Social Entrepreneurship and the Clash of Incentives
Social entrepreneurship — an approach by entrepreneurs who build solutions to social, cultural, or environmental issues.
My sophomore year at Stanford, I took a class on Social Entrepreneurship and loved it. I had come to Stanford as an athletic recruit and had no idea what I wanted to do professionally. When I learned about social entrepreneurship*, it seemed like the perfect fit for me. It played into my ambitions for achieving financial success and making the world a better place. Here was a way that I could make a lot of money while still feeling good about myself.
At Stanford, I was immersed in the heart of Silicon Valley where bright-eyed, bushy-tailed students are applauded for pursuing big entrepreneurial goals. I didn’t realize at the time that entrepreneurial culture is encouraged by those looking to accumulate mass wealth more than I thought — by venture capitalists looking for 10x returns and an academic institution thriving on alumni donations. I didn’t connect the dots that the concentration of ridiculous wealth in small numbers of companies was a leading perpetrator of growing populations of at-risk, underserved people.
I greatly respect for-profit social entrepreneurs, their hard work, and their values. I am always inspired to be a better person when I chat with friends who have started their own social enterprise. Furthermore, I am still considering social entrepreneurship as a potential life path. However, it is absolutely false that for-profit social entrepreneurship is usually the highest leverage path for positive impact in a given field.
For-profit social entrepreneurs need to meet the double bottom line of profit and positive impact, which makes their chances of success slim if they compete with traditional companies. Positive social impact also depends on collaboration with the communities you aim to serve, which is difficult when decisions are centralized in an ivory tower.
If you are optimizing for a path of maximum positive impact, you must first identify the root of the problem and then evaluate whether social entrepreneurship is the best path to address it.
Rich or Mission: the clash of incentives for the for-profit social entrepreneur
In The Founder’s Dilemmas, Noam Wasserman claims that a founder must choose either Cash or King. Choosing Cash means that you prioritize making as much money as possible. Choosing King means you prioritize retaining as much control over one’s company as possible. When you make the best decision for one, you are probably not making the best decision for the other. The results of each business decision exponentially compound, which is why it is best to prioritize one choice to maximize the chances of achieving that goal.
Social entrepreneurs prioritize their mission/vision, which means they choose King. Choosing King, or Mission means more control over decisions, which means maximizing chances of achieving one’s mission statement. For instance, Khan Academy’s mission is “to provide free world-class education to anyone, anywhere.” (source)
Statistically, if an entrepreneur chooses Mission, she will have fewer opportunities for startup growth and personal ownership than at a traditional startup. If she chooses Rich, then she is not a social entrepreneur.
Consider which startup is more likely to survive when a Mission-minded enterprise is pit against a Rich-motivated enterprise. All of the Rich-minded founder’s decisions are geared towards making a profit. A socially-minded founder has to worry about her double bottom line: positive social impact and profit. Since Rich-motivated founder only has to worry about the growth of her business at all costs, she is statistically more likely to win a larger market share.
I would really like to say that social entrepreneurship is the key to maximum impact. It would certainly be convenient for me to say so. However, an estimated 90% of startups fail and typically only the top startups in each tech industry survive. An enterprise will likely be demolished if they are outpaced by competitors. If a social enterprise directly competes with non-social enterprises, it has even lower chances of survival.
What is the root of the problem, and is social entrepreneurship the best path to solve it?
A major reason to choose an alternative path is that the social good startup may not address the root of the problem.
Take America’s $1.5 trillion student debt crisis as an example. The root of the student debt problem is that student tuition and loan interest are way too damn high. College is getting too expensive to be worth it, which sucks because citizens should be encouraged to learn.
There is an entire collection of startups that help graduates pay down their student debt (I worked for one). Certainly, these student debt startups make some positive impact. However, do they make a long-term impact that addresses the root of the problem? Does it fix the fact that higher education digs students into a well of debt for the rest of their lives? Perhaps if one advocated for the federal regulation of exorbitant tuition and loan interest rates, one could prevent the wound instead of putting a bandaid on it.
There are alternative career paths if you want to maximize social impact.
Working for the government has a poor reputation among millennials for being overly bureaucratic and slow. While this may be true, the government also has distribution channels to millions of underserved individuals.
Those under the poverty line rely on federal programs like Medicare to survive. Working for the government may not be the flashiest position, but it is a practical option for social impact.
Depending on the nature of the problem you hope to solve, social entrepreneurship may or may not be the right path. A guest lecturer at Stanford once gave my class advice on figuring out the right path that optimizes for one’s Mission.
- Get to the root of the problem you want to solve
- Figure out the position that has the highest leverage to solve that problem, in an occupation that you enjoy doing. Since there are existing institutions that already reach millions of individuals, it is unlikely that starting a company from scratch will have the highest impact given a fixed time input.
- If social enterprise is the right way, do you think about your startup day and night? Else, don’t do it.
Every entrepreneur can attest that entrepreneurship is incredibly stressful and consumes every waking hour of their life. From what I’ve been told by fellow entrepreneurs, the lifestyle is really not worth your sanity unless you are fervently passionate about your impact goal.
Summary
Social entrepreneurship may not be the highest social outcome career, given the same time and energy spent in the endeavour.
This is a nuance that many young people (like myself) miss because the shiny surface of social entrepreneurship checks all the boxes for our aspirations: social impact, money, and startup ownership. If you try to attain all three, you will not be making the decisions to maximize social impact. When pit against entrepreneurs who are not socially driven, the one with more choices is statistically more likely to win.
If you want to make the greatest social impact, prioritize for social impact.
Did this resonate with you? I welcome your thoughts in the comments below. 👏
*A social enterprise may be for-profit or non-profit. (source)
This post was inspired by the book Winners Take All and chats with socially-minded friends.
