The Power of Profit in Advancing Systemic Change
Commercial platforms offer powerful avenues for solving social problems on a large scale.
At the core of transformative scale is the imperative to create systemic change. It’s really hard to do, but it’s what ultimately matters.
In my experience, advancing from a successful small-scale program to systemic change requires clearing three high hurdles. First, the intervention has to reach enough people for a sufficient amount of time to significantly move the needle in solving the targeted problem. Second, it must be deployed not by just one organization but by many actors so that it can spread far and wide. Lastly, if change is to take root, the intervention must continuously be made better and less expensive.
The challenges to surmounting these hurdles are enormous. Clearly, it’s not enough to come up with a great program or an innovative practice. You have to deliver it to all the people that need it as quickly as possible. Nonprofits can show the way, and the public sector can promise scale, but I’m most interested in commercial platforms. Their ability to tap capital markets and draw in new players via the profit motive makes them well suited to overcome all three of the hurdles to systemic change. The most powerful commercial platforms for social change are those where the end user is also the payer. Footing the bill exacts accountability, which in turn aligns interests. Microfinance is a good example, where poor borrowers are both beneficiary and payer.
Commercial platforms, of course, have their limits. They don’t work well where it would be morally repugnant to restrict access only to those who can pay, such as a suicide crisis hotline. And a commercial approach excludes between 7 and 10 percent of the population who are living at close to indigence and cannot pay for most goods and services. Even with those constraints, that leaves a lot of humanity to address.
Creating a successful commercial platform to address social needs, however, presents its own set of challenges, not the least of which is getting the business model right. Successful and innovative business models are always hard to come by. In the social sector, the challenges to doing this are even greater.
As an investor, I ask five simple questions when evaluating whether a business model can solve a solve social problem:
- Is the industry or sector key to improving the human condition, such as health care, education, housing, or basic services?
- Is the industry or sector capable of sustaining an enterprise large enough to be relevant for the capital markets? If not, even if successful, the business model is likely to remain a small and isolated player incapable of driving systemic change.
- Can the proposed business model win in the targeted industry or sector? Will it be able to displace the current models that in the past were unable to deliver the desired social outcomes?
- Is the management team capable of delivering the business model? Ideas are a dime a dozen. And if it’s something truly innovative and disruptive, a business plan by definition can only be a rough map of what lies ahead. Accordingly, success hinges on a committed team that will have the courage and determination to change and adapt as much and as long as necessary to make the project succeed.
- Finally, what will the social and financial returns be? In answering this last question, a key consideration is that maximizing social impact requires that other players follow in the wake of the initial business model so that, far from being just the effort of a lone ranger, it is the collective result of an entire industry. There is no better guarantee that a social problem is being solved at scale than to have numerous businesses competing to solve it.
In all of history, there has been only one way to create a new industry: develop an economic activity that earns above-average financial returns. The reason is simple. If an endeavor yields only average returns (or lower), why would entrepreneurs, investors, and businesses drop what they are doing and incur the risk of attempting something new? And without followers, depending on one single player makes it highly unlikely that the resulting impact will be sufficiently large to cause systemic change.
Creating a successful, large-scale social enterprise also requires the ability to navigate a hostile ecosystem. Throughout history, society has been shaped to best fulfill the needs of those at the top of the socioeconomic pyramid. Accordingly, if your business model seeks to serve the base of the pyramid, expect to deal with a daunting lack of infrastructure—whether it’s inadequate legal and regulatory frameworks, unresponsive banks, a hostile government bureaucracy, lack of trained talent, or a poor transportation network.
Coping with these ecosystem barriers means working with others, both governments and civil society. As in all endeavors, clarity and focus are keys to success. The greater the challenges, the more important it is to have a tight, specific definition of the problem you are targeting—for example, “providing working capital loans to urban low-income micro-entrepreneurs” works better than “eliminating poverty.”
In developed nations, commercial platforms can be engines for systemic change as well, but it requires careful thought to define their role. Take education reform in the United States, for example. Ultimately, it’s the public education system that must change if you really want to succeed. If it is to meet societal goals, the public system cannot be replaced by commercial alternatives. Hence, the question is, how can commercial models help the public system change for the better? One possibility being played out is whether commercial schools can provide a catalytic motivation for the large, entrenched public education systems to undertake fundamental change. This could happen if public education funding changes from a school district model to an individual student model. Should this happen, supporters argue that even stodgy bureaucratic systems will start changing when they face a threat of tax dollars following students as they go from public to charter or private schools.
Whenever you attempt transformative change, it’s not enough to have a really great idea. What ultimately matters is finding a way to take action that will truly solve the problem at a large scale. That is very hard to accomplish, but commercial platforms can offer a powerful tool for success.