Last week's lecture at the MIT Sloan School marked a significant change in my thinking about social entrepreneurship. I continue to believe that the word "social" and its normative connotations confuse the matter. Which has the greater social benefit:
- A non-profit feeding 10,000 children in Africa
- A company that creates 29,000 jobs
- A for-profit that sells a device that reduces AIDS transmission for 7.5 million people per year
All three of the organizations provide significant social benefit and the last two are for-profit. One should pursue social entrepreneurship only if it has an economic benefit. Otherwise, one should do traditional for-profit entrepreneurship. In the end, it is achieving the objective that benefits the customer and society and not the business model--social or for-profit entrepreneurship--that is important.
To understand social entrepreneurship, portfolio theory helps. An investor has two choices:
- Make an investment in a for-profit company at a market rate of return and make a separate donation for a "social" purpose from the proceeds of the return, or
- Invest in a social entrepreneurship venture, receive a below market return because the investor knowingly transfers the additional return available to a recipient to benefit them (the "donation") through lower cost, greater features, etc. and effectively maximizes the value creation (the "social" benefit)
The question is why would someone opt for the second alternative, social entrepreneurship? The only rational reason for the investor to opt for social entrepreneurship is that there is greater efficiency in the "donation" through economies of scale, better management, additional services, etc. Otherwise the investor would just make the donation themselves. For example, OLPC provides a wide range of project services at nominal charge or for free that the investor could not duplicate by merely donating laptops.
In summary, the economics and efficiency of the venture determine whether social entrepreneurship is the best alternative. Otherwise the investor could create the same "social" benefits through a direct donation.