I recently read a blog post discussing the dilemma social entrepreneurs face when deciding on the best organizational structure for their new firms. For example, a nonprofit company can seek donations for a social cause; a for-profit enterprise can raise money with the expectation of a return on investment. In the blog post, the author’s venture launched as a nonprofit entity, and then quickly added a for-profit spin-off to generate capital. There may be other alternatives: strategic partnerships, B Corp certification, legal status as a benefit corporation, or funding through community development financial institutions.
Let’s take a step back to define social entrepreneurism. While there is not an official definition, the term generally describes the intersection between social responsibility and the scalability and sustainability of traditional corporations. Social entrepreneurs have a strong desire for social change, but realize that short-term solutions rarely address deep-seated social problems. Philanthropic structures and nonprofit organizations provide pieces of the puzzle. Within philanthropy, the philosophy is, “Give a man a fish and you feed him for a day,” whereas nonprofits may expand this concept to, “Teach a man to fish and you feed him for a lifetime.” However, there can be more. Carrying this Chinese proverb one step further (according to Fulbright Professor Dayle Smith), the social entrepreneurship philosophy is, “Provide access to capital to create a sustainable fishing business at a fair rate of return and change the world.”
So the challenge becomes ongoing access to capital while simultaneously delivering on a social mission. This can take different forms. Blake Mycoskie created TOMS Shoes to match every purchased pair of shoes with a new pair given to a child in need.TOMS is registered as a private for-profit corporation with nonprofit distributing partners who have on-the-ground capacity for getting shoes to those in need. Ben & Jerry’s, as a B Corp, is a for-profit entity certified by the nonprofit B lab to have met high standards of overall social performance. Patagonia, which registered as California’s first benefit corporation in 2012, is legally required to redefine fiduciary duty to place a high standard on mission-driven impacts in addition to shareholder responsibilities. (Only a handful of states administer this legal corporation status or the similar LLC status referred to as L3C.)
And if there is a preference—or need—to operate as a nonprofit, there may be opportunities to obtain capital through community development financial institutions (CDFIs). These institutions serve as independent funders who provide a financial return to their investors. Forward Community Investments, for example, is a CDFI in Madison that connects “socially-minded investors with carefully-selected nonprofit organizations.”
Additional information can be found at Stanford’s Center for Social Innovation, Duke’s Center for the Advancement of Social Entrepreneurship, Oxford’s Skoll Centre for Social Entrepreneurship, Benefit Corp Information Center, and the Certified B Corporation.