The Launch Path — A new book under development.
Nonprofits and Social Ventures.
Are you looking to create a startup that will make the world a better place? This chapter’s for you.
One sunny spring morning 13 years ago I had a conversation that changed forever the way I think about impact-driven organizations.
That morning I met with Jim Koch in his small office on the campus of Santa Clara University. He told me about his vision for being able to improve on the traditional model of nonprofit organizations, using Silicon Valley thinking to create a new kind of startup (“social ventures”, he called them) that could harness the power of markets and deliver social impact at scale.
Jim is one of those guys who has the kind of gravitas that makes an entire room go quiet when he speaks. After getting his MBA and PhD from UCLA he went into corporate management, then moved over to the academic world where, as a professor and Dean of the Business School, he helped build Santa Clara University’s MBA program into the nationally-ranked business school that it is today. As if that wasn’t impressive enough, he also spent time as interim Dean of Santa Clara’s renown School of Engineering. That’s a pretty rare double play. Santa Clara University is a Jesuit school located at the heart of Silicon Valley and is the oldest university in California¹.
As we sat together that morning, Jim talked about how the traditional charity model needed to be updated. Non-profit organizations relied on donations to survive, and their impact activities were typically focused on symptom relief rather than systemic change. When there was famine somewhere in the world, charities would raise money to send in truckloads of food. Once people were fed, the charities and donors would move on to the next humanitarian crisis without having ever addressed the underlying reasons for why the famine had occurred in the first place. “If what we care about is sustainability”, Jim told me, “then we need a new kind of organization. We need to bring entrepreneurial thinking to the impact world”.
Three years earlier, a professor named C.K. Prahalad from Michigan’s Ross School of Business had published a groundbreaking book called The Fortune at the Bottom of the Pyramid. The book begins by talking about the constant fundraising beat of large charities: “Turn on your television and you will see calls for money to help the world’s 4 billion poor — people who live on far less than $2 a day”. And yet despite the tens of millions of dollars raised by these charities, “For more than 50 years, the World Bank, donor nations, various aid agencies, national governments, and, lately, civil society organizations have all fought the good fight, but have not eradicated poverty.”
After declaring the traditional charity model to be broken and ineffective, C.K. Prahalad makes a stunning proposal: he suggests that we stop treating the “bottom four billion” people as a burden and start treating them as partners in opportunity. “What is needed”, Prahalad writes, “is a better approach to help the poor, an approach that involves partnering with them to innovate and achieve sustainable win–win scenarios where the poor are actively engaged and, at the same time, the companies providing products and services to them are profitable”.
He finishes with this bold statement: “Entrepreneurship is at the heart of the solution to poverty.”
I finished my meeting with Jim Koch at Santa Clara University and drove back to my office, thinking about all of this. In addition to having run a few private companies in my career, I had also run two nonprofit organizations focused on K-12 education. So I was acutely aware of how different the for-profit and non-profit worlds were. Frankly, as a private sector guy I found the non-profit world to be very frustrating and I had been musing about the notion that there had to be a better way to deliver impact. The vision that Jim articulated resonated with me.
Two years earlier, Muhammad Yunus had been awarded the Nobel Peace Prize for what the Nobel Committee called “efforts through microcredit to create economic and social development from below”. His Grameen Bank pioneered the field now known as microfinance, giving loans to entrepreneurs too poor to qualify for traditional bank loans. Not only did his bank lift tens of thousands of people out of poverty, they did so profitably. Read that last sentence again, because it sums-up the radical concept that an organization can both do good and do well at the same time.
“Charity becomes a way to shrug off our responsibility. But charity is no solution to poverty. Charity only perpetuates poverty by taking the initiative away from the poor. Charity allows us to go ahead with our own lives without worrying about the lives of the poor. Charity appeases our consciences.”― Muhammad Yunus
Jim Koch was exactly the right guy to take these lofty thoughts and put them into structured practice, right at the intersection of his experience of running a leading School of Business and a School of Engineering at a Jesuit university dedicated to making the world a better place. So synthesizing the concepts developed by C.K. Prahalad, Mohammad Yunus, and others, Jim Koch co-founded at Santa Clara University what is today called Miller Center for Social Entrepreneurship². The Center runs the world’s leading startup accelerator program for social ventures, and I’ve been honored to serve as an Executive Mentor with the program for twelve years now. We’ve had nearly 1,300 entrepreneurs go through the startup accelerator program and our graduates have gone on to raise nearly a billion dollars in capital and deliver social and economic impact all over the world.
What do these social ventures typically look like? Here are five that I’ve had the pleasure of working with, just to give you a flavor:
- Nnaemeka Ikegwuonu had a passion for helping smallholder farmers in his native country of Nigeria. So he established a community radio station that would deliver meaningful content to them (weather, market information, tutorials on improving agricultural yields) in order to help improve their livelihoods.
- Cliff Schmidt had a passion for helping the billion people who lack the literacy skills to learn from books or internet. So he founded Amplio to design and distribute “talking books”, inexpensive durable audio devices that can be loaded with audio content and delivered to remote, underserved, illiterate populations that are often missed by other communications initiatives.
- Patricia Letayf and Alice Bosley met as graduate students at Columbia University, studying international economic development. Together they developed a thesis that a potentially powerful way to help the world’s 65 million refugees is to help them start their own businesses. So they founded Five One Labs, a startup incubator located in Iraqi Kurdistan, to help refugees in conflict-affected areas to launch their own startups.
- George Srour spent time in East Africa and became passionate about figuring out how to improve primary education. He realized that a key problem was simply a lack of suitable facilities. So he founded Building Tomorrow, which has worked with the Ugandan government to build and open nearly 100 primary school facilities.
What they all have in common is they are passionate startup founders who (1) noticed a problem worth solving; (2) developed a effective solution to that problem; and (3) created a sustainable economic engine for a new startup venture that could deliver that solution.
So, with regard to The Launch Path, how is building and launching a successful social venture different than a traditional startup? I honestly think it’s probably 80% the same. You still need product-market fit, you still need to understand how your venture fits within the landscape of competitors and alternatives, and you still need an economic model. But here are a couple key concepts to understand that represent the slight differences between launching a social ventures vs a traditional startup:
- Contributed income vs earned income.
Charities and non-profit organizations exist on contributed income (donations and grants), whereas companies operate on earned income (profit from operations). Many social ventures are launched and operated on a combination of the two — a typical model might be to use contributed income to launch the venture, and then become sustainable by having earned income associated with ongoing operations. This affects the economic model for a startup, which we’ll discuss in Chapter 5.
- Layering a theory of change on the business model.
Ordinary startups need to have a business model — a rationale by which the organization creates, delivers, and captures value in the form of earned income. Social ventures — if they intend to be sustainable on earned income – need to have the same. But as organizations dedicated to social impact, they also need to have a theory of change — a rationale by which social impact is delivered and measured. This affects the Business Model Canvas which we’ll discuss in Chapter 4.
- Sources and structures of capital.
In the bifurcated world of non-profit and for-profit that existed until recently, there were no established sources of capital for hybrid organizations. Social ventures weren’t “non-profit enough” to pitch foundations for grants and they weren’t “for-profit enough” to pitch for venture capital. Fortunately, in the past ten years this has changed dramatically and today there are many different sources and structures of capital for social ventures. In Chapter 6 we’ll look at everything from impact capital funds to demand dividend financing structures.
- Choosing the right entity type.
A traditional nonprofit in the US is incorporated as a 501(c)3, a special tax-exempt organization that has to operate within a very constrained set of parameters. Social ventures will often be better off incorporating as a traditional corporation or a B-Corp, a special entity that is recognized by many states. Choosing one of these structures will give you more flexibility with regard to financing the venture. We’ll dive into this in Chapter 6.
- The “Exit” (spoiler: there is none).
Many tech entrepreneurs dream of building a startup that will be bought by Google for $500 million, or maybe even having a billion dollar IPO. With social ventures, those outcomes are unlikely. So this makes the investor pitch (and capital structure) for social ventures a bit different.
With those broad exceptions, launching a successful social venture or nonprofit organization requires the same basic set of steps as any other startup. Passion, smarts, and tenacity are the key ingredients, as always.
As Jim Koch points out in his 2018 book “Building a Successful Social Venture”, in the fifty years from 1962 to 2013, the world’s population grew from 3.2 billion to 7.1 billion. Most of that growth has been concentrated in poor countries, with accelerating rural-to-urban migrations. Meanwhile we’ve become increasingly aware of the fragility of the planet’s ecosystems and of the existential threat presented by climate change. In order to save humanity we need to fix these things. And in the name of humanity we want to do so in a way that aligns with our view of social justice.
Traditional nonprofit organizations still have their place. But as the planet’s problems intensify, new thinking is needed. Fresh thinking, and an entrepreneurial mindset. All over the world today, social entrepreneurs are addressing these challenges in innovative new ways, treating base of the pyramid populations as partners in opportunity instead of charity cases.
As Jim’s most recent book concludes, social entrepreneurs today are “helping to bridge the chasm between transformative ideas and the complex realities of creating successful ventures. Through our collective imaginations we can construct a path forward to a more sustainable, just, and prosperous world — one that works for everyone”.
- The claim to “oldest university in California” is a somewhat complicated one. Santa Clara University, which began as Santa Clara College in 1851, today officially uses the description “California’s oldest continuously-operating institution of higher learning”. UC Berkeley had its origins around the same time, and Stanford didn’t come along until 1891.
- I have greatly simplified the history of Miller Center, its startup accelerator program for social ventures, and the many great minds behind it. A more complete rendition is here.