Social entrepreneurs are "unreasonable people"—they break the rules. In this excerpt from their new book, John Elkington and Pamela Hartigan investigate the relevance of the new thinking for the mainstream

The new generation of social and environmental entrepreneurs lead by example. They attack intractable problems, take huge risks, and force the rest of us to look beyond the edge of what seems possible. They seek outlandish goals, such as economic and environmental sustainability and social equity. In so doing, they disrupt established industries while creating new paths for the future.

So, who are these people and what can we learn from them? They share the same characteristics as all entrepreneurs—they are innovative, resourceful, practical and opportunistic. They delight in coming up with new products or services, or new approaches to delivering them. What motivates many of these people is not doing the "deal", but achieving the "ideal". And because the ideal takes a lot longer to realise, these entrepreneurs tend to be in the game for the long haul, not just until they can sell their venture to the highest bidder.

Social and environmental entrepreneurs operate across a spectrum of enterprises, from the purely charitable to the purely commercial. But because many of the markets they address are immature, they tend to skew towards the not-for-profit end.

On the purely charitable side, "customers" pay little or nothing, capital comes in the form of donations and grants, the workforce is largely made up of volunteers, and suppliers make in-kind donations. At the purely commercial end of the spectrum, by contrast, most transactions are at market rates.

Many of the most interesting experiments take place in the middle ground, where hybrid organisations pursue new forms of blended value and where better-off customers sometimes subsidise the less well-off. Blended value is what results when businesses—whether for-profit or not-for-profit—create economic, social and environmental value. So a key challenge for 21st century investors and managers will be to boost the attractiveness to all key stakeholders of the value blends they create.

Creating successful business models
It is in the nature of their work at the bleeding edge of change that social and environmental entrepreneurs are often seen to be unreasonable; the successful organisations they build, however, are anything but. Of course, people say that anyone could have predicted that a Grameen Bank or a Green Belt Movement would work, but very few people foresaw the longer-term success of Amazon, eBay, or Google.

Whether entrepreneurs plan out their futures in great detail or rely on trial and error, these world-changing pioneers are learning to channel their irrepressible convictions, their boundless creativity, and their ability to amass the necessary resources into building sustainable systems and structures that address the most pressing market failures of our time.
Inevitably, many start out by responding to natural disasters (like earthquakes, hurricanes, tsunamis, famine, disease); man-made ones (like war); or the prospect of global climate change.

One central goal for such social enterprises—and for those who fund them—is leverage. We use this term not necessarily in the narrow accounting sense of financial leverage, although securing adequate financial resources is a critical concern for these organisations. Rather, it means leveraging all kinds of resources—from indigenous capabilities and social capital to philanthropic and governmental support, business partnerships, and income from previously untapped markets.

Increasingly, small groups of people use multiple kinds of leverage to drive change on a disproportionate scale. As a result, they are able to transform their ventures and, in some cases, the entire system of which they are a part. Their efforts create new markets and new levels of influence, often outpacing established organisations.

Leading social enterprises tend to fall into three business models, which we call the "leveraged non-profit", the "hybrid non-profit" and the "social business". All pursue social or environmental ends that the markets have failed to address. In the process, they may adopt unique leadership, management, and fundraising styles, each with its own implications and lessons for people working in mainstream organisations. Each model offers different challenges and opportunities for would-be partners and other entrepreneurs. 

Model 1—The leveraged non-profit venture
Many kinds of market failure are difficult—if not impossible—to tackle using for-profit business models. Ask most model 1 entrepreneurs why they are not working on a for-profit basis and they will look at you as if you are from another planet. These people aim to meet needs that are ignored by current market mechanisms and businesses. Maybe this blinds them to the occasional opportunity to operate on a for-profit basis, but generally they operate where the market air is too thin for mainstream businesses to even think of venturing.

Model 1 entrepreneurship tends to distinguish sharply between private and public goods. Private goods are ones people can own individually and are typically produced by for-profit businesses. In contrast, a public good is one where consumption by one individual does not reduce the amount available for others. So if an individual eats a cake, there is no cake left for anyone else; if an individual breathes air or drinks water from a stream, there is still air or water available to others.

Although governments are often involved in producing and ensuring access to public goods, many private firms are involved with health, education, safe drinking water, housing, and the like. Entrepreneurs step in to fill the gap where governments are not able—or willing—to provide a public good and where the private sector cannot justify the risk in relation to the rewards.

Certain characteristics are typical of most model 1 enterprises. Public good is being delivered to the most economically vulnerable, who do not otherwise have access to the service. Both the entrepreneur and the organisation are change catalysts, with a central goal of enabling beneficiaries to assume ownership of the initiative, enhancing its longer-term sustainability. And multiple external partners are supporting the venture financially, politically, and in kind.

The founding entrepreneur morphs into a figurehead, in some cases for the wider movement, as others assume responsibilities and leadership. You could argue that entrepreneurs applying leveraged non-profit approaches are modern-day alchemists who, with minimal financing, leverage the power of communities to transform an otherwise grim daily existence. And, while they learn a good deal from their failures, the best of them are proving more successful than the alchemists, whose experiments heralded the dawn of the industrial era—laying the foundations on which "real" science would later be built. In like manner, leading social entrepreneurs signal where the coming years will head.

But companies—and other potential mainstream partners—should not be fooled into thinking that these entrepreneurs' dependence on external funds and in-kind support will make them easy partners. Quite the contrary. Many carry an understandable rage born from years of watching their communities being short-changed, ignored, or destroyed by greed. That said, mainstream businesses that create successful partnerships with these enterprises will likely find their thinking challenged, their horizons stretched, and their own employees reinvigorated.

Model 2—The hybrid non-profit venture
Innovation happens in each of the three models, but the most experimentation happens with hybrid non-profits. Many of the new philanthropists strongly favour model 2 enterprises and are eager to work with them. One key reason: they hope the imaginative blending of non-profit and for-profit strategies will produce unexpected forms of hybrid vigour. Also, the more business-like aspects of a hybrid venture can make it seem more normal than a model 1 venture, where there may be no realistic prospect of profit.

Hybrid enterprises model some of the novel forms of social and environmental value creation that will be central to business success and sustainability in the coming decades. As with model 1 ventures, goods and/or services are delivered to populations that have been excluded or under-served by mainstream markets, but the notion of making (and reinvesting) a profit is not totally out of the question.

Sooner or later, the founding entrepreneur—or his or her team—typically develops a marketing plan to ensure that the poor or otherwise disadvantaged can access the product or service being provided. The enterprise is able to recover a portion of its costs through the sale of goods and services, in the process often identifying new markets.

To sustain activities and address the unmet needs of poor or otherwise marginalised clients, the entrepreneur mobilises funds from public, private, and/or philanthropic organisations in the form of grants, loans, or, in rarer cases, quasi-equity investments.

As mainstream investors and businesses enter the picture, even when they are not seeking mainstream financial returns, they tend to push hybrid non-profit ventures to become model 3 social businesses, to ensure access to new sources of funding, particularly capital markets. This may be warranted in some cases, but it risks refocusing activities to the point where the poorest will no longer be served.

Model 3—The social business venture
Model 3 ventures are set up as for-profit businesses from the outset, either because there is no access to philanthropic funds, or because there is an obvious market. But they tend to think about the question of what to do with any profits very differently from mainstream businesses.

The entrepreneur sets up the venture as a business with the specific mission to drive transformational social and/or environmental change.
Profits are generated, but the main aim is not to maximise financial returns for shareholders but to financially benefit low-income groups and to grow the social venture by reinvestment, enabling it to reach and serve more people.

The entrepreneur seeks out investors interested in combining financial and social returns. The enterprise's financing—and scaling—opportunities can be greater because social businesses can more easily take on debt and equity. Balancing such a venture's social mission and its financial sustainability can, however, create internal tensions. The founding entrepreneur must exercise a strong leadership role, which may make succession more challenging than it is with leveraged or hybrid organisations. On the plus side, social businesses are easier for mainstream businesspeople to understand—and to develop partnerships with. This, in turn, facilitates access to capital markets, a window that's closed for philanthropy-dependent entrepreneurs.

To date, the best-known social businesses tend to be found in microfinance. But the number of these organisations is growing, and—particularly in the area of cleantech—they are gaining traction.

10 characteristics of successful social entrepreneurs

Capturing the common characteristics of such extraordinary, diverse people is tough, but here are some especially noteworthy qualities. Among other things, these entrepreneurs:

1. Try to shrug off the constraints of ideology or discipline
2. Identify and apply practical solutions to social problems, combining innovation, resourcefulness, and opportunity
3. Innovate by finding a new product, a new service, or a new approach to a social problem
4. Focus-first and foremost-on social value creation and, in that spirit, are willing to share their innovations and insights for others to replicate
5. Jump in before ensuring they are fully resourced
6. Have an unwavering belief in everyone's innate capacity, often regardless of education, to contribute meaningfully to economic and social development
7. Show a dogged determination that pushes them to take risks that others wouldn't dare
8. Balance their passion for change with a zeal to measure and monitor their impact
9. Have a great deal to teach change-makers
in other sectors
10. Display a healthy impatience