-until the genocide destroyed so much of what was beautiful.

The story of the bakery was the transformation that comes with being seen, held accountable, succeeding. I had the privilege of watching the women acquire a sense of dignity once they were given tools for self-sufficiency. I discovered the power of creating a business with real accountability. And I learned, maybe most important, to listen with my heart and not just my head.