11.    Create a public-private social innovation fund.
A public-private social innovation fund can leverage taxpayer dollars with private funds to make resources available for funding social-entrepreneurial solutions. Creating a fund specifically designated to advance social entrepreneurship would enable government to follow a performance-based model for investment, not unlike venture capital funds, to both seed and scale initiatives. The two related models to follow show how such a fund could work structurally and operationally.

Models:     Small Business Investment Company (SBIC)
                 Venture Philanthropy & Social Venture Capital

Small Business Investment Company (SBIC)
The Small Business Administration (SBA)’s Small Business Investment Company program provides an example of a fund that mixes public and private funding; it exhibits how a public-private social innovation fund might work structurally. The SBIC program seeks to make investment capital available to help start and grow small businesses that are not yet eligible for venture funding. In 2005, the program dedicated more than $23 billion in small business entrepreneurs—with $12 billion of that funding representing private capital. To do this, the SBA selects investment firms that are already skillful at managing funds for a particular audience and offers them a 2 to 1 match for funds privately raised.  Once the investment capital is raised, the firm manages the fund, makes investments, and reports back to the SBA on its progress in reaching specific performance measures including providing a financial return on the SBA’s investment in the fund. 

Venture Philanthropy & Social Venture Capital
In the nonprofit sector, two approaches to funding for-profit and nonprofit social-entrepreneurial initiatives have emerged over the last decade; they show how a public-private social innovation fund might operate. The first approach, known as venture or engaged philanthropy, combines long-term grant making support with management assistance for nonprofit social entrepreneurs. The second, known as social venture capital, makes debt and equity investments to for-profit organizations focused both on social impact and financial return—sometimes called a “double bottom line.” Venture philanthropy and social venture capital borrow heavily from the private sector’s venture-capital practices, where initial investment decisions are typically measured against the organization’s past history, leadership, and a business plan that provides a clear roadmap of the next 3 to 5 years of growth, with clear targets to measure success.  Whether such investments take the form of philanthropy, debt, or equity, they are typically made over as many as 3 to 5 years, with the expectation that if the organization meets its targets, it can expect re-investment for continued growth. The money is completely unrestricted, invested in an overall plan rather than a specific program.

Among the most prominent philanthropy groups operating this way are Ashoka, Atlantic Philanthropies, The Blue Ridge Foundation, Draper Richards Foundation, Echoing Green, Edna McConnell Clark Foundation, Great Bay Foundation, New Profit Inc., Robin Hood Foundation, Roberts Enterprise Development Fund, the Skoll Foundation, Venture Philanthropy Partners, and the Wallace Foundation. Some of the best known social venture capital groups include Acumen Fund, Good Capital, Investors Circle, and the New Schools Venture Fund. (The latter actually provides both grants and investment to nonprofits and for-profits in education.) In just the past 18 months, super-growth funds have emerged that act much like investment banks. Such funds include Growth Philanthropy Network, Nonprofit Finance Fund Capital Partners, and Sea Change Capital, which was started by former Goldman Sachs executives.

10.    Seek partnerships with foundations and corporations to support social-entrepreneurial endeavors. 
Government can leverage public dollars by partnering with foundations and corporations to support social-entrepreneurial initiatives. Seeking partnerships with foundations and corporations can allow government to test new ideas within a constrained resource environment, while providing foundations and corporations access to entire systems, such as education. Such partnerships would also aid in raising awareness of a specific social problem, while engaging the expertise of stakeholders in the nonprofit and private sectors. Often, such projects are the only way to embark on new, resource-intensive initiatives, given the limits of existing government resources.

Model: Wallace Foundation partnership with Chicago and New York City
The cities of Chicago and New York have recently committed to ensuring that as many school-age children as possible—especially those most in need—have access to programs offering before- and after-school learning and enrichment opportunities. City agencies in both cities have partnered with the Wallace Foundation for support in planning and funding the development of city-wide networks of out-of-school-time programming. In Chicago, Wallace is working with AfterSchool Matters (ASM), which was created by the city to expand out-of-school-time programming. In New York City, Wallace is working with the Department of Youth & Community Development, which created a new funding stream that provides resources to programs that demonstrate adherence to quality standards and tailors its offerings to the needs of particular age groups.

In both cases, Wallace has provided significant funding to develop business plans as a means to engage public and private leadership, gather necessary facts, and map out the actions necessary to achieve sustained, citywide impact. Based on its assessment of the quality and feasibility of business plans, the foundation has made substantial multi-year investments to build data tracking systems, develop quality standards, and provide additional operational support.  All of these investments would have been difficult to fund with government resources, given so many competing priorities.

9.    Open earmarked funds to competitive processes.
The federal government’s fiscal year 2008 spending bills included $18.3 billion worth of earmarks. This controversial federal budgeting practice designates funds for a wide variety of specific projects and initiatives—including some aimed at addressing social problems—without employing competitive processes to guide decision-making. Often, these earmarks are given to one entity for decades.  By opening up earmarked funds to competitive processes administered by relevant government agencies, government could use these existing resources to seek out innovative, effective, and sustainable programs that government may not currently be aware of. This would also help to ensure that tax dollars are spent wisely.
 
Model: U.S. Dept. of Education’s Office of Special Education Programs 2007 Funding
In 2007, the Department of Education’s Office of Special Education Programs (OSEP) received $12 million in federal funding for special education, which had previously been allocated to one organization, through earmarks, for more than 15 years. OSEP opened up the funding to a competitive process, which enabled the agency to seek out the best solution based on the original purpose of the earmark: to make printed materials available to students with print disabilities—including blindness, low vision, severe dyslexia, and mobility impairment that prevents reading a traditional printed book. As Lou Danielson, a former OSEP division director, explains, “Lack of competition tends to stunt innovation and growth, particularly for the people who get the funding for long periods of time. Ultimately, it serves no one well.”

OSEP issued a call for proposals and administered a peer-review process that resulted in a 5-year, $32 million award to Benetech’s Bookshare.org, an organization OSEP had only recently become aware of. Bookshare.org was already the world’s largest accessible library of scanned books and periodicals that can be downloaded to be read as Braille, large print, or synthetic speech. OSEP funding has enabled Bookshare.org to build and improve upon a successful model and greatly increase its impact with students in elementary, secondary, and post-secondary schools. The organization is in the process of adding 100,000 new educational materials to its library. It is also coordinating with state education agencies, schools, and publishers to identify new content, and to provide that content at lower costs, for qualified disabled students.

8.    Allocate a percentage of agency budgets toward encouraging innovation.
Reallocating just a small percentage of an agency budget to make room for experimentation can spark enormous social innovation. As Chris Gabrieli, chairman of the education think tank Mass2020, explains: “Think of social entrepreneurship as a way to create an R&D portfolio of innovative solutions to troubling social problems, by intentionally allocating a small portion of already-dedicated public financing for innovative proposals that are very goal-oriented and willing to show transparently how they do what they do. This would be a way to see if they can benefit the whole field, and it would open up a space for social entrepreneurs to operate in sectors that previously have had little room for innovation.”

Model: Charter Schools
One of the most widespread examples to date of government encouragement of social entrepreneurship can be seen in the development of charter school policy—the use of public school financing to encourage the development of new schools that exercise increased autonomy in their programming, in exchange for increased accountability in terms of academic results and fiscal practices. According to Gabrieli, “Charter school policy opened the door for literally hundreds of social entrepreneurs to try their hands at making a difference on the achievement gap. It has created thousands of schools, ranging from extraordinary successes through mediocrity down to abject failures, with experimentation and learning all along the spectrum.” Among the social-entrepreneurial initiatives leading this movement are KIPP schools, Uncommon Schools, and Achievement First—all of which have demonstrated an ability to outperform their traditional public school counterparts in math and reading achievements among the most at-risk students.

States took the first step in enabling this new form of public school that has fostered greater experimentation and innovation. The first state to pass a law to enable the existence of charter schools was Minnesota in 1991. By 2004, 40 states, in addition to the District of Columbia and Puerto Rico, had passed charter school laws, with more than 3,000 schools operating nationwide in 2004–2005, serving over 700,000 students.

7.    Explore tax structures to enable new organizational forms.
In the early twentieth century, Congress created a variety of 501(c) tax categories, enabling the existence of nonprofit organizations exempt from some federal income taxes. The creation of this new organizational form, and the establishment of tax deductions to encourage donations to such organizations, set the stage for the development of a vibrant nonprofit sector, whose workforce now makes up 10.5 percent of U.S. jobs.

Today, as social entrepreneurs demonstrate successful solutions regardless of organizational form, they increasingly blur the lines between the nonprofit and for-profit sectors. New tax structures, leading to possible new organizational forms, could help to encourage social innovation, while lending confidence that could spur greater philanthropic, private, and public investment in the development of sustainable models.

One example is the for-profit organization Outside The Classroom, which seeks to reduce alcohol and drug abuse on college campuses through an innovative Web-based curriculum for college students. While the company has recently begun generating a profit, its start-up phase proved particularly challenging. The organization was started as a nonprofit, but found itself turned down by dozens of grant makers. It then decided to become a for-profit organization and find “patient capital” from socially motivated investors who were willing to wait for profits while the market was developed, or accept below-market returns, in exchange for social impact. A new tax structure—or revisiting of 501(c) guidelines—could make it easier to adopt the core characteristics of social entrepreneurship and support companies like Outside The Classroom, which fit somewhere between traditional nonprofits and traditional businesses.


Model:  North Carolina’s Low-Profit, Limited Liability Company (L3C)
In the 2007 session, North Carolina State Senator Jim Jacumin introduced the “Endangered Manufacturing and Jobs Act,” in an attempt to support North Carolina’s furniture industry, which has suffered in recent years as a result of global competition. A key element of the bill is the creation of a new organizational identity, the Low-Profit Limited Liability Partnership Company (L3C).  L3Cs could generate modest profit, while pursuing charitable or educational aims. The new tax structure would make it much easier for foundations to make use of a little-used but already established vehicle—called Program-Related Investments (PRIs)—to invest in for-profit initiatives aimed at addressing social problems. In the case of North Carolina’s furniture industry, the existence of an L3C structure would greatly simplify the process of accepting philanthropic funds to aid in the purchase and revitalization of the state’s ailing furniture factories.

Robert M. Lang, Jr., chief executive of the Mary Elizabeth & Gordon B. Mannweiler Foundation, which developed the idea for the L3C structure, says that the idea is taking off in other states as well: “Vermont’s House of Representatives has passed a bill that would create the new designation, pending approval by the state senate. Backers are also trying to get legislation passed in Georgia, Michigan, Montana, and North Carolina.” (UPDATE: this legislation has passed in Vermont. Click here to learn more.)

5.    Educate all 3 sectors in social entrepreneurship’s new approach to social problem solving.
Social entrepreneurship provides not only new ways of addressing persistent social problems, but also news ways of thinking about them. Government leaders can play a crucial role in educating the public, private, and nonprofit sectors in how to begin tackling social problem solving from this new, business-oriented perspective that prioritizes cost-effective and results-driven solutions.

Model:  The Phoenix Project   
Leaders of Virginia’s public, private, and nonprofit sectors have joined forces to form the Phoenix Project, a statewide effort to accelerate social entrepreneurship in Virginia as a way of battling poverty and other pressing social challenges. The effort has involved Governor Tim Kaine, former Governor Mark Warner, Lieutenant Governor Bill Bolling, and other elected officials in educating leaders in all three sectors in the new way of thinking that social entrepreneurship brings to social problem solving. The presence of high-level government officials as spokespeople has drawn to the effort private and nonprofit sector CEOs, as well as leaders from 40 Virginia universities, to pursue the Phoenix Project’s four-part strategy: (1) convene statewide discussions to educate and network leaders interested in social entrepreneurship; (2) engage public leaders as guest lecturers in an annual six-week social entrepreneurship academic and experiential program for thirty top undergraduate and graduate students drawn from throughout the Commonwealth; (3) create partnerships between consortia of universities and economically distressed communities to provide the context for launching and refining social enterprise solutions; and (4) forge a statewide agenda for accelerating social entrepreneurship with specific roles for leaders of each sector. According to the Phoenix Project’s Founder Greg Werkheiser, “With the visible involvement of our government leaders, we are creating the conditions necessary to make Virginia a destination for social entrepreneurship and for effective solutions to the problem of poverty.”

Learn more about the Phoenix Project and its approach to spurring social entrepreneurship in Virginia.

3.    Convene the public, private, and nonprofit sectors on critical social issues to advance solutions.
Government has the unique ability to convene the necessary stakeholders in order to address a particular social issue.  By gathering the key players from all sectors, public officials can lead the process of agreeing on the root causes of the social problem, plotting out a course of action for addressing it, and advancing solutions.

Model: The California Rural Economic Health Vitality Project
In 2005, Governor Arnold Schwarzenegger and his cabinet joined the California Center for Regional Leadership in hosting a statewide planning process called the Rural Economic Vitality Project. Through a series of regional and statewide planning meetings, the project brought together the key stakeholders from all three sectors to develop an agenda for spurring economic growth in California’s rural communities. Convening the necessary mix of leaders from all sectors to understand the challenges faced by California’s rural communities and identify actions for addressing them proved to be a major breakthrough. The Governor and the California Center for Regional Leadership were able to develop a Rural and Economic Health Vitality Policy Agenda with specific recommendations that are now being implemented.

4.    Develop awards programs to recognize and reward innovative, effective, and sustainable solutions.
Establishing government award programs to recognize success in social entrepreneurship would identify and support successful approaches. Such support could take the form of publicity, training, networking opportunities, and funding, and it would help to accelerate the progress of social entrepreneurs who are achieving exceptional results. A number of philanthropies, academic institutions, and media organizations—including Ashoka, Echoing Green, Fast Company Magazine, Harvard’s Kennedy School of Government, The Manhattan Institute, Schwab Foundation, Skoll Foundation, and the Social Innovation Forum—are already sponsoring awards programs that could serve as models for government.

Model: Social Innovation Forum
In the nonprofit sector, Root Cause’s Social Innovation Forum, which operates in Boston, provides an example of a competitive selection process that rewards proven solutions by connecting them to resources.  Each year, the Social Innovation Forum partners with local foundations and corporations to identify “Social Innovators” who are demonstrating promising approaches to addressing specific social problems in greater Boston. The organization provides these Social Innovators with strategy consulting, executive coaching from private sector leaders who volunteer their time, and introductions to a local Social Impact Investment Community made up of government leaders, foundations, and individual donors who are willing to offer time, talent, relationships, and money. Since 2003, the organization has identified and directed more than $2 million in resources to innovative, results-oriented organizations working in such areas as domestic violence, workforce development, youth development, and the environment.

1.    Establish institutions that support and promote social entrepreneurship.
The establishment of institutions, such as the Small Business Administration and the Office of Homeland Security, has long served as a key step that public officials can take to commit to and advance a particular issue. New institutions at the city, state, and federal levels would lead the way in creating environments in which social entrepreneurship can thrive. These institutions could also take the form of quasi-public agencies. 

Model: Louisiana’s Office of Social Entrepreneurship
Louisiana’s Office of Social Entrepreneurship has made its mission to “enable citizens and organizations working across sectors to use business principles to build, measure, and scale the most innovative, effective, and sustainable solutions to the social problems facing communities across the state.” It plans to conduct convenings across the state, in partnership with the private and nonprofit sectors, to discuss the root causes of Louisiana’s most pressing social problems and to identify the solutions that have already proven successful. During this ongoing process, the office and its partners will support citizens and organizations by: seeking to improve public policy and remove barriers; recognizing and rewarding successful models; offering training and networking opportunities to social entrepreneurs; and providing access to financial and in-kind resources. The office is also in the early stages of developing a public-private social innovation fund. Louisiana’s Office of Social Entrepreneurship is positioned to be the first of many institutions that support and promote social entrepreneurship.

Learn more about the Louisiana Office of Social Entrepreneurship and view an outline of its mission, strategies, model, and vision.

2.    Allow greater autonomy. Set standards. Publish results.
Granting initiatives working on difficult social problems greater autonomy in how they spend their allotted money can encourage entrepreneurial behavior. At the same time, government can set performance standards and publish results. Such practices will ensure that the necessary work is getting done, while creating space for developing new ways of meeting and even surpassing those results. 

Model: New York City Public Schools’ Children First Initiative
Seeking to give school principals more control over their ability to meet performance standards, New York City Public Schools’ Children First Initiative grants greater autonomy to principals in handling day-to-day issues such as scheduling, hiring, curricula, and professional development. In return for this greater autonomy, schools are held to clear standards of accountability, particularly related to assessments and outcomes in reading and math, and particular school-performance measures, such as attendance and graduation rates. A central part of this reform is the development of public progress reports for every school in the system, based on a variety of measures, in which schools will receive a letter grade of “A” through “F.”

In partnership with government, social entrepreneurs can augment their ability to generate and implement transformative, cost-effective solutions to the most challenging societal problems facing our nation and the world. According to Vanessa Kirsch, president of New Profit Inc. and co-chair of America Forward, “Every day, social entrepreneurs are developing and implementing innovative solutions to meet our country's domestic challenges, and they are achieving greater results with fewer resources. Just as public investment has supported major initiatives in the past, a future president—and other city, state, and federal administrations—can support social entrepreneurs and their effective solutions and, in doing so, effect measurable change in our nation.”

In addition to Louisiana’s Office of Social Entrepreneurship, a number of initiatives focused on collaboration between government and social entrepreneurs have appeared in recent years. In Virginia, the Phoenix Project has partnered with high-level government officials to encourage social-entrepreneurial solutions that will reduce poverty in the state. In Texas, the OneStar Foundation, a quasi-public agency that leads the Corporation for National and Community Service activities in the state, is working in partnership with Texas Governor Rick Perry. OneStar has established a social sector development fund—with funding from the state matched by private funds—that seeks to stimulate social innovation, entrepreneurship, and investment in Texas’ nonprofit sector. Vermont recently passed legislation for a Low-Profit, Limited Liability Partnership Company (L3C), to accommodate social enterprises that blur the lines between the nonprofit and private sectors. The U.S. Department of Agriculture partnered with the Girl Scouts of the USA to train a new generation of leaders in rural communities in social entrepreneurship through the Challenge and Change program. One of the presidential candidates has called for a national Social Entrepreneur Agency. The Center for American Progress has provided thought leadership and recommendations for a White House Office of Social Innovation. New Profit’s America Forward coalition of more than 60 social-entrepreneurial organizations is working to connect social entrepreneurs with policymakers. The Ash Institute for Democratic Governance and Innovation at Harvard University’s John F. Kennedy School of Government will convene a working group of government officials, social entrepreneurs, and other thought leaders to examine and seek to change the way America’s communities approach social problem solving. Root Cause’s Public Innovators is working with government leaders at the city, state, and federal levels to promote a new way of thinking about and approaching social problems. These new initiatives constitute the first wave of what is likely to be a flood of new experiments in governmental support of social entrepreneurship.

RECOMMENDATIONS FOR GOVERNMENT TO ADVANCE SOCIAL ENTREPRENEURSHIP
Government has frequently developed institutions, programs, and policies to support a variety of activities in the private and nonprofit sectors. The 13 recommendations detailed here are coupled with models that draw on existing government support of social entrepreneurship; government support of private-sector small business entrepreneurship; and non-governmental initiatives that could serve as models for government.

To aid policy makers and government agencies in navigating these recommendations, we have divided them into three categories from which to take action from:

•    Lay the foundation for a new era of social entrepreneurship.
•    Set policy to enable and encourage social entrepreneurship.
•    Develop financial and non-financial resources for social entrepreneurship.


Next week: 13 Recommendations & Models

So far, collaboration between social-entrepreneurial organizations and government has occurred in isolated incidents. Yet, given the traditional role of the government in responding to market failures—and the amount of federal funds dedicated to resolving domestic social problems—it is evident that working together strategically provides the United States with an opportunity not only to accelerate solutions in the areas in which our nation currently lags, but to become a model for the rest of the world. As Roger L. Martin and Sally Osberg state in a recent article for the Stanford Social Innovation Review, “Social entrepreneurship, we believe, is as vital to the progress of societies as is entrepreneurship to the progress of economies, and it merits more rigorous, serious attention than it has attracted so far.”


Leading the Advancement of Social Entrepreneurship

Government support of entrepreneurship in the private sector provides a model for the steps that government leaders can take to address America’s toughest social problems while helping to make our nation a global leader in social entrepreneurship. With the establishment of the Federal Reserve (1913), Securities and Exchange Commission (1934), and the Small Business Administration (1953), along with countless other policies, institutions, and programs, the federal government has encouraged a flood of innovation and entrepreneurship that produced some of the world’s greatest companies. The innovations of these companies have led to the creation of thousands of jobs, at times spawning entire new industries—as did Ford Motors with the automobile industry and Microsoft with the software industry. Ultimately, government played a crucial role in making America all but synonymous with business innovation and entrepreneurship. 

Momentum is building for government to create the same type of environment for social entrepreneurship. In February 2007, Louisiana Lieutenant Governor Mitch Landrieu launched an unprecedented effort to find and promote effective solutions to the myriad challenges facing his state following Hurricanes Katrina and Rita. Seeking to bolster the state’s social service system, and to ensure that emergency funding would be well spent, Landrieu founded the nation’s first government-run Office of Social Entrepreneurship. The office aims to shift the orientation of the social-services sector of Louisiana to a results-driven approach, while making Louisiana, in Landrieu’s words, “the most hospitable place in the country for those who are testing and launching the best, most effective new program models for social change.”  As Director of Strategic Partnerships Brooke Smith explains, the disasters of Hurricanes Katrina and Rita actually surfaced an opportunity to find new ways to approach longstanding societal challenges in Louisiana. “We began to see successes in areas where we’d never looked before. They all centered on social entrepreneurs who had succeeded in finding a way to bring the public, private, and nonprofit sectors together and to run truly effective, innovative, sustainable programming that could really move the dial on the state’s issues in education, health care, transportation, and other areas that have been problems for a long time.” 

Next week: Leading the Advancement of Social Entrepreneurship, continued

Introduction: A New Type of Entrepreneurship for the Twenty-First Century

As the first decade of the twenty-first century comes to a close, the United States faces incredible societal challenges. One quarter of the population fails to finish high school, creating a national graduation rate that lags 8 percent behind rates in the European Union.  The United States has the highest incarceration rate in the world, with 1 in 100 adult Americans behind bars.  U.S. child poverty rates are also among the highest of the world’s developed nations, with 21 percent of American children living below the poverty line.  And even with the highest per capita spending on health care,  the U.S. health system ranks 37th in the world—lower than any other developed nation.  On the global stage, nearly 3 billion people live on less than 2 dollars a day,  while malaria—an easily preventable and curable disease—kills more than 1 million children per year.  If the United States is to maintain its place as a world leader, we must find ways to reverse these trends, both in our own country and around the world.

Crucial to surmounting these and other challenges facing our nation and the world will be making efficient and effective use of public sector resources, and leveraging those resources through collaboration with the private and nonprofit sectors. Public-finance theory tends to assign two major roles to government: 1) providing public goods, such as libraries, public education, national defense, and policing; and 2) addressing inequalities produced by market failures through redistribution—in the form of unemployment benefits, disaster assistance, or benefits to families living in poverty, to name a few of the most common methods.  To carry out the latter role, the federal government alone spends more than $1 trillion per year, by conservative estimates, to provide direct benefits to constituents, award service grants and contracts to nonprofit and private service providers, and employ government agency staff.  State and local governments dedicate their own funds to benefit their constituents—creating an even larger pool of government resources and activities, all aimed at solving social problems. Government resources dwarf the funds spent by the nation’s largest foundations and by individual donors, who contribute $16.4 billion  and $163.5 billion  per year respectively. Given the magnitude of the challenges we face, and the vast amount of government resources devoted to these challenges, spending every taxpayer dollar wisely is imperative. 

Social entrepreneurship—the practice of responding to market failures with transformative, financially sustainable innovations—is uniquely positioned to help government officials address our nation’s toughest social problems more effectively.   Combining business principles with a passion for social impact, social-entrepreneurial initiatives can take the form of for-profits, nonprofits, or government programs and exhibit three core characteristics:

•  Social Innovation - finding, testing, and honing new and potentially transformative ways of approaching social problems;

•  Accountability - measuring results, continuously making improvements based on those results, and sharing performance and outcome data with stakeholders;

•  Sustainability - identifying reliable financial and other types of support by utilizing markets, forming partnerships across sectors, and responding to stakeholder needs to ensure that the solution will be enduring. 

Next week: Leading the Advancement of Social Entrepreneurs