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PUBLISHED ON HBR.ORG
AUGUST 30, 2010

ARTICLE
SOCIAL ENTERPRISE
Social
Entrepreneurship
Success Raises Thorny
Questions
by Timothy Ogden
 SOCIAL ENTERPRISE

Social Entrepreneurship
Success Raises Thorny
Questions
by Timothy Ogden
AUGUST 30, 2010

For years, Unitus epitomized the promise of social entrepreneurship. It won a host of awards,
including Fast Company‘s “Social Capitalist” prize three years running. The nonprofit organization’s
mission was to prepare microfinance institutions to take commercial capital and help them arrange
debt and equity investment. It can rightfully take a good deal of credit for the billions of dollars that
are now flowing to MFIs, enabling them to quickly scale up and serve millions of customers they
otherwise couldn’t have reached.

Unitus made another pioneering move in July: It announced that it was suspending operations
because it had fulfilled its mission. It’s one of the few social organizations to put itself out of
business. But instead of generating praise, this decision created controversy — and drew out some
important lessons for other social entrepreneurs.

The controversy was rooted in the essence of social entrepreneurship: crossing the boundaries
between nonprofit and for-profits sectors. To prove that a for-profit investment in microfinance was
sound, the nonprofit Unitus launched a for-profit private-equity fund to raise capital for the MFIs it
was assisting. Unitus board members were among the investors in that private-equity fund — which
created conflicts of interest. They were approving grants that would allow MFIs to run profitably
enough to attract commercial capital and would also benefit board members personally as equity
investors in those MFIs. (Since the controversy erupted, Unitus board members have stated that all
proceeds from their equity investments will be donated to charity.) At one point, a Unitus board
member was also simultaneously on the boards of both the Unitus private-equity fund and SKS
Microfinance, an MFI to which Unitus provided grants, assistance, and concessionary debt and in
whom it made equity investments through the for-profit fund.

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 The convoluted interrelationships that come from blending nonprofit and for-profit capital are not
unique to Unitus. Take Global Giving, another widely celebrated entrepreneurial organization. The
founding of Global Giving included the creation of both a for-profit and a nonprofit organization,
designed this way in part to enable different types of investments. Global Giving also attracted notice
last year for enabling users to make tax-deductible donations to for-profit companies that are
engaged in “social good” projects. Or consider Omidyar Network and Google.org both of which blend
for-profit investments and nonprofit grants. That’s a model being adopted by an increasing number
of foundations as they look to amplify the effects they’re having on the ground. Then there are the
nonprofits that are footing the bill for pharmaceutical companies to test drugs for rare diseases.

My point here is not to suggest that Unitus or any of these other path-breaking organizations have
done something wrong or untoward but to illustrate that blending capital sources raises thorny
questions. Specifically:

1. How should rewards be allocated when public-benefit funds (such as donations to nonprofits or
foundation grants) are blended with for-profit investments?
2. What rules regarding conflicts of interest should be in place?
3. What standards of transparency meet the needs of both the public interest and for-profit
innovators who want to protect their competitive edge?

Finding satisfactory answers to these questions is hugely important to the social entrepreneurship
field. As long as these questions remain unanswered, as long as the sector doesn’t adopt clear rules
and norms, the possibility for controversy and for real abuse remains. Controversy and abuse
undermine trust — and trust is the vital ingredient in growing the capital base for social
entrepreneurs. Without it, social entrepreneurship will always remain a niche field, cut off from the
capital markets that Unitus itself proved can be so powerful in attacking social problems.

Timothy Ogden is an executive partner at Sona Partners, and the editor in chief of Philanthropy Action,
an online journal for high net worth donors. You can follow Tim on Twitter: @timothyogden and
@philaction.

Timothy Ogden is managing director of the Financial Access Initiative, a research center at NYU-Wagner, and of the US
Financial Diaries project. Follow him on Twitter at @timothyogden.

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