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2020 Social Sector Innovation.

I teach entrepreneurship and innovation at Stanford and I serve as an Executive Mentor at Miller Center for Social Entrepreneurship where we run the leading accelerator program for social ventures. So I’ve sort of got one foot in two camps — one with entrepreneurs who dream of billion dollar IPOs, and one with entrepreneurs whose dreams are of poverty alleviation, climate change, and social justice.

Over the next few minutes, I’d like to take you on a little personal journey to tell the story about how I arrived at this particular intersection, and perhaps to give you some glimpses into the future of innovation in the social sector.

About ten years ago I got interested in the whole topic of how we can do better at achieving impact on social issues. I had run a couple venture-funded software companies, and I had run two 501(c)3 nonprofit organizations, and so I’d become aware of how different the nonprofit world was from the commercial world. Honestly, I found the nonprofit world to be very frustrating; I became convinced that the traditional charity model was broken.

I also became aware of just how huge the problems of the planet are. Climate change, education, women’s economic empowerment, poverty, food. And the more I learned the more I was convinced that the traditional charity model was inadequate for the magnitude of some of these issues.

So if the traditional charity model was inadequate, then how could we fix that? I mean here we are, in the heart of Silicon Valley, we’re supposed to be all about innovation. If we can figure out how to put a billion transistors on a single chip, can’t we figure out a way to feed the hungry?

The traditional charity model, of course, goes back a long way. The word “Charity” itself is rooted in the word “Christian”, and for the Puritans who in the 1600’s first settled what was to become the United States, charity was an important component to their belief set.

But if you look further into why giving to charity was an important part of the Puritan’s belief set, it was really to assuage their guilt. You see the Puritans were aggressive capitalists who came here to make a lot of money and build a new nation. But they were also Calvinists who were taught by the church that self-interest would send you to hell. So how do you reconcile being a capitalist and being told that self-interest would send you to hell? By giving to charity every Sunday.

You could exploit people all week long, as long as you gave 10% to charity!

And I felt that that’s sort of what charity had become in 21st century America.

We live extravagant lives around having money and buying things, and we occasionally toss a hundred bucks to feed orphans in Africa so that we can feel virtuous about what Good Samaritans we are.

We consume, consume, consume, creating huge plastics waste and landfill problems, but as long as we roll our recycling bin out to the curb every week we can congratulate ourselves for caring about the earth.

When, confronted with the starving child, we are told:
“For the price of a couple of cappuccinos, you can save her life!”. The true message is: “For the price of a couple of cappuccinos, you can continue in your ignorant and pleasurable life without feeling any guilt.”

-Slavoj Zizek (2010). Living in the End Times.

I just wasn’t comfortable that the 21st century American idea of charity was actually making a dent in the very real social problems we faced.

I also became aware of how traditional charity focused on temporary relief of symptoms rather than looking for sustainable solutions to systemic problems. Shipping a few truckloads of rice into a famine-stricken region is great, but what would really great would be to improve crop yields so that famine doesn’t strike again.

But perhaps the biggest turning point for me was reading the book “Uncharitable”, by Dan Pollotta. This one book, probably more than anything else, changed my thinking. He talks about how that same Puritan view of the world — which set the moral trajectory of the United States — created a bifurcation in America between the for-profit world and the charity world. This Puritan moral code that somehow said that it was wrong to make money from helping people.

But why should it be scandalous for the CEO of a nonprofit to make the market rate salary she would earn as the CEO of a for-profit company?

Why do we allow people to make huge profits doing any number of things that will hurt the poor, but we want to crucify anyone who wants to make money helping them?

-Dan Pollotta

Pollotta discusses the data about salaries for MBA’s, ten years after graduation. The average Stanford MBA working in the private sector makes $400,000/year, ten years after graduation. The average CEO of a hunger charity makes $84,000/year. So there’s no market incentive for the best-and-the-brightest to go into the business of helping people.

Also, as a business guy, I realized how risk-constrained nonprofit organizations are. A movie studio can loose $100M on a movie that flops, and it’s a legal tax write-off, but if a nonprofit tries something innovative and loses $100K, there’s an Attorney General investigation. Without the ability to take risk, there is no innovation. And so, ipso facto, the nonprofit sector was completely devoid of innovation.

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Without risk there is no innovation.

How the hell are we going to solve the big social problems of the planet if innovation is off-limits?

And then I slowly I became aware that there were some innovative examples of what would eventually be called “social enterprises” — sort of hybrid ventures that were run like a real company, but with a social mission.

The most famous social entrepreneur, before any of us had heard the term “social entrepreneur”, was Mohammed Yunas and the Grameen Bank. He was able to dramatically improve the livelihoods of the Bangladeshi poor not by giving them charitable hand-outs but by giving them micro-loans they had to pay back. He built Grameen Bank into a profitable business and lifted hundreds of thousands of people out of poverty by giving them the access to credit that allowed them to build businesses for themselves.

Around the same time, a business school professor named CK Prahalad wrote a book named , suggesting that there were new entrepreneurial opportunities to be found in viewing the 3 billion poorest people as a ready market rather than a burden.

Now that’s a pretty innovative idea.

Then one day a friend introduced me to the retiring Dean of the Santa Clara University business school, who was founding what is now the Miller Center for Social Entrepreneurship. Located at Santa Clara University, the idea of the the new center was to harness the power at the intersection of Santa Clara’s highly-ranked business and engineering schools, the Silicon Valley expertise of its network, and the University’s strong Jesuit commitment to helping humanity. The idea was to create an accelerator program for social enterprises.

When I first got involved, we were running about 17 social ventures a year through the accelerator program. We’re now approaching 200 social ventures a year.

Just to give you a flavor for the social enterprises that go through our program, here are three quick examples:

Solar Sister: This enterprise recruits, trains and supports new women entrepreneurs in Africa, equipping them to create a livelihood selling durable, affordable solar-powered products and clean stoves. The impact they deliver has an economic development component as well as an environmental component.

Potential Energy: A new stove, developed at UC Berkeley and sold in Sudan, has impacted the lives of the people of Sudan by reducing exposure to toxic smoke and requiring half the firewood of an open fire.

Tugende: In East Africa, many taxis are motorcycles. And drivers, without access to credit to buy motorcycles, have to rent them by the day which leaves them a slim livelihood. Tugende finances the purchase for drivers and other entrepreneurs in East Africa.

In total, we’ve had over 900 social enterprises go through the Miller Center accelerator so far, and they’ve raised over $1 Billion in capital, before and after the program. Our graduates are operating in countries all over the world, using the power of markets to effect social change — which I have come to believe is the high-leverage model for achieving the change we need to make the world a more just, equitable, and sustainable place.

So that brings us to today, and my standing here in front of you. But now what? There’s a lot of innovation going on today, all over the globe, as we enter what the World Economic Forum is calling the 4th Industrial Revolution. Pretty much every sector in pretty much every corner of the globe is seeing tremendous innovation and disruption. So what does the future of social innovation look like?

Well, let me me give you four trends in the social sector that I think are worth paying attention to:

Open Innovation: I recently talked with Jim Thompson, Director of Innovation at the US State Department. Now, you would think that federal bureaucracies would be the least-innovative organizations possible, but Jim told me about Fish Hackathon, put together by the State Department, to get coders all over the world to work on solutions to preserve the oceans and fisheries. I think we’re seeing lots of examples of open innovation, as organizations of all kinds are shifting from thinking of innovation as a secret process to be protected, to realizing the power of open innovation.

Entrepreneurship as a tool for social good. There’s a growing awareness that when you look at all the things we care about in the developing world — hunger, poverty, education, women’s rights — all of those things improve when we can foster entrepreneurship. Entrepreneurship creates jobs, it creates livelihoods, it creates purpose, and everything else tends to rise with it. One example of this in action is the SEED program at Stanford, but my favorite example is Five One Labs, a startup incubator being run for refugee populations in Northern Iraq. Check them out.

Innovation frameworks used to uncover new solutions. Innovation frameworks such as Design Thinking and Human Centered Design are being used today by NGO’s and Social Enterprises all over the world, to create innovative new impact models. I recently interviewed David Milestone, Director of Innovation for USAID, and he told me about not only are they using Design Thinking internally at USAID, they created Design for Health, an online toolkit for physicians and researchers to use Design Thinking tools to develop innovative new approaches to healthcare.

Capital Innovation: If there’s one thing that has held back the work of nonprofit organizations, it’s been access to capital. Charitable giving in this country has been stuck at about 2% of GDP for the past half century. So that’s the total capital pool available to nonprofits. It’s hard to get a bank loan, and impossible to raise venture capital for a nonprofit or a social enterprise. Meanwhile, for-profit businesses have access to the trillion dollar capital markets — they can raise venture funding, issue stock, issue bonds, and leverage all the other ways to tap the capital markets.

But suddenly we are seeing capital innovation that is changing that, opening-up access to capital for social ventures. We’re seeing VC’s putting together Impact Funds specifically to invest in social enterprises, we’re seeing mainstream financial services firms like Goldman Sachs putting together new asset classes such as Social Impact Bonds, and we’re seeing innovative new investment structures such as the Demand Dividend, giving traditional investment funds a structure that makes sense for investing in ventures where a “conventional” exit (IPO or M&A) isn’t going to happen.

This is a game-changer, folks. Giving social enterprises access to capital markets will allow impact innovations to scale like never before.

So those are my thoughts on social entrepreneurship, and of current trends in social innovation.

As we sit here in April of 2020, the COVID-19 pandemic is dominating the headlines, and our lives. We’re all wondering how this will all turn out. I don’t know for sure, but I do know that entrepreneurs and innovators will be part of the solution.

And I know that social ventures, using the power of markets and innovation frameworks will continue to change the world. Thanks very much.

Video of the webinar.

Written by

I’m a Silicon Valley guy. I teach entrepreneurship at Stanford, coach startup CEO’s at Miller Center, and run the 4thly Startup Accelerator. Also, I love tacos.

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