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«Mary Clark Grinsfelder Community Council of Greater Dallas Abstract In this paper, we review the literature on entrepreneurship and the skill sets ...»

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Social Entrepreneurship and the

Financing of Third Sector Organizations

Dennis R. Young

Andrew Young School of Policy Studies,

Georgia State University

Mary Clark Grinsfelder

Community Council of Greater Dallas


In this paper, we review the literature on entrepreneurship and the skill sets

required by entrepreneurs operating in different sectors of the economy.1 Case

studies from the social enterprise literature are examined in some detail. We search

for distinctions between entrepreneurship in the business and public sectors and entrepreneurship in the nonprofit sector and relate this to the variations in financial support found among nonprofit sector organizations. We conclude that third sector social entrepreneurs are likely to require a different mix of skills than business entrepreneurs. In particular, political skills broadly defined, and the ability to secure and maintain charitable support, appear to be common to successful social enterprise ventures. Hence, taking too narrow a view of social entrepreneurship and social enterprise by confining it to the traditional business model of entrepreneurship constrains the potential benefits of developing social entrepreneurship in the third sector. This implies that education of potential social entrepreneurs should be broadly construed, combining business, public and nonprofit based instruction.

While the concept of entrepreneurship has a long history in the commercial sector, it has been embraced relatively recently in the social economy or third sector. Nonetheless, social entrepreneurship is now one of the hottest topics for policy makers and practitioners seeking new solutions to social problems in the United States, Europe, and other parts of the world. However, there is not yet conceptual clarity on the nature of social entrepreneurship and how it is similar and different from business sector entrepreneurship. Indeed, Dees and Anderson JPAE 17(4), 543–567 Journal of Public Affairs Education 543 Social Entrepreneurship and the Financing of Third Sector Organizations (2006) argue that the concept of social entrepreneurship represents a confluence of two schools of thought: the idea of generating earned (market) income in support of social purposes (e.g., through commercial activity by nonprofit organizations) and the undertaking of innovation for social change.

The latter idea is generic and sector-agnostic, and consistent with the ideas of Jean-Baptiste Say, Joseph Schumpeter, and Peter F. Drucker. Say (1803) is credited with associating the French term entrepreneur (“one who undertakes”) with venturesome individuals who stimulate economic progress by finding new and better ways of doing things. Schumpeter (1934) wrote of entrepreneurship as the bringing about of “new combinations” of the means of production. Schumpeter’s emphasis was on innovation, leading to new kinds of economic goods and services, new ways of producing them, the opening of new markets, development of new sources of raw materials, or the creation of new organizational structures.

Drucker (1995) characterized entrepreneurs as searching for change, responding to it, and exploiting change as an opportunity. D. Young (1983) and later Brinckerhoff (2000) adapted these notions of entrepreneurship specifically to nonprofits and social entrepreneurship, respectively. D. Young (1986) described nonprofit entrepreneurs as “innovators who found new organizations, develop and implement new programs and methods, organize and expand new services, and redirect the activities of faltering organizations” (p.162).

As Bielefeld (2009) noted, the confusion surrounding the distinction between for-profit and nonprofit entrepreneurs raises important questions for the teaching and practice of social entrepreneurship. How should we prepare nonprofit managers to become social entrepreneurs? To what degree do social entrepreneurs do the same things that business entrepreneurs do? What can managers and academics learn from the study and practice of commercial and social entrepreneurship?

The proper conceptualization of social entrepreneurship in the third sector—in particular, the nature of its link with the commercial marketplace— matters because it defines the skill sets that will be sought by third sector organizations to address their social missions. If social entrepreneurship is primarily about marketplace success, then the traditional model of the business entrepreneur is appropriate. However, if the broader concept of innovator and catalyst for social change is adopted, then a different skill set may be required of social entrepreneurs.

In this paper, we argue that the broader conception of the social entrepreneur is appropriate because social enterprise does not depend solely on marketplace success. Indeed, the financial foundations of third sector organizations are quite varied, and this variation is likely to be reflected in the financing packages for new ventures, implying that social entrepreneurs must be able to negotiate public sector and philanthropic environments as well as markets. Given that these environments require different knowledge and skill capacities, social entrepreneurs need capabilities that are somewhat different from those of the typical business 544 Journal of Public Affairs Education Social Entrepreneurship and the Financing of Third Sector Organizations sector entrepreneur. This in turn suggests that would-be social entrepreneurs require a different educational preparation than business sector entrepreneurs.

The next part of this paper examines the literatures on business, public sector, and social entrepreneurship with an eye toward identifying similarities and differences in required skills. An important finding is that required skill sets are related to the resource opportunities available to entrepreneurs in different sectors and that social entrepreneurs must be able to negotiate resources from all three sectors. Thus, in the next section, we examine the economic foundations of various third sector environments, in particular the dependence of nonprofits in different fields of service on sources of income derived from the market, government, and philanthropy. This provides the context for reviewing a set of published case studies of social enterprise that reveal, at the micro level, the variety of financing sources and entrepreneurial skills required for successful social enterprises.

Subsequently, we classify these skills into three general categories: market, political, and generic (organizational) management skills. We conclude that social entrepreneurship is not only distinct from business entrepreneurship in its mix of skill requirements but also that these requirements vary substantially within the third sector. In the final section, we reflect on the implications of this analysis for education of successful social entrepreneurs. This in turn suggests that would-be social entrepreneurs require different educational preparation than classical business sector entrepreneurs.

Entrepreneurial Capacities The modest but growing literature on social entrepreneurship must be put into the context of a much more robust overall literature on entrepreneurship, most of which is implicitly focused on the business sector but is often generic in its approach to entrepreneurship as a phenomenon. The broader literature considers various perspectives on entrepreneurship, including the personality traits of entrepreneurs (e.g., Cunningham & Lischeron, 1991), the motivations for entrepreneurial behavior (e.g., D. Young, 1983), the contexts and circumstances of entrepreneurship (e.g., Kearney, Hisrich, & Roche, 2008), the decision-making processes through which entrepreneurship takes place (e.g., Hisrich, 2006), the role of entrepreneurship in economic theory (e.g., Baumol, 2002; Kirzner, 1979), and the skills and capacities required for success. Our review focuses primarily on the latter, with an eye toward identifying those skills and capacities that can be addressed in educational curricula for social entrepreneurs.

Generic Skills Cunningham and Lischeron (1991) reviewed six schools of thought about entrepreneurs. Three of these hinge on skill sets: the management school, which emphasizes that entrepreneurs need certain kinds of management skills to successfully run and grow their organizations; the leadership school, which Journal of Public Affairs Education 545 Social Entrepreneurship and the Financing of Third Sector Organizations emphasizes abilities to adapt to change, assume responsibility, and inspire and motivate people; and the intrapreneurship school, which emphasizes the special capacities to recognize and exploit opportunities within existing organizations, including the ability to set up new units, services, and programs. Various contributions to entrepreneurship research elaborate on one or more of these skill sets. For example, Smilor and Sexton (1996) emphasized the leadership characteristics, capacities, and skills of entrepreneurs while Kirzner (1979) explained how entrepreneurs use their keen managerial ability to perceive profitable opportunities that go unnoticed by others.

Public Sector Skills Several scholars have compared entrepreneurship in the public sector to entrepreneurship in the business sector. For example, Kearney, Hisrich, and Roche (2008) concluded that public sector characteristics such as larger, hierarchical, and more rigid organizations; short-term budgets and planning horizons, lack of rewards and incentives to innovate, cultures of risk aversion, political reluctance to close down failing programs, coordination issues among bureaucratic entities, limits on public resources, and lack of public confidence require public sector entrepreneurs to be especially skilled in persuasion, compromise and accommodation, problem solving, vision articulation, resource development, alliance and coalition building, navigating the legislative process, and sharing credit with program participants and supporters.

Social Entrepreneurship Skills The specialized literature on social entrepreneurship identifies a number of important skill sets that social entrepreneurs need to bridge the public, nonprofit, and business contexts. D. Young (1983, 1985, 1990) identified several generic capacities, including problem-solving ability, ingenuity and creativity, analyzing risks, identifying opportunities, consensus building, mobilizing resources, and persistence. Risk taking included jeopardizing professional reputation and secure employment. Political skills included negotiating grants and contracts, securing sponsorship of key supporters, working to pass enabling legislation, and satisfying regulatory authorities. Persistence included the patience to overcome financial, regulatory, political, and bureaucratic barriers, especially in the context of government funding.

Waddock and Post (1991) argued that social entrepreneurs required the ability to understand extremely complex problems and to form a convincing vision for solving them. Social entrepreneurs needed the personal credibility to secure critical resources, build networks of support for their initiatives, and frame a sense of collective purpose for those who support them. Pilz (1995) found that nonprofit entrepreneurs needed to be able to discern community needs, take risks, develop innovations, and focus on what they could do for others. Brinkerhoff (2000) 546 Journal of Public Affairs Education Social Entrepreneurship and the Financing of Third Sector Organizations viewed social entrepreneurs as stewards of the public interest who must be able to identify new ways of serving constituents and adding value to existing service, take reasonable risks, understand the difference between wants and needs, understand social and financial returns to investments, and focus on mission as well as financial feasibility.

Dees (2001), focusing on the role of nonprofit entrepreneurs as change agents, noted their ability to adopt a mission to create social (not just private) value; recognize and relentlessly pursue new opportunities to serve the mission;

engage in continuous innovation, adaptation, and learning; act boldly even without resources currently in hand; and demonstrate a sense of accountability for desired outcomes for the constituencies served. Andersson and Helm (2008) also argued that nonprofit entrepreneurship required innovation, proactiveness, and risk taking.

Comparisons With Business and Public Sector Skill Sets Dees (2001) observed that social entrepreneurs have much in common with business entrepreneurs, including drive, ambition, leadership skills, and a sense of how to make maximum use of resources. Thompson, Alvy, and Lees (2000) also argued that skills and characteristics of social entrepreneurs mirror those of business entrepreneurs but require an extra dose of “visionary ideas, leadership skills, and a commitment to helping others” (p. 328). In particular, social entrepreneurs must be able to discern unmet public needs and mobilize resources and people to address those needs.

Alvord, Brown, and Letts (2004), using data from seven well-established organizations, suggested that social entrepreneurs need the capacity to bridge diverse stakeholder communities and adapt in response to changing circumstances over the long term. Light (2005) identified the ability to overcome serious barriers to success as crucial to creating “pattern-breaking change” in how governments, nonprofits, and businesses address significant social problems. Successful social entrepreneurs tend to possess the skills and capabilities to develop a particular idea, capitalize on opportunities, and work within organizational constraints and particular financial environments (Light, 2008). Like Dees, Light argued that social entrepreneurs need not rely on market-based tools to accomplish their objectives, because earned income is only one of several means to support social goals.

Handy, Ranade, and Kassam (2007) also saw strong parallels between nonprofit and business entrepreneurs in their ability to overcome challenges and constraints, identify new opportunities, promote innovative ideas, mobilize resources, and bear risks. Wei-Skillern, Austin, Leonard, and Stevenson (2007) found both substantial similarities and differences between social and commercial entrepreneurs.

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