Anderson, Beth & Dees, Gregory (2006), “Rhetoric, Reality, and Research: Building a Solid Foundation for the Practice of Social Entrepreneurship”, from Social Entrepreneurship (ed. Alex Nicholls), New York: OUP

This is a great piece – one which I felt I should have read earlier. Specifically, this essay raises a number of research questions typically overlooked by social entrepreneurship curriculums and practitioners when assessing the ‘effectiveness’ of earned income ventures. (Not surprisingly, these questions make great areas of inquiry for my thesis!) These include:

‘Self-Sufficiency’: What does it mean for an organization to be self-sufficient? Is it fair to describe organizations that depend on earned income as self-sufficient and those that rely on other sources as ‘dependent’? What are the value judgments that underlie the promotion of earned income?

“Dependency is generally regarded as bad – a sign of weakness and vulnerability. Self-sufficiency is regarded as unequivocally good – a sign of strength. What are the values implicit in the use of these terms? … Of course, the term earned income itself is value laden, seemingly implying that the donations, grants, and government support that social sector leaders work so hard to attract and use for important social services are not ‘earned’“

‘Sustainability’: Is earned income inherently more ’sustainable ‘ than other forms of income for social entrepreneurs? Under what conditions is it most likely to be sustainable? Is ’sustainability’ the right measure for assessing financial strategies?

‘Boschee nad McClurg claimed that, ‘As long as nonprofits continue to be dependent on contributions from individuals, grants from foundations, subsidies from government and other forms of largesse, they will never become sustainable or self-sufficient’; But it is not clear that earned income is intrinsically more reliable than all other sources; A few failures have been documented; A thoughtful research agenda would also explore the notion of sustainability in some depth; if we want to promote sustainability we would be urging the creation of endowments; even large multinational corporations can only expect to live forty or fifty years on average; the life expectancy for smaller businesses is much lower, with one survey estimating 12.5 years for all firms”

‘Financial Freedom’: Does earned income give social entrepreneurs more flexibility in how they spend their money? Is complete reliance on earned income optimal for social entrepreneurs? How difficult is it to generate profits from earned income ventures in the social sector?

Another alleged feature of earned income ventures that makes them attractive is the promise of financial freedom and flexibility. ‘The beauty of making a profit is that you can do a lot with the money, you can do what you want to do’; But in a business with 10 percent total return on sales that also requires half of those profits to be reinvested in the business (both generous estimates), it will take $1 million in sales to generate $50,000 in free cash flow. Especially if the venture is not completely aligned with the organization’s mission, social entrepreneurs must ask if this earned income strategy is the most effective way for them to generate $50,000 in unrestricted cash; A very different story can emerge when costs are fully taken into account; Without rigorous in-depth research, we have no idea about the level of financial ‘bottom-line impact’ business ventures are having on not-for-profit organizations. If total reliance on earned income truly were optimal for social entrepreneurs, one might expect to see far more social entrepreneurs adopting a for-profit form.

‘Scalability’: Does greater reliance on earned income make it easier to scale a successful social venture? How and under what conditions does earned income contribute to scalability?

Recently, proponents of earned income have started to emphasize another potential benefit – its scalability. But does reliance on earned income improve the scalability of social purpose organizations? Again, we have little systematic evidence one way or the other.

‘Social Impact’: How and under what circumstances can earned income strategies be used to improve social impact? Does the ‘double bottom line’ metaphor make sense? How should social entrepreneurs make decisions about the best funding strategy for maximizing their social impact?