GLOBAL SOCIAL BENEFIT INCUBATOR (GSBI™)JAMES L. KOCH, PH.D., BILL & JAN TERRY PROFESSOR OF MANAGEMENTDIRECTOR, GSBI NETWORK & SECTOR STRATEGY

PRACTICE-BASED MODELSFOR SCALING SOCIAL MISSION ENTERPRISE

UNITE FOR SIGHT GLOBAL HEALTH & INNOVATION CONFERENCEYALE UNIVERSITY| APRIL 21-22, 2012

1. Examine conceptual frameworks and practical strategies for scaling social ventures based on a decade of work in the GSBI

2. Apply these lessons to your enterprise

OBJECTIVES

OUR GLOBAL IMPACT

Helped more than 140 social entrepreneurs build sustainable, scalable business models to benefit the lives of more than 74 million people worldwide. 93% of ventures

are still operating and 55% are scaling.

GovernmentThe Market

Business Models and Market Mechanisms

Branching A really big organization

AffiliationCo-opt other organizations/ Network of networks

Dissemination Viral spread / Social Movement

GAME CHANGING TECHNOLOGY

SCALING IMPACT

How could you positively influence the lives of a billion people?

What does this graph tell us about technology, prosperity, and justice?

TWO THOUSAND YEARS OF PROSPERITY IN WESTERN EUROPE

Open Innovation - 2010 Gala

TECHNOLOGY BENEFITING HUMANITY TENTH ANNIVERSARY OF 2001 FOUNDING

LEAPFROG AS A DEVELOPMENT PLATFORM

OUR APPROACH

GSBI THEORY OF CHANGE

• Develop technology based total solutions

• Execute innovative business models for sustainability at scale

• Advance social enterprise eco-systems

SOCIAL BENEFIT PROGRAMS

GOALEnable social enterprises to scale, creating systemic change

for the poor.

Innovation Social Capital

Entrepreneurship

STUDENT AND FACULTY ENGAGEMENT

GSBI ON NBC

WHAT WE’VE LEARNED

Market Imperfections

Disruptive Solutions

Business Model Innovation

Impact Capital

KEY CONCEPTS FROM GSBI

Diagnose Market Imperfections

Apply Disruptive Innovation Design

Develop a Scalable Business Model

Specify a Path to Investment Readiness

WHAT YOU SHOULD BE ABLE TO DO

MARKET IMPERFECTIONS

Market Inefficiency Market power (buyer/seller, information, barriers) Transaction costs (access to markets) Externalities (who pays)

Public goods Free riders Private opulence and public squalor Who pays for basic services: Government, industry, cooperative,

family, individual

Market-Oriented Motivations and Behavior Fairness in incentivized value chains Alternative rationalities to individual as purely economic agent

OVERCOMING MARKET IMPERFECTIONSHELPING MARKETS ALLOCATE RESOURCES TO

SOCIETY’S PREFERRED USE

Making markets more just and inclusive Markets respond to rich, not poor Value of non-market production Relative returns f (value creation v. value appropriation)

Questions How do market imperfections impact your venture? How would you overcome these imperfections?

Poverty premium as arbitrage

OVERCOMING MARKET IMPERFECTIONSHELPING MARKETS ALLOCATE RESOURCES TO

SOCIETY’S PREFERRED USE

DISRUPTIVE INNOVATION DESIGN

Many of history’s greatest growth markets were created when a disruptive technology enabled a larger population of less skilled or less wealthy people to do things in a more convenient setting that historically could be only done by expensive specialists in and inconvenient, centralized, setting. (Clayton Christensen)

These disruptions have been one of the fundamental mechanisms through which the quality of our lives have improved.

DISRUPTION AND GROWTH

DISRUPTIVE INNOVATION THEORY

Time

Time

Company improvement trajectory

Customer demand trajectoryNon-c

onsu

mer

s or

Non-c

onsu

ming

Conte

xts

New-Market Disruption

Compete against nonconsumption

Low-End Disruption

Target overshot customers

with lower-cost business model

Pe

rfo

rma

nce

Diff

ere

nt

pe

rfo

rma

nce

me

asu

re

• Discount retailing• Steel mini-mills

Sustaining Innovation

Bring better products into

established markets

DISRUPTION IN HEALTH CARE

Time

Company improvement trajectory

Customer demand trajectory

Provider-Level Disruption

Pe

rfo

rma

nce

*

Self-careNurse practitio

nersFamily/personal care physicians

Specialists and subspecialists

*Can mean either outcomes or complexity of diagnosis and treatment

Time

Point-of-Care Disruption

Pe

rfo

rma

nce

*

In-home careIn-office care

Outpatient facilitiesGeneral hospitals

Community Health Workers eHealth Services / Rural Clinics

Sustaining path of innovation Better product Higher margin Best customers

Disruptive innovation Less wealthy

Lower cost/improving quality Less skilled Greater convenience

SUSTAINING AND DISRUPTIVE INNOVATION

MARKET SIZE OF THOSE MAKING LESS THAN $1,500 DOLLARS

Emergence of consumer class targeted by MNC’s @ $1,500

Beyond trade-offs of cost and quality Radical new price-performance levels World class quality (adverse environments) Scalable business models Universal access

From innovation driven by top of pyramid to innovation from below

A “NEW SANDBOX”

Based on resident ethnographers in IndiaProduct specifications for rural PC (2006)

OLPC sought 10 times reduction in. . . Device cost Power usage (e.g., 210 watts v. 5) Connectivity costs

Rechargeable Extreme temperatures, dust, moisture

Classmate Computer . . . what are the 4 P’s?

TECHNOLOGY AND INFRASTRUCTURE FOR EMERGING REGIONS: RURAL PC EXAMPLE

SURPRISING PATTERNS SHOWING LATENT DEMAND

Grameen Phone Market opportunity—3 billion people< $2/day Technology—cell phones Business model

Phone ladies (100,000) Micro-payments (customer surplus/call=2-3% of monthly

income, prepaid swipe cards) Total revenue in Bangladesh ($500 million); profit=$80

million (2005) How would you disrupt this model?

TAPPING LATENT DEMAND: ICT

Fuel Cell Energy—distributed generation Market opportunity 1.6 billion people Current technology (kerosene, wood, cow dung) Technology alternative (example)

Rechargeable fuel cell LED (90% >efficient, 10-year life)…array 2-3 Storage battery Wiring

Business model Unit cost = $75 Micro-credit to finance or lease to own

TECHNOLOGY AND BUSINESS MODEL

Haier Group, China Founded in 1984: Low cost, compact, energy efficient refrigerators

for the Chinese market Today: Largest appliance manufacturer in the world

Also, in air conditioning, consumer electronics, mobile phones

Galanz, China Tiny, efficient microwave for small apartments 1993 sold 10,000 units (profitable business model at $39 price) 2010 sold 15 million, largest in world (40% share) Recent move: air conditioning

Suntech Power, China World’s largest producer of solar panels (sales in 80 countries) China will double 2011 installation in 2012 to 4,000 MW CEO forecast parity with fossil fuel generation by 2015

DISRUPTIVE INNOVATION EXAMPLES

New Mkt. Disruption

Low End Disruption

Sustaining Innovation

Customers Non-consumer or non-producer

Overshot customer at low

end of market

Undershot customer

Technology Simplicity, customization

Good enough performance at

lower prices

Improve along primary basis of

competition

Business Model

Completely new model, different from core bus.

Attractive returns at low prices

Extension of winning model

Competitor Responses

See market too small to matter, lack key skills

Motivated to flee incursion

Lack skill to compete

successfully

STRATEGIC CHOICE

Source: Clayton Christensen

Resources Processes Values (Decisions)

People Hiring & Training Ethics/rewards

Technology Product development

Cost structure

Products Manufacturing Income Statement

Equipment Planning & budgeting

Customer demands

Information Market Research Size of opportunity

Cash Resource allocation Vision/culture change

Brand Double bottom line

Distribution New organization

Flexible Not Flexible Not Flexible

INCUMBENT DILEMMAS

ARAVIND

How did values, processes, and resources enable Aravind to serve the poorest of the poor with world class eye care?

What resources and processes could you use to “disrupt” existing product or service markets for the target population you seek to serve?

QUESTIONS

APPLYING DISRUPTIVE INNOVATION THEORY AT THE BASE OF THE PYRAMID

Localizing Technology

Establishing Business

Model

Interfacing Ecosystems

Value Creation

EmpathyFirm Level and

Customer Finance

TechnologyCapital

Governance

Cost Reduction

Extreme Affordability

Unit Economics Capital Efficiency

Market Penetratio

n

Left & RightBrain Thinking

Crossing the Chasm

Partnering

Decision Making Domains

Fu

ncti

on

al

Mech

an

ism

s

Value CreationCost ReductionMarket Penetration

MINIMUM CRITICAL SPECIFICATIONS

Technology The material system employed for providing a product or service

Business Model The mechanism for providing a product or service in a manner that ensures the ongoing viability of the venture

Eco-System Key actors/facets of the community that the venture interacts with (and influences) as part of delivering its products or services

All driven by mission, vision, and values of social enterprise

ORGANIZING FRAMEWORK OF MARKET CREATION

DEVELOPING A SCALABLE BUSINESS

MODEL FOR THE SOCIAL ENTERPRISE

Society’s change agentsCreators of innovations that disrupt the status quo and transform our world for the better

Equilibrium change

SO●CIAL EN●TRE●PRE●NEURS (NOUN)

Mission and VisionEnablers/Obstacles Beneficiary Needs (Market) AnalysisThe Product (Service)Business ModelCompetitive AdvantageManagement Team, Key Partnerships, GovernanceFinancial Model for Sustainability at ScaleMetrics Dashboard

SCU SOCIAL VENTURE BUSINESS PLANNING

BUSINESS MODELS & VALUE CREATION

Value Proposition What value do you create & for whom?

Income (Revenue) Drivers How do you obtain money to create value?

Expense (Cost) Drivers How do you spend money to create value?

Cash Flow How do you maintain sufficient cash to sustainably create value?

Critical Success Factors What are the key assumptions for sustainable value creation (revenue and expense streams)?

Economic Definition of Value: Beneficiary/customer is willing to pay (Economic buyer may be a third party)

Social Benefit Definition of Value: Improvement in well-being (quality of life) of beneficiary/customer (outcomes/impact). . . including environmental sustainability

“VALUE” ECONOMIC AND SOCIAL DIMENSIONS

Value Proposition: A brief description of your organization and the value it provides which articulates why target beneficiaries will choose your product or service offerings over other alternatives (including non-consumption).

Value Propositions often are sentences in the form of:

[Name of organization] provides [products/services], which are [statement of key differentiators], for [target beneficiaries], and thereby creates [statement of social value/impact], unlike [alternatives].

THE VALUE PROPOSITION

Ideas at Work - provides a low cost, easy to use and maintain, manual water lifting device, which is offered through a micro credit loan system to rural Cambodians, thereby building up credit history, while at the same time saving time and improving health—providing a solution that is superior to the three available water pump alternatives in cost, ease of use, and maintenance.

VALUE PROPOSITION EXAMPLEIDEAS AT WORK (IAW)

Product: IaW provides a rope pumpOperations: IaW develops, manufactures, and

distributes the rope pumps (value chain roles)Service: IaW provides operation and repair

training for the rope pumpsMarket Creation: Karaoke, product

demonstrations, and customer testimonials educate the market and create sales

Financing: IaW arranges micro-credit for their rope pump customers

VALUE PROPOSITION INCLUDES ELEMENTS OF PRODUCT OR SERVICE

EXPENSE DRIVERS EXAMPLEIDEAS AT WORK: 4 YEAR

INCOME DRIVERS: HYBRID EXAMPLEIDEAS AT WORK: 4 YEAR

Cash flow positive: end of 2009(6000 pumps)

Source: Multi-year budget Period by period statement of cash inflows and

outflows (usually monthly or quarterly)

CASH REQUIREMENTS(CASH FLOW STATEMENT)

Year 1 Year 2 Period “n”

+ Cash Inflows by source

- Cash Outflows by use

= Net Cash Flow

+ Beginning Cash = Ending Cash (Cash Balance)

3 Year Cash Flow

2007 2008 2009 2010

Starting Cash $40,000 $37,553 $25,408 $17,938

Cash In $107,213 $332,500 $516,500 $744,000

Earned $19,000 $232,500 $466,500 $744,000

Contributed $88,213 $100,000 $50,000

Cash out $109,660 $344,645 $523,970 $655,895

Operation $60,700 $206,045 $278,270 $307,895

Cost of goods $48,960 $138,600 $245,700 $348,000

Ending Cash $37,553 $25,408 $17,938 $106,043

CASH MANAGEMENT EXAMPLEIDEAS AT WORK

Key value proposition assumptions

Key income assumptions

Key expense assumptions

CRITICAL SUCCESS FACTORS EXAMPLE IDEAS AT WORK

VALUE PROPOSITION

EXERCISE

Value Proposition: A brief description of your organization and the value it provides which articulates why target beneficiaries will choose your product or service offerings over other alternatives (including non-consumption).

Value Propositions often are sentences in the form of:

[Name of organization] provides [products/services], which are [statement of key differentiators], for [target beneficiaries], and thereby creates [statement of social value/impact], unlike [alternatives].

THE VALUE PROPOSITION

Product: A physical item that creates value

Service: Augmented product or information that

creates value

Market Creation: Activities that create

awareness and educate the market

Operations: Processes that create value

Financing: Methods of enabling payment,

creation of an economic buyer

WHAT ARE ELEMENTS OF YOUR VALUE PROPOSITION & HOW WILL YOU CAPTURE VALUE TO SCALE?

Value PropositionCustomer SegmentsCost structure

Key activitiesKey resources

Revenue streamsCustomer relationships Channels / distribution

Key Partnerships

VALUE PROPOSITION IS PIVOTAL IN BUSINESS PLANNING PROCESS

Key Partnership

sKey Activities

Value Proposition

Customer Relationships

Customer Segments

Key Resources

Channels

Cost Structure Revenue Streams

LEFT AND RIGHT BRAIN THINKING

Alexander Osterwalder and Yves Pigneur, Business Model Generation 2010

ACCESSING PATIENT CAPITAL

Leveraged Non-profit

For-profit Social Business

Hybrid Social Business

ARE YOU A SOCIAL BUSINESS?

FINANCINGHYBRID SOCIAL ENTERPRISE OPTION

Not-For-Profit Entity

Investors

Entities For-Profit Entity

Hybrid Social Enterprise

Foundations: * Social Loans (PRI)Social Venture Funds: * Social Loans

Social Investors: * GrantsFoundations: * Grants

Banks: * Commercial Loans * EquitySocial Investors: * EquityFoundations: * Mission Related Equity

Commitment• BoP• Market Solution• Ambition to ScaleFinancial Sustainability• Financial Plan• Cost Recovery• Sustainability • Grants v. Loan (cash flow)Potential to Scale• Market Risk (socio-political)• Output Growth• TAM (> 1 million)

Potential for Social Impact•Quality of Life for the Poor•Cost Effectiveness (BACO)•System Change (transformative)Management Capacity•CEO/Entrepreneur•Management Team•Management Information System•Governance

How are these criteria different than conventional

V.C. criteria?

IMPACT CAPITAL & INVESTMENT READINESS

Disciple: When sunlight first illuminates the horizon?

Indian Sage: When two travelers from opposite ends of the world awake and embrace each other and realize they have been sleeping under the same stars and share the same sky and the same dreams.

WHEN DOES THE NIGHT END AND DAY BEGIN?

THANK YOUWWW.SCU.EDU/SOCIALBENEFITTWITTER.COM/CSTSSCUFACEBOOK.COM/CSTS.SCU

AUGUST 23RD, 2012

ENERGY MAP

IMPACT CAPITAL