The Rise and Struggles of Social Enterprise in 2013

Last year was eventful for social enterprise in the United States.

Social entrepreneurs have seen their fair share of struggles as they build new businesses in the post-recession economy. But 2013 also saw three changes to the ecosystem that supports social enterprise and nonprofit organizations, and they are likely to improve the operation of the entire sector next year. Here is a summary of these changes:

New investments from foundations

Social entrepreneurs constantly face the well-known challenge of securing funding; yet foundations sit on multi-million-dollar endowments.  The IRS is alleviating this problem, if only slightly, by taking final action on a regulation proposed in 2012 that adds nine examples to the type of program-related investments that US foundations can make. Like grants, these investments must further a foundation’s mission; unlike grants, they are expected to be repaid. The addition of these examples is likely to reduce the transaction cost that foundations currently face in making program-related investments, thereby increasing the amount of program-related investment that happens in the United States.

New corporate forms

Supporters of social entrepreneurs in law and government have pushed for the creation of new corporate forms, such as benefit corporations, flexible purpose corporations, and L3Cs. Benefit corporations, for example, allow shareholders to hold managers accountable not only for how much money the company has made, but also for social and environmental objectives that the company has achieved. Last year, Delaware—home to more than half of America’s publicly traded businesses—became the 20th state to sign benefit corporation legislation into law.

New social enterprise business models

As many commentators note, complex social problems such as homelessness and criminal recidivism have increasingly required collaboration among governments, businesses, and nonprofit organizations. Social impact bonds (SIBs) enable such partnerships, and 2013 saw the launch of the first municipal SIB in New York City and the first federal-state SIB in New York. Twenty-eight states applied to a lab at Harvard for pro bono technical assistance to design their own SIBs. And the United States Treasury is creating a $300 million Innovation Fund to support these SIBs starting 2014.

This progress is coming as restless social entrepreneurs test and develop different models for addressing poverty, unemployment, and other social issues—and we will certainly continue to see more of this experimentation next year.

But this progress is also coming as entrepreneurs running social organizations struggle to scale their organizations, especially when compared to their peers in Silicon Valley. Take two of the most successful recent businesses on the social and private side: Over the past decade Facebook grew more-than-100-fold to more than 1 billion users, while Teach for America increased its corp size only 4-fold.

And barriers to growth are rising: The Great Recession has eroded foundation endowments, and a slow climb out of the recession has strained local and state government budgets.

So what awaits social entrepreneurs in 2014?

If 2013 was a year in which many new efforts were launched, then 2014 will be the year in which these efforts are tested—and repeated or discarded based on their success. The IRS program-related investment rules are a great start, but will they spur more foundation investment? Newly designed SIBs look promising—and this year, as the first evaluations are released, we’ll find out if they work. And will the quantity of new corporate forms across state lines translate into a qualitative improvement in the way social businesses operate?

These are some of the questions social entrepreneurs are asking as the new year unfolds.

Read more stories by Michael Belinsky.