19 October 2012 | by Rafael Ziegler and Jana Gebauer

Ideas changing minds or money changing hands?

Development cooperation support for social innovators is an opportunity that calls for a focus on social and ecological funds and the networks that regenerate and sustain them

It is a sign of the drawing power of social entrepreneurship that larger players of development co-operation get or want to get involved in social entrepreneurship support. An example is KfW, one of Germany’s largest banks by assets and profitability. It is currently looking into setting up a fund for the support of social entrepreneurship (SE) in Asia and possibly also in Africa.

Precisely because of the opportunities that such large players open up for social entrepreneurship, we must follow such dynamics critically. In particular, following a conference at KfW in October 2012, we see a risk in narrowing down social entrepreneurship to social business. Overemphasizing the aspect of financial return involves four dangers:

1. Much ado about few.

Let’s take as an example social entrepreneurship in the water sector. Many regions across the globe suffer from scarce and shrinking fresh water sources, as well as very limited access to drinking water and sanitation. Innovative and sustainable solutions are of highest societal interest. Still, the number of entrepreneurial initiatives that receive support from organizations with generally wider selection criteria (for example, SE-relevant foundations) is very limited. Now narrow down the choice to those initiatives that directly generate income, and even fewer SEs will make the cut. This point was conceded in a panel discussion in Frankfurt, when a director of the bank pointed out that it has been difficult to find sufficient role models that are socially innovative and also generate financial return.

2. Blocked scale-ways to heaven.

The idea that the primary goal of scaling a social innovation is increased impact (versus organizational size) is by now widely accepted, and its empirical dimension is increasingly researched. With the focus on the impressive but rare innovative social business, organizational size may regain importance—and at the expense of other, indirect ways of scaling. Take again the example of the water sector. In studies we did on SE organizations in this sector, we did not find any initiative that aimed for organizational growth, not to mention growth comparative to a large or even medium-sized corporate organization. Instead, we found consultants, networks of networks, social intrapreneurs, and interface providers that scaled collaboratively. There is a risk that banks would not consider initiatives with such indirect approaches to scaling if a focus on organizational growth prevails.

3. Missing out on earned income potential where it matters most.

The identification of social entrepreneurship with social business tends to promote a focus on earned income as income for the SE organization. However, a social innovator may also generate earned income for a community—not immediately, but in the medium- or long-term. An investment decision therefore needs to include the indirect and future economic effects that do not appear in the SE organization’s own accounts. Again using the water sector an example, integrated watershed development can increase water availability and, eventually, income from agriculture. The investor in watershed invests in an ecological (and social) fund: water that regenerates once properly restored and managed. Such investments seem as important as—and are in fact a pre-condition of—investments in stocks, defined as the amount of water available at a given time for consumption or production. An organization may draw on water as a stock for drinking water, sanitation, or agriculture, and yield financial return. But you can only use a stock in the long-run if there is a fund that regenerates it. This distinction between funds and stocks also applies to other aspects of the natural and social environment. A focus on funds is especially important in a context of extreme poverty, where there is no prospect of earning income without a prior investment in the resource base.

4. Fast, faster, gone.

In scaling discourse, a focus on rapid global adoption prevails, and for understandable and ethically urgent reasons. But we should not forget temporal depth—that is, the impact over many years and the social-ecological preconditions of long-term impact. Consider as an example the risks associated with climate variability and how these can affect earned income of farmers. Again, investors—especially from development cooperation—have a crucial, patient role to play, or they’ll miss the chance to make a real social impact themselves.

Jan Vandemoortele, co-architect of the Millenium Development Goals, once made the point that the goal of development ought to be ideas changing minds rather than money changing hands. Social entrepreneurship, with its focus on new ideas, is an approach that does precisely that: put ideas and their impact first. But changing minds takes time, requires a focus on funds and on networks of actors in the areas of civil society, government, and business.

About the author

Rafael Ziegler and Jana Gebauer are both GETIDOS Fellows.

This blog was first published on the Stanford Social Innovation Blog.

It was prepared in the context of the project  BMBF Nachwuchsgruppe.