Foundational Article on “Social Entrepreneurship”

The Meaning of “Social Entrepreneurship”

J. Gregory Dees1

Entrepreneur in Residence

Kauffman Center for Entrepreneurial Leadership

Ewing Marion Kauffman Foundation

and

Miriam and Peter Haas Centennial Professor in Public Service

Graduate School of Business

Stanford University

October 31, 1998

The idea of “social entrepreneurship” has struck a responsive cord. It is a phrase well suited to

our times. It combines the passion of a social mission with an image of business-like discipline,

innovation, and determination commonly associated with, for instance, the high-tech pioneers of

Silicon Valley. The time is certainly ripe for entrepreneurial approaches to social problems. Many

governmental and philanthropic efforts have fallen far short of our expectations. Major social

sector institutions are often viewed as inefficient, ineffective, and unresponsive. Social

entrepreneurs are needed to develop new models for a new century.

The language of social entrepreneurship may be new, but the phenomenon is not. We have

always had social entrepreneurs, even if we did not call them that. They originally built many of

the institutions we now take for granted. However, the new name is important in that it implies a

blurring of sector boundaries. In addition to innovative not-for-profit ventures, social

entrepreneurship can include social purpose business ventures, such as for-profit community

development banks, and hybrid organizations mixing not-for-profit and for-profit elements, such

as homeless shelters that start businesses to train and employ their residents. The new language

helps to broaden the playing field. Social entrepreneurs look for the most effective methods of

serving their social missions.

Though the concept of “social entrepreneurship” is gaining popularity, it means different things to

different people. This can be confusing. Many associate social entrepreneurship exclusively with

not-for-profit organizations starting for-profit or earned-income ventures. Others use it to describe

anyone who starts a not-for-profit organization. Still others use it to refer to business owners who

integrate social responsibility into their operations. What does “social entrepreneurship” really

mean? What does it take to be a social entrepreneur?  To answer these questions, we should start

by looking into the roots of the term “entrepreneur.”

Origins of the Word “Entrepreneur”

In common parlance, being an entrepreneur is associated with starting a business, but this is a

very loose application of a term that has a rich history and a much more significant meaning.

The term “entrepreneur” originated in French economics as early as the 17th and 18th centuries.

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The Kauffman Center for Entrepreneurial Leadership provided the funding for this paper. This paper has

benefited tremendously from comments and suggestions by the members of the Social Entrepreneurship

Funders Working Group, particularly Suzanne Aisenberg , Morgan Binswanger, Jed Emerson, Jim

Pitofsky, Tom Reis, and Steve Roling. However, this is still a draft. The definition proposed here has not

been formally adopted by the group (yet) and should not be understood as representing the views of the

group or any of the named individuals.

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In French, it means someone who “undertakes,” not an “undertaker” in the sense of a funeral

director, but someone who undertakes a significant project or activity. More specifically, it came

to be used to identify the venturesome individuals who stimulated economic progress by finding

new and better ways of doing things. The French economist most commonly credited with giving

the term this particular meaning is Jean Baptiste Say. Writing around the turn of the 19th century,

Say put it this way, “The entrepreneur shifts economic resources out of an area of lower and into

an area of higher productivity and greater yield.” Entrepreneurs create value.

In the 20th century, the economist most closely associated with the term was Joseph Schumpeter.

He described entrepreneurs as the innovators who drive the “creative-destructive” process of

capitalism. In his words, “the function of entrepreneurs is to reform or revolutionize the pattern

of production.” They can do this in many ways: “by exploiting an invention or, more generally,

an untried technological possibility for producing a new commodity or producing an old one in a

new way, by opening up a new source of supply of materials or a new outlet for products, by

reorganizing an industry and so on.” Schumpeter’s entrepreneurs are the change agents in the

economy. By serving new markets or creating new ways of doing things, they move the

economy forward.

It is true that many of the entrepreneurs that Say and Schumpeter have in mind serve their

function by starting new, profit-seeking business ventures, but starting a business is not the

essence of entrepreneurship. Though other economists may have used the term with various

nuances, the Say-Schumpeter tradition that identifies entrepreneurs as the catalysts and

innovators behind economic progress has served as the foundation for the contemporary use of

this concept.

Current Theories of Entrepreneurship

Contemporary writers in management and business have presented a wide range of theories of

entrepreneurship. Many of the leading thinkers remain true to the Say-Schumpeter tradition while

offering variations on the theme. For instance, in his attempt to get at what is special about

entrepreneurs, Peter Drucker starts with Say’s definition, but amplifies it to focus on opportunity.

Drucker does not require entrepreneurs to cause change, but sees them as exploiting the

opportunities that change (in technology, consumer preferences, social norms, etc.) creates. He

says, “this defines entrepreneur and entrepreneurship—the entrepreneur always searches for

change, responds to it, and exploits it as an opportunity.” The notion of “opportunity” has come

to be central to many current definitions of entrepreneurship. It is the way today’s management

theorists capture Say’s notion of shifting resources to areas of higher yield. An opportunity,

presumably, means an opportunity to create value in this way. Entrepreneurs have a mind-set that

sees the possibilities rather than the problems created by change.

For Drucker, starting a business is neither necessary nor sufficient for entrepreneurship. He

explicitly comments that “not every new small business is entrepreneurial or represents

entrepreneurship.” He cites the example of a “husband and wife who open another delicatessen

store or another Mexican restaurant in the American suburb” as a case in point. There is nothing

especially innovative or change-oriented in this. The same would be true of new not-for-profit

organizations. Not every new organization would be entrepreneurial. Drucker also makes it clear

that entrepreneurship does not require a profit motive. Early in his book on Innovation and

Entrepreneurship, Drucker asserts, “No better text for a History of Entrepreneurship could be

found than the creation of the modern university, and especially the modern American

university.” He then explains what a major innovation this was at the time. Later in the book, he

devotes a chapter to entrepreneurship in public service institutions.

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Howard Stevenson, a leading theorist of entrepreneurship at Harvard Business School, added an

element of resourcefulness to the opportunity-oriented definition based on research he conducted

to determine what distinguishes entrepreneurial management from more common forms of

“administrative” management.  After identifying several dimensions of difference, he suggests

defining the heart of entrepreneurial management as “the pursuit of opportunity without regard to

resources currently controlled.” He found that entrepreneurs not only see and pursue

opportunities that elude administrative managers; entrepreneurs do not allow their own initial

resource endowments to limit their options. To borrow a metaphor from Elizabeth Barrett

Browning, their reach exceeds their grasp. Entrepreneurs mobilize the resources of others to

achieve their entrepreneurial objectives. Administrators allow their existing resources and their

job descriptions to constrain their visions and actions. Once again, we have a definition of

entrepreneurship that is not limited to business start-ups.

Differences between Business and Social Entrepreneurs

The ideas of Say, Schumpeter, Drucker, and Stevenson are attractive because they can be as

easily applied in the social sector as the business sector. They describe a mind-set and a kind of

behavior that can be manifest anywhere. In a world in which sector boundaries are blurring, this

is an advantage. We should build our understanding of social entrepreneurship on this strong

tradition of entrepreneurship theory and research. Social entrepreneurs are one species in the

genus entrepreneur.  They are entrepreneurs with a social mission. However, because of this

mission, they face some distinctive challenges and any definition ought to reflect this.

For social entrepreneurs, the social mission is explicit and central. This obviously affects how

social entrepreneurs perceive and assess opportunities. Mission-related impact becomes the

central criterion, not wealth creation. Wealth is just a means to an end for social entrepreneurs.

With business entrepreneurs, wealth creation is a way of measuring value creation. This is

because business entrepreneurs are subject to market discipline, which determines in large part

whether they are creating value. If they do not shift resources to more economically productive

uses, they tend to be driven out of business.

Markets are not perfect, but over the long haul, they work reasonably well as a test of private

value creation, specifically the creation of value for customers who are willing and able to pay.

An entrepreneur’s ability to attract resources (capital, labor, equipment, etc.) in a competitive

marketplace is a reasonably good indication that the venture represents a more productive use of

these resources than the alternatives it is competing against. The logic is simple. Entrepreneurs

who can pay the most for resources are typically the ones who can put the resources to higher

valued uses, as determined in the marketplace. Value is created in business when customers are

willing to pay more than it costs to produce the good or service being sold. The profit (revenue

minus costs) that a venture generates is a reasonably good indicator of the value it has created. If

an entrepreneur cannot convince a sufficient number of customers to pay an adequate price to

generate a profit, this is a strong indication that insufficient value is being created to justify this

use of resources. A re-deployment of the resources happens naturally because firms that fail to

create value cannot purchase sufficient resources or raise capital. They go out of business. Firms

that create the most economic value have the cash to attract the resources needed to grow.

Markets do not work as well for social entrepreneurs. In particular, markets do not do a good job

of valuing social improvements, public goods and harms, and benefits for people who cannot

afford to pay. These elements are often essential to social entrepreneurship. That is what makes it

social entrepreneurship. As a result, it is much harder to determine whether a social entrepreneur

3

is creating sufficient social value to justify the resources used in creating that value. The survival

or growth of a social enterprise is not proof of its efficiency or effectiveness in improving social

conditions. It is only a weak indicator, at best.

Social entrepreneurs operate in markets, but these markets often do not provide the right

discipline. Many social-purpose organizations charge fees for some of their services. They also

compete for donations, volunteers, and other kinds of support. But the discipline of these

“markets” is frequently not closely aligned with the social entrepreneur’s mission. It depends on

who is paying the fees or providing the resources, what their motivations are, and how well they

can assess the social value created by the venture. It is inherently difficult to measure social value

creation. How much social value is created by reducing pollution in a given stream, by saving the

spotted owl, or by providing companionship to the elderly? The calculations are not only hard but

also contentious. Even when improvements can be measured, it is often difficult to attribute an

them to a specific intervention. Are the lower crime rates in an area due to the Block Watch, new

policing techniques, or just a better economy? Even when improvements can be measured and

attributed to a given intervention, social entrepreneurs often cannot capture the value they have

created in an economic form to pay for the resources they use. Whom do they charge for cleaning

the stream or running the Block Watch? How do they get everyone who benefits to pay? To offset

this value-capture problem, social entrepreneurs rely on subsidies, donations, and volunteers, but

this further muddies the waters of market discipline. The ability to attract these philanthropic

resources may provide some indication of value creation in the eyes of the resource providers, but

it is not a very reliable indicator. The psychic income people get from giving or volunteering is

likely to be only loosely connected with actual social impact, if it is connected at all.

Defining Social Entrepreneurship

Any definition of social entrepreneurship should reflect the need for a substitute for the market

discipline that works for business entrepreneurs. We cannot assume that market discipline will

automatically weed out social ventures that are not effectively and efficiently utilizing resources.

The following definition combines an emphasis on discipline and accountability with the notions

of value creation taken from Say, innovation and change agents from Schumpeter, pursuit of

opportunity from Drucker, and resourcefulness from Stevenson. In brief, this definition can be

stated as follows:

Social entrepreneurs play the role of change agents in the social sector, by:

Adopting a mission to create and sustain social value (not just private value),

Recognizing and relentlessly pursuing new opportunities to serve that mission,

Engaging in a process of continuous innovation, adaptation, and learning,

Acting boldly without being limited by resources currently in hand, and

Exhibiting a heightened sense of accountability to the constituencies served and for

the outcomes created. 

This is clearly an “idealized” definition. Social sector leaders will exemplify these characteristics

in different ways and to different degrees. The closer a person gets to satisfying all these

conditions, the more that person fits the model of a social entrepreneur. Those who are more

innovative in their work and who create more significant social improvements will naturally be

seen as more entrepreneurial. The truly Schumpeterian social entrepreneurs will significantly

reform or revolutionize their industries.  Each element in this brief definition deserves some

further elaboration. Let’s consider each one in turn.

4

Change agents in the social sector: Social entrepreneurs are the reformers and revolutionaries

described by Schumpeter, but with a social mission. They make fundamental changes in the way

things are done in the social sector. Their visions are bold. They attack the underlying causes of

problems, rather than simply treating symptoms. They often reduce needs rather than just meeting

them. They seek to create systemic changes and sustainable improvements. Though they may act

locally, their actions have the potential to stimulate global improvements in their chosen arenas,

whether that is education, health care, economic development, the environment, the arts, or any

other social sector field.

Adopting a mission to create and sustain social value: This is the core of what distinguishes

social entrepreneurs from business entrepreneurs even from socially responsible businesses. For a

social entrepreneur, the social mission is fundamental. This is a mission of social improvement

that cannot be reduced to creating private benefits (financial returns or consumption benefits) for

individuals. Making a profit, creating wealth, or serving the desires of customers may be part of

the model, but these are means to a social end, not the end in itself. Profit is not the gauge of

value creation; nor is customer satisfaction; social impact is the gauge. Social entrepreneurs look

for a long-term social return on investment. Social entrepreneurs want more than a quick hit; they

want to create lasting improvements. They think about sustaining the impact.

Recognizing and relentlessly pursuing new opportunities: Where others see problems,

entrepreneurs see opportunity. Social entrepreneurs are not simply driven by the perception of a

social need or by their compassion, rather they have a vision of how to achieve improvement and

they are determined to make their vision work. They are persistent. The models they develop and

the approaches they take can, and often do, change, as the entrepreneurs learn about what works

and what does not work. The key element is persistence combined with a willingness to make

adjustments as one goes. Rather than giving up when an obstacle is encountered, entrepreneurs

ask, “How can we surmount this obstacle? How can we make this work?”

Engaging in a process of continuous innovation, adaptation, and learning: Entrepreneurs are

innovative. They break new ground, develop new models, and pioneer new approaches. However,

as Schumpeter notes, innovation can take many forms. It does not require inventing something

wholly new; it can simply involve applying an existing idea in a new way or to a new situation.

Entrepreneurs need not be inventors. They simply need to be creative in applying what others

have invented. Their innovations may appear in how they structure their core programs or in how

they assemble the resources and fund their work. On the funding side, social entrepreneurs look

for innovative ways to assure that their ventures will have access to resources as long as they are

creating social value. This willingness to innovate is part of the modus operandi of entrepreneurs.

It is not just a one-time burst of creativity. It is a continuous process of exploring, learning, and

improving. Of course, with innovation comes uncertainty and risk of failure. Entrepreneurs tend

to have a high tolerance for ambiguity and learn how to manage risks for themselves and others.

They treat failure of a project as a learning experience, not a personal tragedy.

Acting boldly without being limited by resources currently in hand: Social entrepreneurs do not

let their own limited resources keep them from pursuing their visions. They are skilled at doing

more with less and at attracting resources from others. They use scarce resources efficiently, and

they leverage their limited resources by drawing in partners and collaborating with others. They

explore all resource options, from pure philanthropy to the commercial methods of the business

sector. They are not bound by sector norms or traditions. They develop resource strategies that

are likely to support and reinforce their social missions. They take calculated risks and manage

the downside, so as to reduce the harm that will result from failure. They understand the risk

5

tolerances of their stakeholders and use this to spread the risk to those who are better prepared to

accept it.

Exhibiting a heightened sense of accountability to the constituencies served and for the outcomes

created: Because market discipline does not automatically weed out inefficient or ineffective

social ventures, social entrepreneurs take steps to assure they are creating value. This means that

they seek a sound understanding of the constituencies they are serving. They make sure they have

correctly assessed the needs and values of the people they intend to serve and the communities in

which they operate. In some cases, this requires close connections with those communities. They

understand the expectations and values of their “investors,” including anyone who invests money,

time, and/or expertise to help them. They seek to provide real social improvements to their

beneficiaries and their communities, as well as attractive (social and/or financial) return to their

investors. Creating a fit between investor values and community needs is an important part of the

challenge. When feasible, social entrepreneurs create market-like feedback mechanisms to

reinforce this accountability. They assess their progress in terms of social, financial, and

managerial outcomes, not simply in terms of their size, outputs, or processes. They use this

information to make course corrections as needed.

Social Entrepreneurs: A Rare Breed

Social entrepreneurship describes a set of behaviors that are exceptional. These behaviors should

be encouraged and rewarded in those who have the capabilities and temperament for this kind of

work. We could use many more of them. Should everyone aspire to be a social entrepreneur? No.

Not every social sector leader is well suited to being entrepreneurial. The same is true in business.

Not every business leader is an entrepreneur in the sense that Say, Schumpeter, Drucker, and

Stevenson had in mind. While we might wish for more entrepreneurial behavior in both sectors,

society has a need for different leadership types and styles. Social entrepreneurs are one special

breed of leader, and they should be recognized as such.  This definition preserves their distinctive

status and assures that social entrepreneurship is not treated lightly. We need social entrepreneurs

to help us find new avenues toward social improvement as we enter the next century.

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