In Getting Beyond Better: How Social Entrepreneurship Works, Roger L. Martin and Sally R. Osberg say social entrepreneurs are able to develop “equilibrium-shifting" solutions to problems.  Martin is former dean of the University of Toronto’s Rotman School of Management in Canada, and a board member of the social entrepreneurship Skoll Foundation. Osberg is president and chief executive officer of the Skoll Foundation.

In the chapter, “The Nature Of Social Entrepreneurship", they give examples to show how social entrepreneurship works. Edited excerpts:

In 1969, Sir Ronald Cohen cofounded Apax Partners, Britain’s first private equity and venture capital firm, now operating with $20 billion in assets. In many ways, Cohen is a prototypical entrepreneur. He and his partners set out with some seed capital to meet a need they saw in the world—lack of access to venture and equity funding. Driven by the opportunity to invest in new innovations, even in the face of inherent risks, Cohen built a significant and very profitable enterprise, to the benefit of his customers and himself.

Over his years at the helm of Apax, Cohen came to understand the potential and the limitations of business: “Entrepreneurship, innovation, and capital were extremely powerful levers for getting change made," he says. “At the social level, they certainly helped people from very diverse backgrounds to increase their wealth, the wealth of their communities, and the country more broadly. But they didn’t close the gap between rich and poor. Basically, the gap between rich and poor grew bigger and bigger instead of smaller and smaller."

Raised to believe in philanthropy as a way to address social needs, Cohen came to acknowledge its limitations too, particularly in tackling the persistent challenge of inequality. On its own, philanthropy was coming up short: “How do you begin to give real equality of opportunity to people, how do you help people get out of the difficult predicaments in which life had placed them?" he recalls asking. An answer eventually came: “I began to think of doing the same thing for social entrepreneurs as I’d been involved in doing for business entrepreneurs: connecting them to the capital markets, giving them the help to scale their organizations, think strategically about the future of their organizations, and achieve innovation."

The social sector, Cohen argued, wasn’t as ineffective as is sometimes claimed. In fact, its results were often impressive, offering demonstrable benefits to society. But it did lack access to the range of capital options that would enable organizations to grow and scale. “There was no harnessing of entrepreneurship, capital, and innovation in the social sector," he says. “Even though the social sector is huge: In the United States, it is nine million people working in not-for-profits; it is three-quarters of trillion dollars of foundation assets. In the UK, it’s eight hundred thousand people and about £100 billion of foundation assets. Yet the common characteristic is that everyone in the sector is small and nobody in the sector has any money."

The social sector’s ability to build scale and attract resources, Cohen believed, was hampered by its lack of access to the capital markets. In business, entrepreneurs have access to multiple forms of capital to grow their enterprises: equity investment, secured debt, unsecured debt, and so on. In the social sector, by contrast, organizations depend in large part on charitable contributions and grants—both of which tend to be short-term in focus and often come with restrictions, especially on the amount of money that can be dedicated to administration. These restrictions can meaningfully hamper growth.

So Cohen started Big Society Capital in 2011 to provide social entrepreneurs access to capitalization avenues similar to those available to business entrepreneurs. “The role of Big Society Capital was that it should be a wholesaler of capital," he explains. “The purpose was to create social investment firms that would fund frontline social organizations in the not-for-profit sector." The firms that Big Society aims to create would provide secure debt, collateralized debt, or other capital instruments like social impact bonds, offering new options for the social sector similar to those that had long been used in business. “We’re trying to show not-for-profits that they can build a balance sheet," Cohen says. “The balance sheet can have philanthropic capital at the bottom and then all the layers of capital sitting on top of that . . . It isn’t really that different, in a way, in terms of entrepreneurship. You’re backing entrepreneurs, giving them access to capital, except that their purpose is social."

Reprinted by permission of Harvard Business Review Press. Excerpted from Getting Beyond Better. ©2015 Roger L. Martin and Sally R. Osberg. All rights reserved.

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