Starting Up: Becoming a Social Entrepreneur

From smSmallBiz

When Derek Ellerman and Katherine Chon entered their business idea into Brown University's annual entrepreneurship competition in 2002, they knew winning would be a stretch. After all, their idea called the Polaris Project started out as a web portal providing information and resources on human trafficking — or, in other words, a nonprofit.

However, Ellerman and Chon (who wound up in second place in that competition) found that starting a nonprofit and for-profit business is pretty similar: An idea had better be innovative and entrepreneurs are still expected to do their homework. For Ellerman and Chon, that included writing a business plan and checking out the competition, among other things. "We felt, based on looking at the existing organizations, none took the approach we wanted to take," says Ellerman.

Their idea: Make the Polaris Project indispensable so it's in a better position to compete for federal funding. To do so, Ellerman and Chon formed partnerships with metropolitan police forces across the country and started a national 24-hour hotline. Based in Washington, D.C., Polaris also advocates for stronger antitrafficking legislation, promoting the criminalization of those responsible for human trafficking rather than those being trafficked. The idea, Ellerman says, is to make the trade in humans so risky that the industry will cease to exist. "We wanted to put people on the ground and link that to long-term social change," he says.

Ellerman and Chon have plenty of company. Interest in social entrepreneurship, which is sometimes defined as applying business strategies to solving social ills, has been steadily rising in recent years. For example, a number of universities now host social entrepreneurship business competitions while many others offer courses. Prominent institutions including Harvard, Stanford, Duke, Columbia and Oxford have even established centers for social entrepreneurship.

If you're an entrepreneur with the commitment, passion and vision to tackle a large-scale social problem, social entrepreneurship might be for you. It's best to get a better picture of what a social venture is before you start your business plan. Here's a primer:

About Social Entrepreneurship

Social entrepreneurship is commonly described as having more than one bottom line or as many as three. For example, in addition to financial performance, a firm's environmental and social effects are also measured. To put it simply, for these entrepreneurs, it's not just about the money.

"Most [social entrepreneurs] don't say 'I want to be a social entrepreneur,'"says Bruce Lowry of the Skoll Foundation in Palo Alto, Calif., which invests in social enterprises. In the past, Lowry notes that social entrepreneurship just sort of happened. A doctor or some other nonbusiness person would work in the field, take note of an area that needed improvement and fix it. They were effectively accidental entrepreneurs, says Lowry.

However, as social entrepreneurship grows up, so too does its definition. As the name indicates, a social venture, which can either be for-profit or nonprofit, combines a social purpose with an entrepreneurial activity such as providing a product or service. Greg Dees, a social entrepreneurship professor at Duke University's Fuqua School of Business in Durham, N.C., boils it down to two schools of thought: social innovation and social enterprise.

Social Innovation

These social entrepreneurs are considered to be innovators, not necessarily business people, Dees says. They're interested in reforming or revolutionizing some sort of pattern of production or service. He points to Wendy Kopp, founder of Teach for America, and Millard Fuller, co-founder of Habitat for Humanity International — both of whom were honored as social entrepreneurs — as examples of social innovators.

Innovators typically create nonprofits with unique approaches that can help them better secure funding from individuals, corporations, community groups and the government. As such, they don't operate as businesses in the traditional sense, Dees says.

Lowry from Skoll says these "social entrepreneurs don't want to give a man a fish or even teach a man to fish. They want to change the fishing industry." To be a social entrepreneur, "you have to fundamentally change or eliminate a problem," he says.

Social Enterprise

Enterprise entrepreneurs account for the other side of the social entrepreneurship coin. To avoid the constant search for funding that nonprofits must bear, many businesses "are market-based and use business methods for providing services or tackling a problem," Dees says. In this respect, these ventures function more like traditional enterprises than their innovator counterparts, he says.

While socially innovative ventures typically operate as nonprofits, social enterprises can be either nonprofit or for-profit. Also, innovators tend to use their organizations as vehicles for changing public policy while enterprise entrepreneurs influence markets and bring about changes via business initiatives.

Dees notes that Mohammed Yunus, the founder of the Grameen Bank, a microfinance lender and community development bank in Bangladesh, is a good example of an enterprise entrepreneur, as the bank operates as a for-profit entity owned by its borrowers. The Grameen Bank started as a for-profit entity in large part because nonprofits were looking for other sources of income. "He saw [this type of ownership] as a potential solution," Dees says. And in 2006, Yunus and the Grameen Bank won the Nobel Peace Prize.

Other recent Starting Up columns:

• Starting Up: Protecting Your Products

• Starting Up: Launching in Tough Times

("Starting Up," a weekly column written by Diana Ransom for smSmallBiz.com, follows entrepreneurs through the early stages of launching a business. Write to her at dransom@smartmoney.com .)