Mission, Mandate and Margin

I have recently been on a couple of conference panels where the question comes up: how do we scale these social enterprises?  At the Global Philanthropy Forum, the panel was about scale and sustainability.  I commented that the terms often get me to scratch my head because they feel like jargon. 

To me, scale is simply something that is pervasive or large, perhaps large enough to make a material dent on the problem trying to be solved.  Sustainability is really about something that endures.  Anything that lasts, from the Library of Congress to the American Red Cross to General Electric is sustainable. (Ironically, thanks to creative destruction, is much harder for private businesses - those that are profitable in the near term - to sustain themselves over the long term.) Finally, I noted that scale and sustainability without a qualifier is not so interesting, at least to me and the team at Acumen Fund: we seek scale and sustainable solutions that have been built with integrity and values, that provide dignity to users, that have quality at their core.

When I reflected on “scaled and sustainable” institutions that are an important part of my life, I immediately thought about two social sector programs that my daughters are involved with: the Girl Scouts and youth basketball.  Both are scaled and sustainable.  The Girls Scouts, after a century, are in nearly every community in the United States (if they are in the little city of Lambertville, NJ, population 4,000, they must be everywhere).  They achieved scale through their compelling mission: to build girls of courage, confidence and character, who make the world a better place.   Their MISSION has attracted millions of dollars in contributions (cookie sales have probably helped), but it is the contributions and the hundreds of thousands of hours of volunteer labor from the local chapter leaders, without which the organization would not have scaled.

In contrast to the Girl Scouts, which is a large, branded organization, another idea that has replicated to the point of scale is youth basketball.  Youth basketball leagues also exist in nearly every community, but unlike the Girl Scouts with a consistent program and set of activities (with plenty of room for diversity at the local level), youth basketball leagues are replications of a simple but powerful concept: a band of parents believes in the mission of youth basketball as another way to build confidence and character in children through competitive basketball.  They find a gym, buy some T-shirts and start playing.  Our local league relies on registration fees and snack food sales to cover some of the core costs, but would not exist without the hundreds of volunteer hours of the coaches (myself included), parents, referees, and league organizers who make the whole thing work.

Scaled successes in the nonprofit sector scale through the power of their MISSION.

For businesses, it is MARGIN that drives scale, specifically profit margin.  Any large business - from Google to WalMart to General Electric - have “scaled” because the economics of their businesses and their business units have generated sufficient profit margins to either reinvest in the business or to attract commercial capital (debt or equity) that is interested in getting a piece of that margin over time. Either the cash flows are financeable through debt or a source of risk capital is willing to bet there will be some profits in future years that justify an equity investment.   Businesses without margins (at some point in time) do not grow; those with unattractive margins grow slowly; those with fat margins are rocketships.

Scaled successes in the private sector scale through the power of their MARGIN.

But not all that is scaled is in the private or social sector.  Governments are an important source of scale.  The United States’ national transportation infrastructure, universal public K-to-12 education, widely adopted pollution controls after the Clean Air and Clean Water Acts, the military, etc. are all large, scaled programs, services, institutions or systems that have scaled through MANDATE.  The government has the power to tax and administer massively scaled programs that serve a national purpose, correct for a market failure, or respond to a public need.

At the Global Philanthropy Forum, there was a terrific example of a  hepatitis B vaccine program in China that will cost $400m to scale from one small district to solve the problem nationally.  There is not enough philanthropy in the world to fund a public health campaign of that scale in China, particularly as the Global Fund uses its billions to grapple with AIDS, TB and Malaria.  The mission is compelling but is probably not going to compete in the philanthropic marketplace for that much money in the next few years.  The economics of vaccination campaigns to millions or low-income Chinese also do not pencil out. There is no margin for a product that people are not willing to pay for.  The program will only scale if the government of China puts up the money.  It’s actually a pretty good deal: the $400m of spending over the next five years will save the government roughly $1B from the disease burden over the next decades.  Through the power of a MANDATE, the government is able to scale a regional pilot program nationally.

So scaled public programs rely on a government MANDATE.

At this point, you’re probably asking yourself: OK, makes sense, but how does this relate to social enterprise?

Where this gets interesting from a social enterprise perspective is that it offers us a lens to understand the oft-discussed but also misunderstood “path to scale”.  The path to scale is not straightforward; social enterprises don’t follow just one path or another.  In fact, every business in Acumen Fund’s portfolio blends some element of business, social enterprise, and policy experiment at different points in their life cycle.  They need to focus on margin, communicate a compelling mission, and advocate for a mandate at various stages of their development.

Husk Power is an example.  It is a biomass gasification business in India that buys waste rice husk and converts it into electricity for small, off-grid villages in rural Bihar.  Gyanesh Pandey is a charismatic leader who has used his increasingly public profile to raise a fair bit of philanthropy.  This “free money” – which has come from everything from business plan competitions to this week’s Sankalp Forum is useful as Gyanesh conducts R&D to pilot the model.  He continues to benefit from volunteer offers of support from all over the world, including people willing to travel to Bihar to work for free. The mission of providing affordable, renewable power in communities that otherwise lack access to formal energy services is compelling.

His margins are also quite attractive.  At least on paper, he thinks the systems should pay for themselves within two to three years, so the business itself attracted risk capital like Acumen Fund and even more commercial investors like Bamboo Finance and DFJ.  Even more exciting is the potential for mandate: Gyanesh is working with the government of Bihar to write the regulations for how rural biomass gasification can benefit from government subsidies (which make the margins even more attractive).  If successful, the mandate for government funding will scale up these systems more rapidly than either the compelling mission or the attractive margins.

While this blend of approaches is exciting for Gyanesh and for Acumen Fund, it also raises a critical question: when to follow which path and in what sequence.  Venture capitalists expect their management teams to focus.  There will be plenty of time for fame when you sell your business. A philanthropist, on the other hand, loves to provide a platform for the charismatic grantee, as it is part of the business model, but it can cause the entrepreneur to lose focus.  And the policy world is desperate for good ideas, but the pace of change in government is often unpredictable.  Waiting for a mandate is about is productive as  waiting for Godot…

So, you get to scale and sustainability through mission, margin or mandate, or through some combination of all three .  The fun part is figuring out which and when; the risk is that choosing the wrong path at the wrong time can mean the difference between a scaled success, and yet another pilot program languishing on the ash heaps of failed social change experiments. 

So the question is, how should social enterprises think about navigating these three path's to scale?