As the first Internet stock bubble neared its popping point in 1999, IBM chief executive Lou Gerstner famously dismissed the dot-com start-ups of his day as “fireflies before the storm—all stirred up, throwing off sparks.” The Internet would truly achieve its disruptive potential, Gerstner argued, when thousands of big institutions around the world started using the new communication and technology platform to transform themselves. He was right. Although many of the dot-com players did not survive the 2000 market crash in technology stocks, they were indeed harbingers of a coming business revolution.

Nearly 15 years later, we see a new set of fireflies before a different storm. This time, an explosion of creativity in social entrepreneurship has unfolded against the backdrop of a crisis in global capitalism. Barely half of Americans polled in 2010 by GlobeScan said they believed in the free-market system, down from 80 percent in 2002. A large majority had lost trust in government. The most recent Edelman Trust Barometer found that trust in business has been below 50 percent for 8 of the past 12 years. Throughout Europe, only small minorities said they believed in free-market capitalism.

Meanwhile, social entrepreneurs are developing innovative business models that blend traditional capitalism with solutions that address the long-term needs of our planet. They are tackling chronic social problems, ranging from healthcare delivery in sub-Saharan Africa to agricultural transformation in East Asia and public-school funding in the United States. Social entrepreneurs are working in close collaboration with local communities, incubating groundbreaking (and often lifesaving) innovations; modeling synergistic partnerships with governments, companies, and traditional charities; and building business models that deploy technology and enable networking to create wins for investors and clients alike. “Social entrepreneurs are mad scientists in the lab,” says Pamela Hartigan, director of the Skoll Centre for Social Entrepreneurship at Oxford University. “They’re harbingers of new ways of doing business.”

We believe this collaborative approach offers intriguing hints about how enterprises of all sizes can deliver value for themselves and society. Below we suggest four ways in which social entrepreneurs are showing the way forward.

Using profit to fund purpose

Many of today’s leading social entrepreneurs have created organizations that are neither businesses nor charities, but rather hybrid entities that generate revenue in pursuit of social goals. While not entirely new (the Girl Scouts have been selling cookies for many years), this desire to blend purpose with profit has more recently been formalized in structures such as the US “benefit corporation” (B Corp), a corporate entity legally required to create benefit for society as well as its shareholders.

While B Corps are still rare, many nonprofit organizations generate revenue to advance the parent organization’s social goals. VisionSpring, for example, is a social venture that provides eye tests and glasses to lower-income customers in more than 20 countries, including Bangladesh, El Salvador, India, and South Africa. Initially, VisionSpring distributed its eyeglasses through a dedicated sales force of microentrepreneurs. Like many business owners before him, founder Jordan Kassalow soon learned that pushing a limited range of products through a single sales channel was a tough way to make a living. “There wasn’t enough money coming in to support our operations,” he says. “We realized we could either be a really nice, perpetually subsidized nongovernmental organization, or—better yet—change our business model so we wouldn’t need subsidies.”

Today VisionSpring operates vision stores that generate income via programs in which higher profit margins on more expensive glasses subsidize basic eyewear for the poorest customers. Kassalow also distributes eyeglasses and vision testing through large organizations like BRAC, a philanthropy in Bangladesh with a huge existing network for distributing healthcare services. VisionSpring calculates that one pair of its glasses increases the average recipient’s labor productivity by 35 percent, which works out to $216 in additional income over two years—a 20 percent rise. Kassalow plans to continue operating on a nonprofit basis while working toward profitability in every country where VisionSpring operates. (All profits are poured back into the organization.) His El Salvador unit is already profitable, and he expects VisionSpring’s India operations to achieve profitability by 2015.

Kassalow’s blended approach to value creation is increasingly common. Living Goods, for example, is a US-based nonprofit that sells essential products such as fortified foods, pharmaceuticals, and high-efficiency cookstoves through an Avon-like network of microfranchisees in Uganda. According to founder Chuck Slaughter, this model provides a modest income to the franchisees while helping to fund his operating costs. “Avon has five million agents,” he says. “My thought was if you can make that kind of money selling discretionary stuff, imagine what you can do selling absolutely essential, life-changing goods.”

Similarly, Riders for Health is a UK-based organization that sells logistical services to health ministries in seven African countries. It runs a fleet of some 1,500 vehicles that deliver medical services to between 11 million and 12 million rural Africans. The organization funds its operating expenses in part by charging local health ministries a cost per kilometer that covers fuel, maintenance, replacement parts, and logistical costs. Originally founded to service health-ministry motorcycles in Lesotho, Riders for Health now operates in several African countries and has added a slew of logistical services to its product mix. The organization maintains ambulances and hospital generators, transports medical samples from rural clinics to labs for analysis, and manages compliance programs for patients taking medication. “We don’t charge profit of any kind,” says cofounder Andrea Coleman. “But from the beginning, our mission has been to earn as much money as possible from different income streams.”

Delivering individualized products that marry need and want

Successful social ventures leverage their small scale and intense customer focus to create products and distribution models that precisely match the needs and desires of the communities they serve. In this sense they are modeling a much broader economic trend. In a 2010 McKinsey Quarterly article, Shoshana Zuboff argued that the capitalist mode of production was going through a historic transition from mass consumption to the wants of individuals, a phenomenon that she called “distributed capitalism.” Obvious examples include various personalized shopping experiences enabled by interactive technology, also known as mass customization.

While we often associate distributed capitalism with digitized consumer transactions, the concept has broader application in the world of social entrepreneurship. Caerus Associates, for example, is a small consultancy that uses a combination of big-data analytics and local community knowledge to assess development trends, often in societies suffering from violent conflict. In an article that appeared last year in McKinsey’s special volume on social innovation, Caerus founder David Kilcullen explained how his social venture advises governments, corporations, and local communities on what he calls “designing for development.” The main idea here is that development programs must be designed with input from local actors because they call the shots on the ground.

Education delivery is another area where we can see the principles of distributed capitalism at work. In Bangladesh, a social entrepreneur named Mohammed Rezwan operates a fleet of solar-powered floating schools that provide mobile education to rural schoolchildren who are often isolated during the monsoon floods. Rather than building a school and asking children to show up, Rezwan brings school to the children, when and where they need it. Similarly, Pakistan’s Pehli Kiran School System is a network of schools for the children of impoverished migrant workers living in illegal settlements, or katchi abadis. Local authorities frequently raid and dismantle these settlements, forcing the families to move. Pehli Kiran schools move right along with them, with the goal of ensuring that students can continue their education no matter what happens to their homes.

Or consider how two social entrepreneurs have managed to customize the delivery of agricultural-development services in rural Myanmar. Jim Taylor and his partner Debbie Aung Din operate Proximity Designs, a social venture that develops innovative, low-cost products designed to raise agricultural productivity. Proximity Designs employs ethnographers and product designers who work closely with subsistence farmers in the countryside to develop products like solar-lighting systems and foot-operated irrigation pumps.

Proximity Designs funds its operations in part by selling the products through a network of for-profit agricultural supply dealers in small towns in Myanmar. To ensure that farmers can afford to buy its goods, Proximity Designs also developed a financing program that advances small loans at modest rates. “We look through the lens of what impact we can have,” says Taylor. “One farmer I met had piglets that were like children—they wouldn’t sleep at night unless the lights were on. He used to stay up all night with a lit candle because he was worried about burning the house down. Now that the farmer has our solar lights; the pigs are happy and he gets to sleep.”

It would be difficult to gather such granular insight from a product design lab in, say, California. By virtue of their small size and engagement with the communities they serve, social ventures like Proximity Designs are well positioned to deliver products that meet both the needs and the wants of their clients.

Crowdsourcing the solution

In a 2008 article, communications scholar Daren C. Brabham defined crowdsourcing as “an online, distributed problem-solving and production model.” Today we see crowdsourcing applications in many different realms, from open-source software development to financial-prediction markets and funding for creative projects through Kickstarter and similar sites. Crowdsourcing has been a particular boon to social entrepreneurs, who can use it to create disproportionate impact with modest resources.

Charles Best is the founder and CEO of DonorsChoose.org, a Web-based platform that raises money to fund class projects in American public schools. Individual donors contribute an average of $50 apiece to projects that typically cost about $500. DonorsChoose.org vets every project, pays all project costs directly, and makes sure that the teachers write thank-you letters to every donor. Best covers his operating costs by charging each donor an optional 15 percent administrative fee. “We’re one of the few charities that doesn’t go hat in hand seeking donations,” he says.

Best crowdsources quality control as well as fund-raising. He used to hire college students to vet all the projects, which he says was costly and often ineffective. Today he uses a network of trusted teachers who have already received DonorsChoose grants and volunteer their time to make sure that all new projects deserve funding. This year, DonorsChoose expects to receive at least 150,000 project submissions from public schools all over the United States, and it plans to disburse about $50 million in grants, 85 percent of them to teachers working in high-poverty schools. Best’s organization has been entirely self-sustaining since 2010. Since inception, a total of 145,000 teachers at nearly half the public schools in America have received grants through the site.

In recent years, we’ve also seen a boom in prize competitions that crowdsource solutions to difficult social problems. Information technology and social media now enable cheap and easy collaboration. For social ventures, this dramatically expands the pool of potential problem solvers and lowers the cost of developing solutions. Ashoka’s Changemakers initiative, for instance, is an idea factory that encourages social entrepreneurs to develop concepts that transcend the competition itself, essentially building a marketplace for innovation in an issue area in just a few months. Changemakers judges are also potential investors. By requiring participants to post their ideas and selecting a relatively large pool of finalists, Changemakers and similar competitions can help match competitors to new funding.

Working themselves out of a job

One important test of any social venture is whether it can create sustainable impact beyond its own projects. Some of today’s most farsighted social entrepreneurs have created business models that allow them to effectively work themselves out of a job by creating sustainable, lasting change in the communities that they serve.

I-DEV International, for example, is a New York–based impact investment firm that’s in the business of what it calls “market-based sustainable development.” In Peru, I-DEV helped impoverished farmers build an international business out of tara, a native tree species whose fruit had historically been consumed locally for medicinal purposes. However, plant researchers had developed new applications for tara in the global food, pharmaceutical, leather, and pet-food industries. I-DEV helped some 200 Peruvian farmers to organize a farming co-op that today is the largest and most successful supplier of unprocessed tara in Peru.

The co-op generates nearly $4 million a year in revenue for its members. I-DEV is currently gathering investors to help the farmers build a tara processing plant. Managing director Jason Spindler says the deal will be structured as a joint venture in which the farmers take the majority stake while I-DEV and equity participants are minority shareholders. “Nothing we do is for charity,” he says.

Other social ventures scale innovation by partnering with local governments. Ned Breslin is the CEO of  Water For People, an international nonprofit that works with local communities to install water pipes, latrines, and other sanitation infrastructure in Africa, Latin America, and South Asia. His goal is to ensure that nobody in a district where Water for People works will ever need sanitation assistance from another international development organization.

To do that, Water for People mobilizes local authorities from the community level all the way up to the national government. It insists that all levels of government invest their own money alongside Water for People. The local communities are also asked to participate as investors, and their contributions must take the form of cash rather than sweat equity. Breslin maintains a low public profile for his organization, with the goal of ensuring that communities and local governments get the credit for improving sanitation and therefore feel ownership in the programs. “What we’re really challenging is the endless project-by-project approach of philanthropy,” he says. “The point of our investment is not to do another project. It’s to get the water flowing at scale so they never need another project.”

Social entrepreneurs and capitalism

Despite their early successes, social ventures in this new generation are still entrepreneurial start-ups. Some may survive and grow into major organizations. Others may disappear. Regardless of their individual fates, we believe these organizations demonstrate a way forward for the capitalist mode of production, one in which economic and social value creation are no longer seen as antithetical.

Social entrepreneurs are part of a broader conversation about the relationship between business and society that has been gathering steam since the Great Recession. In a recent Harvard Business Review article, McKinsey global managing director Dominic Barton argued that global capitalism was at a turning point. “We can reform capitalism, or we can let capitalism be reformed for us, through political measures and the pressures of an angry public,” he writes. Barton suggests that capitalism should return to the values of its founding philosopher Adam Smith, who believed that business and society were profoundly interdependent.

Similarly, Harvard Business School professor Michael Porter argues that capitalism has betrayed its promise by focusing on the narrow equation of value with short-term economic returns. Porter urges companies to think in terms of “shared value,” which involves generating economic value while at the same time creating value for society by addressing its needs and challenges.

Meanwhile, the author and consultant Dov Seidman makes a business case for ethical capitalism. Globalization, he argues, has made it increasingly difficult for companies to offer unique value propositions based on their products and services alone. At the same time, the ubiquity of electronic communication and the rise of social media have created a transparent business world in which bad behavior is more difficult to hide than ever before. As a result, ethical behavior has become a point of competitive differentiation. Companies that “outbehave” their competitors will eventually outperform them as well.

We can cite many examples of large organizations that are already putting these principles into practice. Elsewhere in this volume, leaders from The Coca-Cola Company, Hindustan Unilever, and Royal DSM explain how their companies blend profit and social purpose by deploying advanced supply-chain technologies that deliver lifesaving goods and services to some of the world’s poorest people. Meanwhile, the social ventures that we have profiled in this essay are testing many ideas about the proper relationship between business and society, some of which may eventually scale up and become standard practice for organizations of all sizes. While the solutions are diverse, most are based on the working assumption that profit and purpose need not conflict.

Social ventures that create new value chains while generating profit in pursuit of social goals are a direct challenge to Milton Friedman’s dictum that the social purpose of a business is to generate profit for its shareholders. With public cynicism about business at record levels, we may well see more organizations following their lead.

The article originally appeared in McKinsey's online publication Voices on Society

The article was co-authored by Danielle Sachs, Director of Social Impact for McKinsey & Company, and Richard McGill Murphy, the managing editor of Voices on Society a print and online publication from McKinsey & Company. 

Opinions voiced by Global Minds do not necessarily reflect the opinions of The Global Journal.

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