In a study involving more than 50 social entrepreneurs, Endeavor Insight discovered that some of their businesses have been far more successful at scaling both their financial success and their social impact than others. Authors Rottenberg and Morris offer an excellent report of the findings. Those findings are summarized below.
A disciplined study of more than 100 different characteristics of those 50 businesses did not find conclusive reason some scaled better than others. In-depth interviews with close to 20 of the entrepreneurs who lead the companies revealed an interesting tradeoff.
Prioritizing financial goals over social leads to better chances of scaling and, thus, achieving greater social impact.
When asked to rank how frequently they favored one type of goal over another, the entrepreneurs showed that they followed a pattern: “those who prioritized financial goals over social goals were much more likely to experience high rates of growth and [thus] have a greater social impact.”
If we accept that the financial goals must take precedence, they cannot be allowed to completely overshadow the social impact. This could be a slippery slope wherein accomplishing the financial goals eventually causes the destruction or worse, perversion, of the social goals. “[Social Entrepreneurs] actually need even more rigor in [their] thinking.” says Michael Chu, Senior Lecturer at the Initiative on Social Enterprise at Harvard Business School and Managing Director of the investment fund IGNIA.
The rigor must be used to intimately align the social and financial goals of the business such that achieving the latter will honor the former. In this respect social entrepreneurs have two masters to appease whereas more traditional startups have only one.
Design business models to minimize “friction” between social and financial goals.
If the financial and social goals are in conflict in any way then that will generate “lots of friction points due to conflict between them,” says Cathy Clark from the Center for the Advancement of Social Entrepreneurship at Duke University. Having some friction “doesn’t mean that you won’t scale. It just means that you have to be even smarter. You have to manage around these sorts of issues.”
The graphic above shows a qualitative treatment of these conflicting tradeoffs. The authors present it as a tool to help focus attention on this tradeoff as entrepreneurs build their business models and as a reminder as managers make decisions.
The authors offer the following cogent considerations and recommendations for social entrepreneurs:
- Design business models that align financial and social goals as closely as possible to minimize tradeoffs and reduce friction.
- When tradeoffs must be made, prioritize financial goals over social ones to maximize the long-term sustainability of the business.
The organizations that support them also need to:
- Work to identify founders who can develop business models that prioritize financial sustainability and ability to scale. In our experience, entrepreneurs with strong business backgrounds who develop passion for social issues tend to do this very effectively.
- Encourage entrepreneurs at social enterprises to prioritize long-term sustainability when dealing with trade-offs.
The full article by Rottenberg and Morris is a worthwhile read and can be found here.
Chad W. Jennings is an intern with the Unitus Ventures (formerly Unitus Seed Fund). He blogs on using the power of capitalism to defeat poverty.