Philanthropists Should Invest in Social Enterprise

Philanthropists can get more “bang for their buck” if they invest in social enterprise over programs where the impact ends once the funding runs out, according to the leader of an innovative US foundation.

Mark Gunton is the CEO of the Clinton Foundation’s Clinton Giustra Enterprise Partnership, established by former US president Bill Clinton and Canadian philanthropist Frank Giustra, which uses a market-based approach to create sustained impact.

Gunton, who gave an address at the Philanthropy Australia National Conference on Wednesday, told Pro Bono Australia News philanthropists have four areas where they can achieve philanthropic goals.

“A programmatic approach, where you’re really just spending money… impact investment as a new alternative to achieving philanthropic goals. And you have social enterprise, and I think you have two categories of social enterprise,” Gunton said.

“Basically you have social enterprise where there’s still an element of donor funding to subsidise it, and then you have social business, which is a powerful new subset of social enterprise, whereby the business is profitable and the profits are recycled, so you lose that donor dependency.

“Comparing the four, in terms of bang for your buck, you get a much higher return from social enterprise than you do programmatically, which is fundamentally a one-way street.”

He said social enterprise, especially social business, was much more efficient in terms of replicating models and scaling.

“Social business has an inherent sustaining mechanism that programs don’t. When you donate money to a program, say for example cataract surgery, once the money stops, surgery stops and the problem continues,” he said.

“Whereas social enterprise [is] set up to be a sustainable solution to a social problem, especially if it’s a social business, so therefore [it’s] profitable and self-scaling, and it continues to address a problem in a sustainable way. There are certain social objectives that can only be met through social enterprise.”

But Gunton said the potential for the social enterprise sector had not been fully met because “traditional philanthropists” preferred the certainty offered by programs and investors tended to shy away from the risks.

“There’s normally no surprises [for philanthropists who invest in programs]. You spend the money, you get what you want. You stop spending the money and it stops, but you’ve still got the certainty of achieving your objective in a programmatic way,” he said.

“Promotional investors shy away from social enterprise because they’re difficult businesses and there’s always risk associated with businesses, especially in early stage. In incubation it’s very hard to get backing.

“So I think for those two reasons, philanthropists should invest in social enterprise because it’s probably the best available approach to achieving sustainable change or improvement [and it’s] where the money is most needed.”

In North America both established foundations and private family foundations have been backing social enterprise for the past 10 to 15 years.

However, Gunton said a number of structural issues had developed because of their approach.

“In the North American context [foundations] tended to concentrate their effort on social entrepreneurs, so they basically take a private equity model where they want to invest in an individual.

“And because they’re investing in an individual – number one they don’t replicate unless you have found a way of cloning the social entrepreneur, so if you… develop a successful social enterprise it’s very hard to take it to another part of the world because it’s dependant on the social entrepreneur.

“Secondly, a lot of these social enterprises fail because of the lifeline these foundations have given them. It becomes all too easy to revert or lean back on grant money rather than find viable commercial solutions in the social enterprise.

“A social enterprise that is loss making will never scale to its potential, and unfortunately in North America the bulk of social enterprises that have been funded have fallen short of true commercial viability.”

He said in Australia there was an opportunity to “jump ahead” of North America by backing social business.

“Social business… like I say, is a powerful new form of social enterprise that does not rely on individual social entrepreneurs. It’s basically the replication of enterprise models that are sponsored by philanthropists and where the leadership of the enterprise can be changed as easily as commercial business,” he said.

“You’re not reliant on individuals, you’re reliant on performance and strategy and models, and modifying and replicating those.

“I would argue that in Australia there’s an opportunity to take a completely different approach whereby you’re taking more the growth-mode of a multinational corporation, which replicates its own business model, versus the North American experiment in social enterprise, where they’ve taken individuals and backed those individuals in sort of niche markets, and I would argue haven’t been too successful in doing so.”