Entrepreneurship is a spectrum so why did we forget to support its social side?
Athe end of 2019 I had the chance to participate to Unleash as a “ mentor”. Unleash is an amazing program gathering hundreds of social entrepreneurs building social startups in a week, to address the Sustainable Development Goals.
At this event something became clear, the tools used to support for profit or even mixed non/for profit startups makes absolutely no sense when dealing with real impact. For example one day health is building hospital in rural Uganda. They treated 20,000 people, and are significantly reducing the cost needed to build hospital and train its staff, once hospitals are launched they become self sustainable. Now who would invest in them? Venture Capital won’t, Social Venture Capital will argue it is not a sustainable model, and foundation will find them too small… At the end of the day it is always possible to find support, but where is the needed bridges and clear paths that we so oftenly find when building for profit startups?
How come then do we see more and more “Impact” Venture funds? In this post we will dive into the founders motivations and deduct the needs for new vehicle to effectively support social innovation and impact.
When working on startup weekend I rejected the idea of social entrepreneurs, from my point of view any business has a social impact I could not see how someone building a coffee shop in Tanzania and feeding people would have less of an impact than someone building an organic and eco friendly farm in California. The only difference boils down to the founder’s motivations one is greedy the other is virtuous.
Steve Blank proposed 4 types of entrepreneurs I would like to go further this archetype and explain why we can also think of entrepreneurship as a spectrum and how one founder can navigate through it during its carreer.
Where would you fit on this spectrum? What would be your Entrepreneurship journey on this spectrum? As often in entrepreneurship things are studied at the level of the company. It’s time to go down to the founder level!
Defining Social and Capital Entrepreneurs.
We should start by defining what we are talking when talking about social entrepreneurs. This is a delicate exercise, as entrepreneurship itself is poorly defined; as academic Amar Bidhe put it “Entrepreneurs who start and build new businesses are more celebrated than studied.”
As Noam wasserman explains in his book Founder’s dillemas:
Most economists assume that entrepreneurs are out to make a lot of money. According to one researcher, “That the entrepreneur aims at maximizing his profits is one of the most fundamental assumptions of economic theory.”
In the same book, Pr Wasserman quotes a Kauffman foundation study showing that 75% of founders of tech startups said that building wealth was a very important motivation.
So how can we explain social entrepreneurs in that context? Social entrepreneurs were introduced by the founder of Ashoka, himself inspired by Gandhi and the ability of one individual to bring social change. Later on Dr Dr. Alex Nicholls and others like Pr. Yunus helped advance and theorized what a social entreprerise does but they rarely studied the founders.
If we want to study social entrepreneurs we are therefore left with the need to separate entrepreneurs in two groups, those motivated by personal wealth (formally known as entrepreneurs) and those motivated by social impact and change.
We will call the first ones Capitalist Entrepreneurs and the second ones Social entrepreneurs although I think it would be more exact to call them Socialists entrepreneurs but the negative political connotation might explain why their advocates have chosen the word social instead.
A Capitalist entrepreneur definition:
A capitalist entrepreneur is an agent of change looking to allocate resources toward a perceived economic opportunity to maximize personal wealth via equity.
A social entrepreneur definition:
A social entrepreneur is an agent of change looking to allocate resources toward a perceived social opportunity to maximize social impact.
We should of course notice that hell is paved of good intention and vice versa greed could have very positive side effect as described by Adam Scmith in both the Wealth of the Nation and its theory of Moral Sentiments.
Wealth and external honours are their proper recompense, and the recompense which they can seldom fail of acquiring. What reward is most proper for promoting the practice of truth, justice, and humanity? The confidence, the esteem, and love of those we live with. Humanity does not desire to be great, but to be beloved. It is not in being rich that truth and justice would rejoice, but in being trusted and believed, recompenses which those virtues must almost al- ways acquire. -Adam Smith (Theory of Moral Sentiments)
The extreme archetypes of the entrepreneurial spectrum : Evil entrepreneurs and Saint entrepreneurs.
Evil Entrepreneur
An evil entrepreneur is a capitalist entrepreneur looking to maximize wealth at the cost of society.
To be fair I should have named it “hostile entrepreneur” instead of evil, as the Latin root of social is ally / friendly. But evil seemed more straightforward and naturally implies the existence of saint entrepreneurs, this was way too much fun to resist :)
An evil entrepreneur is nothing else than an entrepreneur who is getting rich without caring for anything or anyone else. A good example would be any drug lord or dictators.
Saint Entrepreneur
An saint entrepreneur is a social entrepreneur looking to maximize social impact at the cost of its own wealth / health.
Beyond Good and Evil, do we need to moralize capitalism since God is dead?
As Pr Christensen noted in this video Capitalism worked well in the USA because American entrepreneurs believed in a higher moral judge (God) and these moral values kind of self regulated the system.
As people are losing faith (cf graph bellow) it would therefore be natural to assume a rise of “Evil Entrepreneurs” as Capitalist entrepreneurs can now go wild per se.
The Entrepreneurial spectrum
For many years I rejected the idea of evil entrepreneurs, considering any entrepreneurial activity useful economically and therefore good for society.
My mistake had been to think of entrepreneurship as a binary or discrete system where the outcome would be Steve Blank 6 types of startups
Similar to the discovery of the visible light spectrum (a rainbow), where we started to “see” 7 colors instead of an infinite number (here is a fun story about why Newton advocated for that “magic” number) I now see an infinite number of entrepreneurial types moving through the entrepreneurial spectrum.
The entrepreneurial spectrum is driven by a moral arbitrage between personal wealth and positive social impact. The social entrepreneurs chose to maximize social impact while the capitalistic entrepreneurs follow the classical economic idea that one is motivated by personal gain.
With these 2 dimensions in place, we can plot entrepreneurs on this entrepreneurial spectrum:
This spectrum shows something important: society tends to celebrate the right side of the spectrum a lot more than its left side (Who knows the guy on the upper left?)
We can therefore plot the trajectory of founders, some might start high on social impact and end up low and vice versa.
An example: Bill gates from Evil to Saint entrepreneur.
I grew up hating Bill Gates as a young developer supporting Open Source and fighting Microsoft seeing them as the “enemy”. Now I would not only like Microsoft (who now supports open source) but also support Bill Gates with his amazing work thanks to its foundation, this is a reminder that entrepreneurs can move on the entrepreneurial spectrum through time.
Is Capitalism more good than bad?
Back to an old economist debate since Adam Smith we know that capitalism, can be good or bad (it just somehow chose to be good). It has certainly done an amazing job at reducing poverty worldwide, but it also has done an amazing job at concentrating wealth to very few (Marxist theorists would say a revolution is on the horizon)
26 people own as much as 3.8 billion people! (Oxfam)
Capitalistic redemption: The importance of philanthropy and the new gospel of wealth worth $1.5 trillion.
Andrew Carnagie wrote in the later 19th century in what would become his Gospel of Wealth that “The man who dies thus rich dies disgraced.”
For capitalism to still be a positive force, we need to rebalance the force (pund intended) by increasing philantropic support to social entrepreneurs especially when the market is going up.
The other possible solution is the one advocated by Piketty and Bernie Sanders or even some billionaires who are suggesting to increase governmental taxes to force redistribution. But this assumes that government are good at building social innovation. I disagree with this as I think social innovation will benefit from some kind of social competition from thousands of brains instead of a very top down approach. But I also believe good policies could support social innovation.
My point of view is that we need to displace taxes towards social innovation instead of feeding slow and already very inefficient centralized governments.
According to UBS in its Global Philanthropy report: “The assets of philanthropic foundations in 23 countries is close to USD 1.5 trillion.”
How could foundations do more?
When we are talking of $1.5 trillion of assets of philanthropic foundations it does not mean all that money went to support non-profits and other projects, actually most of it went on the stock exchange to support “classic” capitalism.
For example, the gates foundation had $47.8b of Total Liabilities and net assets in 2018 versus $51.85b in 2017 around 7 % of the fund went into grants. The same year Mr. Gates’s wealth increased by $4b. This explains why you can both have a foundation (that is tax-deductible) and getting richer (more evil :) every year.
Many foundations are endowment funds (meaning they are only required to follow the 5% rule in the USA). It is also important to observe that foundations only represent a small fraction of the GDP on average (kudos to the netherlands and Switzerland though!)
Policymakers could test the idea of a dynamic rate instead of a static one of 5%. This way when capitalism is working well, foundations give back more, this prevents the foundation to be a form of tax evasion tool.
To understand furthermore how the foundation works you can read about endowment funds here.
Another point that I will develop in other blog posts is the introduction of new capital and impact risk vehicles. As we explained at the beginning of this article, the gap is too big between launching an innovative non profit and getting big enough to access foundation grants. This is why I will introduce Bridge Capital (non profit to foundation gap), Step Capital (to support Step-ups to go from few 100k to $20M ish) and Philanthropic Angels (To support social entrepreneurs from day 0)
A lot to write! so be sure to subscribe if you made it here!
We need the equivalent of a Nobel Prize for social entrepreneurs.
So now we know that both good and evil entrepreneurs exist, we also know that entrepreneurs can move freely on the entrepreneurial spectrum based on their choices.
As our society perceives the richest people as the most “successful” we will also need to celebrate social entrepreneurs a lot more as a model to follow if we want to end up with a more balanced society.
For example, when attempting to measure Wikipedia’s economic value it would be around $30b with trillions of indirect impact difficult to measure while its founders are only worth $1M (Jimmy Wales and Larry Sanger).
Frederick Banting discovered the insulin nearly 100 years ago, having watched countless people dying from type 1 diabetes before its discovery. Banting said: “Insulin does not belong to me, it belongs to the world,” and sold the insulin patent to the university for $1. Today the insulin market is a $20.8b one and Frederick descendant could have own a big chunk of that at even a higher valuation if he had taken a pure capitalistic approach, who knows of him today?
Finally even if It is hard to measure; there is little doubt that the controversial website https://sci-hub.tw used by thousands of researchers has a huge academic and therefore economic impact too while its founder risked years of jail to launch it!
If thousands of people can give trillions of dollars of values to the world without expecting to capture wealth the least we can do is celebrating them to inspire the next generation and unleash amazing impact!
In Conclusion — Lessons learned
- Accepting social entrepreneurs implies to accept entrepreneurship as a spectrum with the existence of capital(ists) entrepreneurs and social(ists) entrepreneurs each having different motivations. But at the end of the day with positive impact (one short term the other long terms)
- We need to celebrate entrepreneurs who built great impact
- We need to increase the number of philanthropic activities in a time when capitalism is functioning well and when the wealth gap keeps increasing. We could suggest a dynamic ratio for endowment funds versus a static one of 5% in the USA. This ratio could be re-evaluated every year based on the market performance, to redistribute more when capitalism is working well.
- We need to introduce new financial vehicle to support social entrepreneurs. These tools will be symetrical to what existis for capitalist entrepreneurs leading to a clear path more adapted for social impact. Such ideas are -> philantropic angels, step capital / venture debt (introducing the concept of stepups in my next post) etc…
- We tend to celebrate those who made a lot of money for one main reason: In a capitalist world, money is the equivalent of food; we need it to live; therefore we seek it; it fascinates most of us. In this abstraction we built as mankind (c.f. Sapiens) social entrepreneurs are perceived as having higher moral values, but they offer a less attractive model that is made of sacrifices and austerity (less food). They can’t give us well-paid jobs or investment while those who have so much money have power and fascinates us with their ”success”. But at end of the day both types of succesful entrepreneurs only care about the impact they are building; money is just a side effect of that passion. What we perceive as good or evil is just an illusion due to our current economic model. We need to compensate that entrepreneurial distortion by supporting and celebrating entrepreneurs who succeeded on the other side of the entrepreneurial spectrum.
Bibliography
Noam Wasserman (The founder’s dilemma) / Muhammad Yunus (A world of three zeros) / Steve blank (4 types of entrepreneurs) / Edith Penrose (The theory of the Growth of the Firm) / Richard Cantillon (An essay on economic theory) / Baumol, Schram, Litan Good Capitalism Bad Capitalism, Adam Smith (The Theory of Moral Sentiments)
Special Thanks
For challenging questions / feedbacks to Wayne Lifshitz, Mike Ducker and Tanner Taddeo.
I would also like to thank Professor Clayton Christensen who passed away during the redaction of this blog post. Professor Christensen gladly met me and my co-founder at HBS Campus a couple of years ago when researching corporate innovation. He greatly influenced me to study entrepreneurship through models instead of annectods, this post is no exception. The few great people I had the chance to meet all taught me to consider each individual as important as the next one, Professor Christensen and his family was no exception. May he rest in peace.
