Social capital and social business

24 Nov

Note to readers: This blog post is almost twice my usual post and I was feeling a bit guilty about it. But then, I read Seth Godin’s post today and it makes me feel much better.  

 

As we have been trying to raise funds for running United Prosperity, we have realized how hard it is. We had applied to the Echoing Green Foundation last year. They received more than 1500 applications for 20 Fellowships each valued at around $68,000. Based on the feedback we received, my assessment as to why we did not get funded was that United Prosperity as a venture is complex and some of the Echoing Green evaluators did not want to risk their donation of $68,000 on a venture which seems extremely complicated.

 

Early this year, I was also talking to a Venture Capitalist who invests mostly in for-profit social ventures. He was quite willing to invest a comparable amount in United Prosperity provided we could turn it into a for-profit venture, which could give him a multifold return on his investment in due course.

 

This soon made me realize that we have reasonably good amount of commercial capital available for reasonably good and sometimes bad business plans, but ‘social capital’ or capital whose primary purpose is to ‘do good’ with little or no financial returns to investors seems to be in severe short supply.

 

But then, the need or market for ‘doing good’ is so large, how do we expect non-profits or social ventures to build infrastructure and IT systems to do good in a scalable manner when the ‘social capital’ to build such scalable infrastructure is unavailable? That seems to be the challenge most social ventures face.

 

I think there are a few ways one could make such ‘capital’ available:

 

  1. Collect the available social capital in a scalable manner over the internet: Organizations like Kiva,Wokaidonorschoose.org and ours are doing that.
  2. Reuse the social capital: Money given as a donation is used once. But as a Kiva loan or United Prosperity guarantee, the same ‘social capital’ gets reused with multiple entrepreneurs.
  3. Use some amount of ‘social capital’ which bears slightly higher risk to free up additional commercial capital: With United Prosperity, the ‘social capital’ provided by social guarantors frees up additional commercial capital with banks.

But still there is a problem. Other than the already stretched government grants, most of the ‘social capital’ available in the world comes from donations from individuals directly or through grant making Foundations set up by philanthropists or corporations.  And most of the leading philanthropists such as Bill Gates, Warren Buffet, Michael Dell or Pierre Omidyar have made their money from business. i.e. It is commercial capital which is eventually being turned to social capital thanks to the generosity  and public spiritedness of individuals. The same holds true with United Prosperity or Kiva – Our guarantors or Kiva lenders earn their income through commercial means and then choose to help poor entrepreneurs.

 

There is also an another interesting observation. Commercial capital seems to have the ability to take risks and multiply itself and expand the scope of commerce. Social capital seems to be incapable of multiplying itself and rapidly expanding the scope of ‘doing good’. To take our unsuccessful fund raising example, the VC with ‘commercial capital’ was willing to take risks and invest in United Prosperity but Echoing Green with ‘social capital’ was perhaps worried that United Prosperity will never see the light of the day in a reasonable time and unwilling to support us.  

 

Overall, all of us are in a situation where we have to rely on ‘commercial capital’ to transform itself into ‘social capital’ and do good for society. If our businesses are not robust and successful, we will have fewer high net-worth individuals and lesser ‘commercial capital’ getting transformed to ‘social capital’. Thus the importance of the role of business and the generosity of individuals is unquestioned in society but one major question is unanswered: Why cannot we get ‘social capital’ to multiply itself just like ‘commercial capital’?

 

I think it can and it should if we want to ‘do good’ in a scalable way.  One way Prof. Yunus talks about in hisNobel lecture and his recent book ‘Creating a world without poverty: Social business and the future of capitalism’  is through a new type of organization called as the ‘social business’. 

 

As per Prof. Yunus in his Nobel Lecture, “Social business will be a new kind of business introduced in the market place with the objective of making a difference in the world. Investors in the social business could get back their investment, but will not take any dividend from the company. Profit would be ploughed back into the company to expand its outreach and improve the quality of its product or service. A social business will be a non-loss, non-dividend company. Once social business is recognized in law, many existing companies will come forward to create social businesses in addition to their foundation activities. Many activists from the non-profit sector will also find this an attractive option. Unlike the non-profit sector where one needs to collect donations to keep activities going, a social business will be self-sustaining and create surplus for expansion since it is a non-loss enterprise. Social business will go into a new type of capital market of its own, to raise capital.”

 

At this point, we need to raise around $2 Million of startup capital to sustain our operations over the next four years. If we are to raise capital as a social business, we will seek out non-dividend paying equity (or a 0% interest loan). We will find public-spirited investors who will put in the new non-dividend paying equity and provide stewardship to the organization.   And at some point, when United Prosperity achieves break-even from its operations, we might be able to buyback the equity from the investors. Or the investors may even be able to sell the equity to other later stage more risk-averse investors at a premium. Prof. Yunus also talks of a social stock market where such social stocks may be listed. Social business and social stock market have the ability to increase the pool of social capital available in the world and increase the scope of doing good. The Tactical Philanthropy blog had a post on a Non-Profit IPO in Canada.  I don’t know if the Non-profit raised donations or raised equity. But who knows, social business and social stock markets may become a reality faster than we think.

One Response to “Social capital and social business”

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  1. Is a for-profit model a silver bullet for the Bottom of the Pyramid? | United Prosperity Team Blog - November 23, 2009

    […] and support from thousands of microlenders and that a sustainable not-for-profit model or a social business model works the best for us. However, the feeling I get on several occasions is that a large number […]

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