The Call for a New Normal
Today’s younger generation is nearing a seminal understanding: the recognition that the “old” model of industrial/extractive/sell-as-much-as-you-can economics inherited from previous generations can no longer propel the human adventure on this planet. This new generation is compelled to deliberately explore, define, and advance a new global economic model that fosters a new paradigm for social and economic development.
In pursuit of this new economic model, a group of fourteen development experts, foundation leaders, and business and social entrepreneurs from across the globe gathered at the Rockefeller Foundation’s Bellagio Center from June 6-8, 2017. The group of experts and practitioners convened to examine emerging patterns in new business enterprises that reflect the values of sustainability, responsibility, and opportunity (SRO). The conference agenda posed the following questions:
- Is there an emerging generation of SRO companies and enterprises with enough common characteristics, identity, momentum, and growth prospects to warrant building a framework to support them and accelerate their growth?
- What are the tailwinds and headwinds, the obstacles and opportunities that may affect the course of this emerging paradigm?
- How do we identify, understand, support and accelerate the growth of these models?
- What can be done to help reduce the obstacles that prevent SROs from reaching scale?
The participants who attended play important roles in shaping, funding, and monitoring this field, and the three-day gathering provided an opportunity for this group to share experiences, pose questions, and interact with other insightful thinkers to assess the capacity of existing and emergent SRO enterprises to help usher in an economic paradigm that manages both profit and purpose.
Over three days, the group identified a category of SRO businesses that are emerging and becoming more influential; defined some characteristics that SROs share; and considered what instrumentalities and frameworks could augment the SRO movement.
The comments that follow draw on observations and insights offered at the Bellagio meeting on SROs in June 2017.
Why "SROs"?
Everyone has an aspirational vision of the future: a world where opportunities are equally distributed; where values are shared; where diversity is celebrated; and where metrics of success include not just traditional profit measured in commercial terms but social and environmental impact as well. The world economy as it exists today does not reflect this aspirational vision, and although important progress is being made, additional vehicles are needed to overcome the complex barriers that stand between the present economic system and a sustainable global economy. Global development financial institutions cannot bear the burden on their own: a lack of capacity and funding hampers their reach and ability to effect long-term change. Nor can we rely entirely on traditional business enterprises; while global businesses have an important role to play, particularly with regard to the environment, their shareholder structures and vested interests make transitions toward sustainability difficult.
Long-term solutions to the world’s most pressing challenges require a new model relying increasingly on innovative enterprises that meet market needs while addressing social and environmental challenges. This new model must be sustainable globally and must offer opportunity to many of those who seek it – an enormous and exciting challenge. For now, we call this new type of business the “Sustainability, Responsibility and Opportunity” enterprise, or SRO. As society is pushed toward a tipping point by social and environmental stressors, the SRO model is more important than ever.
Defining SRO Models
Nearly half a century ago Ashoka launched its Fellows Program and the field of social entrepreneurship, which encompasses many SROs, was born. Two decades later, Acumen emerged, pioneering investment in social enterprises that focused on addressing poverty. Since then, the field of social enterprise has grown. The number of social entrepreneurs seeking viable ways of building and scaling opportunity-generating enterprises – characterized by self-help, pioneering of new systemic approaches, and organized by or serving the poor – has multiplied dramatically.
Notable examples of SRO enterprises include VisionSpring, which works to provide affordable access to eyewear; KOKO Networks, which uses an innovative tech platform to connect suppliers, retailers, and consumers and is pioneering an ethanol-burning alternative to traditional charcoal cook stoves; and SELCO India, which provides solar energy solutions to millions and supports the development of a broad range of sustainable economic enterprises. Enviu in the Netherlands incubates and invests in impact-driven companies. Brazil-based PECSA offers integrated management solutions to improve the productivity and sustainability of rural farms, and BVRio develops market mechanisms that facilitate compliance with social and environmental legislation, promoting sustainability and a green economy. But while many examples of SROs exist, the Bellagio group tried to go further and reach a common definition.
- 624 million people could have their vision restored with a pair of glasses
- VisionSpring uses innovative distribution channels to provide affordable eyewear to undeserved communities, creating over $800 million in economic impact
- KOKO Networks has developed a suite of hardware and software technologies that enables households to access goods and services that improve their lives
- KOKO's first consumer solution, "SmartCook", is a fast and affordable way to cook using clean liquid ethanol
- KOKO's technology is helping to disrupt Africa's $12 billion retail market for charcoal, contributing to a reduction in carbon emissions and the prevalence of indoor air pollution
- SELCO was founded to help dispel three myths associated with sustainable technology and the rural sector as a target customer base: 1) Poor people cannot afford sustainable technologies, 2) Poor people cannot maintain sustainable technologies, and 3) Social ventures cannot be run as commercial entities
- Since its founding, SELCO has sold, serviced, and financed over 2,000,000 solar systems to customers and has operated profitably for over a decade
In pursuit of a singular denotation, the group assessed shared characteristics of SROs. Notably, such enterprises are mission- and profit-oriented organizations that seek to fulfill a need overlooked by traditional actors such as government or big business. These entities are heavily market driven, recognizing and playing into market dynamics to meet demand and generate revenue; they do not rely completely on bi-lateral or multilateral donor organizations, nor are they fully supported by private philanthropic resources, although almost all rely on concessional financing in their early stages.
Because SROs put social and environmental needs at the center of their work, they optimize rather than maximize profit. Unlike conventional companies that focus on maximizing value creation for shareholders, the financial performance of SROs is considered along with performance in social and environmental terms as well. SROs avoid profit-seeking at the cost of the environment, and they are equitable internally, treating employees, suppliers, and partners fairly. This can be distilled into the essence of SROs: they actively manage performance in three areas, 1) financial, 2) social, and 3) environmental.
Stemming from their mission-oriented focus, SROs often have a long-term, open source mentality: most do not aspire to dominate and monopolize an opportunity; rather, they pursue collaboration and seek scale. And in pursuing scale, SROs acknowledge and attempt to influence the broader systems in which they operate. They are mindful that a systems-change approach is important to effect lasting, meaningful impact.
Global Trends: Obstacles and Opportunities
SRO models play an important role in managing and channeling social and environmental shifts. Global “mega trends” such as rising economic inequality, population growth, increasing carbon emissions, and big data are rapidly reshaping society and highlighting the urgent need to develop positive, adaptive responses. These same trends are creating both obstacles and opportunities for SROs. To scale successfully, SRO leaders and partners must determine which trends and uncertainties matter most, which opportunities to pursue, and which barriers need to be overcome.
SROs presently must work largely alone to overcome obstacles relating to information, transparency, and capital availability. This challenge is augmented by the fact that the SRO landscape lacks a mechanism for donors, partners, individuals, and peers to analyze and compare SRO enterprises – a gap that makes it difficult for stakeholders to track SRO models and assess good, better, and best practices. Collaboration to understand and troubleshoot this and other barriers that arise from a rapidly changing landscape will be an important step to foster a world in which SROs flourish.
Barriers to Scale
A conspicuous lack of rapid growth is symptomatic of the challenges faced by SROs. Instances of meteoric growth are frequently seen in the tech industry, for example, where cases of disruptive businesses pioneering innovative models abound. According to Deloitte’s 2016 Technology Fast 500™, three-year growth rates for the fastest-growing 500 tech firms ranged from 120 to over 66,000 percent, with 95 of these firms experiencing growth exceeding 1,000 percent. It doesn’t take long to name a young tech “unicorn” (a startup with a valuation of at least $1 billion), but can the same exercise be completed as quickly for an SRO enterprise?
Because impact is not as easily compared, only the traditional measures of revenue, profit, headcount, etc. stand out as universal metrics. One example of a rapidly scaling SRO may be BRAC, a Bangladesh-based enterprise founded in 1972 that today reaches over 126 million people globally and realizes annual revenue exceeding $684 million. But because SROs balance profit and impact, one of the most intractable challenges is to grow rapidly in terms of both traditional financial metrics and social value. Building an SRO movement will therefore require SROs, their partners, and investors to understand the primary barriers to scale – and generate ways to overcome such challenges.
SROs and the ecosystem of partners supporting these enterprises face a variety of growth challenges that differ from those encountered by their purely for-profit counterparts. The most critical barriers fall into four buckets: financing, organization, vision, and human capital.
Financing
Access to appropriate financing is among the most frequently cited challenges facing SROs. Traditional venture capital funding – in which aggressive returns are expected in exchange for high risk acceptance – is poorly suited to meet the needs of SROs, which pursue multi-dimensional objectives and whose models may require more lead time to generate returns. The structure and mindset of Series A investment rounds have remained relatively constant for decades, and a viable alternative for SROs has yet to emerge, leading many SROs to seek concessional financing from philanthropists or development finance institutions. As one social entrepreneur puts it: “if I use the word ‘impact’ [when speaking to prospective investors], I’m dead.” Open conversations about new types of investment structures and calibrated expectations about return profiles for SROs will be needed to shift the mindset of mainstream investors.
Innovative corporate structures are helping to precipitate important conversations about the balance of financial and social/environmental returns. The nonprofit B Lab, for example, certifies benefit corporations or B Corps – for-profit companies that are required to meet standards of social and environmental performance and transparency as part of their stated objectives. Congruent with SRO principles, the B Corp structure assigns executives with a directive to manage more than just a fiduciary commitment to shareholders. As this and complementary structures become increasingly well-known, more investors will be in a position to reassess how returns are measured and discover the opportunity to generate financial, social, and environmental return on investment.
Encouragingly, some new investment firms are doing just that: seeking financial returns while helping to build an SRO economy. These include Next Sector Capital, ResponsAbility, Double Bottom Line, IDH, Encourage, members of the CREO Syndicate, and others. These entities are motivated by the understanding that without access to appropriate capital, SROs are forced to identify other, less efficient, mechanisms of growth.
Foundations, too, are beginning to realize that to achieve the large-scale system changes they seek, they will need to expand their philanthropic alliances beyond traditional grant making to stimulate and underwrite investment in sustainable economic enterprises. Examples include the, Good Energies Foundation, the Packard, MacArthur, Ford and Rockefeller Foundations, and others in the field of sustainable forestry and agricultural land use.
Organization
Most SROs, like most entrepreneurial companies, pioneer ground-breaking, never-before-seen innovations. These innovations are often applied in contexts where data is scarce, regulations are opaque or nonexistent, and blueprints to scale are absent. Without access to reliable and timely information, organizational decision-making can be delayed, and when decisions are made they risk being sub-optimal due to low quality inputs. What information does exist can be costly to access and, in some cases, even fake.
Compounding the effect of information scarcity, SROs are often unaware of which individuals and organizations could be supportive as they launch. Plugging into the right networks and engaging key influencers within a system are often among the most helpful activities for early-stage SROs. Such relationships help young enterprises to navigate complex regulatory environments and benefit from the learnings of peer organizations. Unfortunately, though, many enterprises are unaware of whom to engage and risk spending an inordinate amount of time navigating the complex systems around them.
Shared Vision
Beyond the “nuts and bolts” of formally establishing an SRO enterprise and refining its model, driving alignment around a shared narrative is important to carry the work of SROs forward. One of the most ponderous, though underreported, challenges facing the SRO movement is the lack of a common purpose among funders, investors, and the broader community of SROs. Without a broad, shared ambition that brings diverse stakeholders on board, each entity risks becoming siloed. This type of behavior inhibits cooperation and more efficient scale. A bold, common vision and set of shared principles are needed to unite partners and promote a coalescence around shared objectives. Such a vision, when defined, would encourage the aggregation of different but complementary enterprises that together create a transformative environment.
Human Capital
The largest tech companies in Silicon Valley have become notorious for wooing top talent with lavish offices, catered meals, generous salaries, and tempting stock options. Leading SROs compete for the same talent with few of the same perks. Do they, however, offer something that young professionals increasingly crave: meaning? For many members of the younger generations, the opportunity to solve critical problems while pursuing potential large-scale financial returns is attracting extremely talented entrepreneurs and is helping to drive the SRO movement.
Still, recruiting top talent remains a challenge, particularly for SROs in emerging markets, where cultural norms can discourage young employees from accepting jobs that pay less than traditional, purely for-profit companies. In India, parents of young men working at SRO enterprises often exhort their children to seek more lucrative ventures. The Managing Director of a leading SRO captures this pungently: “you want Gandhi to be your neighbor’s son but not yours.” At the same time, creating a cohort of highly paid “poverty alleviation professionals” in emerging markets could create problems, namely that these professionals become detached from the challenges they are working to address. To encourage the engagement of younger generations, society must confront the established values that prevent SRO enterprises from developing in terms of talent.
You want Gandhi to be your neighbor's son but not yours.
But in addition to raw talent, there is an important, frequently overlooked, subset of the human capital challenge: mindset. The mindset with which SRO entrepreneurs approach growth is often a stark contrast from entrepreneurs in for-profit ventures. Whereas the latter aggressively pursue funding to fuel their scale, SROs often take a more tempered approach to investment. They may be loath to consider how much more funding they can raise; rather, they focus on delivering on the commitments they made for the first tranche of resources. The ambitious entrepreneurs behind SRO enterprises are driven by a passion for solving a social or environmental challenge that, at times, can detract from the traditional pathway toward rapid growth. Innovators in the SRO space need to be aware of mental obstacles that, while well-intentioned, may overlook opportunities to grow.
How to Build an SRO World
Given the range of opportunities and obstacle facing SRO enterprises, a breadth of efforts is required to lift and mainstream the movement. An ecosystem approach that encompasses vision alignment, data and technology enhancement, and intermediary development is needed to effectively build the SRO landscape.
Narrative-Building
To reach scale, the SRO movement will need convergence around enlightened self- and collective interest – galvanizing entrepreneurs, individuals, and institutions around a common goal. Underpinning this narrative, a set of common principles is needed to animate individuals in the context of their own lives and be recognized by those in diverse geographies. Crafting a bold vision from a set of shared principles would help unite partners and facilitate the drive toward the same objectives. Such principles could include:
- Accountability: committing to performance that achieves enduring social and environmental value. This group is ultimately accountable to communities, citizens, and shareholders of future generations
- Inclusivity: acknowledging diverse stakeholders as shareholders in the process
- Mindfulness: focusing on a responsibility to future generations; stewarding the environment for future communities
- Intentionality: designing means and mechanisms that guard against exploitation and extraction; building and ensuring opportunity for shared prosperity
- Urgency: fostering a spirit of urgency and competition; a race to the top for this sustainable, responsible, and opportunity rich environment
- Transparency: unrelenting openness about progress and challenges
Data and Technology Enhancement
Two facets of enhanced data and technology are needed to support the SRO movement: 1) data on existing SROs, their work, vision, and gaps; and 2) mechanisms to improve the availability of data that inform decision making of emerging SROs. Given the incipient nature of the movement, additional data is needed to understand the profile of existing SROs. Enhancing data and technology in this area will improve understanding of the activities and needs of SROs and help new SROs get organized and rapidly test hypotheses.
Generating data on SROs must be a collaborative effort: those that produce and own data must actively share, and incentives are needed to encourage sharing more broadly. The funding community has an especially important role to play in using the data they have to help mobilize SROs. Collaboration and data sharing will enable more descriptive, meaningful insights to be generated and will help connect like-minded partners that can further their work together.
Intermediary Development
Like any rapidly emerging field, the SRO landscape is filled with a variety of stakeholders playing different roles: accelerators, donors, think tanks, practitioners, universities, and others all work to further the SRO ambition. Independently, each of these intermediaries make an important contribution to the SRO world: universities pioneer research and foster the next generation of talent; accelerators give life to inchoate ideas; and donors provide funding for SROs to test and scale new models. As the field evolves, however, these players risk becoming increasingly fragmented – falling into silos that hinder communication and collaboration. The field of SRO enterprises needs these partners, but it also needs these partners to collaborate efficiently to propel the sector forward.
One potential solution is to foster a new generation of intermediary organizations – entities whose purpose is to help SRO enterprises in specific sectors grow by connecting them to partners, building their capacity, and actively collaborating with other intermediaries. These entities would receive funding, in part, from SROs themselves as well as from foundations, encouraging competition and directing the flow of capital to the highest performers delivering the greatest value-add. These new intermediaries would serve as the “glue” that binds critical components of the landscape together and provide constructive services to emergent enterprises.
Are We at a Tipping Point?
Given the embryonic nature of the SRO movement, some may be quick to question the veracity of the claim that the SRO cause has reached an inflection point. But whether or not this is a tipping point may be irrelevant. With regard to inclusivity and sustainability, the world is at a critically dangerous moment, and there is a pressing need to scale the work of organizations promoting sustainable models that effect meaningful change over the long-run. The younger generations, for the most part, understand that continuing along the current path will lead to destruction, and society must therefore nurture a new global economic model that champions a paradigm for social and economic development. If an SRO model is capable of fulfilling the promise of that paradigm, it deserves every opportunity the world can afford it.
Credits:
VisionSpring, KOKO Networks, SELCO India