Social Enterprise

The Power of Profit in Advancing Systemic Change

Commercial platforms offer powerful avenues for solving social problems on a large scale.

SSIR x Bridgespan: Achieving Transformative Scale SSIR x Bridgespan: Achieving Transformative Scale Achieving Transformative Scale is an eight-week blog series exploring pathways that social sector leaders around the world are pursuing to take solutions that work to a scale that truly transforms society.

At the core of transformative scale is the imperative to create systemic change. It’s really hard to do, but it’s what ultimately matters.

In my experience, advancing from a successful small-scale program to systemic change requires clearing three high hurdles. First, the intervention has to reach enough people for a sufficient amount of time to significantly move the needle in solving the targeted problem. Second, it must be deployed not by just one organization but by many actors so that it can spread far and wide. Lastly, if change is to take root, the intervention must continuously be made better and less expensive.

The challenges to surmounting these hurdles are enormous. Clearly, it’s not enough to come up with a great program or an innovative practice. You have to deliver it to all the people that need it as quickly as possible. Nonprofits can show the way, and the public sector can promise scale, but I’m most interested in commercial platforms. Their ability to tap capital markets and draw in new players via the profit motive makes them well suited to overcome all three of the hurdles to systemic change. The most powerful commercial platforms for social change are those where the end user is also the payer. Footing the bill exacts accountability, which in turn aligns interests. Microfinance is a good example, where poor borrowers are both beneficiary and payer.

Commercial platforms, of course, have their limits. They don’t work well where it would be morally repugnant to restrict access only to those who can pay, such as a suicide crisis hotline. And a commercial approach excludes between 7 and 10 percent of the population who are living at close to indigence and cannot pay for most goods and services. Even with those constraints, that leaves a lot of humanity to address.

Creating a successful commercial platform to address social needs, however, presents its own set of challenges, not the least of which is getting the business model right. Successful and innovative business models are always hard to come by. In the social sector, the challenges to doing this are even greater.

As an investor, I ask five simple questions when evaluating whether a business model can solve a solve social problem:

  1. Is the industry or sector key to improving the human condition, such as health care, education, housing, or basic services?
  2. Is the industry or sector capable of sustaining an enterprise large enough to be relevant for the capital markets? If not, even if successful, the business model is likely to remain a small and isolated player incapable of driving systemic change.
  3. Can the proposed business model win in the targeted industry or sector? Will it be able to displace the current models that in the past were unable to deliver the desired social outcomes?
  4. Is the management team capable of delivering the business model? Ideas are a dime a dozen. And if it’s something truly innovative and disruptive, a business plan by definition can only be a rough map of what lies ahead. Accordingly, success hinges on a committed team that will have the courage and determination to change and adapt as much and as long as necessary to make the project succeed.
  5. Finally, what will the social and financial returns be? In answering this last question, a key consideration is that maximizing social impact requires that other players follow in the wake of the initial business model so that, far from being just the effort of a lone ranger, it is the collective result of an entire industry. There is no better guarantee that a social problem is being solved at scale than to have numerous businesses competing to solve it.

In all of history, there has been only one way to create a new industry: develop an economic activity that earns above-average financial returns. The reason is simple. If an endeavor yields only average returns (or lower), why would entrepreneurs, investors, and businesses drop what they are doing and incur the risk of attempting something new? And without followers, depending on one single player makes it highly unlikely that the resulting impact will be sufficiently large to cause systemic change.

Creating a successful, large-scale social enterprise also requires the ability to navigate a hostile ecosystem. Throughout history, society has been shaped to best fulfill the needs of those at the top of the socioeconomic pyramid. Accordingly, if your business model seeks to serve the base of the pyramid, expect to deal with a daunting lack of infrastructure—whether it’s inadequate legal and regulatory frameworks, unresponsive banks, a hostile government bureaucracy, lack of trained talent, or a poor transportation network.

Coping with these ecosystem barriers means working with others, both governments and civil society. As in all endeavors, clarity and focus are keys to success. The greater the challenges, the more important it is to have a tight, specific definition of the problem you are targeting—for example, “providing working capital loans to urban low-income micro-entrepreneurs” works better than “eliminating poverty.”

In developed nations, commercial platforms can be engines for systemic change as well, but it requires careful thought to define their role. Take education reform in the United States, for example. Ultimately, it’s the public education system that must change if you really want to succeed. If it is to meet societal goals, the public system cannot be replaced by commercial alternatives. Hence, the question is, how can commercial models help the public system change for the better? One possibility being played out is whether commercial schools can provide a catalytic motivation for the large, entrenched public education systems to undertake fundamental change. This could happen if public education funding changes from a school district model to an individual student model. Should this happen, supporters argue that even stodgy bureaucratic systems will start changing when they face a threat of tax dollars following students as they go from public to charter or private schools.

Whenever you attempt transformative change, it’s not enough to have a really great idea. What ultimately matters is finding a way to take action that will truly solve the problem at a large scale. That is very hard to accomplish, but commercial platforms can offer a powerful tool for success.

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  • BY Franklin Mora

    ON June 12, 2014 12:21 PM

    Professor Chu,

    I’m a great admirer of your work. I’ll be an MBA at Ross School of Business this Fall, and hope you would consider coming to speak to our class this coming year. smile

    On a more serious note, I wonder if your view of investing on a high-return social enterprise will only stunt the growth of creating the social impact we need. Your comments would hinder someone from being a first mover, raising capital, and exploring opportunities for projects that could indeed scale, but would need grants and venture philanthropy funds to get started.

    Commercial platforms are indeed necessary to create systemic change. But would disrupting, and better yet, creating an entire new industry segment really be necessary to tap into capital?

    As an inspiring social entrepreneur, I wonder if I should focus on raising enough capital to pilot test a potentially scale-able idea before I just go out and see what can work and is necessary in the market. Or if instead I should focus on building on what others have done before me to reach commercial scale-able success.  I greatly enjoy your work. I hope to some day create systemic change.

  • Pat Kilduff's avatar

    BY Pat Kilduff

    ON June 13, 2014 01:10 PM

    I admire your academic credentials, however, I wonder about your hands on experience.  I’d like to hear this discussion with someone like Julie Lien at Tumml in San Francisco who is actually providing the resources you discuss (and seem to dismiss a bit as too difficult to provide.  Not all the Tumml cohort with become large impact,. successful companies, but as a combined effort stand to have a reasonable impact.

  • Robert H Scarlett's avatar

    BY Robert H Scarlett

    ON June 14, 2014 05:09 AM

    I really appreciate the way that, in this article, you have captured the lessons you have learned from your decades of experience in investing, investment banking, and (in your second career) developing a scale-able model for commercial micro-finance.

    I hope this modest article is widely read and comprehended by all of those who are sincerely interested in bringing about systemic change.

    If people truly wish to serve as “agents of systemic change”, they have to confront the inherent limitations on the resources that are available from philanthropy and/or from tax revenues.

    This article rightly responds to the reality that systemic change - at scale - can only be accomplished by viewing the beneficiaries of the desired social change as “customers” and by tapping into private capital markets - to support the scaling-up of the desired change.


  • Geneva P.'s avatar

    BY Geneva P.

    ON June 15, 2014 07:02 PM

    As noted in the article early-seed stage start-ups are more challenged since they are starting with little infrastructure and unknown business model. I agree that the ability to attract capital can help scale and encourage competition. But returns pressure from the capital markets can also pivot companies away from the BOP customer base. How can early stage companies stay incentivized to stay with their intentional customer base?  Or rather, how can capital markets also value the social returns which may not be easily quantifiable?

  • Michael Chu's avatar

    BY Michael Chu

    ON June 16, 2014 12:46 PM

    Quick responses to two comments: First, to Franklin’s point, raising initial funds from friends & family or philanthropy is not inconsistent with commercial platforms nor disruption—in fact, microfinance did just that, and began to really move the dial when those early attempts evolved into the BancoSol and Compartamos Banco of this world (as Robert Scarlett recalls in his note.) Geneva expresses the widely shared fear of “mission drift.” I understand the concern, but I’ve always thought it was a red herring. Business models built on meeting the unmet needs of the base of the pyramid succeed precisely because they develop the unique competencies required by their target market, which are very different from those needed at the top of the pyramid. Hence, worrying that Compartamos will end up lending to the leading brewery or cement company is like worrying that McDonalds will go into fine French cuisine—the key success factors are so different that it makes no business sense.

  • Stephen Carter's avatar

    BY Stephen Carter

    ON March 16, 2015 02:23 PM

    This is a powerful piece. You make some good points and some glib generalizations.

    “The most powerful commercial platforms for social change are those where the end user is also the payer.” Google, Twitter, facebook? Commercial platforms can also block systemic change, as GM did by sitting on low hydrocarbon technology for a long time. Your ACCION background explains why you cite microfinance. The recent AEJ issue on microcredit shows otherwise. On that basis, the poor are payers but the beneficiaries are commercial investors.

    You are selective in your economic history when you say “In all of history, there has been only one way to create a new industry: develop an economic activity that earns above-average financial returns.” Where does a state’s support of economic development sit with this? Are you familiar with the recent work of Mazzucato on innovation or the earlier work of Amsden or Wade on South Korea?

    On the other hand, you are correct in emphasizing the need to nurture sectors of competing firms instead of favoring selected entrepreneurs.

    You also surface a double standard between the developing and developed world in education. For the developed world, you say “Ultimately, it’s the public education system that must change if you really want to succeed. If it is to meet societal goals, the public system cannot be replaced by commercial alternatives.” Yet in the developing world you seem to condone the provision of education based on ability to pay. You do not explain your inconsistency here.

    You correctly recommend letting student funding follow students. This is reminiscent of Friedman.

    Your argument seems weakest on goods and services with positive externalities where you do not make a persuasive case.

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