According to the same census, however, 74 percent of nonprofits, including hospitals and universities, have no paid employees and only 6 percent have more than 10 staff. In 2009, the Brazilian Association of NGOs (ABONG) polled its members and found that only 20 percent have annual budgets of more than $1 million. In addition, the foundation sector in Brazil is weak. Most foundations are corporate foundations, with no endowment and strong ties to the original businesses—and offer very little support to social enterprises.

So there is good news about civil society activity in my country, but there is also concern about how sustainable and effective the social sector really is. Can several hundred thousand organizations with no paid staff and little funding provide the support and services that many of Brazil’s 190 million citizens desperately need?

I have always been interested in the public good. During college, at the Industrial Engineering School in São Paulo, I worked for Brazil’s antitrust agency. As an analyst at McKinsey & Company, I discovered Ashoka and did pro bono projects for several social entrepreneurs. At Harvard Business School, I enrolled in every possible social enterprise course and then returned to McKinsey, where I continued to consult for social businesses in my spare time.

If you ask Brazilian executives what they want to do when they retire, many will say “Open an inn at the beach.” The social sector was my eventual inn at the beach. But that plan changed in 2005 when a friend asked, “If you were offered a job at the Clinton Foundation at your current salary, would you take it?” I replied with a resounding “Yes!” What startled me was how instinctively I answered. It wasn’t until I was considering two equally appealing but different job offers—at a European private bank establishing operations in Rio and at a digital-inclusion nonprofit with more than 900 schools—that I realized everybody would be better off, especially me, if my business skills were used for social impact. It was then I decided that social entrepreneurship, and more specifically social finance, was my calling.

FOUNDING SITAWI

Three insights helped me define what I wanted to do: 1) advice is not enough—many consulting projects for for-profit or nonprofit clients don’t yield impact; 2) capital is not enough—many grants do not generate impact either; and 3) more types of capital equals much more capital—there are about 200 times more funds in traditional markets (debt and equity) than in grants in Brazil.

Before I took the plunge I asked myself: What is the worst that can happen? If sitawi fails, I will spend the next two years doing something I love and go back to the corporate world.

The development process took about one year. At the end of 2006, I started the first social fund in Brazil, sitawi, which means to flourish or develop in Swahili. My colleagues and I faced three immediate questions: Who are our target clients? Should sitawi itself be structured as for-profit or nonprofit? And how would we pay the bills?

First of all, we decided that our focus was to provide midsized loans ($50,000 to $250,000) to organizations for which social impact is a core mission and business is the supportive engine. Such organizations don’t have access to capital and will be the last to be served by banks. Because most of these social enterprises are nonprofits and are less comfortable working with a for-profit fund or bank, we decided to structure the fund as a nonprofit. That would also allow us to receive foundation and donor support.

We aimed to position ourselves somewhere between a foundation and a bank. Whereas a foundation provides grants and other support, a bank provides loans at market-based interest rates. We decided to provide some strategic support—much more than a bank but less than many foundations’ capacity-building programs—and integrate this support through the provision of below-market loans. The latter decision was especially important, because market-rate loans in Brazil have interest rates of 35 to 50 percent, loans that our target clients likely could not get because they lack collateral (a must in Brazil) and banks don’t have incentives to understand or support the social sector.

We were joining several other funders that support social enterprises and nonprofits: Acumen Fund, based in New York City, which provides loans and equity; Charity Bank, headquartered in Kent, England, which is a fully regulated bank targeting the social sector; and the pioneer Nonprofit Finance Fund, in New York City, which also provides loans. The difference between sitawi and these funders is that we’re creating infrastructure for the social sector specifically in Brazil and for Brazilian social enterprises.

But before sitawi had any funds to lend (or lending revenue to book), we had costs. In 2006, I had recruited two people to help me start sitawi: an entrepreneurial college dropout and a Boston Consulting Group consultant. For the first year and a half, we provided strategic consulting services to companies, foundations, and larger nonprofits, offering advice on “social impact with a business mindset” to make payroll. We talked about social loans as if we did one loan a day. But we hadn’t made a single loan: Social entrepreneurs had a hard time thinking about loans, and funders had a hard time considering support of intermediaries like sitawi.

FIRST LOANS

At the end of 2008, we still had no money in the fund, but we had two potential recipients: Daspu, a clothing brand owned by Davida, a prostitute rights association that needed to finance its winter 2009 collection; and Solidarium, a social enterprise connected to Aliança Empreendedora, an organization that provides business support and market access to small artisan associations, which had a large order from Wal-Mart Stores. So I did what entrepreneurs typically do: I put my money where my mouth was and extended the loans myself—credit lines of $30,000 and $90,000, respectively. These were simple working capital loans at rates of 1 percent a month (similar to Brazil’s central bank base rate) and were repaid within three months.

In 2009, as the financial crisis hit Brazil, several commitments to fund sitawi were withdrawn. Finally, the Avina Foundation granted us $250,000, enabling sitawi to formally start the fund.

Since then, we have provided close to $1 million in loans to eight social enterprises, a mix of nonprofits with business units and for-profits with a clear social mission that promote civil rights and provide health care, social services, and income opportunities benefiting more than 10,000 people. That has been accomplished with a fund turnover of 2.5 times and no default or restructuring of loans. Today, we have much more demand from deserving social enterprises than we can serve.

The other enterprises we have funded are microcredit institution ICC/Banco do Povo ($250,000), to allow it to expand its reach to more people developing small businesses; community bank Banco Palmas ($140,000), to enable it to fund new loans to its best customers; fair marketing handmade product coalition Tekoha ($65,000), to finance the purchase of raw materials to meet its largest order to date; social investment organization IDIS ($90,000), to improve the company’s debt structure; and São Paulo poverty alleviation and social service agency Caspiedade ($330,000 in two separate loans), to make up for delays in payments from government contracts.

The need for our services has been obvious. Davida had a hard time opening a bank account; its crime was to have the word prostitute in its legal name. Banco Palmas uses an official line of credit that has harsh restrictions on late payments, punishing its portfolio as a whole, especially the best customers. Local governments expect Caspiedade to pay taxes on time—even when they don’t reimburse the services provided—and otherwise will freeze payments of money owed. It’s definitely not easy to run a social enterprise in Brazil!

There is so much to be done to improve the social sector. Nonprofits, especially ones linked to politicians, are repeatedly involved in corruption scandals. The country’s tax and legal infrastructure in this area is weak. Although there are several laws that provide tax benefits for donations to arts and sports projects, there is very little incentive for giving to social organizations—and none to help foster social enterprises. Unfortunately, I see more talk than action in those directions.

Sitawi’s current focus is on the estimated 20,000 social enterprises and nonprofits for which sales of products or services generate more than 20 percent of income. As the fund grows and we attract more support for operations, the need for consulting, which represented 52 percent of revenues in 2010, decreases.

Over the next five to 10 years, we believe our market-building efforts will have created enough demand to launch a for-profit fund with the same strong social mission focus, one that will attract more capital and visibility to the social impact market. Over time, I see sitawi pioneering new financial products tailored to the social sector, such as loan guarantees, performance contracts, and hybrid products. But, just as in the United States and Europe, there is a long road ahead.

On a personal note, a few years ago I did receive a call from the Clinton Foundation to apply for a position. I respectfully declined, and smiled inside.

Leonardo Letelier is the founder and CEO of sitawi, the first social enterprise fund in Brazil. He was previously Ashoka’s full economic initiative director in Brazil and a senior engagement manager at McKinsey & Company.

Bonilla beat the odds when she enrolled in an antipoverty pilot program run by New York City’s Center for Economic Opportunity (CEO). In exchange for taking on a full course load, the program provided Bonilla with enough money for tuition, books, and MetroCards for the commute to campus. She received tutoring, academic advisement, and job placement services. The program staff also lent Bonilla a laptop, so that she could do her schoolwork and still be home with her children.

Today, more than 1,000 students from all six City University of New York community colleges are enrolled in the program, and 55 percent of students complete their associate degrees in three years. Bonilla has finished her associate degree and is on track to earn a bachelor’s degree in public administration this spring. After graduation, she plans to open a daycare center for children with special needs.

The community college graduation initiative is just one of more than 40 programs tested by CEO, which evaluates and implements innovative antipoverty initiatives, rigorously assesses their outcomes, and makes funding decisions based on program performance. With an annual budget of $100 million in public and private funding, CEO programs have helped New Yorkers find employment, graduate from college, open savings accounts, shop for healthy foods, and earn tax credits.

In 2006, New York City Mayor Michael Bloomberg established a commission to analyze the issues and scope of poverty in the city. At the recommendation of the commission, he formed the center within the mayor’s office to better inform the way New York City and the federal government spend dollars fighting poverty. “Usually, mayors are preoccupied with fire and safety and roads and trash pickup,” says Gordon Berlin, president of the education and social policy research firm MDRC. Bloomberg, however, faced an extraordinary situation that was difficult to ignore. “The state requires a dollar-for-dollar match on most programs serving the poor,” explains Berlin. Researchers at CEO calculated a 19.9 percent poverty rate for New York City in 2009.

“It’s daring to talk about poverty and to say: ‘We don’t have the answers. We’re going to build on the work of others, and we’re going to try new ideas,’” says Veronica White, executive director of CEO. “It gets you involved in a conversation that a lot of politicians would be afraid to get involved in, and Mayor Bloomberg wasn’t.”

The center borrows and builds upon existing lessons from private, government, academic, and nonprofit organizations to create its own programs. These antipoverty interventions range from a re-entry program for young offenders that originated in Oregon, to a matched savings program that works closely with the city’s Volunteer Income Tax Assistance sites.

INVESTING WISELY

CEO runs pilot programs in collaboration with appropriate city agencies. Its 15-person staff monitors program performance, and each project’s success and failure is measured by outside research firms such as MDRC. If analysts find that the program makes a measurable impact and an agency can integrate the initiative into its activities with dedicated funding, CEO hands the program over to the agency. “It’s very unusual to see this combination of innovation and mainstream take-up in government,” Berlin says.

Many of the organization’s programs stem from others’ successes. “It’s essential to understand what’s come before you in thinking about programs,” says White, who often looks outside New York City for inspiration. “It is about making sure you do that scan of what’s in existence, what’s working, and what’s not working.”

Preceding her role at CEO, White was a nonprofit consultant and chief operating officer of Partnership for New York City and president and CEO of Housing Partnership. Staff members at CEO are equally versed in government and nonprofit work as well as in translating research into practice. All senior staff have advanced degrees in economics, sociology, public policy and administration, public health, and law.

White says some of her team’s best research comes from talking to providers and participants who are involved in poverty programs every day, asking them about the drawbacks of the existing programs and what they would add if they had more resources. Antipoverty programs dependent on federal funding are often restricted by what they can do with government funds. “There’s only so much room to innovate with federal dollars,” says Allegra Blackburn-Dwyer, chief of staff at CEO. “We start with other resources and test around the edges.”

One antipoverty initiative led Mayor Bloomberg and CEO staff to Mexico. The country’s conditional cash transfer program, called Oportunidades, provides 5.8 million poor families with regular payments if they meet certain requirements, such as going for regular health checkups and keeping children in school. Children enrolled in the program are healthier and stay in school longer.

In 2007, CEO refined the Mexican cash incentive program and adapted it for New York City families. Opportunity NYC: Family Rewards became the first conditional cash transfer program launched in a developed country. During its first two years, the program offered 22 incentives, ranging from $20 to $600, for activities including children’s school achievement, preventive health care, and parents’ work, education, and training. “MDRC worked with CEO and other experts to refine it and adapt it for New York City, and we have put it to a very serious test,” says Jim Riccio, the lead MDRC researcher on CEO projects replicated in New York City from elsewhere.

To appraise its programs, the center uses a range of performance management and evaluation techniques, including random assignment studies. The control group is invaluable in measuring changes in poverty levels, particularly today. “In the current economic climate, of course poverty is going up,” Berlin says. “If you have a reliable comparison group, you may find that the poverty rate would have gone up even more.”

Early results from MDRC’s five-year evaluation of the Family Rewards program are promising. Cash rewards reduced debt and hardship and improved health outcomes and, among some high school students, academic performance. The program also cut poverty among participants by 11 percent.

RIPPLE EFFECT

After benefiting from their predecessors, White and her team return the favor by sharing what they’ve learned. All of CEO’s research and evaluation reports are available to the public on the center’s website. “Other places have done great work, but they don’t necessarily have it available for other people to look at,” says White. “We are really interested in formal and informal learning communities.”

Now, she will be able to expand CEO’s reach even further. The organization was the only government body to win a Social Innovation Fund federal grant of $5.7 million annually for five years to reproduce one or two of its five most successful programs, including the conditional cash transfer initiative, in New York City and seven other cities.

With the federal grant, CEO is replicating its savings account program in Tulsa, Okla., San Antonio, and Newark, N.J. Participants of the SaveUSA initiative are eligible for a 50 percent match, up to $500, if they deposit at least $200 from their tax refund into a SaveUSA account and maintain the deposit for a year. In New York City, the 2,200 participants of the original banking program saved more than $1.7 million in three years.

But not all of CEO’s programs have been worth replicating. As planned, the center has discontinued several of its less effective initiatives. Most programs that the center has cut were inadequately put into practice, had flawed models, or offered too few services. When the center partnered with just a single provider and tested a program that proved unsuccessful, researchers couldn’t decipher whether the program failed as a result of its design, location, or recruitment.

The center’s ventures, successful or not, are not always viewed as positive learning experiences—especially by Bloomberg critics. Heather Mac Donald, a fellow at the Manhattan Institute, has been a vocal challenger of the conditional cash transfer program.

“CEO has to deal with the fact that they’re in a political world and can take heat directed by political opponents,” Riccio says. He says the scope of the city’s poverty problem also can set the center up for failure. “They risk setting expectations that are beyond what they can do. The cause of poverty is affected by macroeconomic forces that the city can’t control.”

Despite these challenges, White and her CEO colleagues continue to innovate and test models that they plan to replicate in and outside of New York City. “It’s important to build on the basis of what other people know,” says White. “We’re working with what they’ve done and we’re trying to retool it and make it better.”

The organization is using some of the Social Innovation Fund award to create how-to guides for five of its antipoverty programs, so that other governments and nonprofits can replicate CEO’s star achievements. Says White: “I think part of the long-term value of the center is that we can spread so much of our knowledge base across the country.”

Corey Binns is a journalist based in New York City. She writes about science, health, and social change for publications including Popular Science and msnbc.com.

When Charlie Kroll was an undergraduate at Brown University, he had his sights set on a banking career. He shifted gears after a coveted internship fell through. Before graduation, Kroll started his own web development business from his apartment in Providence. His fledgling company struggled through the typical startup challenges, but eventually took off when Kroll and his team developed software for financial institutions. Andera, now a decade old, recently moved to larger quarters in Providence to house its staff of 85.

Andrew Yang, a lawyer turned entrepreneur, heard this success story a few years back when he shared a panel discussion with Kroll. Yang started wondering what might happen if more young graduates went the entrepreneurial route instead of heading into banking, consulting, or graduate school. “What if we had more of our best and brightest trying to become Charlie? What if they didn’t have to walk through fire to succeed? If we can have enough people creating 85 new jobs in our cities as opposed to becoming professional service providers,” Yang thought, “we’ll all be in better shape—individuals, society, the economy, the country.” Yang found himself with the time and resources to further investigate these what-ifs when Manhattan GMAT, a test preparation company of which he was CEO, was acquired by Kaplan.

Before launching Venture for America as a nonprofit in early 2011, with $500,000 in private donations, Yang talked with startups in several smaller cities to make sure there was demand for his idea. Despite depressed local economies, he found “phenomenal entrepreneurs” eager for the fresh talent he offered, especially at the below-market salaries they could afford. Yang already knew there was a ready supply of talent. He had met hundreds of 20-somethings during his years in the test prep business. “They’re interested in helping run, start, and build a company,” he says, “but they don’t know how to go about it.”

Venture for America will give them a chance to find out through hands-on experiences rather than textbooks or lectures. The first class of fellows, selected from an applicant pool of more than 500, will start with a boot camp in the summer of 2012 to learn practical business lessons. Then it’s off to spend two years at the elbow of entrepreneurs in locales where the rents are low but unemployment is high. Fellows will earn about $35,000 annually, plus benefits, and get a chance to land $100,000 in seed funding for their own venture at the end of the two years. Loosely modeled on Teach for America, Venture for America also will provide ongoing professional development throughout the fellowship.

Participating employers range from a renewable energy startup in Providence to an independent music licensing enterprise in New Orleans. In Detroit, several companies that are part of a new business hub will all take on fellows. The arrangement gives companies “access to top-tier talent with a fresh perspective at a very attractive price point,” says Josh Linkner, CEO and managing partner of Detroit Venture Partners. In return, Linkner adds, the fellows can expect “an opportunity to really understand the world of entrepreneurship from the inside. Even if they go back to big industry, they will have learned the nimbleness of startup life. If they continue to think like an entrepreneur throughout their career, it can have a significant impact on society.”

Yang hopes fellows will put down roots in the cities where they are assigned. “These are fantastic places to spend time and build a business,” he says. “Long term, we want people to innovate and create opportunities for themselves and others.”

Fellows also will come away from the experience with a strong network, including an A-list of entrepreneurs who have agreed to make themselves available as mentors and role models. First to sign on was Charlie Kroll.

During its 37 years, ShoreBank Corporation became the United States’ leading social enterprise of its kind: its for-profit bank subsidiary was the largest certified Community Development Financial Institution (CDFI) in the nation. Its social impact was significant: more than $4.1 billion in mission investments and more than 59,000 units of affordable housing financed. In 2008, ShoreBank had more than $2.4 billion in assets and earned more than $4.2 million in net income. It had inspired a national movement of community development financial institutions, shaped federal community investment legislation, and served as a role model for dozens of progressive banks. The company also had influence abroad, overseeing social and economic development projects in more than 60 countries and working with Muhammad Yunus to capitalize Grameen Bank and administer microloans to the poor.

So why did ShoreBank fail? What lessons can the social enterprise community learn from its record of success? And what can be learned from its closure?

The full answers to these questions will take years to answer, as the legal and regulatory process of winding up the bank’s affairs continues and the FDIC will not complete its study of the bank until August 2013. This has limited the freedom of participants to speak fully about their experience. But we have had the privilege to speak with two of ShoreBank’s founders and others who are familiar with the bank’s history and activities.¹

To extract lessons from ShoreBank’s failure one must understand its remarkable history. ShoreBank innovated at every turn—economically, socially, and organizationally. For almost four decades, it stood for the proposition that neither race nor wealth nor geographic location should bar an individual from access to capital to buy a home, build a business, or develop a community. The bank’s motto, “Let’s Change the World,” served as a marketing device and a rallying cry for progressive community activism. In time, however, it also became a political red flag, stirring to action opponents of the causes ShoreBank advocated.

Various explanations have been offered about why ShoreBank failed. One view holds that the bank was capsized by the financial tsunami brought on by the subprime mortgage crisis. Another view holds that it was management errors and misjudgments by regulators that made the bank vulnerable. And still another view holds that it was the highly partisan politics of Washington, D.C., that prevented the needed capital infusion. Although there is some evidence for each theory, none is complete in itself.

Part of the challenge of extracting lessons from ShoreBank’s failure is to disentangle various economic, governance, and political factors and understand how each contributed to the bank’s demise. In his famous study of the Cuban Missile Crisis, The Essence of Decision, Graham Allison examined the actors, events, and conditions of the 1962 confrontation through three conceptual lenses: rational decision making, bureaucratic decision making, and political decision making. No single lens provided an adequate perspective to understand all that took place, but the three perspectives complemented one another and shed light on the considerations facing President John F. Kennedy and his administration. We employ a comparable approach, looking at ShoreBank’s operating environment, culture, and decision making to illuminate what is known—and not known—about the organization.

A DIFFERENT BANK

ShoreBank was founded in 1973 in Chicago by a small group of colleagues from the Hyde Park Bank. In the late 1960s, Ronald Grzywinski, Hyde Park Bank’s president, and his colleagues Milton Davis, Jim Fletcher, and Mary Houghton had launched a successful urban development division focused on a minority-owned small business loan program. They were community activists as well as bankers, with a passion for changing the economic future of inner-city neighborhoods. These were the days of redlining, a banking practice that systematically denied credit to people in urban, low-income, minority neighborhoods. Nonprofit economic development organizations, although strongly mission driven, were limited by their ability to attract philanthropic support. As professional bankers, the colleagues envisioned a different approach to address the twin problems of access to capital and urban decay.

The vision was simple and radical: The bank would become an “agent of change,” promoting economic redevelopment by supporting viable inner-city businesses that would provide goods, services, jobs, and housing. A commercial bank could leverage capital from deposits and make loans to amplify the impact of its shareholder equity.

A 1970 amendment to the Bank Holding Company Act placed all bank holding companies under the supervision of the Federal Reserve Board. Two years later, the board issued a list of permissible activities, which included allowing bank holding companies to invest in community development corporations if the primary purpose was community development for low- and middle-income people. “That led us to expand our idea—from using a bank to using a bank holding company,” remembered Mary Houghton, a ShoreBank co-founder. Luckily, the Federal Reserve Board then issued a favorable interpretation of its own regulation that reinforced the belief that the bank could be a community development organization.

In August 1973, the founders acquired a small bank, the South Shore National Bank, with $800,000 of equity capital from a small group of private investors and a $2.25 million loan from American National Bank. After the Federal Reserve Board approved the creation of ShoreBank Corporation in December of the same year, the new bank began operating under the auspices of the holding company. This structure enabled the founders to join regulated banking activities with economic development activities. Grzywinski and his co-founders believed that access to credit was only one of the keys to successful community development. Affiliated for-profit and nonprofit organizations were needed to support local entrepreneurs with higher risk lending and to provide technical assistance services. As a bank holding company, ShoreBank could offer a more potent mix of financial products and tools to boost economic development. In 1973, this dual mission approach was a radical idea.

The intention, explained Grzywinski in a 2008 interview, was to “use all of the bank’s resources to bring about redevelopment” in an “almost totally minority neighborhood with all of the symptoms of deterioration.” Said Houghton: “Our goal was to actually reverse the deterioration in the housing market [in Chicago] and be a catalyst for appreciation in a specific local market. If we hadn’t concentrated our efforts but had … dispersed our lending in a larger catchment area, we wouldn’t have really changed the nature of a market.”

ShoreBank differed from traditional banks in both what it did and how it did it. These differences created social value for the community, but they presented challenges because they often came at a financial cost. According to the bank’s founders, it took a decade to achieve breakeven for banking operations. On the deposit side, lower deposit minimums—designed to make the bank available to all regardless of socioeconomic level—meant smaller account balances than the industry average. Time and creativity were needed to create a sustainable model for serving these accounts profitably. Moreover, ShoreBank’s loan business had smaller average transaction sizes than traditional banks, which meant that fees collected as a percentage of administering the loan were less than larger loans typical in upper income markets, although they required the same administrative time. And, as Houghton explained, loan officers were asked to make assessments of community improvement a priority: If it was good for the community long-term, then they were asked “to go to extra lengths to find a way to structure the deal so that it was bankable.”

Mission mattered. The ethos of moderate financial returns and strong social returns was made possible, in part, by the expectations of ShoreBank’s investors. ShoreBank stock was privately held by a small group of shareholders (which ultimately grew to 75), including religious organizations, nonprofits, and community organizations, as well as insurance companies, banks, and trusted corporations and individuals. As Grzywinski explained, this composition meant that all the investors in ShoreBank “invested with the understanding that the primary purpose of their investment is to do development and not maximize return on capital.”

At the same time, ShoreBank needed ongoing access to growth capital, in part because of the bank’s modest profitability and the limited pool of socially inclined capital available in the United States. The closely held nature of ShoreBank by a small number of mission-aligned investors created some long-term structural issues. Grzywinski explained that none of the shareholders, including the founders, had any liquidity for their shares. “That’s a real problem,” he said, “and it’s a real limitation on growth.”

THE GROWTH YEARS

For the first decade ShoreBank focused almost entirely on the South Shore area of Chicago because the bank founders wanted to work with local decision makers who had a deep understanding of the markets in which they were working. In the early 1980s ShoreBank began lending to a growing number of people and businesses in adjacent neighborhoods, and in 1986 it opened a new branch in another Chicago neighborhood with similar needs.

This expansion was tied to the founders’ goal of creating a replicable model. That belief was realized in 1987 when an invitation came from the Winthrop Rockefeller Foundation for ShoreBank to help start a banking operation in rural Arkansas, called Southern Development Bancorporation. ShoreBank helped raise the capital and managed the bank for a number of years until Southern Development Bancorporation’s board took over. Not long after the Arkansas project, ShoreBank initiated a program in Michigan, and then in Cleveland and later in Detroit.

In 1997, ShoreBank became the first banking corporation in the United States to address environmental issues. Through a partnership with Ecotrust, an environmental organization in Portland, Ore., ShoreBank Pacific was created as a federally regulated bank focused on the underbanked area of environmental business development. The mission was timely and the founders viewed it as an opportunity to expand ShoreBank’s deposits and operations.

In each market where ShoreBank created a federally regulated bank, it also created an associated nonprofit—such as ShoreBank Enterprise Cleveland, ShoreBank Enterprise Detroit, and ShoreBank Enterprise Pacific (later renamed ShoreBank Enterprise Cascadia)—which predominantly focused on higher risk business lending. The founders saw these additional activities as critical to their theory of change. Incorporated as nonprofits, the organizations were largely self-financing through their operations, supplemented by grants, and were not financed by the ShoreBank holding company.

ShoreBank also started other nonprofits and for-profits to further its social mission. For example, the Center for Financial Services Innovation grew out of an opportunity to deliver asset-building services to the underbanked. ShoreBank executives often were asked to speak in the United States and abroad about their mission-driven approach to banking and to partner with other social entrepreneurs. In 1988, ShoreBank organized a for-profit consulting company to manage all of this activity professionally.

By 2008, the ShoreBank Corporation was a complex organization consisting of three circles of activity. (See “The ShoreBank Corporation Network, 2008” chart below.) The center circle—ShoreBank, the for-profit, federally regulated banking business—accounted for the bulk of its $2.4 billion of assets, making a variety of community-focused loans. The second circle included the nonprofit organizations that provided complementary services to banking and nonbanking clients. A third circle was composed of the contractual and consulting services, which enabled ShoreBank Corporation to assist other mission-driven organizations. It is important to note that the FDIC’s closing of ShoreBank affected the Midwest bank, but not the other components of the holding company, which now operate as independent organizations.

ShoreBank’s growth brought problems, however. In Community Capitalism, Richard P. Taub described internal challenges created by ShoreBank’s rapid expansion. He noted the heavy travel schedule of ShoreBank’s founders, and a management structure that required much direct supervision. He also noted that ShoreBank had difficulty hiring future leaders who had top banking skills and a commitment to social values. ShoreBank’s Cleveland and Detroit banks were never as robust as the original Chicago bank, and Taub pointed to the challenges of operating in neighborhoods that suffered even greater levels of deterioration than Chicago’s South Shore.² In our interviews, the ShoreBank founders discussed how they realized that markets such as Cleveland and Detroit required more management oversight than the bank was sometimes able to deploy as well as banking tools that were matched to cities with failing manufacturing industries and less homogeneous economic conditions.

These challenges were seen as part of the learning process; they never forced a rethinking of ShoreBank’s mission or its business model. Over time, the ShoreBank Corporation was “modestly profitable,” to use Grzywinski’s words. From 1998 to 2008, the bank achieved about an 8 percent return on equity with net loan losses only slightly higher than those of commercial banks. By the end of 2009 ShoreBank Corporation was the nation’s leading entity of its kind. The for-profit bank was the largest certified CDFI in the United States. And the holding company’s subsidiaries and affiliates had made $4.1 billion in mission-driven loans. Through its international activities, ShoreBank provided consulting services in more than 60 countries and trained almost 4,000 bankers who provided approximately $1 billion a year in international community development loans.

This catalytic role was one of the most satisfying outcomes for the bank’s surviving founders, Grzywinski and Houghton. “We have made it legitimate for ourselves and others to use the nation’s banking system to advance the cause of development,” said Grzywinski. More broadly, we have contributed … to democratizing the availability of private nongovernment credit to lowincome and otherwise disadvantaged people. And we have done that in many parts of the world.”

Unfortunately, the world was about to change.

FINANCIAL MELTDOWN HITS CHICAGO

ShoreBank’s social enterprise accomplishments ran headlong into the 2008 financial crisis. The impact was most severe on the bank’s risk management and capital requirements. Management felt strongly that lending money, particularly to lower income people disproportionately affected by the economic crash, was imperative. It focused on customers who had been the victims of subprime lenders, and started a 2008 Rescue Loan Program to help refinance mortgages. But as the financial crises deepened, loan losses accelerated. Precise data are not publicly available, but by the end of 2008 ShoreBank had increased its loan loss estimate to $42 million (vs. $6 million in 2007) and recorded a net loss of $13 million (vs. net income of $4 million in 2007).

The FDIC and Illinois Department of Financial & Professional Regulation took formal action to address ShoreBank’s deteriorating financial condition in 2009. In April, the regulators rated ShoreBank as a “problem bank.” (Their January 2008 ranking was “fundamentally sound.”) This led to a visit from state and regional FDIC officials and, at ShoreBank’s request, a meeting with FDIC officials in Washington, D.C. The parties entered into a consent decree—known as a “cease and desist” order—that was formalized on July 20. Loans were revalued downward, and the need for new capital grew.

Capital is to a bank what water is to a person in the desert—the key to survival. ShoreBank began raising capital by issuing shares of common stock to private investors in the first quarter of 2009. The bank initially needed $20 million, but as its situation worsened throughout 2009, capital needs were reassessed. By July 2009, the bank was seeking $50 million to $60 million; this was revised to $80 million, and then $100 million by the end of 2009.³

The capital campaign was by turns difficult and exciting. The challenge of raising money during the nation’s most severe financial crisis since the Great Depression was daunting. But progress was made. By May 2010, ShoreBank had raised $146.3 million from 53 investors. But private capital alone wasn’t sufficient in the nation’s new banking environment. The private funds were placed in escrow, contingent upon ShoreBank’s receipt of $72 million from the Treasury Department’s Community Development Capital Initiative (CDCI), part of the wider Troubled Asset Relief Program (TARP) initiative. In late 2009, President Obama approved extending TARP to cover CDFI banks, thrifts, and credit unions certified as targeting more than 60 percent of their activities to underserved communities.

As ShoreBank’s fundraising continued, a new management team was installed. On April 30, 2010, George Surgeon, longtime senior ShoreBank executive and CEO of ShoreBank’s banking operations since 2009, assumed the role of CEO of the entire holding company. At the same time, David Vitale, a highly regarded Chicago banking executive and civic leader, came on board to raise capital. The new leadership submitted ShoreBank’s CDCI application on March 1, a full month before the deadline, and on May 19 the FDIC’s Chicago Regional Office recommended that ShoreBank receive CDCI funds and forwarded the bank’s application to the FDIC’s Division of Supervision and Consumer Protection for further action. On May 26, ShoreBank Corporation announced further changes, bringing in a new executive leadership team to support Surgeon. Vitale became executive chair and a new president, chief operating officer, and CFO were announced—all of whom had successful track records in the mainstream banking industry. Grzywinski and Houghton officially retired.

ShoreBank’s situation was in public view, and a number of Illinois supporters, notably Rep. Jan Schakowsky (D-Ill.) urged the Treasury Department’s acceptance of the CDCI request. Rumors circulated that ShoreBank had “friends in high places,” particularly at the Obama White House.⁴ On May 21, television personality Glenn Beck set out to “expose” ShoreBank as something other than a “really good local bank.” He asked why Wall Street heavyweights such as Goldman Sachs were pledging millions to assist ShoreBank, insinuating political motives. Republican legislators openly questioned the administration’s support for ShoreBank at the same time new rules were being drawn for the financial services industry.⁵ The political temperature of the rescue escalated.

ShoreBank’s funding request required a review and vote by an interagency group representing the FDIC and other federal banking agencies. This CDCI Interagency Council considered ShoreBank’s request on May 26 and again on June 2—and, according to FDIC Inspector General Jon T. Rymer, deferred a vote both times because of concerns about asset losses and the bank’s ability to raise capital. Each time, the bank renewed efforts to reassure regulators. In early June a rumor surfaced that unnamed Federal Reserve Board staffers believed ShoreBank would need $300 million of additional capital to survive. Finally, on June 15, ShoreBank’s application was considered for a third time. The council remained divided: The FDIC recommended that ShoreBank receive CDCI funds, but representatives from the Office of the Comptroller of the Currency, Federal Reserve Board, and Office of Thrift Supervision voted no. As a result, the application was not forwarded to the Treasury Department for further consideration. Without CDCI funds, the assembled private capital could not be released from escrow, leaving the bank severely undercapitalized. That settled ShoreBank’s fate—it would have to be closed.

From June to August, negotiations took place as to how ShoreBank would be closed. There were few bidders. Negotiations among FDIC officials, ShoreBank’s new officers, state regulators, and potential investors gave rise to the idea of creating a newly chartered institution to purchase the assets of ShoreBank—including banking operations in the Midwest, but not the other assets of the holding company. This became reality with the creation of Urban Partnership Bank, which was granted an application for deposit insurance and a state charter by Illinois on Aug. 16, 2010. Four days later, ShoreBank was closed by order of the state of Illinois and Urban Partnership purchased its assets.

Urban Partnership Bank currently operates as an FDIC-insured bank whose mission includes promoting economic sustainability and serving the needs of low- and moderate-income groups in Chicago, Cleveland, and Detroit. It is owned by the financial institutions, foundations, companies, and individuals that sought to continue ShoreBank. Twenty-two of the 53 investors, representing $139 million of the $146 million pledged to save ShoreBank, transferred their investments to Urban Partnership Bank. Three of Urban Partnership Bank’s current senior leaders were executives who had joined ShoreBank during the period of FDIC supervision and resolution.

LESSONS LEARNED

The closing of ShoreBank presents a fascinating set of puzzles for analysts. Conventional wisdom suggests that ShoreBank was a victim of simple economic realities: too little capital in the face of an unexpectedly deep recession. Some might argue that this shortage was caused, in turn, by ineffective risk management and a history of operating decisions that settled for a below-market return on investments. But we believe these arguments are flawed or, at best, incomplete. The bank needed capital, true, but so did hundreds of other US banks during the financial meltdown. The bank’s operating policies and risk management had succeeded for 35 years, through recessions and industry crises, and it was rated highly by regulators until the 2008 financial crisis. It responded well to the crisis, and the regional FDIC office recommended it receive CDCI funds.

Another possible analysis is that ShoreBank suffered because it was not seen as “too big to fail.” Had it been much larger, the federal government might have saved it from collapse. But the federal government was not concerned about smaller banks or banks that were socially beneficial, in other words, “too good to fail.” Had ShoreBank’s catalytic role in the communities it served been more broadly understood and accepted, it might have mustered the necessary political support for a rescue package.

A third possibility is that the interagency vote against CDCI funding for ShoreBank was a politicized vote. On May 14, Fox Business Network commentator Charlie Gasparino reported that Wall Street bankers “personally” told him there was “political pressure put on them to bail out ShoreBank.” No details were offered. The support of Democratic legislators and past contacts between ShoreBank executives with members of the Obama administration, including Senior Advisor Valerie Jarrett and President Obama himself, prompted Republicans to challenge the ShoreBank bailout. John D. McKinnon and Elizabeth Williamson reported in The Wall Street Journal on May 20, 2010—before the interagency votes—that questions raised by members of Congress about ShoreBank’s alleged use of political influence were greatly complicating its efforts to raise private capital from large banks and CDCI funds.

“Republican lawmakers began two inquiries into the rescue of a pioneering Chicago community bank by some of Wall Street’s biggest financial firms, saying political considerations appear to be at work,” McKinnon and Williamson wrote. “Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein was personally making fundraising calls to other banking executives, seeking private sector pledges totaling $125 million for the failing community development lender, Chicago’s ShoreBank Corp. After initially declining to invest, Goldman itself promised at least $20 million in recent days.”

According to McKinnon and Williamson, on May 19, Rep. Darrell Issa of California, ranking Republican on the House Committee on Oversight and Government Reform, wrote a letter to the White House to complain. “It is important to avoid even the mere appearance that Mr. Blankfein is attempting to curry favor with the administration by contributing money to save the White House’s favorite community bank,” Issa wrote. In a second letter to President Obama, Republican lawmakers cited assertions by some bank representatives that the White House pressed them to contribute to the ShoreBank fundraising. Rep. Spencer Bachus of Alabama, the top Republican on the House Committee on Financial Services (a long-standing critic of community development banks), and Rep. Judy Biggert (R-Ill.) said the allegations “raised questions as to whether the government was rescuing a politically connected bank while letting hundreds of others fail.” ⁶

The ShoreBank story virtually defines the toxic politics of Washington today. Rather than spend $72 million, with the potential of repayment, to support a bank with a multi-decade track record of adequate liquidity and positive economic development impact—objectives favored by both Democratic and Republican administrations—the Deposit Insurance Fund has been saddled with a loss of more than $330 million. The reason? After ShoreBank was closed, the FDIC entered into a loss-sharing agreement with Urban Partnership Bank in which FDIC absorbed a large share of $329 million of losses to provide the new bank with a healthy balance sheet. (This estimate was revised to $452 million in January 2011.) Meanwhile, the investigation by Rymer, prompted by Republican members of Congress, concluded there was no wrongdoing by either ShoreBank or the FDIC. According to Rymer, the large investors in ShoreBank and Urban Partnership Bank invested “primarily because they believed in ShoreBank’s mission and they did not feel pressure to invest as a result of the FDIC chairman’s calls.” ⁷

Beyond this lesson in toxic politics, there are several big-picture lessons to be gleaned from the closing of ShoreBank. First, an organization’s social mission must be balanced with financial realities. A social mission should serve as a powerful incentive to strengthen an organization’s operating systems from the harsh consequences of the economy, competition, or a hostile environment. Clearly adequate for normal times, ShoreBank’s credit and risk management processes were not sufficient to withstand the full force of the financial meltdown. Concentrating most of its loans among low- and moderate-income people and businesses in inner-city Chicago, Cleveland, and Detroit fulfilled the bank’s social mission, but it also exposed it to significant risk during an economic downturn. The rapid deterioration of the bank’s assets and loan portfolios was magnified by regulatory resets, as loan portfolios had to be revalued downward with the deepening recession. This damaged the bank’s balance sheet and exacerbated the need for new capital. The lesson here is clear: For market-based social ventures, mission should be highly integrated with and responsive to the changing realities of the market.

ShoreBank also provides a cautionary lesson about new organizational models and resource limitations. There was genius in the idea of using a bank holding company to own and operate for-profit and nonprofit entities focused on the same social mission. And the founders’ passion for replicating the model and assisting others to learn from it was admirable. Like all experimental ventures, there were failures and successes and demands for ongoing learning and refinement. At the same time, legitimate questions remain about whether the resources of the holding company were sufficient for the breadth of its activities. Could ShoreBank have achieved the same results through partnerships with independent nonprofits rather than by housing them within the holding company structure? There is an argument for coordination and control through a holding company structure, but particularly in the new economy, there is a counterargument for more flexible, less burdened organizational models.

Lastly, did ShoreBank succeed in hiring enough new leaders—both strong in banking knowledge and passionate about the social mission—who could run the many pieces of the holding company? Operations in Cleveland and Detroit were disappointing, but the operations were not shut down. Should they have been? Could resources have been more effectively used elsewhere, in some of the more specialized lines of business that produced healthier financial and social impact? Experimentation is necessary and expected, but learning—and making changes, including some that are painful—is vital.

In the end, ShoreBank leaves an almost four-decade legacy of innovative ideas: It demonstrated that careful re-engineering of the market-based banking system can achieve adequate profitability and deliver strong social impact. ShoreBank also proved to be a catalytic presence in its community, in the banking industry, and throughout the world. We believe this is a dual legacy that matters and endures.

ShoreBank’s commitment to progressive banking lives on in the community development banks it inspired and, more directly, in the Urban Partnership Bank, whose mission is closely aligned with what ShoreBank’s once was.⁸ ShoreBank Pacific lives on through OneCalifornia Bank (now One PacificCoast Bank) and ShoreBank International is now a leading financial advisory firm. Last, many of the nonprofit entities now operate as independent nonprofits (mostly under revised names) and continue their original missions of aiding economic development through investment, research, and consulting services.

Taken together, ShoreBank provides an important lesson about value creation that is social in nature. In late 2008, Grzywinski said that although ShoreBank had failed to prove that a broader social usage of capital was an idea whose time had arrived, “certainly it was an idea we think is on the right side of history.” Indeed, the world needs radical, more effective, scalable approaches to address social problems. These will come only from those who are willing to operate in uncharted territory. Innovative organizations like ShoreBank, which harness the capitalist system to produce positive social outcomes, continue to offer promise for the future.

ShoreBank was never perfect, but it was too good to fail.

James E. Post holds the John F. Smith, Jr. Professorship in Management at Boston University. He is co-author of Redefining the Corporation: Stakeholder Management and Organizational Wealth. In 2010, he received the Aspen Institute Faculty Pioneer for Lifetime Achievement Award in the field of business and society.

Fiona S. Wilson is assistant professor of strategy, sustainability, and social entrepreneurship at the Whittemore School of Business & Economics at the University of New Hampshire.

KaBOOM! connects dollars and volunteers from corporations, such as Target, Snapple, and Home Depot, with communities in need to rally around a single tangible goal: the building of a kid-designed playground in one day. Community members and volunteers get to see the fruits of their labor right away (hence, KaBOOM!), creating an “achievable win,” as Hammond calls it, and a vivid sense of potential. During the past 15 years, KaBOOM! has been one of the fastest growing nonprofits in the United States. It now has an annual operating budget of more than $20 million. It has raised more than $200 million and harnessed a million volunteers to create more than 2,000 playgrounds primarily in low-income communities, a remarkable track record.

Hammond’s account of his emergence as a passionate and visionary social entrepreneur is inspiring. After growing up in a group home and dropping out of college, he describes how he found his calling in the service movement. He developed KaBOOM!’s innovative program and business model, established an upbeat organizational culture, instituted quality control standards for program replication, and nurtured the organization’s expansion. He reveals how he learned to delegate, and he refreshingly admits to just “winging it” at times and making some pretty big managerial mistakes. Hammond describes how he “turned a mission into a movement” by increasing advocacy efforts and freely sharing tools and expertise through online social networks to enable others to construct more than 1,600 do-it-yourself playgrounds.

Hammond identifies “cascading transformative change” in communities as KaBOOM!’s intended impact and writes that “we measure our success by looking at what happens after we leave.” He notes that an impressive 86 percent of the sites are maintained and that the planning and building process helps foster stronger communities. His point is that it matters how children use the playground and how community members continue the momentum and join forces to organize other efforts. Yet most of the evidence in the book about KaBOOM!’s longer term social impact is anecdotal. The statistics on outputs and the stories about positive community change are compelling, but the book would be even richer with more thorough documentation.

Hammond writes that “no single individual or organization can do enough on its own” and praises his senior team, board chairs, and other groups. Nevertheless, the story would have benefited from more detail about and insights into how the board and executive staff shared leadership and worked to make tough decisions, set priorities, and allocate scarce resources. Likewise, Hammond says little about co-founder Dawn Hutchison, the unfolding of their respective roles, and her departure from the organization. More also could have been written about how KaBOOM! has participated in coalitions with other leading organizations in the field, such as Playworks, which sends trained play coaches to urban low-income schools. The book’s subtitle—How One Man Built a Movement to Save Play—is individualistic, not collective.

Hammond makes a strong case that play is a necessity, not a luxury. While reading the book, I took a walk in a neighborhood outside of Detroit at sunrise, while children were still asleep. I noticed a nice playground that had a sandbox full of shovels, pails, and toy trucks. The kids in the community had not taken their playthings home, but left them there as a shared resource—the essence of social capital. Later that day, the playground was bustling with children who were exploring, sharing, refereeing, engaging, and inventing. Hammond explains how play teaches children how to practice adult roles. It enhances cognitive and physical development, creativity, and cooperation. And it helps prevent childhood obesity.

This book goes beyond children’s play. By reading it, social entrepreneurs and nonprofit leaders, along with the funders, investors, and advisors who support them, will get some solid, practical advice about how to grow a social enterprise, adapt programs and operations along the way, and amplify impact.

Paul Connolly is chief client service officer of TCC Group, a management consulting fi rm that provides strategy, evaluation, and capacity-building services to foundations, nonprofit organizations, and corporate community involvement programs.

Selling body parts is mostly illegal in the United States. The Anatomic Gift Foundation and the dozen or so other nonprofit and for-profit ventures that have sprung up in the last decades say they don’t trade in cadavers; they offer procurement services. If there’s a whiff of the body snatcher in this, there is also the strangeness that comes with the creation of an industry. According to Michel Anteby, an associate professor at Harvard Business School, the moral legitimacy of a new market can come as much from how you sell something as from exactly what you’re selling.

Other once-suspect trades have become mainstream—we now readily buy life insurance and sperm. Scholarly accounts of this kind of gradual market legitimization mostly have focused on conformity: New ventures conform to societal ideals, or prior models, or customer demands. Focusing on New York state’s commerce in cadavers in 2007, Anteby found that cadaver entrepreneurs are attempting to create moral legitimacy in a vacuum. They follow no precedent, and their customers “are not vocal or strong enough, not to mention often alive, to defend the ventures.”

Instead, the ventures try to deflect accusations of illegitimacy or immorality by emphasizing the moral approach to their practices. “In the same way that food can be deemed halal or kosher because it was prepared in a different way, the programs are trying to make arguments around the morality of their pursuit based on how they treat the deceased,” says Anteby. “‘How we operate makes us more moral than you.’”

At Research for Life, a for-profit company based in Chandler, Ariz., CEO Garland Shreves considers it his mission to raise the standard of service in the industry. Unlike the traditional whole-body donation programs at medical schools, Shreves says, his company answers the phone day or night, will never reject a donation his company promised to take, and offers free spiritual counseling to the family of the deceased.

Shreves’s good practices, however, don’t guarantee a moral cadaver industry. The flipside, Anteby says, is that “if I know how you operate and what makes something moral, I can import your practice and claim morality.” After all, any pioneering social entrepreneur can anticipate the benefits of a new venture—be it fair trade or microcredit to the poor—but “there might be a danger in creating precedent in a market that’s not yet completely legitimate and then opening it up to other players who might have very different goals and motives,” says Anteby. “You’re legitimizing not only your market, but the market more broadly.”

Michel Anteby, “Markets, Morals, and Practices of Trade: Jurisdictional Disputes in the U.S. Commerce in Cadavers,” Administrative Science Quarterly 55, 2010.

Child returned to the same data others cite when they make the case that nonprofits are relying more and more heavily on earned income over donations or grants. One incriminating indicator, “unrelated business income,” is the money a museum makes from selling Empire State Building snow globes (which presumably don’t bring fine art to the people) but not from reprints of Vincent van Gogh paintings (which do). Although unrelated business income did increase by more than 250 percent in the nonprofit sector between 1991 and 1997, so did total revenue; snow globe peddling as a proportion of aggregate total revenue has remained steady since the early 1990s at about one half of 1 percent.

The Nonprofit Almanac’s data go back farther, to the 1970s. It’s true that nearly half the growth in total revenue from 1977 to 1997 came from fees and charges. But it’s also exactly what we should expect, says Child: In 1977, fees and charges already accounted for nearly half the revenue in the sector. Looking at program service revenue or commercial revenue data from the Urban Institute’s National Center for Charitable Statistics doesn’t change this picture; the proportion remained constant from 1986 to 2004. If growing commercialization means increased reliance on earned income, it looks very much like commercialization is not growing.

Burton Weisbrod, professor of economics at Northwestern University and editor of To Profit or Not to Profit: The Commercial Transformation of the Nonprofit Sector, objects to defining it so narrowly. “To talk about the effect of commercial forces is not the same thing as to say what fraction of revenue is coming from user fees,” he says. “Those are rather different questions.” Commercial interests especially permeate higher education and hospitals in ways that don’t show up in Child’s statistics. When the pharmaceutical company Novartis gave the University of California, Berkeley, $25 million—and got two seats on the five-person committee that decided which research projects the money would support—that counted as a “donation.” There is also a time horizon problem, Weisbrod says. The extremely high percentage of commercial revenue in hospitals began with the creation of Medicare, which predates the available data by a dozen years.

So to what extent do market forces enhance or corrupt nonprofits? Child, for his part, isn’t taking sides yet. He recommends simply “tempering the debate about whether commercialization is good or bad for the sector, and just answering the empirical question first.”

Curtis Child, “Whither the Turn? The Ambiguous Nature of Nonprofits’ Commercial Revenue,” Social Forces 89, 2010.

I remember arriving at Dhaka airport, clutching a notepad and holding a pen, with the immense desire to understand how Grameen had managed to empower millions of poor women through the simple technique of providing small, affordable loans. What was this fairy dust that allowed millions the ability to turn their dreams into reality? There were many things I learned during my 10-week sojourn in Bangladesh. They are perhaps best reflected in the story of Khairunissa Begum, a woman in her 50s whom I met in a remote village in the Bay of Bengal. It took me 24 hours on a launch from Dhaka to reach her small village in Patuakhali. I was stuck both by the area’s majestic natural beauty and by the simple lifestyles of the people.

Khairunissa had taken a loan of $100 from the Grameen Bank and invested it in her business. From that first loan transaction and the confidence it imparted, over time she built up a mini-financial empire in her community by owning a mithai (sweet-meat) store, a poultry farm, and a thriving public telephone call office. In other words, Khairunissa had become the business tycoon of her area. Khairunissa’s story is typical of many microfinance clients who start life in the throes of poverty facing an ocean of indignity, where the only things they own are the clothes on their back. In her case, she started her life owning only one sari, which she would wash from one side first and then wrap the wet end around herself before washing the other side, as she did not have the resources to buy another. Through the help of microloans, she now owns dozens of colorful saris, along with assets like a home and livestock, which she never could have imagined possessing a decade ago.

I was bitten by the microfinance bug after spending time at Grameen. But I was not entirely confident that I could transfer the learning to Pakistan. Yunus was adamant that Pakistan needed a similar enterprise, and he was willing to give me a loan of $10,000 to start a project along Grameen’s lines. But where was I to start and how? The first thing I had to do was to overcome my own insecurities; the fear of failure tormented me. But Yunus said, “Roshaneh, if you fail, tell the world it was Dr. Yunus’s fault!” I was lucky to have mentors like him who understood what it meant to set up a new entity from scratch.

The first step involved an extensive dialogue with women across urban and rural Pakistan, where my colleagues Sadia Khan and Mahbina Waheed and I set out to understand the constraints and challenges facing female business managers. I heard time and again from self-employed women that they had the skills, knowledge, and aspirations to grow their businesses, but they lacked access to capital to expand to the next level. During this research expedition, I was sitting with a young woman in a remote community in Okara, Punjab, who wove extraordinarily beautiful baskets and dreamed of selling her wares in Lahore, Pakistan’s second largest city. I realized that I had to help her with a financial solution, and that a specialized microfinance program targeting women from low-income communities was the need of the hour.

From 1995 to 1998, I launched a small action research program for microlending in three communities around Lahore. This was a period of myth-breaking for me and for many people—economists, civil activists, academics—who questioned the wisdom of what I was planning to do. I was extremely lucky that my own family, who are broad-minded intellectuals and have excelled in the diverse fields of law, art, and civil society, was sold on the idea of my development experiment and supported me from its inception. The first myth that I had to break in my mind was the visibility of women’s role in the local economy. I had grown up with the belief, corroborated by Muslim feminist literature, that low-income communities are divided into male and female spaces. Thus I assumed that the moment I arrived in a village, I would not see women transacting business in marketplaces and that most female businesses would be home-based.

So on my first day of work as a Kashf loan officer in a village 25 kilometers outside of Lahore, I was pleasantly shocked to meet a female entrepreneur. When I went up to her to ask her whether she was sitting at her husband’s store while he was away on an errand, she was both offended and amused by my question. At that moment I realized that I had imbibed millennia of patriarchal attitudes by making this assumption, and that I needed to change how I saw my own society. When I went into the store, she had customers. She asked me to sit down while she sold her male clients cigarettes and other items. Then she told me about a dozen other women like herself who were buying and selling, negotiating and contracting business, within and outside this community, and intermingling in the world of men.

Pakistan has been associated closely with the war on terror and highlighted as a country that continues to be a nursery for radical extremism. There is some truth to this picture. And yet, if we use this brush to paint a portrait of the country, our view will be too simplistic, for Pakistan is a complex country facing major economic, social, and political issues. Unlike other parts of South Asia, Pakistan was a latecomer to the field of microfinance, and it was only after the Kashf Foundation’s inception in 1996 that the concept of low-income microfinance emerged. Like other parts of the region, however, the microfinance sector in Pakistan grew rapidly, at an average rate of 40 percent per annum until 2007 and with a market penetration rate of 10 percent. In other words, despite the rapid growth of the microfinance industry, today it meets the needs of only 10 percent of the overall households that require such access.

A recent study by the UK Department for International Development, titled Access-to-Finance, has shown that more than 86 percent of households that require microfinance and other financial services in Pakistan are deprived of them. Also, overall microfinance operations in Pakistan are focused on retailing loans through a group lending approach, and there is little work being done on microsavings. Since 2002, however, eight microfinance banks have been established to offer savings accounts. Yet only 2.9 million people have access to these savings services, or around 12 percent of those who need them.

Currently, Kashf is providing loans from $150 to $500 to 300,000 families through a network of 150 branches. Originally, we followed a group lending approach, like Grameen Bank, but two years ago we moved to a business appraisal lending model, where we focus on building the entrepreneurial capacity of women and their families. The past few years have been difficult for the country, however, both economically and socially. Some politicians, seeking cheap public favor, have instituted loan write-offs, weakening consumer credit discipline and our ability to expand our programs. In turn, we have modified our methodology by focusing on a more customized lending approach.

Our new approach involves an extensive appraisal with our clients of the businesses they intend to invest in, as well as advice and training in areas such as debt management, financial budgeting, and savings. This focus on client education ensures that a strong and responsible relationship can be established between the customer and the microfinance institution, and that financial decisions result in economic opportunities for the client and her family. We have introduced an extensive client relations program, which includes a complaint resolution process and telephone hotline. Furthermore, over the past 17 years, we have realized that there was a missing link in our work: Savings is equally important for the economic empowerment of women and their families. As a result, we established the Kashf Microfinance Bank, a licensed entity that offers savings products to our clients along with credit and insurance.

Many people ask me whether the work of Kashf can make a difference in a country where 85 percent of households live on $2 or less a day. This question reminds me of the story of a boy who found himself on the seashore surrounded by thousands of dying fish. The boy started to pick up one fish at a time and throw them back into the sea. A man watching him from afar came up to him and asked why he was wasting his time. The boy said that if he could save even one fish, he would have fulfilled his purpose in life. I agree that microfinance is not a silver bullet, but it certainly changes lives. I recently met Kiyenat (which means universe in Urdu), the daughter of one of my clients. She was dressed in a clean blue uniform with blue ribbons in her pigtails, and when I asked her about her school day, she quickly took out her English workbook and proudly shared her lesson with me. That is the change that microfinance can make. It can change the opportunities for the future generations.

Roshaneh Zafar is founder and managing director of the Kashf Foundation in Pakistan. Previously, she worked for the World Bank in Islamabad.

When he returned to Northwestern University’s Kellogg School of Management that fall, Youn drew up plans for One Acre Fund (OAF). The organization provides farmers who live off their harvests with a loan of about $75 to buy a bundled package of seed, fertilizer, eight training sessions, and crop insurance. Farmers pick up these supplies and receive training at depots set up no farther than two kilometers from their homes. Two weeks after a harvest, farmers must repay the loan.

The model is simple. But so is the solution to feeding the approximately 100 million subsistence farm families, who account for a large share of the world’s poor people, says Youn. “We have known for decades how to make their farming twice as productive—seed, fertilizer, training, and market access. This is an incredible opportunity that for some reason has gone untapped throughout the world.”

Since OAF opened for business in January 2006 to 40 farm families in Bungoma, it has experienced considerable growth. In 2010, OAF served a total of 30,000 families in six districts in Kenya and Rwanda. This year, Youn, who started the enterprise with $7,000 of his own money, aspires to raise $5 million, earn about $4.5 million in program revenue, and reach 60,000 families, “We have built everything for scale from the beginning,” he explains. “Our ambition is to make a real dent in helping out the world’s subsistence farm families.”

LOCAL STAFF, LOCALIZED EXPERTISE

To reach so many families and still make an impact, Youn made critical choices about both the organization’s staffing and its model—the investment package for farmer families. First, Youn and his colleagues decided to staff the field organization completely with local farmers, who are then trained and fostered by the organization. Today, OAF counts 600 staff members who all live locally. “This makes our program delivery very inexpensive and lean, and I also believe that these ‘regular’ farmers are able to deliver superior training in our context,” says Youn.

One of OAF’s earliest clients, Everlyne Mamai from western Kenya’s Chwele District, looked frail when she signed up to farm with the organization during a hunger season. During this time, families typically eat 40 percent less food than in the plentiful months. With profits from her first OAF harvest, Everlyne made bricks. With the profits she made from selling bricks, she bought a cow and named it One Acre Fund. While her husband continues to grow maize as an OAF farmer, Everlyne has worked her way up the organization. She handed out loans and supplies as an OAF field officer. Within a year she was promoted to her current position as a field manager, where she now oversees five field officers. She recently completed a six-month management program run by OAF where, with other top managers, she learned to give constructive feedback and to use Microsoft Word and Excel. Her extra income has paid for an addition to the family’s home and secondary school tuition for two of her children. Most important, Everlyne’s family no longer starves during the region’s hunger season.

To reach as many families like Everlyne’s as possible, Youn developed a scalable model inspired by McDonald’s. Just as the fast-food chain has made each store operate uniformly by systematizing it and de-skilling every job, One Acre Fund takes a similar approach by offering only a simple, easily replicated bundle of supplies for farmer families. Once some organizations have built trust within a community, they’re often approached to do more—fund a library or build a school. Youn and his team have made a point not to take on any extra commitments. “One Acre Fund has said, ‘We’re going to do what we do well and we’re going to do it with laser focus,’” says Anne Marie Burgoyne, a portfolio director of the Draper Richards Kaplan Foundation and a former OAF board member.

But Youn admits not all growth has been easy. “We have gotten everything wrong at some point—our agronomy, our repayment procedures, our HR [human resources] practices, our farmer enrollment strategies.” OAF throws out dozens of trials every few months, and Youn isn’t afraid to admit that most of them fail.

The organization took one of these missteps when they recruited a few dozen farmers for initial trials in Uganda. The relatively larger land sizes in Uganda where population pressures have yet to hit hard, unlike in Kenya and Rwanda, give Ugandan farmers less reason to improve their yields from a single plot. Instead, they prefer just to plant on additional land. As a result, OAF found that Ugandan farmers had a lower demand for their services. “Given that there are tons of other countries where our model does fit, we decided not to launch in Uganda in the near future,” Youn says.

In the countries where One Acre Fund already operates, it works alone. It doesn’t partner with NGOs because in the rural areas that OAF serves there are none; its customers are off the grid. Yet Youn has intentionally made his model open source in the hopes that others will adopt and move it into underserved regions. In the meantime, OAF has worked to collaborate with governments. Already, they have formed a strong relationship in Rwanda, working on the country’s behalf to hand out government- issued vouchers for fertilizer. Political unrest in Kenya has slowed progress there. But OAF has been invited to make a presentation to Kenya’s Ministry of Agriculture in November 2011.

Youn and other OAF staff members live in the rural parts of Kenya and Rwanda, so that they can carefully monitor the success and failure of their farmers. OAF officers annually conduct randomized trials by measuring the harvests of OAF farmers and comparing them with the yields of farmers who have yet to sign up for the program. They then share their results with everyone from donors and farm families. “We can tell precisely what impact we’re having,” says founding board member Matt Forti. “For every planted acre, we’re tripling the yield that comes out of the ground.”

FUNDRAISING FOR AGGRESSIVE TARGETS

As they regularly prove the model’s success and expand, Youn and Forti have had to evolve their fundraising strategy. “We constantly revisit our funding model,” says Forti. Five years ago, Youn began fundraising by asking his business school classmates for $20 donations, enough to support a farm family of six for one month. But those small gifts could not sustain the organization’s rapid growth. The OAF 2011 budget adds up to $7.5 million, but its ambitions are even grander. Within the next 10 years, Youn hopes to serve 1.1 million farm families, or about 5.5 million people. “Even though small gifts will always be one of our strategies, we’re not complacent to think that they can fund our next stage of growth,” says Forti.

Their tenacity has brought fairly large grants and prestigious recognition from the Draper Richards Kaplan Foundation, the Skoll Foundation, and Pershing Square. In 2010, OAF brought on Tony Kalm, the organization’s first full-time fundraiser. In addition, Forti says they are always looking to evolve their board of directors and are searching actively for new members, especially those familiar with franchising operations like Starbucks and McDonald’s. Burgoyne notes that this carefully selected board works as a credible proxy for Youn when he is in Kenya.

Still, keeping up with Youn’s ambitions to reach 300,000 farm families, or 1.5 million people, by the end of 2015 will take much more fundraising and efforts from groups other than OAF. The team is looking for more partnerships with governments and possibly NGOs. “Andrew sees a limitless need out there and always seems to meet his very aggressive targets,” says Forti.

For Youn, the most gratifying part of the job is talking to families in the rural areas, and seeing the food that they have stored in their homes in bags provided by OAF. Kenyan farmer Christine Walela used her first bean harvest to buy a cow, which produces daily milk to sell. She then produced a maize harvest that tripled her prior harvest and allowed her to put two of her children in a better school. What’s more, she has a metric ton of food stored in her home right now. That’s more than enough to feed her family for a year and have leftovers. Her story is a very common one for OAF families.

“They are using their surplus to invest in school fees, cows and chickens and goats, new businesses, and new roofs for their houses,” says Youn. “It is a really wonderful thing to see.”

Corey Binns writes about science and health for Popular Science, Scientific American, Women’s Health, and Scholastic’s Science World.

I have started successful and unsuccessful for-profit and nonprofit ventures. My goal in writing this article is to help other social entrepreneurs navigate these waters. I am not, however, a lawyer, and I cannot offer legal advice about creating a venture. Rather, I want to guide you through the issues that you need to consider before you even begin to think about choosing an attorney or getting help structuring your social venture.

The first thing to remember is that the legal structure is simply a tool for accomplishing your goals. Deciding structure first may lock you into a direction that won’t get you where you want to go. It is important to take the time to explore your idea first; then answering the legal structure question will be easier.

Selecting a legal structure is not a question of moral purity. I am structure agnostic: I believe that for-profit and nonprofit structures can both be good vehicles for improving society. You should look seriously at both as part of your toolkit as you’re creating your new social venture.

If personal wealth is a primary motivation and changing the world for the better is a nice benefit but not fundamental, it is pretty clear that you should create a for-profit structure. Being a for-profit typically gives you more flexibility and control, especially if you’re the sole or controlling shareholder. This flexibility gives you the freedom to completely change your business if you spot a new and more lucrative opportunity. And you can still create an ethical and responsible for-profit. If giving away money or providing services at below cost and feeling good about it is your primary or only motivation, then your answer is similarly easy. The U.S. 501(c)(3) nonprofit structure was created to serve this purpose. If your ideas fall somewhere between making lots of money and giving most of it away, there are many ways to structure a venture to accomplish these goals.

Before looking at what type of legal structure to create, you need to explore the four issues that will illuminate your ultimate decision: what your motivation is for starting the venture, what market you are targeting, how you plan to raise capital, and what type of control you want over the venture.

MOTIVATION

Most new ventures fail. If you are going to take on the risks and responsibilities of a new venture, you need to be motivated to succeed. That is why it is important first to understand your motivation for starting a new social venture and your definition of success. Social entrepreneurs are typically driven by the goal of making positive change in society, but other factors may also influence your motivation. Almost all ventures change dramatically during their formative periods. It’s certain that several things that you know for sure right now about your venture are wrong. You just don’t know which ones. In the face of that uncertainty, what is going to remain constant and guide you in making the hard decisions?

How fundamental is the social mission? Assuming that your motivations are not purely financial, you need to understand how essential the social mission is to the success of your venture. Is your primary goal social change? Are you willing to pass up lucrative financial opportunities that would take the venture away from social change? How will you prioritize the social bottom line if the venture is in peril? Does your venture exist if the social impact is removed or minimized?

What are your personal financial objectives for this venture? Many entrepreneurs make financial sacrifices in the course of creating a start-up. These sacrifices are often justified to oneself or to one’s family by the promise of an eventual financial payoff. As you approach a social venture, you need to be clear what your financial parameters are. How much of your own money are you willing to invest in the venture, either in the form of cash or in forgone wages (compared with your market value)? Even successful social ventures that reach financial sustainability (break even on an ongoing basis) may never recoup the initial investment. Can you (or the investors) live with that possibility? It’s possible to make a decent living running a social venture, but you are not likely to get rich. Is that okay?

How do you define success? Success does not need to be defined as personal riches. For many entrepreneurs, the drive to succeed is about proving oneself and making a difference. External forces, however, can shape what becomes your organization’s definition of success. If you take on a venture capitalist as a partner there will be intense pressure to define success in terms of delivering the required returns to your investors. If you take on a foundation as a partner, they will define success by social impact. Families and society often define success in terms of material attainment, and you may encounter strong social pressure to focus on personal riches rather than on social good.

MARKET

Entrepreneurs must understand their market. Just about every social question and issue you may address can be recast into market questions, such as: Who is the customer? What is the value proposition? And who is the competition? Understanding your customers, their environment, and their needs is crucial to any social venture. Determining how to best serve your customers will shape your decision of how to structure your venture.

Who are your customers? One of the most important questions you need to answer as a social entrepreneur is who your customers will be. What is the need your venture is going to fill? What community are you serving? How are you going to access expertise about the needs of your customers? What activities are the customers doing now that will influence the use of your product or service? Are the users of your product or service the same as the people who pay for it? Will you need to find a new payer for your idea to work (for example, funders to directly purchase goods or services for the actual beneficiaries)?

Who or what is the competition? Notwithstanding the frequent claim of start-up entrepreneurs that they have no competitors, even if there isn’t something precisely like your proposed product or service, there are other ways potential customers are spending their money or time to meet their needs. For example, if for-profit business competitors are exploiting a community, a nonprofit venture may be given the benefit of the doubt and have the opportunity to enter the market. Or if the nonprofit sector is not being responsive to a community’s needs, a business approach that treats people like customers might be more successful in making change. The organizations filling the existing need may even become a distribution channel for your new solution.

What is your value proposition? You must understand how you are going to differentiate your product or service from the competition. Are you presenting an incremental value proposition (my product is 10 percent better or 10 percent less expensive) or a revolutionary value proposition (it’s 10 times better or a tenth the cost of the existing option)? If you plan to offer a product or service that the for-profit sector already provides, be prepared for the Internal Revenue Service (IRS) to ask why they should issue you a tax exemption letter. Providing something below cost makes getting your nonprofit exempt status easier, but that may not mesh with your business plan and would generally require fundraising to close the gap between revenues and costs. On the other hand, a revolutionary value proposition might create the opportunity for high profitability and great scale, potentially making a for-profit structure appealing.

What is the market size and how profitable could you be serving that market? How much money can be or is being spent a year on addressing the need your organization is going to meet? It is easier to build a for-profit business when the market size is in the tens of millions or billions of dollars than if it is only $500,000 per year. Profitability is also important. Businesses with low profit margins are generally tougher to sustain because they can be quite sensitive to revenue fluctuations. If you know you’re going to lose 10 percent on every sales dollar, it is clear that you should consider a nonprofit rather than a for-profit structure.

CAPITAL

Capital requirements often play an important role in the decision to be a for-profit or a nonprofit. If you aren’t plausibly going to be able to pay back the money to investors or lenders with an additional return, the only for-profit investor you may be able to get is yourself. If you can’t raise or don’t have the capital you need, then you need to look seriously at the nonprofit structure, or reworking your business plan to start more slowly with less money.

How much money do you need to get your venture launched? Is it possible to start the venture with less than the amount you imagine and get to your destination more gradually, or does your business plan require accomplishing certain costly objectives before you can launch? Once you have a handle on the amount and timing of your funding needs, you need to seek out your options for finding that capital. If you need only $100,000 to get your venture off the ground you have many options. If, however, you need tens of millions of dollars, your degree of flexibility is vastly reduced.

How much money will you need to keep the business growing? How will your capital needs change over the first two, five, and 10 years? Unless you are lucky enough to hit upon a model that allows you to bootstrap your venture, it will take additional outside capital to bring your venture to profitability (as a for-profit) or sustainability (as a nonprofit). And profitability or sustainability does not necessarily end the need for capital. If you want to expand to new markets or scale up the organization, you will likely need more funding.

Will you have assets you could borrow against? Debt is a practical option for nonprofit and for-profit ventures that have or plan to acquire assets that can be used as security for the repayment of the loan. Ventures with substantial assets, such as those in the housing and microcredit sectors, have an easier time obtaining loans. Smaller working capital loans are available for those ventures with accounts receivable to borrow against. One significant difference between being a for-profit and a nonprofit is that foundations are more likely to make loans at below-market interest rates to quality nonprofits. These loans have to meet the requirements for a program-related investment (PRI), where the loan advances the charitable purpose of the foundation and income is not a significant purpose of the loan (typically satisfied with a below-market interest rate).

Will tax structure affect your business significantly? Nonprofits often have the benefit of being exempt from income and property taxes. But what if your venture is unlikely to have much income or property? Being exempt from taxes won’t make a big difference to your choice of structure then. If, however, the amount of income or property taxes would have a big impact on the viability of a venture, choosing a nonprofit form could make a significant difference in the venture’s long-term success. If your main practical source of capital is philanthropy, then becoming tax-exempt will make it much easier to raise capital in the form of grants. Government often creates programs where only nonprofit organizations are eligible to apply. If a government funding stream is essential to the viability of your venture, then that’s a strong case to organize as a nonprofit.

CONTROL

For-profit and nonprofit structures have very different control and governance regimes, so it is important to determine how much control you need to have over your venture. Nonprofit structures are generally less flexible than for-profits, because of the requirements to qualify for nonprofit status.

How important are confidentiality and secrecy to you and your venture? Privately held for-profits can be very secretive about their business information: tax returns are confidential, salaries are confidential, profits are confidential, and business plans are confidential. For some entrepreneurs, this is a privacy question. For others, control of this information is part of gaining a competitive advantage. Nonprofits, however, are legally required to operate with a much greater degree of transparency. All but the smallest U.S. nonprofits have to file a detailed tax return every year that is public information, disclosing assets, income, expenses, and top employee salaries. Moreover, this information is often freely available on the Internet or from organizations like GuideStar.

Can you run and fund your venture yourself? If you completely control the venture, you have a great deal of flexibility to run the organization the way you want. You may choose to run at break-even, never pay a dividend, or even give away your profits to a separate charity. As soon as you start sharing control with others, you create the possibility of a split. You may believe that parents, siblings, spouse, life partner, close friends, or mentors are good partners, but many ventures have split these personal relationships. Disputes over money are often at the root of these splits. Thinking these shared control issues through at the beginning reduces the chance of a schism forming.

Will you need to share control with investors? Typically, the ultimate authority in a venture is vested in a board of directors. The investors may or may not hold a majority of the board, but once you have a return-oriented investor, your degree of flexibility is reduced. In most cases, you have a very serious obligation to your investors to keep their best interests in mind. This is a legal obligation known as a fiduciary duty, and it requires you to place your obligation to your investors above your own interests. There is a growing movement in the United States to incorporate larger stakeholder interests in corporate structures and provide the board with some protection if it chooses to balance the interests of the shareholders with another valid social interest such as the environment. But this doesn’t obscure the complications from accepting capital from investors or lenders who have a legitimate expectation of being repaid with returns based on risk.

Will you need or want to share control with the public interest? When you operate a nonprofit, the board is acting primarily in stewardship for the public interest. As an entrepreneur, you need to recognize that as you move from sole control to shared control, you are placing your fate and the fate of your venture in the hands of others. Founders are often ejected from their ventures by boards whose primary obligations are to the venture itself, investors, or society. When choosing partners, investors, or board members for your venture, you need to choose people who share your vision for your venture, and who can be trusted with stewarding what may become your life’s work.

SELECTING THE BEST STRUCTURE

After answering the previous questions you are ready to think about what type of legal structure you want to create for your organization. Once you begin to consider a particular legal structure seriously, you will want to consult a lawyer, but first it is useful to consider all of the various options. What follows is an overview of five basic organizational structures, looking at both their advantages and disadvantages, along with examples of organizations that have adopted those structures. These particular structures are from the United States, but their analogues exist in many other countries.

| For-Profit | Social ventures can take on standard for-profit structures, such as a C corporation, limited liability company (LLC), or sole proprietorship. One of the principal advantages of a for-profit is that it can tap the large pool of investment capital. Because the social mission is not part of the legal structure, however, it is up to the board of directors and entrepreneur to make sure that the company fulfills its social obligations. The decision about what type of for-profit to create is often driven by tax considerations. Venture capitalists are almost always interested in investing in C corporations, even though profits can be taxed at the corporation level and again as dividends at the investor level. Some individual investors prefer LLCs because they are a pass-through for tax purposes and therefore do not have double taxation.

Advantages:

• Well-known structure that doesn’t need to be explained
• Relatively easy to raise money as equity or debt
• Can tap U.S. Small Business Administration grants, loans, and technical assistance
• Easy to sell or shut down (as long as you pay your creditors)
• Can convert to a nonprofit more easily than a nonprofit can convert to a for-profit
• Extensive precedents on best practices for managing for-profits

Disadvantages:

• The social bottom line is not built into the structure, but is instead dependent on the leadership
• Income and property subject to tax
• Governance is primarily focused on serving the shareholders, creating a strong fiduciary duty to act in the shareholders’ best interests by making money for them
• Cannot accept foundation grants or nontaxable contributions

Examples:

• Compartamos Banco is a Mexican microcredit bank that converted from a nonprofit to a for-profit, and then went public.
• D.light design is a privately held company that sells affordable solar-powered LED lights in the developing world. It has received investments from a variety of Silicon Valley venture capitalists.
• Grameenphone offers affordable cell phone service to Bangladesh. The founder raised angel capital in New York City before signing partners Grameen Bank and the Norwegian telecom company Telenor. Grameenphone’s initial public offering in Bangladesh was oversubscribed and the country’s largest to date.
• Whole Foods Market Inc. is a publicly held company that contributes 5 percent of its profits to charity.

| For-Profit with a Social Overlay | These ventures take the for-profit structure and make significant tweaks toward the social objectives. There are numerous ways of doing this. Some of these structures have been in place for decades, such as cooperatives (which can be for-profit or nonprofit) and employee-owned firms. Other structures are new, such as benefit corporations (enacted in Maryland) and low-profit limited liability companies, or L3Cs (now legal in several states). Other for-profit options include socially controlled stock structures in which a community has a controlling interest in the company though a preferential class of stock, non-stock companies, and the flexible purpose corporation (under consideration in California).

Advantages:

• Same advantages as standard for-profit
• Ensures some level of commitment to the social objectives of the organization through the governance structure
• Additional options for raising capital (for example, it is easier for foundations to invest in an L3C through a PRI)
• Marketing benefits from having a social orientation

Disadvantages:

• Control can be more diffuse (for some social entrepreneurs, this is considered an advantage)
• The social overlay may not hold through adversity or legal challenges
• Investors may not want to invest in these forms without strong social motivations
• Exit options may be more constrained than a standard for-profit

Examples:

• Equal Exchange (a cooperative) sells fairly traded and organic coffee, tea, chocolate, and snacks from farmers around the world.
• Impact Makers (a non-stock company) is a management consulting company that donates all of its profits to charity.
• Maine’s Own Organic Milk Company (an L3C) was created by family farmers and investors to sell the farmers’ organic milk.
• Seventh Generation (a B corporation) manufactures nontoxic cleaning products and donates 10 percent of its profits to charity.

| Hybrid | Rather than being limited to choosing either a for-profit or a nonprofit structure, some organizations take advantage of both by creating governance structures and contracts that bind a for-profit and nonprofit together in a hybrid structure. Sometimes the for-profit creates the nonprofit. For example, the for-profit brokerage firm Charles Schwab & Company created Schwab Charitable, an affiliated nonprofit that handles the donor-advised fund operations. In other instances, the nonprofit creates the for-profit. Typically, this is to pursue an activity that looks more like a business.

Advantages:

• The nonprofit and the for-profit entities each retain the advantages that are unique to those legal structures
• Creating a subsidiary can protect the nonprofit status of the parent by removing the unrelated income (if it becomes too large relative to the parent’s size)
• The subsidiary shields the parent from liabilities arising from the subsidiary’s activities
• The for-profit subsidiary can be sold at the nonprofit’s discretion

Disadvantages:

• Once assets are in the nonprofit, they are locked into the nonprofit sector and cannot be transferred back to the for-profit
• Shutting down the nonprofit affiliate requires its net assets to be transferred to another nonprofit
• Care needs to be taken that benefits flow from the for-profit to the nonprofit (and not the reverse) and that charitable restrictions are respected
• If the for-profit is the main source of funding for the nonprofit, it can be difficult to diversify the funding base of the nonprofit
• Additional overhead for two organizations

Examples:

• Hewlett-Packard Company Foundation is the nonprofit foundation affiliated with Hewlett-Packard Co. Although corporate foundations are formally separate from the corporation, often there is de facto control by the corporation.
• Greyston Foundation is a Buddhist charity. Greyston Bakery is a wholly owned affiliate that employs disadvantaged people who make the brownies for Ben & Jerry’s ice cream.
• The nonprofit Mozilla Foundation, makers of the Firefox Web browser, created the for-profit Mozilla Corp. to handle sales and distribution of the browser. It did this when Google started paying Mozilla tens of millions of dollars as part of an advertising agreement, putting the nonprofit status of the foundation at risk.

| Nonprofit with a Mission-Related Enterprise | These are typically tax-exempt nonprofits that have earned income that is clearly related to the social mission. Many types of nonprofits earn income from the sale of products or services, including theaters, museums, colleges, and thrift stores. Any income earned from the enterprise must be used by the organization to further its mission. In contrast to a for-profit, the income cannot be distributed to investors or shareholders (although it can repay loans).

Advantages:

• No taxation on mission-related income
• Ability to raise philanthropic money to fill the gap between the costs of providing the product or service and the revenues
• Opportunities for creating a selling advantage based on the charitable nature of the enterprise

Disadvantages:

• Two bottom lines means that sometimes there are tradeoffs
• Access to capital limited to traditional nonprofit resources, such as philanthropists and debt

Examples:

• Benetech operates almost exclusively mission-related enterprises with a mixed-income structure. Revenues from product and services are usually not enough to pay for the full cost of operating the enterprises, so grants and donations fill the gap.
• TransFair is the main fair trade certification organization in the United States that collects certification fees from the supply chain of fair trade commodities like coffee, bananas, and cocoa, which pay for the majority of the organization’s budget.
• Goodwill is a national network of local nonprofits that operates recycling, product sales, and employment training services.

| Nonprofit | The social mission of traditional nonprofits is clear and unambiguous. They raise all of their money through donations of money, products, or time, and do not have any earned-income enterprises. Examples of traditional nonprofits include 501(c)(3) charities and 501(c)(3) foundations.

Advantages:

• No conflict between the venture and the social objectives
• People receive a tax deduction for donations that are used to directly help the disadvantaged, or in the case of foundations, used to help other charities in the form of grants

Disadvantage:

• Dependent on traditional fundraising to operate the organization

Examples:

• The Robin Hood Foundation receives donations from thousands of people each year that are consolidated and given as grants to nonprofits to help alleviate poverty in New York City.
• Mercy Corps receives grants, donations, material aid, and government funds that it uses to fund disaster relief efforts and economic development projects.
• Music in the Schools Foundation pays for music classes in the low-income Ravenswood School District in East Palo Alto, Calif.

CONCLUSION

The world is facing big problems. More and more people are turning their attention to solving those problems. The old models of traditional for-profits and charities no longer are sufficient tools for meeting these challenges. The future is far more likely to be dominated by businesses that are tracking more than their financial bottom line, and nonprofits that see enterprise as a fundamental part of large-scale social change.

Policymakers are responding to the changing times by embracing new forms of social action that fall between the two poles of traditional business and traditional charity. Expect to see new organizational forms exhibiting these increasingly hybrid characteristics. I believe that the new generations of business and social leaders will fundamentally reject what they see as a false dichotomy of the past, and adopt new structures that can transparently deliver more social benefits. Both business and the social sector are going to change in these directions, and society will be the better for the change.

Author's note: The idea for this paper came during a meeting hosted by the Social Enterprise Alliance and the Aspen Institute in 2007, just before the alliance’s annual Social Enterprise Summit. I want to thank the social enterprise and legal leaders who made that such an inspirational gathering. I also want to thank Jeff Rauenhorst, Joan Mellea, and Barbara Morrison for their assistance in researching and drafting this essay. Finally, I’d especially like to thank Joshua Mintz, vice president and general counsel of the John D. & Catherine T. MacArthur Foundation, and Robert Wexler, partner at the law firm Adler & Colvin, for their assistance with the final draft.

Jim Fruchterman is a MacArthur Fellow, former rocket engineer, high-tech entrepreneur, and social entrepreneur. After starting two successful Silicon Valley for-profit technology companies in the 1980s, he founded Benetech as a deliberately nonprofit technology company in 1989 to develop solutions that respond to market failure in the fields of literacy, environment, and human rights. Fruchterman was a co-founder of the Social Enterprise Alliance and has served on three federal advisory committees in the field of disability.

Visual impairment is more than just a health problem. It has economic, educational, and public safety implications. In Tanzania, for example, 71 percent of people who are farsighted are dissatisfied with their ability to do near work, such as winnowing grain, sewing, reading, and cooking food. But only 6 percent of people in Tanzania who are farsighted have eyeglasses.¹ In India in mid-2000, only 7 percent of the population wore spectacles, whereas about 65 percent of the population needed them.²

A simple pair of eyeglasses could dramatically improve the lives of the poor, by increasing earning power and occupational and public safety, improving educational opportunities, and fostering the ability to perform everyday tasks. Even the straightforward economic return from eyeglasses for the poor far exceeds their cost. A variety of approaches have been tried to solve this problem, using for-profit businesses, social enterprises, and innovative technologies. To date, none have succeeded on a large scale.

Given the high economic value and low cost of eyeglasses, it would seem that private companies could profitably supply eyeglasses to the poor—an ideal situation for applying the bottom of the pyramid (BOP) approach popularized by C.K. Prahalad. In 2005, Essilor International, a publicly traded French company, launched a BOP initiative targeting the Indian rural poor. But the project has yet to make a profit.

VisionSpring, founded in 2001 as a nonprofit dedicated to reducing poverty and generating opportunity in the developing world through the sale of affordable eyeglasses, uses a social entrepreneurship approach. In 2009, VisionSpring sold 201,000 pairs of readymade reading glasses. It is now trying to scale up its efforts and hopes to sell 1 million pairs of eyeglasses per year by 2012. Yet even if VisionSpring achieves this goal, the impact is too little, given that between 500 million and 1 billion people need eyeglasses—and the number is growing.

Another approach to solving the vision problem emphasizes technological innovation to provide low-cost, self-adjustable spectacles. These eyeglasses are called AdSpecs, and they are being developed by Joshua Silver, a physics professor at Oxford University. At least two other organizations are also offering adjustable spectacles, but none has achieved significant scale, probably because they are not cost-effective and have not gained customer acceptance from a style perspective.

If the benefits of eyeglasses are so obvious, why has it been so difficult to solve such an apparently easy social problem?

VISION BARRIERS

Many challenges confront the provision of eyeglasses to the poor in developing countries. Chief among them are a lack of awareness about the value of corrected vision, access to eyeglasses, and affordability. A 2006 study of the principal barriers to eye care in Andhra Pradesh, India, reported that 23.8 percent of the 2,615 respondents believed they did not have a serious vision problem, with 23.4 percent stating that they were able to see adequately, 20.4 percent that other obligations prevented an eye checkup, and 17.5 percent that they did not have the money.³

One of the problems is that many poor people do not know that a simple, affordable product exists to restore their clear vision; they assume that only expensive eyeglasses will solve their vision problem. Others do not fully appreciate the benefits of good vision. VisionSpring relates a case where a farmer’s crop failed after he planted the wrong seeds because of his poor near vision.

Cultural biases related to comfort and attractiveness also pose hurdles for the use of eyeglasses. A study in East Timor found that the chief reasons for unwillingness to use eyeglasses were appearance (41.1 percent) and embarrassment (37.5 percent).⁴ In China, some people mistakenly believe that wearing eyeglasses causes children’s vision to deteriorate faster. And elsewhere, poor people settle for traditional medicine, which is not known to correct refractive error.

Poor access is another major barrier. In the developing world, eyeglasses are primarily available in high-priced urban optical shops. For the rural poor, a trip to buy glasses is expensive and often prohibitive. It often requires a daylong trip each way to a nearby city. Eye screening centers are sparse, especially in rural areas, because of lack of funding. As a result, primary eye care is largely unavailable where governments lack the willingness to pay for the services or where there is not a community base with the ability to pay.

Even if people become aware of and gain access to eyeglasses, the glasses must become more affordable. In the Tanzania study, 31 percent of the people surveyed were unable to afford eyeglasses at a price that covered the cost and shipping of the spectacles. The East Timor study found that 49 percent of rural subjects were unwilling to pay even $1 for eyeglasses, and only 16 percent were willing to pay $3. Willingness to pay was higher for the urban poor than the rural poor, and higher for men than women. VisionSpring’s experience is that most people are willing to pay around 10 percent of their monthly income, once they experience proper vision. This implies that eyeglasses have to be priced at about $2.50 to gain wide acceptance among the poor. A recent study in India provided eyeglasses free to the subjects. One month after using the eyeglasses, the subjects were asked how much they would be willing to pay for the eyeglasses; the median answer was about $4.⁵

Yet in developing countries, eyeglasses are sold at significant margins by eye doctors and optical shops. A pair of custom eyeglasses often costs about $50, a price truly out of reach for poor people living below the poverty line of about $3 per day. The total indirect cost of acquiring eyeglasses—including reduced livelihood, cost of transportation, and doctor fees—can be significantly more than the cost of the eyeglasses themselves.

Another major barrier to delivering vision correction is the lack of trained optometrists. Many developing countries have as few as one optometrist for every 1 million people—the figure for the United Kingdom is one per 8,000 people. In Mali, the ratio is one per 8 million, according to the Centre for Vision in the Developing World. Many developing countries lack sufficiently trained ophthalmic support personnel, such as assistants and technicians, and rely too much on highly skilled ophthalmologists for simple eye screenings. The Andhra Pradesh study found that 93 percent of those who wore eyeglasses for farsightedness got a prescription from an ophthalmologist.

To better understand the challenges of providing eyeglasses to the poor, it is useful to examine closely the work of three providers—Essilor, VisionSpring, and AdSpecs—each of which is taking a different approach to solving the problem.

ESSILOR: BOP APPROACH

Some people believe that the vision crisis can be solved by using the for-profit model to tackle the BOP market. The best example of this approach is Essilor International. With revenues of $4.2 billion and a global market share of about 30 percent, Essilor dominates the global ophthalmic lens industry. Essilor designs, manufactures, and sells plastic optical lenses in more than 100 countries. Essilor owns 15 lens manufacturing plants and 311 prescription laboratories, 37 of which are in India. The plants manufacture semifinished lenses for prescription laboratories, which grind and polish the lenses to meet specific prescriptions. Finished lenses are then sold to opticians, optometrists, cooperatives, and optic chain stores.

In 1998, Essilor entered the Indian market after internal market research showed much growth potential for plastic lenses. At that time, most people in India used glass lenses; the growth of plastic lenses (which are lighter, more malleable, and shatter resistant) was estimated at 20 percent a year. Sales climbed and Essilor achieved an annual growth rate of 35 percent by 2007. Essilor sold all its lenses through optical shops. Indian opticians generally realize a gross margin of 60 percent on the sale of each pair of eyeglasses; in developed countries, gross margins are typically 100 percent or more.

Because most Indian optical shops were located in urban centers, 70 percent of India’s rural population did not have access to Essilor’s lenses or services. In the early 2000s, Essilor’s management began to view the rural population as a large, untapped consumer market that not only could contribute to Essilor’s growth but also could allow Essilor to address wide-scale visual impairment. This seemed to be an ideal application of the BOP proposition. Because poor roads, communication networks, and other essential infrastructure made access to the rural market difficult, Essilor needed to develop an innovative distribution strategy.

In 2005, Essilor teamed up with two highly respected Indian nonprofit eye hospitals, Aravind and Sankara Nethralaya. The pilot project started by operating a tele-ophthalmology van and a refraction van, which visited villages to provide eye care and distribute corrective spectacles. The model was meant to be neither a corporate social responsibility venture nor a charity. The expectation was that serving the rural poor would provide a profitable and significant growth avenue for Essilor India. And the hope was that Essilor would scale up the operation; the company estimated that 1,000 vans would be needed to reach 600,000 villages.

During the pilot project, the tele-ophthalmology and refraction vans hosted two-day eye camps in villages across India. The camps were able to serve up to 150 patients a day. The tele-ophthalmology van contained state-of-the-art equipment. It provided screenings for various eye disorders, such as cataracts, through a satellite connection to a hospital. The optometrists at the camp screened patients for both nearsighted and farsighted vision. After a screening, patients were provided a prescription and given the opportunity to purchase custom- made eyeglasses from the refraction van. The refraction van carried frames, lenses, a grinding machine, and refraction equipment. In other words, it was an optical shop on wheels. Each van carried 200 to 500 frames and approximately 1,000 lenses, with the capacity to produce roughly 60 custom-made eyeglasses a day.

Essilor paid for the refraction vans, grinding equipment, and lens material. Each fully stocked van cost the company approximately $50,000. In addition to funding the vans, Essilor supported the training of the optometrists. To share in the cost of the project, the hospitals agreed to fund the tele-ophthalmology vans and all related operating expenses, such as wages and fuel costs. Revenues were generated from the sale of the eyeglasses and sponsorships. Each pair of eyeglasses was priced around $4. Sponsors, such as local government authorities, NGOs, and philanthropists, provided support for the eye camps and in return had their organizations’ names on banners.

In 2007, approximately 50 percent of clients screened were provided prescriptions; of these, roughly 40 percent purchased eyeglasses from the van. On average, the project sold 35 pairs of eyeglasses a day. But the revenues earned from the sale of eyeglasses and sponsorships were not sufficient to cover operating expenses, let alone make a profit.

To improve financial performance, Essilor has broadened its product range. In 2010, prices range from $4 to $8. Some of the cheapest products are ready-made reading glasses, which are offered as a low-cost option to patients not in a position to buy prescription spectacles. These low-price products are outsourced from external providers. Essilor also has streamlined its customer process. Now, after registration, each patient meets a refractionist, who performs an automated test on an autorefractor. People with normal eyesight are selected out. Other patients undergo a detailed screening using a trial set, to arrive at an exact prescription. If any clinical issue is diagnosed, the patient is examined by an ophthalmologist via tele-ophthalmology.

Thanks to these changes in pricing, product mix, and process, Essilor claims its BOP operation now covers its operating expenses. Essilor does not charge this initiative overhead and capital costs; only operational and depreciation costs at the van level are taken into account. Therefore, the project does not make any profit. After trying to franchise the vans to local opticians, the company has decided to operate them on its own and to limit future investments to the amount of cash generated by the existing vans. In 2010, Essilor was operating six refraction vans and plans to invest in a few more.

VISIONSPRING: SOCIAL ENTREPRENEURSHIP

Others believe that the vision crisis can best be solved by using a model based on social entrepreneurship. VisionSpring is perhaps the best example of this movement. Founded in 2001 by Dr. Jordan Kassalow and Scott Berrie as a nonprofit in the United States and India, VisionSpring started by providing only ready-made reading glasses to correct farsightedness. The strategy was adopted because of the strong link between poor near vision and economic productivity, and because presbyopia (the progressive deterioration of near vision) represented about 75 percent of the visual impairment problem. VisionSpring aimed to take reading glasses out of the exclusive hands of eye care professionals and make them a consumer product.

The organization developed an innovative business model to provide basic screening services and ready-made reading eyeglasses to people living in rural villages. After assessing multiple suppliers, management decided that China was the most costeffective source for the eyeglasses. To reach rural people, VisionSpring trained local women—“Vision Entrepreneurs”—as independent commissioned sales representatives to visit villages and sell reading glasses for under $4 a pair. Vision Entrepreneurs provided basic screenings, using distance and near eye charts, to determine the appropriate strength of the lenses. VisionSpring provided a “business in a bag”—a sales kit containing reading glasses, screening tools, marketing materials, and a uniform. Vision Entrepreneurs also underwent a three-day training program in basic eye care and business management.

To increase its global reach and scale, VisionSpring also developed a franchise model on a fee-for-service basis. This involved disseminating its sales kits to other nonprofit and for-profit organizations, such as BRAC, a microcredit organization in Bangladesh. Through this franchise model, VisionSpring now has more than 5,000 Vision Entrepreneurs in 11 countries.

Using a wholesale approach, VisionSpring distributes its reading glasses through pharmacies in urban and rural centers. The organization is testing this approach with Apollo, one of the largest pharmacy chains in India. VisionSpring has launched operations in 11 countries in Asia, Latin America, and Africa, with its biggest presence in India. In 2008, the nonprofit sold 98,000 pairs of glasses, and in 2009 it sold 201,000, doubling sales for the fifth straight year. VisionSpring’s objective is to sell 1 million eyeglasses in 2012. Much of the growth is expected to come from franchising and wholesaling the business model, to leverage large distribution networks that already exist in target countries.

In 2009, VisionSpring had revenues of about $250,000, and its total costs were $1.36 million; the difference was covered by philanthropic donations and grants. The cost of eyeglasses procured was 13 percent of total costs; field and overhead expenses (for example, training, marketing, staff salaries, and travel) accounted for the remainder. The total cost of delivering a pair of glasses was $6.77.

VisionSpring’s 2012 budget anticipates 1 million eyeglasses sold, with revenues of $1.3 million and total costs of $2.8 million, requiring a philanthropic subsidy of $1.5 million. Overhead and all field expenses would account for 71 percent of total costs. Currently, 18 percent of total costs are covered by earned revenue; VisionSpring expects this ratio to reach 38 percent in 2012, and has a long-term goal of 100 percent earned revenue coverage. Although VisionSpring seeks to be self-financing, for now its business model is dependent on philanthropy. Looking ahead, management believes that VisionSpring will require at least three to five more years of subsidies before reaching sufficient economies of scale. The break-even point is estimated at 5 million eyeglasses sold per year.

ADSPECS: TECHNOLOGICAL INNOVATION

Yet another group of people believe that the best way to solve the vision crisis among the poor is to use technological innovation to provide low-cost self-adjustable spectacles. The technology enables untrained wearers to set the right focus for lenses in less than a minute, greatly reducing the need for trained optometrists. These adjustable glasses cannot yet help with astigmatism, although about 80 percent of people needing vision correction have such mild astigmatism that the glasses can still be effective.

Joshua Silver developed one such technology, called AdSpecs, at Oxford University’s Centre for Vision in the Developing World in 1996. The glasses are round, plastic frames with lenses made of clear sacs of silicon oil sandwiched between two clear plastic discs. The two sacs are each connected to a tube and a small syringe that can be adjusted by turning a dial. As a wearer adjusts the dials, he or she controls how much fluid is loaded into each sac, thereby changing its curvature; this fine-tunes the glasses to an individual’s prescription. Once the lenses are adjusted, the sacs are sealed off permanently with a small valve and the adjusting mechanisms are removed. The glasses do look rather klutzy: thick lenses in a dark tortoiseshell frame.

Silver calls AdSpecs “an ordinary company that’s never made a profit.” The glasses sell for $19 per pair. Over the last 13 years, 30,000 AdSpecs have been sold to the Ghana Education Ministry, the U.S. government (which purchased 20,000 glasses to distribute as humanitarian aid), and other organizations. Clearly, the high price of AdSpecs is a major drawback. Silver has set an ambitious goal of distributing a billion glasses at the price of $1 per pair by the year 2020. He says the key will be making the technology cheaper and cranking up the volume.

In addition to Silver’s work, new efforts are underway to improve the aesthetics of self-adjustable glasses. A new model, called Eyejusters, is expected in the spring of 2011. Eyejusters differ from AdSpecs in that they use two lenses that slide across each other to alter their focus, based on a design pioneered in the 1960s by Nobel Prize-winning physicist Luis Alvarez. David Crosby, principal scientist at the Centre for Vision in the Developing World, said that the move to SlideLens technology allows for three crucial changes. The lenses no longer need to be round, thus allowing for more freedom in the design. And because fluid has been removed from the design, the manufacturing is easier and the glasses can be produced less expensively; the first generation of Eyejusters are expected to cost $15. Eyejusters also can be readjusted, providing more accurate vision correction.

Two Dutch organizations, Focus on Vision Foundation and VU University Medical Center, are trying to produce low-cost adjustable eyeglasses as well, though they have received less media attention than AdSpecs. Both models are based on the Alvarez lenses, but neither organization has produced the glasses on a mass scale. Focus on Vision, which is probably further along in the development process, plans to distribute 30,000 eyeglasses in 2010 and says its production costs are $4 per pair. Its former president, Dr. Ben van Noort, anticipated that “as soon as Focus Vision makes a million per year, the price will drop to one euro.”

BETTER VISION FOR THE POOR

Why haven’t these approaches made a significant dent in providing affordable eyeglasses to the poor? The biggest problem is price. Many poor people who can afford to pay for eyeglasses do not perceive their value and are therefore unwilling to pay for them, and many others simply can’t afford to pay the full cost of the glasses. There are only four solutions to this problem: increase the appreciation of eyeglasses’ benefits through education and awareness, thereby increasing demand and people’s willingness to pay; reduce the total cost of eyeglasses through technological or business innovations; subsidize the glasses; or pursue a combination of these strategies.

The first solution, education and awareness, is probably not feasible for a private organization. Essilor found that charging $4 resulted in only 40 percent of people who need glasses actually buying them. The East Timor study found that 49 percent of rural subjects were unwilling to pay even $1 for eyeglasses, and only 16 percent were willing to pay $3. Even if this study is exceptional, it is clear that any solution must emphasize dramatic cost reduction. Essilor’s problem is not that the quality of its products and services is high, it is that its costs are high from relying on professional optometrists to customize eyeglasses for individual clients. One lesson from Essilor is that if the poor are given easy access to eyeglasses, a significant fraction will purchase them.

VisionSpring significantly reduced costs by substituting a lowskilled Vision Entrepreneur for a professional optometrist. It also reduced production costs by centralizing purchasing, sourcing from China, and providing glasses in a few standardized strengths. In spite of that, its revenues are not high enough to cover costs. As a result, VisionSpring needs philanthropic subsidies, which limit its ability to achieve scale commensurate with the size of the vision problem. Scaling up is also constrained by limited distribution channels that serve the poor, especially in rural areas. At the same time, creating a distribution network dedicated to one product is an expensive solution. Piggybacking onto an existing distribution network is more cost-effective, as VisionSpring is doing in its partnership with BRAC, Women’s Development Business, and others. An initial drawback of VisionSpring’s approach is that it provided only reading glasses. This left out the significant number of people suffering from myopia, especially children. VisionSpring has now started school-based and other initiatives to provide myopic children and adults with glasses. The organization has demonstrated that it is feasible to reduce production costs through centralized purchasing and to reduce distribution costs by not using highly trained personnel.

The technology innovation approach is also appealing, because by making the glasses self-adjustable two large cost elements can be eliminated: optometrists and customized manufacturing. Its biggest drawbacks are the high cost of producing the eyeglasses and their poor aesthetic appeal. If the costs can be brought down to $1 to $2 per pair and the eyeglasses can be made more cosmetically pleasing, then the technology approach might solve the blurry vision problem. But that is a big if—there is little evidence so far of accomplishing such dramatic cost reduction or design changes. Even if the cost of producing the adjustable eyeglasses comes down dramatically, distribution costs can still be a hurdle. VisionSpring sources the reading glasses at about $1 per pair from China and sells them at $4 per pair to the consumer; it still needs significant philanthropic subsidies. Self-adjusting eyeglasses reinforce the lesson that to reduce total costs it is critical to eliminate trained personnel in the field. Another useful lesson is that the poor are also conscious of style in eyeglasses.

The impact of blurry vision is real and extremely costly to the poor, especially among skilled middle-aged people who rely on clear near vision to work and among children who need to see the blackboard to learn. The economic and social benefits of solving this problem far exceed the costs of providing eyeglasses to all poor visually impaired people. Yet the problem persists. Despite the evidence, blurry vision has attracted little attention as a global public health issue. Because eyeglasses are widely available and affordable in the developed world, there is a perception that blurry vision does not create a sociomedical disorder. Thus there is no sense of urgency about eyeglasses to influence policymakers. Unlike public health causes such as AIDS, there are no activists shouting that eyeglasses are a human right. It is distressing that such a simple, inexpensive, and politically neutral health intervention has been so underfunded and underutilized in poor countries.

PROPOSED SOLUTION

But the situation is not hopeless. The challenge is to move the spectacles business from a low volume, high margin approach to a high volume, low margin one, to gain greater penetration among the poor. The starting point is to reduce costs as much as possible while still providing acceptable quality. The standards to judge what is acceptable have to be from the perspective of a poor person who does not get any vision correction now, not from the perspective of an affluent person who receives modern eye care. Our solution would use a basic screening process that does not require a trained professional. This sacrifices precision, but that is acceptable because medical evidence indicates that undercorrection of vision does not have significant negative side effects. Overcorrection of vision does have side effects, such as headaches and nausea. The screening process needs to avoid overcorrection, but that is easy to achieve using simple techniques. Rather than becoming the final product, self-adjustable glasses could be used for determining a patient’s prescription needs without assistance from a high-cost technically trained professional.

As for the production costs of eyeglasses, they could be reduced by manufacturing eyeglasses in a large factory, emphasizing scale economies, centralizing sourcing, and instituting standardization. (A drawback of the standardization approach to ready-made glasses is that the prescription strength is the same in both lenses.) Lenses would be manufactured from the least expensive material, which is probably acrylic; this is the type of plastic that is used in ready-made reading glasses sold in the United States. Lenses would be offered in steps of 0.50 diopters for reading glasses and in steps of 0.25 diopters up to -2.00D for distance glasses; there would be no correction for astigmatism (which requires customized prescription). We estimate that, if implemented, this approach would give about 80 percent of the people who require a distance prescription a corrected vision of 20/40 or better—the level of vision required to drive in the United States.

One study in India implemented a randomized clinical trial with poor adults to compare ready-made eyeglasses with customized spectacles.⁶ The results showed that although vision is slightly better with customized spectacles, after one month of use 90 percent of the subjects were satisfied with ready-made eyeglasses and planned to continue wearing them. A similar study with Chinese school-age children led by Yangfa Zeng and published in a 2009 issue of Ophthalmology confirms the high level of satisfaction and acceptance of ready-made spectacles.

With our approach, there would be a very limited variety of frame styles, carefully selected on the basis of local preferences. The factory cost of producing standardized prescription eyeglasses using simple frames in a country like China would be well below $2 per pair. Distribution costs would be reduced by piggybacking onto existing networks, such as a microcredit organization, a packaged consumer goods company, or government offices and agencies. Overhead would be minimized by localizing costs and by restricting the scope of the project to one or a few neighboring countries.

Yet even if this proposal were carried out, it is not certain whether the total costs would result in a pair of eyeglasses that could be priced below what the poor are willing to pay, even assuming significant scale of operations. There is also the issue of geographical variation. The willingness to pay for eyeglasses varies by country, region, culture, and income level. If willingness to pay is high enough to cover the total costs, then there is no need for government intervention. This could be a profitable business for private firms, and consistent with the current vogue of market-based solutions for poverty alleviation.

But if the costs are still too high, then the only way to cover the gap is through a subsidy. The subsidy does not need to cover the entire cost of the glasses, but only the gap between the willingness to pay and the cost. Given the scale of the problem, the only source for such large subsidies is the government. Governments could help to build the market for eyeglasses by funding education and awareness campaigns or subsidizing eye care centers. They also could implement targeted policies, such as requiring children to get basic eye screening in schools.

Modern financial markets can provide significant capital for ventures that are expected to be profitable, making it easy for businesses to scale up. And governments can use the treasury for scaling up its projects. But nonprofit organizations find it difficult to attract the capital needed to scale up and satisfy designated social needs. Ultimately, it will have to be businesses and governments that provide eyeglasses to the poor on a large scale. Nonprofits can advocate and serve as a catalyst to prod governments and companies to solve the social problem, but they cannot do it alone. If selling eyeglasses to the poor becomes profitable, then a nonprofit such as VisionSpring can demonstrate and publicize the economic viability of this approach—or even morph into a for-profit company.

Private companies and government intervention, however, are not mutually exclusive solutions. They can exist side by side. For example, the condom market in India is divided into three segments: condoms sold at market prices by private companies; condoms sold at low prices through social marketing programs and through government subsidies; and condoms distributed free by the government. A similar approach might be useful for eyeglasses.

Aneel Karnani is associate professor of strategy at the University of Michigan’s Ross School of Business.

Bernard Garrette is the Atos Origin Professor of Strategy and Business Policy at HEC Paris.

Jordan Kassalow is founder and CEO of VisionSpring.

Moses Lee is a lecturer and program manager at the Center for Entrepreneurship at the University of Michigan College of Engineering.

Locals told us that açaí is from the Amazon and grows wild in an area the size of England. Although it has been a staple of the Amazon people’s diet for centuries, the berry was just becoming known to Brazilians; in the late 1990s, less than 10 percent of the wild crop was being harvested. We also learned that the açaí trade could be a positive force in the Amazon if the berries were harvested in a socially and environmentally responsible manner. Locals could harvest açaí as a renewable resource and protect the forest rather than work in the timber, charcoal, or cattle ranching trades. We decided to call our company Sambazon, an acronym for Sustainable Management of the Brazilian Amazon, and made it our mission to share this incredible berry with the world.

In our research, we learned that açaí berries are handpicked by local growers, who scale the 40-foot palm trees that flourish along the Amazon’s riverbanks. Baskets of berries are sold, transported by boat through a series of middlemen, and resold at large farmers’ markets in cities like Belém, Bréves, and Macapá. By the time the berries arrived at these open markets, they had changed hands so many times that determining origin and farming conditions or ensuring quality control and organic practices was virtually impossible. In addition, this system created opportunities for middlemen to exploit growers who didn’t have transportation to the markets. The açaí berries perish within 48 hours of picking, so middlemen offered “take it or leave it” terms to the growers.

We realized that if we established direct relationships with the growers, we could cut out the middlemen and bypass the open market, enabling growers to plan their annual crops (and their lives) more consistently. This direct contact also could help us to certify the growers and their farms organic and fair trade, improving quality control and helping protect the forest’s biodiversity.

This had never been done before with a wild-harvested fruit, and it was not an easy task. We knew that constructing a certified supply chain for açaí in the middle of the Amazon rainforest wouldn’t happen overnight. But we saw an incredible opportunity that could generate sustainable jobs for thousands of small family growers. The effort would create a positive economic chain reaction.

With the help of prominent Brazilian nonprofits, including the Foundation for Advancement of Science and Education (FASE), WWF Brazil, and the Federal University of Pará, we developed a sustainable agroforestry program and sponsored U.S. Department of Agriculture organic certification of a small group of growers. From that pilot program in 2002 to today, the number of participating growers has leaped from 100 to more than 10,000. Through our nonprofit partners, we have provided technical assistance, social services, and business courses to the growers and their families. We also assisted Ecocert, a leading European fair trade organization, to develop and implement standards with which to certify açaí for the first time. And in 2005, we built a world-class açaí fruit processing facility in Macapá, on the banks of the Amazon River, which employs nearly 100 people and enables Sambazon to have an even greater impact in the local community.

GROWING A TRIPLE-BOTTOM-LINE BUSINESS

As we developed our supply chain in the Amazon, we began another challenging task in the United States: building demand for an unknown fruit with a name that’s hard to pronounce. We borrowed $50,000 to buy a container of frozen açaí fruit pulp, designed some marketing fliers, and started trying to convince mom-and-pop juice bars in Southern California that açaí was the next big thing. We did endless samplings, demos, and events, so people could taste açaí and learn about the powerful nutrition in the berry. Laboratory tests show that açaí has antioxidants like blueberries or red wine, as well as healthy omega fatty acids similar to olive oil, dietary fiber, and almost no sugar.

By the end of that first summer, in 2001, more than 100 juice bars were selling Sambazon Açaí. We slowly expanded around the country, approaching the best juice bars in Miami’s South Beach, New York City, and Oahu’s North Shore. We made friends with top athletes like surfer Rob Machado and skateboarder Bob Burnquist, who found out that we had brought açaí to the United States in a socially and environmentally responsible manner and wanted to help promote it. Bob helped convince ESPN to allow us to provide Sambazon to athletes at the X Games. Many of the athletes became daily users and shared Sambazon products with their friends and families.

After getting national distribution with Whole Foods Market, still our largest retailer, we began expanding into supermarkets across the country and eventually into superstores like Walmart and Costco. From the very beginning, we studied the experiences of socially responsible business leaders such as Anita Roddick of the Body Shop and Ben Cohen and Jerry Greenfield of Ben & Jerry’s. We also sought out mentors like Gary Hirshberg, founder of Stonyfield Farm, and Steve Demos, founder of White Wave Foods. They gave us tremendous guidance and direction on how to build a strong natural food brand and cross over into the mainstream market, while maintaining our values, brand integrity, and product quality.

We received recognition along the way, and we were proud and humbled by it. In 2006, Sambazon won the U.S. Secretary of State’s Award for Corporate Excellence for helping to support indigenous communities in Brazil through a sustainable business model. Later that year, Sambazon was awarded Ashoka’s Changemakers Innovation Award.

COMPETITION AND VISION

In 2006 and again in 2007, açaí was named a key consumer trend by the global consumer research firm Mintel, and shortly thereafter the market was filled with everything from açaí-flavored Jelly Bellys to Absolut Berri Açaí Vodka. Slick multilevel marketers began selling $50 bottles of açaí cure-all potions, and Internet scammers offered bogus açaí weight loss pills. Today you can still find deceptively labeled products on supermarket shelves that market açaí’s benefits but fail to communicate that the products have been filtered of important nutritional properties, such as omega fatty acids and fiber, which make açaí a highly nutritious food. Although this surge of products brought increasing visibility to the word açaí, it damaged and manipulated the public’s understanding of the berry’s true health benefits. Also, because açaí is new to this country, the U.S. Food and Drug Administration does not have a legal “standard of identity” for the berry. Recently, we launched a campaign called Real Deal Açaí, which educates and informs consumers on how to compare products and encourage competitors to be transparent in their health claims and ingredient labeling.

Our goal wasn’t simply to market a new product. We founded Sambazon to promote positive social and economic change from the forest to the consumer, and to prove the case for sustainable development in the Amazon rainforest. Running a socially responsible business has its costs and benefits. Educating consumers has been capital intensive and challenging. We have nearly 150 full-time employees and provide a healthy livelihood to thousands of Amazon growers and their families. We’ve received multiple rounds of investment funding, and at each stage we have incorporated our values and principles into our partnerships to ensure that our investors understand that profitability and sustainability are not an either-or option but a mark of triple-bottom-line success.

Ten years after founding Sambazon, the company is the market leader in branded açaí products and wholesale açaí supply. Our products are sold in thousands of health food stores, juice bars, and supermarkets in the United States and beyond. As the ecoconsciousness movement builds, we’re seeing more and more people who want to vote with their dollars to help improve the world. To underscore this, we launched a major advertising campaign in 2010, asking people to “Warrior Up” and help create positive change with us. It’s a concept that originated from the Sambazon logo—the Amazon warrior, protector of the forest—and is coming to life through modern-day citizens who are social and environmental change makers.

Twenty years from now, our goal is to show that Sambazon açaí has brought health and wellness to people and is an example of a successful triple-bottom-line business. Business combined with democracy can be a powerful tool to promote innovation, social equality, and biodiversity protection. It’s imperative that leaders of this and future generations continue innovating market- based solutions that protect the environment, alleviate poverty, and make the world a better place. We hope that Sambazon can further this movement and serve as an inspiration to socially responsible entrepreneurs everywhere.

Ryan Black left professional football to pursue social entrepreneurship, founding Sambazon in 2000. He is the company’s CEO.

Jeremy Black, Ryan’s older brother, left a successful career as a financial planner to start Sambazon, where he is chief brand officer.

Light presents a methodology for creating lasting social change, and he begins his book with three research questions: Has the field placed too much emphasis on the individual social entrepreneur, thereby defining social entrepreneurship as the primary source of social innovation? Are there other, equally powerful drivers of social progress? And finally, how are social breakthroughs achieved? Light devotes a chapter to each question, all of which feed into his “breakthrough cycle,” a nine-stage process that outlines the “moves from inputs, activities, and outputs to a new social equilibrium.”

Light’s line of inquiry stems from previous works—“Reshaping Social Entrepreneurship” (2006) and The Search for Social Entrepreneurship (2008)—although his contention is no longer that social entrepreneurship is a little-understood term but that its role has been overestimated as a driver of social change. He argues that the tendency to promote an exclusive definition of social entrepreneurship has prevented the field from forging necessary partnerships. In contrast, he defines social entrepreneurship loosely as “an essential but not exclusive driver” that “can be found almost anywhere.”

To broaden the field’s approach to social problem solving, Light highlights three additional drivers he believes have been neglected—social exploring, social advocacy, and social safekeeping. Each has a specific function: Social explorers assess the present social climate and identify opportunities for change; social advocates use political channels and grassroots movements to maximize pressure points; and social safekeepers (Light’s name for social service providers) transform social breakthroughs into common practice, while also preserving past progress.

When assessing which driver is best suited to address a particular problem, he argues that the choice of driver must align with the desired outcome. Light also believes that social breakthroughs are more attainable when all four drivers exert pressure in tandem “to create the irritation needed for disruption.” His breakthrough cycle relies on eight other elements, such as a commitment to change and an assessment of assets and obstacles.

Light says his book is based on the idea that social entrepreneurship is “neither the only driver in agitating the prevailing wisdom, nor always the best choice in addressing urgent threats.” In the breakthrough cycle, he limits the contribution of social entrepreneurship to the introduction of a new combination of ideas. He also notes that in some cases, this contribution is “irrelevant” for the type of breakthrough needed.

My experience is that the role of the social entrepreneur is both more distinctive and more comprehensive than the phenomenon Light describes. Other drivers are indisputably essential. At the same time, I have witnessed that powerful innovators and organizations undertake many of the activities assigned to social explorers, advocates, and safekeepers. Nonprofits such as Citizen Schools, College Summit, Stand for Children, Year Up, YouthBuild, and Youth Villages (some of which are supported by my organization, New Profit) are social entrepreneur-led organizations that have achieved large-scale impact through policy change, major public-private partnerships, grassroots advocacy, and new service delivery techniques.

Light challenges social entrepreneurs to “join the fight already under way throughout society,” but we are already seeing traction on this front. Cross-sector partnerships like the 100,000 Homes Campaign, the Strive Partnership, and the Education Equality Project all take collaboration seriously while embracing a robust understanding of what various change agents bring to the table.

Driving Social Change will appeal to many who are pioneering new ways to solve old problems, whether through young or established organizations, advocacy efforts, or research. In particular, Light’s presentation of the social breakthrough cycle surfaces many of the components needed for transformative social change, while also leaving room for exploration into how the components work together and the additional elements needed to make change possible.

Light is right that the problems facing us globally are too big for any one person or method to solve. Partnerships are necessary, as are multifaceted approaches that use diverse tactics for social change. We need to learn from the partnerships that are already testing the type of collaboration Light calls for in Driving Social Change. I look forward to the day when we stop debating the pros and cons of social entrepreneurship and move on to better aligning our resources. Then we can actually solve some of the world’s toughest problems together.

Vanessa Kirsch is the president and founder of New Profit Inc., a venture philanthropy fund based in Cambridge, Mass. She has more than 20 years of experience in developing innovative solutions to social problems and is widely recognized as a leading social entrepreneur.

Then, on a routine business trip to Mumbai, Bhatia started to feel under the weather. He lost his appetite and had trouble breathing. Bhatia chalked it up to the 100-degree weather and unbearable humidity. After a visit to a doctor at one of Mumbai’s leading hospitals, however, blood tests showed that Bhatia’s white blood cell count was wildly out of whack, and there were “blasts” in his cells. His doctor instructed him to return home to seek medical treatment. Upon entering the United States, Bhatia was admitted to the Robert Wood Johnson University Hospital in New Brunswick, N.J. He was diagnosed with Acute Myelogenous Leukemia (AML), a cancer that starts in the bone marrow and is characterized by the rapid growth of abnormal white blood cells that interfere with the production of normal blood cells. AML is the most common acute leukemia affecting adults.

Bhatia was facing the toughest challenge of his life. Half of all new cases of leukemia result in death. But Bhatia was determined to beat the odds and get better. After a few months of chemotherapy and other pharmacological treatment, doctors told Bhatia that his only remaining treatment option would be a bone marrow transplant—a procedure that requires finding a donor with marrow having the same human leukocyte antigens as the recipient.

Because tissue types are inherited, about 25 percent to 30 percent of patients are able to find a perfect match with a sibling. The remaining 70 percent must turn to the National Marrow Donor Program (NMDP), a national database with more than 8 million registered individuals.

Patients requiring a transplant are most likely to match a donor of their own ethnicity. That wasn’t a promising scenario for Bhatia. He had a rare gene from his father’s side of the family that proved extremely difficult to match. After typing his brother, his parents, and all of his cousins, the closest they got was a 2/8 match. Even more worrisome was that of the millions of registered donors in the NMDP, only 1.4 percent are South Asian. As a result, the odds of Bhatia finding a perfect match were 1 in 20,000. Worse, there were few other places to look. One would think that a match could be found easily in India, where Bhatia’s family was originally from. But India does not have a national bone marrow registry. Not a single match surfaced anywhere.

Bhatia’s quest to find a donor match is a tale of the revolutionary power of social technology. Most of us are inundated daily with e-mails, videos, blog posts, and online invitations to participate in campaigns—pleas we generally ignore. Yet some social media-driven campaigns are so compelling that they beat incredible odds or cause millions to act. We call this phenomenon of using social technology for impact the “Dragonfly Effect.” It is a method that coalesces the focal points of our careers—research and insights on consumer psychology and happiness with practical approaches for infectious action. The Dragonfly Effect is also an outgrowth of a class taught at the Stanford Graduate School of Business, which brought together students engaged in social media and an ecosystem of collaborators including Silicon Valley entrepreneurs, investors, and faculty and students from Stanford’s Hasso Plattner Institute of Design. Not only did the class demonstrate that people are clamoring for ways to use social media for social good, but it also confirmed our belief that there is a replicable framework to achieve this goal.

Why the dragonfly? The dragonfly is the only insect able to propel itself in any direction when its four wings are working in concert. It symbolizes the importance of integrated effect and is akin to the ripple effect—a term used in economics, sociology, and psychology to indicate how small acts can create big change. To us, the Dragonfly Effect shows how synchronized ideas can be used to create rapid transformations through social media.

The method relies on four essential skills, or wings: 1) focus: identify a single concrete and measurable goal; 2) grab attention: cut through the noise of social media with something authentic and memorable; 3) engage: create a personal connection, accessing higher emotions, compassion, empathy, and happiness; and 4) take action: enable and empower others to take action. Throughout this process, we use the tools of design thinking, a creative approach to experimenting with and building up ideas.¹ Design thinking meshes with the Dragonfly method because it quickly takes people through a series of steps, starting with empathy and moving to hypothesis creation and then to rapid prototyping and testing.

Wing 1: Focus Your Goal Bhatia’s circle of friends, a group of young entrepreneurs and professionals, reacted to the news of his diagnosis with an unconventional approach. “We realized our choices were between doing something, anything, and doing something seismic,” says Robert Chatwani, Bhatia’s best friend and business partner. The friends decided they would attack Bhatia’s illness as they would any business challenge. It came down to running the numbers. If they campaigned for Bhatia and held bone marrow drives throughout the country, they could increase the number of South Asians in the registry. The only challenge was that to play the odds they had to register 20,000 South Asians. They figured that this was the only way to find the match that would save his life. The only problem: Doctors told them that they had a matter of weeks to get the job done.

Bhatia’s friends and family (Team Sameer) needed to work fast and they needed to scale up. Their strategy: tap the power of the Internet and focus on the tight-knit South Asian community to get 20,000 South Asians into the bone marrow registry, immediately. One of Chatwani’s first steps was to write an e-mail with a clear call to action. In the message, he did not ask for help; he simply told people what was needed of them.

Dear Friends, Please take a moment to read this email. My friend, Sameer Bhatia, has been diagnosed with acute myelogenous leukemia (AML), which is a cancer of the blood. He is in urgent need of a bone marrow transplant. Sameer is a Silicon Valley entrepreneur, is 31 years old, and got married last year. His diagnosis was confirmed just weeks ago and caught us all by surprise given that he has always been in peak condition. Sameer, a Stanford alum, is known to many for his efforts in launching the American India Foundation, Project Dosti, TiE (Chicago), a microfinance fund, and other causes focused on helping others. Now he urgently needs our help in giving him a new lease on life. He is undergoing chemotherapy at present but needs a bone marrow transplant to sustain beyond the next few months. Fortunately, you can help. Let’s use the power of the Net to save a life.²

Robert then instructed readers to do three things. First, he urged them to get registered through a simple cheek swab test. He gave a link to locations where this could be done. Second, he told readers to spread the word. Third, he instructed people to learn more by visiting the website set up to help Bhatia. On it were more details on how to organize one’s own drive and information about AML, plus frequently asked questions on registering. Robert sent the e-mail to Bhatia’s closest friends and business colleagues—about 400 to 500 people, including fellow entrepreneurs, investors, South Asian relatives, and college friends. And that set of friends forwarded the e-mail to their personal networks, and so on. Within 48 hours, the e-mail had reached 35,000 people.

Bhatia’s friends soon learned that yet another man in their ecosystem had recently been diagnosed with the same disease—Vinay Chakravarthy, a Boston-based 28-year-old physician. Bhatia’s friends immediately partnered with Team Vinay, an inspiring group of people who shared the same goal as Team Sameer. Together, they harnessed Web 2.0 social media platforms and services like Facebook, Google Apps, and YouTube to collectively campaign and hold bone marrow drives all over the country.

Their goal was clear and their campaign was under way. Within weeks, in addition to the national drives, Team Sameer and Team Vinay coordinated bone marrow drives at more than 15 San Francisco Bay Area companies, including Cisco, Google, Intel, Oracle, eBay, PayPal, Yahoo, and Genentech. Volunteers on the East Coast started using the documents and collateral that the teams developed. After 11 weeks of focused efforts that included 480 bone marrow drives, 24,611 new people were registered. The teams recruited 3,500 volunteers, achieved more than 1 million media impressions, and garnered 150,000 visitors to the websites. “This is the biggest campaign we’ve ever been involved with,” says Asia Blume of the Asian American Donor Program. “Other patients might register maybe a thousand donors. We never imagined that this campaign would blow up to this extent.”

Perhaps the most critical result associated with the campaign, however, was the discovery of two matches: one for Bhatia, one for Chakravarthy. In August 2007—only a few months after the kickoff of the campaign—Chakravarthy found a close match. Two weeks later, Bhatia was notified of the discovery of a perfect 10 of 10 match. Judging from the timing of when the donors entered the database, both Chakravarthy and Bhatia’s matches were a direct result of the campaigns.

One of the main reasons Team Sameer succeeded was its ability to focus. They didn’t get lost in the size of their challenge. They didn’t try to sign up every single South Asian in the San Francisco Bay Area. Instead they focused on those who were well connected to others and who could relate to Bhatia and his story. Those types of people were easy to identify, and the scope of the challenge quickly came into focus. Perhaps most incredible was that Team Sameer and Team Vinay did not stop with just Bhatia and Chakravarthy. Ultimately, Team Sameer and Team Vinay educated a population about the value of becoming registered donors while changing the way registries work. Above all, they came up with a blueprint for saving lives—one that could be replicated.

Wing 2: Grab Attention Not every social media campaign can grab attention through life-or- death stories. Most need to impress through originality or take people by surprise. Consider the Coca-Cola Co. In 2009 the company was looking for a new way to connect to young consumers. Spending on traditional media or Super Bowl ads would be predictable. Instead, they veered far from what could have been anticipated and delivered the “Happiness Machine.” Just before final exams, Coke installed a vending machine in a cafeteria at St. John’s University in Queens, N.Y. Instead of dispensing normal sodas, however, the machine dispensed surprises. When a student paid for one Coke, she got many Cokes … and then got other treats as well: flowers, a pizza, balloon animals, and even a 10-foot sandwich.

The students in the cafeteria were delighted by the surprises, which brought out the best in them. They shared the treats with fellow students. Coke posted a video on YouTube and advertised it with a single tweet: “Would you like a Coca-Cola Happiness Machine? Share the happiness … share the video.” ³ Within two weeks, the video had been watched 2 million times. Although traditional Coke ads, such as those placed on American Idol, would gain greater reach, Coke’s initial data suggest that the Happiness Machine has had a more meaningful impact on consumers. Coke spent less than $50,000 on the video and proved the power of surprise as a tool to establish a deep emotional connection.

Or consider Nike, which in early 2010 partnered with social marketer (RED) to launch the (RED) laces campaign on World AIDS Day. Nike created eye-catching (RED) shoelaces, donating 100 percent of the sale proceeds to fight AIDS. Working with Twitter, they put an item on the Twitter homepage promoting the movement and turned the text of all tweets red that included the hashtag #red or # laceupsavelives.⁴ To ignite the Twitter community, they enlisted celebrities such as Serena Williams, John Legend, Ashton Kutcher, and Chris Rock to send the following tweet (or their own variation): “Today is World AIDS Day. Together we can fight AIDS thru sports, http://www.nikefootball.com/red #red #laceupsavelives.” Nike essentially staged a virtual flashmob with the help of these influencers who were connected to millions of people. Within one day, they reached more than 10 million people with their message, turned more than a half million tweets red through the use of the promotion’s hashtags, and made World AIDS Day a top five global trending topic on Twitter, driving sales of the (RED) laces and ensuring further reach well beyond the followers of a particular set of influencers.

When working to grab attention in a social media campaign, we suggest four design principles: 1)personal: create with a personal hook in mind; 2) unexpected: people like consuming and then sharing new information—draw them in by piquing their curiosity; 3) visual: show, don’t tell—photos and videos speak millions of words; and 4) visceral: design the campaign so it triggers the senses through sight, sound, hearing, or taste.

Wing 3: Engage If Wing 2 of the Dragonfly Effect is about getting people to notice your cause, Wing 3, Engage, is about what happens next—compelling people to care deeply. Engage is arguably the most challenging of the four wings, because engaging others is more of an art than a science. Engagement has little to do with logic or reason. You might have brilliant arguments to explain why people should get involved, but if you can’t engage them emotionally, they won’t be swayed.

Barack Obama’s 2008 run for the White House is perhaps the broadest campaign to successfully use social media for social change. Obama’s team effectively used new social media tools—and according to some experts, this bold move secured him the presidency. Analysts at Edelman Research say that Obama won by “converting everyday people into engaged and empowered volunteers, donors, and advocates through social networks, e-mail advocacy, text messaging, and online video.” ⁵

Although Obama’s grassroots effort was savvy at using a wide variety of existing social media and technology tools, its central channel was My.BarackObama.com (nicknamed MyBO). In many ways this easy-to-use networking website was like a more focused version of Facebook. It allowed Obama supporters to create a profile, build groups, connect, and chat with other registered users, find or plan offline events, and raise funds. MyBO also housed such user-generated content as videos, speeches, photos, and how-to guides that allowed people to create their own content—similar to a digital toolbox. The mission, design, and execution of the site echoed the single goal of the grassroots effort: to provide a variety of ways for people to connect and become involved.

The Obama team, which created the most robust set of online tools ever used in a political campaign, did so in less than 10 days, timing the site to launch around Obama’s presidential campaign announcement. Keeping focused on one clear mission (“involvement through empowerment”) helped them not only to execute fast but also to execute right. In its core functionality, MyBO was the same on launch day as it was on Election Day.

It was no coincidence that MyBO shared similarities with Facebook; the Obama campaign had familiarized itself with Facebook early on, first using it before the midterm elections. At that time, Facebook had just started to allow political candidates to build profile pages, and even though Obama wasn’t a midterm candidate, he still wanted to harness online momentum. The campaign also hired Facebook co-founder Chris Hughes to help it develop and execute its social media strategy.

Hughes’s revolutionary contribution to MyBO was using social media not just to capture people’s attention but also to enable them to become activists (without a single field staffer telling them how). These activists became a team—initially gathering online and then coordinating offline events to evangelize their cause. MyBO integrated behavioral truths (involvement leads to commitment; opportunity leads to empowerment) and social media tools to inspire people to participate in ways that they found meaningful and rewarding. My.BarackObama.com was not merely a website; it was a movement that made politics accessible through social media that people were already using every day. It changed the face of political campaigns forever. But, more important, it made getting involved as easy as opening up an Internet browser and creating an online profile.

Wing 4: Take Action In many ways, Alex Scott was a regular kid. Her favorite food was French fries, her favorite color blue. She hoped to be a fashion designer one day. But in other ways, Scott was different. Just before her first birthday, she was diagnosed with neuroblastoma, an aggressive form of pediatric cancer. A tumor was removed from her back, and doctors told her parents, Liz and Jay Scott, that if she beat the cancer she would likely not walk again. Two weeks later Alex Scott moved her leg—one of the many early clues about her determination and capabilities. When Scott was 4, after receiving a stem cell transplant, she came up with a plan that would change how she and her family coped with cancer from then on. “When I get out of the hospital I want to have a lemonade stand,” she said. Scott wanted to use the money she made to fight cancer and help other children.

Her parents admit now that they laughed at Scott’s project. Although one in every 330 American children contracts cancer before age 20, childhood cancer research is consistently underfunded. Scott was advised that it could be challenging to raise money 50 cents at a time. “I don’t care. I’ll do it anyway,” she replied.

Like thousands of other junior entrepreneurs around the country, Scott set up a table in her front yard and started selling paper cups of lemonade to neighbors and passersby. Her hand-printed sign advertised that all proceeds would go to childhood cancer research. The 50-cent price of a glass of lemonade was ignored as customers paid with bills ($1, $5, $10, and $20) and allowed her to keep the change as a donation. Scott understood the importance of change management, and the change really added up.

Scott raised more than $2,000 that first year. Her plan was far more than a social entrepreneur’s desire to earn profits for a purpose; rather, it empowered others to act for her cause. She reopened her stand for business each summer, and news of its existence and worthy cause spread far beyond her neighborhood, her town, and even her home state of Pennsylvania. She leveraged that momentum and got others to set up their own lemonade stands. Her approach was “sticky” in more ways than one.⁶ Before long, lemonade stand fundraisers took place in 50 states, plus Canada and France. Scott and her family appeared on The Oprah Winfrey Show as well as The Today Show.

Not one to be easily daunted, Scott set a goal to raise $1 million for cancer research. By the time she reached $700,000, Volvo of North America stepped in and pledged to hold a fundraising event to assure that the $1 million goal would be reached.

Four years after setting up her first lemonade stand, Scott succumbed to cancer. She was 8. In her too-short life she raised $1 million for cancer research, built awareness of the seriousness of childhood cancer, and taught a generation of children (and their parents) about the importance of abstract ideals like community and charity. She also demonstrated that making a difference can be fun.

To carry on Scott’s legacy, her parents established a nonprofit in her name, Alex’s Lemonade Stand Foundation (ALSF). Since its founding, the 501(c)(3) charity has inspired more than 10,000 volunteers to set up more than 15,000 stands. It has raised in excess of $27 million and donated to more than 100 research projects at nearly 50 institutions in the United States. Scott assembled a band of cancer-fighting evangelists (family, friends, neighbors, citizens, and corporations) that was far more powerful than anyone, even those closest to her, ever thought possible. At first, ALSF stayed connected to its constituents through two electronic newsletters, Million Dollar Monday and Freshly Squeezed Friday News, which included updates and anecdotes from lemonade stands around the country. No explicit appeal was made; they kept the news light and fun. But when ALSF started branching into social media, it found that the old rules didn’t apply. It engaged its community more directly and frequently through Twitter alerts and Facebook posts. With the help of social media—30,000 Twitter followers and 33,000 Facebook fans—the organization garnered a strong and faithful fan base, growing exponentially. ALSF also redeployed its experience to make it dead simple for anyone to hold a lemonade stand. Their site (www.alexslemonade.org) documents, down to the last detail, what one needs and includes downloadable templates and tools. The foundation sends everyone who registers a package of ALSFbranded materials, with banners, signs, posters, and flyers.

People all over the world took Scott’s idea and transformed it into a movement. The success of Alex’s Lemonade Stand Foundation wasn’t as much about raising money as it was inspiring people to take action. The organization recognized that traditional fundraising (dialing or dining for dollars) was a relatively passive act. By helping children around the country set up their own lemonade stands to fight childhood cancer, Scott mobilized a population of young ambassadors whose involvement and heightened awareness made a much more significant impact.

The organization embraced all four wings of the dragonfly: It focused on the goal to honor Scott’s wish to raise money to fight childhood cancer; it grabbed attention by tapping into a deep-rooted American tradition, the lemonade stand; it engaged people’s emotions by telling and retelling Scott’s compelling story. And finally, it excelled at the fourth wing of the Dragonfly Effect, Take Action, the wing critical to closing the loop on previous efforts.

Ultimately, the Dragonfly Effect demonstrates that one doesn’t need money or power to cause seismic social change. With energy, focus, and a good wireless connection, anything is possible.

This article is based on the book The Dragonfly Effect by Jennifer Aaker and Andy Smith (John Wiley & Sons, 2010).

Jennifer Aaker is the General Atlantic Professor of Marketing at the Stanford Graduate School of Business. She is widely published in scholarly journals in psychology and marketing, and her work has been featured in The Economist, The New York Times, The Wall Street Journal, and NPR, among others.

Andy Smith is a principal of Vonavona Ventures, where he advises technical and social ventures in marketing, consumer strategy, and operations. He is a guest lecturer at the Stanford Graduate School of Business and a contributor to Good Magazine.