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Social Innovation: An Analysis of its Drivers and of the Crowdfunding Phenomena
A thesis submitted to the Bucerius/WHU Master of Law and Business Program in partial fulfillment of the requirements for the award of the Master of Law and Business (“MLB”) Degree
Casey Charlotte Reynolds
July 26, 2013
13,259 words (excluding footnotes) Supervisor 1: Prof. Dr. Martin Högl
Supervisor 2: Mr. John Lord
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TABLE OF CONTENTS
SOCIAL INNOVATION: AN ANALYSIS OF ITS DRIVERS AND OF THE CROWDFUNDING PHENOMENA ............................................................................................................................................ 1 I. ACKNOWLEDGEMENTS ..................................................................................................................... 3 II. INTRODUCTION ................................................................................................................................. 4 III. FINANCING ...................................................................................................................................... 11 IV. LEADERSHIP ................................................................................................................................... 17 V. ENVIRONMENT ................................................................................................................................ 22 VI. BARRIERS ........................................................................................................................................ 28 VII. BUSINESS INNOVATION ............................................................................................................. 29 VIII. CROWDFUNDING ........................................................................................................................ 37 IX. CONCLUSION ................................................................................................................................... 46 X. BIBLIOGRAPHY ............................................................................................................................... 47
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I. Acknowledgements The author would like to thank her parents, Bruce and Helen Reynolds, for their
persistent and remarkable support from the very beginning, and for instilling valuable
lessons about the importance of kindness and hard work.
The author would also like to thank Mr. John Lord, a master entrepreneur himself, for his
patience and generosity in reviewing this thesis; Prof. Dr. Martin Högl for his guidance
and skill in teaching the course “Managerial Leadership”; and Dr. Matthias Weiss for all
his constructive input and suggestions on this thesis.
And, finally, thank you to the MLB Program and all my colleagues in it for the many
things that I’ve learned this year.
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II. Introduction
“In a world buffeted by change, faced daily with new threats to survival, the only way to
conserve is by innovating.”
– Peter Drucker
Social innovation is a powerful instrument for systemic change. Though it has
existed in one form or another for centuries, social innovation increasingly began to
emerge in the late 19th century, and became a prominent feature of the 20th century.
Initially it was driven in large part by religious institutions supporting their members and
by vocal movements for change, and by governments that acted (often in response to
such movements) to improve the lives of their citizenry. Subsequently, non-
governmental organisations and, to a more limited extent, private individuals began to
socially innovate across a broad spectrum, frequently in response to the decline or
leveling off of government programs. The early years of the 21st century however have
witnessed an explosive growth of social innovation through the emerging field of social
entrepreneurship. One leading theorist characterizes this as the “emergence of the citizen
sector and social entrepreneurship.”1 Ultimately it appears that the current explosion of
social innovation is driven by a combination of individual actors innovating and
governments working in partnership with individuals and private ventures to create
meaningful social change.
Social innovation has emerged across a number of different sectors – key growth
sectors in which it occurs include health, education and the care industry,2 and more
specifically includes design, technology, public policy, urban development, social
movements, and community development.3 The manifestation that will be given
particular consideration in this thesis, crowdfunding, has the power to propel forward
initiatives across many of these differing fields through crowd mobilisation via online 1 Bornstein, D., & Davis, S. (2010) Social Entrepreneurship: What everyone needs to know. Oxford: Oxford University Press, xviii. 2 Mulgan, G., Tucker, S., Ali, R., & Sanders, B. (2007). Social innovation: What it is, why it matters and how it can be accelerated. The Young Foundation, 5. 3 Mulgan 6.
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platforms. Crowdfunding is a striking example of the premise that social innovations no
longer need to be non-profit. It is in fact a hybrid of business and social innovation,
using a combination of business methods and social motivation, by way of technological
innovations including online platforms, to achieve both business and social ends. Thus,
for the purposes of this thesis, crowdfunding (with crowdsourcing and microfinancing
noted as its antecedents in crowd mobilization and impact investment) will be used as a
lens through which to view social innovation. Of particular note, crowdfunding involves
one of the key drivers which propels any innovation to success – financing.
Crowdfunding allows individuals and governments to explore impact investment in a
new and exciting manner. In consideration of the above, this thesis will therefore
discuss:
• The emerging concept of modern social innovation, including its history, actors
and existing barriers;
• An overview of the apparent drivers of social innovation;
• An assessment of business innovation drivers and how they can differ from the
drivers of social innovation;
• A comprehensive analysis of crowdfunding, which combines the best parts of
both social and business innovation.
Before exploring the drivers of social innovation, one must first consider what
exactly social innovation is, as well as an appropriate definition. “If you cannot
satisfactorily define what is that you wish to study, research is likely to be erratic and
misguided.”4 Establishing a clear definition in this case is in fact a challenging task, with
no clear universal answer in the field. One source characterizes social innovation as a
sub-category of social entrepreneurship, 5 whilst another source describes it as “solving
the pressing social challenges of our time”6 and still another suggests that social
innovation should be defined as “new ideas that meet unmet needs”.7 Another excellent
and comprehensive description from the Centre for Social Innovation is that the term 4 Pol, E., & Ville, S. (2009). Social innovation: Buzz word or enduring term? Journal of Socio-Economics, 38(6), 884. 5 Bornstein & Davis 2. 6 Social Innovation Exchange. Retrieved 2 July 2013 from www.socialinnovationexchange.org 7 Mulgan 4.
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‘social innovation’ “refers to new ideas that resolve existing social, cultural, economic
and environmental challenges for the benefit of people and planet. A true social
innovation is system-changing—it permanently alters the perceptions, behaviours and
structures that previously gave rise to these challenges. Even more simply, a social
innovation is an idea that works for the public good.”8 After considerable assessment of
various definitions, which all seem to reflect at least a good understanding of the overall
concept, the working definition of social innovation that will be utilized throughout this
thesis is: “a new idea (which) has the potential to improve either the quality or the
quantity of life.”9 This definition has the advantage of being both succinct and generally
comprehensive. Throughout the author’s research, social entrepreneurship and social
innovation have been used as essentially synonymous terms and this conflation, which is
arguably correct if one considers that entrepreneurship and innovation are both the
actualisation of new ideas, will recur herein as well. Innovations that fit this category
include those that impact the overall quality of life in a positive way, from education and
health care to the environment and finance, as well as many things in between. It is,
however, important to note that any idea once born must then be actualized, and this is
where some of the most formidable challenges to innovate occur. Successful social
innovation is also very difficult to replicate. By understanding the drivers of social
innovation however, it is hoped that it can be better encouraged and copied.
There are many questions to be asked in order to determine the value and the
impact of social innovation. For example, what is the end goal of social innovation?
And why has it emerged as a more visible societal goal in the recent past? One theory
regarding the latter is that its emergence is due to “rising demands for types of economic
growth that enhance rather than damage human relationships and well being.”10 David
Bornstein, a premier expert in the field of social entrepreneurship further suggests that,
“People seeking solutions are no longer willing to wait for governments, corporations,
churches, or universities to lead.”11 One prominent example of this phenomenon is the
8 Pol & Ville 880. 9 Ibid 881. 10 Mulgan 5. 11 Bornstein & Davis 12.
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recent political uprisings that are collectively referred to as the ‘Arab Spring’. In
assessing the rapid proliferation of social innovation, regard must also be had for the
technological innovations that now facilitate it, a topic that will be explored more fully in
Section IX. As to the value of social innovation, it is widely held that social
entrepreneurs and innovators have the goal of creating “social value”. This is best
defined as “the creation of benefits or reductions of costs for society—through efforts to
address social needs and problems—in ways that go beyond the private gains and general
benefits of market activity.”12 In order to assess how social innovation occurs, it also
must be asked who the social innovators are.
Social innovators are a highly diverse group. They include individuals,
organisations and companies (existent as well as created for the specific purpose of the
innovation), and movements for change (some widespread and others in smaller
niches).13 Bornstein suggests that social entrepreneurs have always existed, though not
always in the form that is recognized today. Some examples of those who are known for
their social activism but who were in fact also social entrepreneurs include: the
Franciscan order of monks (which has undertaken many good works since their order’s
establishment); Florence Nightingale (who built the first professional school for nursing);
Gandhi (who constructed the first decentralized political apparatus in India); and many
other individuals who are largely unknown14. Bornstein refers to these individuals and all
current and future social innovators very eloquently as “changemakers”. Another expert
in the field is Geoff Mulgan, the Chief Executive of the National Endowment for Science
Technology and the Arts (NESTA) and formerly the CEO of the Young Foundation (two
organisations that have made significant contribution to social innovation and its
development). Mulgan is one of the forefathers of social innovation. He contends that
contagious courage and pragmatic persistence lie at the heart of any successful
innovator15 and his work will be referenced often in this thesis. Based on the concept of
12 Phills, J.A., Deiglmeier, K., & Miller, D.T. (2008). Rediscovering social innovation. Stanford Social Innovation Review, 34-43. Retrieved 10 July 2013 from http://www.ssireview.org/articles/entry/rediscovering_social_innovation/ 13 Mulgan 13. 14 Bornstein & Davis 3. 15 Mulgan 4.
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courageous and persistent changemakers, to innovate is therefore by implication not
merely the existence of the original idea itself but also the follow-through in launching a
fully formed endeavour. Today there exist a number of organisations specifically geared
towards assisting and facilitating innovation, including for example NESTA, the Young
Foundation, the Skoll Foundation, the Gates Foundation and Room to Read. There are
also scientific “innovation labs”: some are linked to universities and companies, while
others are stand-alone institutes that focus on a particular issue.16 Ultimately however, a
social innovator faces immense challenges and will need sustained support, as it must
“overcome apathy, habit, incomprehension, and disbelief while facing heated resistance
from those with vested interests.”17
In the late 19th century and throughout much of the 20th century, governments
were viewed as enactors and sometimes instigators of socially innovative programs. This
is how, across many Western countries, a number of meaningful innovations (which are
now considered often expectations, rather than innovations) came into being.18 Notable
examples of these innovations across many countries include universal health insurance,
universal primary education, a minimum wage and a mandated maximum workweek, all
of which were driven by active movements seeking systemic social change. Some
governments continue to play an active role in innovation today, including for example
the Finnish government19, which recently innovated a new approach to long-term
homelessness through a ‘housing first’ principle, which provides homeless persons with
housing, thereby allowing these individuals to focus on other issues with which they are
struggling. However, many governments have largely come to be regarded as bodies
whose purpose is to scale up successful social innovation, rather than enact it.20 “The
problem is instead one of speed and scale. Successful innovations have spread only
slowly, if at all… Policymakers hope that with encouragement from the state social
16 Mulgan 22. 17 Bornstein & Davis 22. 18 Bornstein, D. (2012) The Rise of the Social Entrepreneur. The New York Times. Retrieved 15 July 2013 from http://opinionator.blogs.nytimes.com/2012/11/13/the-rise-of-social-entrepreneur/ 19 Making Finland a leading country in innovation (2005), Final Report of the Competitive Innovation Environment Development Programme, Edita Prima Ltd. 20 Mulgan 25.
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entrepreneurs' best ideas can be spread faster and wider.”21 Governments often do not
know how to recognize the appropriate social innovations to encourage. Many
government programs falter due to the difficulty of balancing the conflicting interests of
millions of people, due to system rejection (when those people who stand to benefit from
a new idea reject it because they feel it is being imposed upon them, or because they do
not understand the change), or because they become watered down in the implementation
process.22 Instead, in order to make use of a force that has “the care, energy,
resourcefulness and stubbornness necessary to navigate the idea”23, social entrepreneurs
have become the solution. Accordingly, the emerging trend is for governments to
perform this scaling-up function by partnering with private actors in public-private
partnerships in order to circumvent their own weaknesses by engaging with private actors
who do much of the work on the ground.
Social innovation, when implemented correctly, can achieve tremendous societal
good. With an understanding of the value of social innovation to society and the answer
to several fundamental questions in place, perhaps the most pressing question must now
be asked – how can social innovation be encouraged? Like all things, social innovation is
motivated by a number of driving factors, or “drivers”. In order to ascertain what sorts of
drivers propel successful social innovation, one must first ascertain the proper definition
of a “driver”. A useful definition is that drivers are “large vectors of change”24. A driver
of social innovation is therefore a factor that acts as a large vector of change in moving
forward ideas that improve either the quality of life or measurably improves the duration
of that life. Drivers are important in order to identify and understand in order to be able
to create models that new innovators can learn from and follow. In other words, a
comprehensive understanding of drivers can lead to the effective emulation of an idea in
other sectors and countries, and the application of such lessons learned to future, different
social innovations. 21 Social Innovation: let’s hear those ideas. (2010) The Economist. Retrieved 12 July 2013 from http://www.economist.com/node/16789766 22 Bornstein & Davis 22-23. 23 Ibid 23. 24 Delrio, C. & Dondi, C. (2011) Understanding change, adapting to change, shaping the future. Learning in Europe: Observatory on National and International Evolution. Retrieved 5 July 2013 from http://www.menon.org/wp-content/uploads/2012/11/LEONIE_Integrated_study_Report-11-11.pdf
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Due to the relative youth of the field of social innovation, a clear academic
understanding of the drivers of social innovation is lacking at this time. While, as Mulgan
points out, the study of innovation in business and science has progressed very rapidly
over the past few decades25 the study of social innovation remains in its infancy.26 It is
also important not to automatically conflate the established drivers of business innovation
with those of social innovation because the motives, the critical resources, the patterns of
growth and the measurement of success can be very different.27 Growth in this field
however is of tremendous importance as: “There is a good chance that within the next 20
to 40 years the innovative capacity of societies and governments will become at least as
important a differentiator of national success as the innovative capacity of economies. As
that happens, new tools will be needed, new skills and new kinds of organisation. All
societies have remarkable capacities for myopia, obduracy and inertia.”28 However it is
notable that even without a current comprehensive understanding, social innovation
continues to progress and expand at a remarkable rate. Bornstein opines that, “After
looking at hundreds of examples of social change efforts, I see a side of reality that goes
unreported: namely, that we’re getting smarter about the way we’re addressing social
problems. In fact, I would go so far as to say we’re on the verge of a breakthrough —
maybe even a new Enlightenment.”29 It is the author’s opinion that further academic
analysis in the field, undertaken in order to gain a clearer understanding and awareness of
the drivers of social innovation, will continue to expedite this movement towards socially
enlightened enterprises.
There are many socially innovative ideas considered every day. An increasing
number, with courage and persistence, are actualized but a large number fail shortly
thereafter.30 Failure however is an important part of innovation, and there is no failure
that cannot be learned from and built upon. As Stephen Goldsmith emphasizes in his 25 Mulgan 40. 26 Ibid 44. 27 Ibid 40. 28 Ibid 40. 29 Bornstein, D. (2012) Social Change’s Age of Enlightenment. The New York Times. Retrieved July 15 2013 from http://opinionator.blogs.nytimes.com/2012/10/17/social-changes-age-of-enlightenment/ 30 Miller, C. (2010) The Social Innovation Fund’s Challenge: Helping Nonprofits Survive Failure. The Chronicle of Philanthropy. Retrieved 5 July 2013 from http://philanthropy.com/blogs/money-and-mission/the-social-innovation-funds-challenge-helping-nonprofits-survive-failure/26197
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new book, The Power of Social Innovation: How Civic Entrepreneurs Ignite Community
Networks for Good, social innovation requires a high tolerance for failure and a low
tolerance for perpetuating those failures.31 Yet an impressive number of social
innovators do succeed. In order to encourage the successful “positive deviants”32 and in
order to replicate these successes, one must be able to identify the factors that propel
them forward. After much research, which will be expanded upon herein, it appears that
the natural drivers of successful social innovation appear to be threefold. These drivers
are broadly identified as: (i) an appropriate, adequate and consistent source of funding,
(ii) the availability of leaders with the necessary skills who are motivated and compelled
to socially innovate, and (iii) an internal and external environment that is conducive to
and supportive of innovation and would-be innovators. It is important to note however
that these drivers are highly interlocked, as will be apparent throughout the following
analysis.
III. Financing
“Yet most social change is neither purely top-down nor bottom-up. It involves alliances
between the top and the bottom, or between what we call the ‘bees’ (the creative
individuals with ideas and energy) and the ‘trees’ (the big institutions with the power
and money to make things happen to scale).”
- The Process of Social Innovation33
The first driver to consider is financing. From a financing perspective, there are
three types of entrepreneurial funding need: for those in the early developmental stages;
for those in the launching stage; and for those successful innovations looking to expand
towards the ultimate goal of systemic change. Without financing, individuals and
companies cannot invest the time to think of new ideas, proceed beyond the “idea” stage
31 Goldsmith, S., Georges, G., & Burke, T. G. (2010). The power of social innovation: How civic entrepreneurs ignite community networks for good. San Francisco: Jossey-Bass. 32 Mulgan 22. 33 Murray, R., Caulier-Grice, J. & Mulgan, G. (2010) The Open Book of Social Innovation. The Young Foundation. Retrieved 28 June 2013 from http://www.nesta.org.uk/library/documents/Social_Innovator_020310.pdf
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to launch, or sustain themselves to continue with the innovation process. Readily
available capital is therefore a clear driver of social innovation. Conversely a lack of
funding can be fatal to all entrepreneurial efforts - from a budding social innovation to
further expansion of an initiative on a larger scale. What if, however, an innovator could
have the certainty that they would have guaranteed funding to maintain both themselves
and their innovations? This would fundamentally change and encourage the social
innovation landscape.
On a larger scale, without appropriate ongoing funding, socially innovative
initiatives can also struggle due to the necessity of a preoccupation with the very
challenge of obtaining finance. In the case of social innovation, the type of investing that
they are seeking is generally “impact investment”, which has been coined as a term that
refers to “investment with the primary goal of achieving positive outcomes for
individuals, communities or society as a whole, and with a secondary goal of achieving
financial returns for investors.”34 According to Bornstein, this struggle to obtain
investment is in stark contrast to businesses, which are able to raise finance through the
issuance of bonds or of stocks, as well as through loan instruments from banks. By
contrast, social entrepreneurs “typically run nonprofit organizations, usually have to raise
considerable grant funding from foundations, which usually comes in small, short term
installments. Because the funding is so fragmented, social entrepreneurs end up spending
80% of their time fundraising, rather than spending 80% of their time focusing on
running their organizations.”35 Solving the financing issue is thus a critical necessity for
the success of a social innovation.
In this regard, the use of incubators is a common practice in business innovation
but its use is less developed in respect of social entrepreneurship. According to UK
Business Incubation, which works in a public-private partnership with the British
government, an incubator “provides a nurturing, instructive and supportive environment
34 Impact Investment: What is it, Why Nesta? NESTA. Retrieved 22 July 2013 from http://www.nesta.org.uk/investment/impact_investments/our_approach_impact 35 Kawasaki, G. (2007) Social Entrepreneurship: Ten Questions with David Bornstein. How to Change The World: A Practical Blog for Impractical People. http://blog.guykawasaki.com/2007/09/social-entrepre.html
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for entrepreneurs during the critical stages of starting up and growing a new business.
The goal of business incubators is to increase the chance that a start-up will succeed and
achieve growth and shorten the time and reduce the cost of establishing and growing its
business.”36 Bornstein however contends that it is not getting started where most social
innovations have trouble so much as they have trouble in accelerating their growth. The
major constraint, he believes “is the difficulty in accessing growth capital.”37 In business,
incubators and their cousins, accelerators, have seen many strong results. For a generally
thin slice of a company, incubators will typically provide investment in order to propel a
company off the ground towards greater success. Prominent examples of business
incubators include Paul Graham’s Y Incubator (which has launched 300 companies in six
years), the Houston Technology Center (which has raised over $1 billion USD in a
decade for energy and nanotechnology initiatives), Palo Alto Research Center (from
which laser printer, Ethernet and computer fibre optics have emerged) and Seedcamp (a
combination of investment firm and bootcamp for startups).38
Yet notwithstanding the success of business incubators, and although social
incubators have begun to be more common in the public sector and across NGO’s, the
use and understanding of social incubators remains scattered.39 If however a greater
number of effective social incubators were established based on the drivers of social
innovation, these could potentially further the growth of social entrepreneurship.
Incubators are particularly important because few ideas emerge fully formed. Rather,
ideas “often need incubation in a protected environment that provides support, advice and
the freedom to evolve.”40 More social incubators are beginning to emerge, however. To
name a few, notable examples in the US and the UK include Social Fusion, Unreasonable
Institute, Village Capital, Echoing Green Foundation, Social Incubator North and Hub
Launchpad, as well as other support foundations for individual entrepreneurs, including
36 Business Incubation. UK Business Incubation. Retrieved 24 July 2013 from http://www.ukbi.co.uk/resources/business-incubation.aspx 37 Bornstein & Davis 48. 38 12 Business Incubators Changing The World. Forbes Magazine. Retrieved 22 July 2013 from http://www.forbes.com/pictures/eikh45hefh/12-business-incubators-changing-the-world/ 39 Mulgan 23. 40 Ibid 39.
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Ashoka and UnLtd.41 These incubators and support organisations assist social
innovations with financing (as well as processes and support services) across all levels of
their development. “New sources of finance for social enterprise such as UnLtd are
making it easier for individuals with a good idea to get started, and easier for existing
organisations to grow, for example through the loan finance provided by Charity Bank”.42
One innovative example of social incubation, Village Capital, promotes a unique model
whereby a number of entrepreneurs enter into the program together and then judge each
other’s business plans and ideas in order to decide by way of vote which initiatives are
most ready to receive the greatest amount of funding.43
Aside from incubators, one solution proposed by Pol and Ville is the
encouragement of awards and prizes by learned societies to reward and encourage social
innovation. “By ‘prize’ we mean a payment funded by taxpayers that is made to an
individual or through an organization conditional on delivering a specified social
innovation.”44 They do however acknowledge that a number of potential pitfalls exist,
including the possibility that mistakes and the perpetuation of inequities might occur, that
the significant risk of failure might discourage participation and that boards are rarely
known to be generous.45 One example of a failed prize scenario in respect of business
innovation is that of John Harrison and the chronometer: Harrison struggled for almost 40
years to prove the value of his invention and to obtain his prize.46 But notwithstanding
these potential downsides, Pol and Ville believe prizes and awards to be a possible source
of funding for promising innovations.
The previous ideas do not however solve the larger problem of ongoing funding.
The only clear solution, with an ongoing stream of cash and the general habit of investing
without regard to return, is government. Western countries including the United States,
the United Kingdom and Canada are all examples of governments that have actively 41 Ibid 39. 42 Mulgan 28. 43 Venture Capital Venturewell: Louisville. Village Capital. Retrieved 5 July 2013 from http://www.vilcap.com/portfolio/louisville 44 Pol & Ville 883. 45 Ibid 883. 46 Ibid 883.
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begun to invest in private social innovations. In the UK, due to the sharp cuts to social
programs made in the Thatcher era and the desire by ensuing governments to maintain
these cuts, government has needed new and creative methods to solve a variety of social
issues. This has meant that the government has needed to encourage the continuation of
existing social programs through funding as well as support others into creation. This has
resulted in (initially de facto and now explicitly) public private partnerships. The UK
was also a first mover in creating a funding initiative with its Social Investment
Taskforce, started by Prime Minister Tony Blair in 2000. Though this was only mildly
effective, most recently a British “social impact bond”47 has emerged with the goal of
better funding social initiatives. This concept provides for a return to the investor if the
innovation is a success, however no return if the innovation is not. Most recently, Prime
Minister David Cameron’s government has also supported social innovation in the form
of returning social locations to their communities by way of a £250m commitment from
Big Society Capital and Big Lottery Fund to assist communities in purchasing their local
assets, including pubs, shops, and community centres.48
In the United States, since roughly the turn of the 20th century, the federal
government was a very active player in social innovation, from the rise of labour
legislation in the Industrial Era and the advent of Prohibition to Franklin Roosevelt’s
revolutionary New Deal and Lyndon Johnson’s landmark Social Security and Medicare
acts.49 But American governmental social innovation has slowed since then, and has
even been reversed in some ways, with cuts to programs such as food stamps, the
Comprehensive Employment and Training Act, federal guaranteed loan programs for
higher education, legal assistance for the poor,50 Head Start51 and affirmative action
47 Social Innovation: let’s hear those ideas. The Economist. Retrieved 12 July 2013 from http://www.economist.com/node/16789766 48 Ip, M. (2013) Social innovation triggers impact investment in Canada. The Guardian. Retrieved 24 July 2013 from https://socialenterprise.guardian.co.uk/ja/articles/social-enterprise-network/2013/jun/21/social-innovation-triggers-investment-canada 49 Bornstein, D. (2012) The Rise of the Social Entrepreneur. The New York Times. Retrieved 15 July 2013 from http://opinionator.blogs.nytimes.com/2012/11/13/the-rise-of-social-entrepreneur/ 50 Danziger, S. & Haveman, R. (1981) The Reagan Budget: A Sharp Break with the Past. Challenge. Accessed 22 July 2013 from http://www.irp.wisc.edu/publications/focus/pdfs/foc52b.pdf
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programs52. In 2008, then-Senator Barack Obama was able to utilize the concept of
online political crowdfunding to his own advantage, securing $110.7 million UD from
over a million donors,53 in large part through an online crowdfunding platform, which
tapped into a segment of previously underutilized donors. Perhaps this subsequently
influenced his decision to inaugurate the Office of Social Innovation and Civic
Participation (OSICP) and to invest $50 million USD in a “social innovation fund”54.
This fund was created with the goal of “identifying successful high-impact programs
prime for further development and expansion and then using government dollars as a
catalyst to raise sustainable financing from foundations, businesses and individual
donors.”55 Notably, 2012 also saw the passage of the landmark JOBS Act, which creates
new financing possibilities for social initiatives and will be discussed further in section
VII.
In Canada, government at various levels has also continued to advance social
innovation. Amongst other initiatives, certain provincial governments have adopted clean
needle exchange programs, whilst the federal government has publicly vowed to continue
outreach, connect key players together, sharpen ideas and test social finance tools,56 and,
in the case of the Registered Disability Savings Plan, the federal government enshrined
into law a significant funding innovation for the disabled57, thereby introducing systemic
change. Despite these successes however, the general criticism of governments, which
51 State cuts data, 2009-2010 Program Year. National Head Start Association. Retrieved 22 July 2013 from http://www.nhsa.org/files/static_page_files/3A78F56B-1D09-3519-ADBC46009D7A7FC2/REVISED_State_cuts_data.pdf 52 Holmes, S.A. (1998) Administration Cuts Affirmative Action While Defending It. The New York Times. Retrieved 20 July 2013 from http://www.nytimes.com/1998/03/16/us/administration-cuts-affirmative-action-while-defending-it.html 53 Bradley, T. Final Fundraising Figure: Obama’s $750M. ABC News. Retrieved 5 July 2013 from http://abcnews.go.com/Politics/Vote2008/story?id=6397572&page=1 54 Swarns, R.L. (2009) Mrs. Obama Announces New Fund to Aid Non-Profits. The New York Times. Retrieved 5 July 2013 from http://www.nytimes.com/2009/05/06/us/politics/06michelle.html 55 http://www.nytimes.com/2009/06/02/opinion/02tue4.html. 56 Ip, M. (2013) Social innovation triggers impact investment in Canada. The Guardian. Retrieved 24 July 2013 from https://socialenterprise.guardian.co.uk/ja/articles/social-enterprise-network/2013/jun/21/social-innovation-triggers-investment-canada 57 Westley, F., & Antadze, N. (2010). From total innovation to system change: The case of the Registered Disability Savings Plan, Canada. Working Paper. Social Innovation Generation, University of Waterloo. Retrieved 15 July 2013 from http://sig.uwaterloo.ca/sites/default/files/documents/Westley,%20Antadze%20-%20RDSP%20Case%20Study_VMarch1502010.pdf
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provide on average 30-40% of financing to non-governmental organisations in countries
like the United States, Germany, the United Kingdom, France and Japan58, is that they
“are generally poor at recognising and replicating good innovations, particularly when
these come from other sectors.”59
The challenge of financing is a significant one but clearly not one that is
insurmountable with the proper tools in place. Ideas like incubators, prizes, and
government support, either through overt creation of its own programs or through public-
private partnerships, have the potential to bolster and accelerate social innovations.
IV. Leadership
“Everything looks like a failure in the middle.”
- Rosabeth Moss Kanter
One of the key insights of Ashoka, a first mover in the field of social innovation,
is that “if you want to predict how things will turn out for a new idea, your best bet is to
focus on the person behind the idea.”60 Leadership is an extremely important driver of
social innovation that is very difficult to quantify. It is also challenging to accurately
qualify what characteristics and skills are the ‘right’ ones to have for socially innovative
initiatives. Without appropriate leadership driving forward an innovation however, it will
stumble and perhaps fail, and will certainly be less effective than if it had the appropriate
leadership. In point of fact, many experts in the field of social innovation have a wide
variety of opinions as to what exactly constitutes appropriate leadership in the field. This
thesis therefore will consider a number of skills suggested by these experts as the most
important for a leader to possess to be successful in social innovation.
Fundamentally, the individual must possess or develop the necessary skills, and 58 Mulgan 34. 59 Ibid 34. 60 Bornstein & Davis 24.
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some might contend, the education, to socially innovate. “Taking a good idea to scale
requires skillful strategy and coherent vision, combined with the ability to marshal
resources and support and identify the key points of leverage, the weak chinks in
opponents’ walls.”61 At the same time there are prominent exceptions to this rule, most
notably Bill Gates. However it is also noteworthy that the co-founder and co-chair of his
eponymous foundation, his wife Melinda Gates, earned a bachelor's degree in computer
science and economics from Duke University and an MBA from Duke's Fuqua School of
Business.62 Therefore it might be that the skills of a naturally gifted innovator can be
strengthened with the cooperation or assistance of partners who possesses knowledge and
skills relating to the appropriate processes and fields that can be instrumental to
innovation success.
Much like in its parent field of entrepreneurship, Phills, Deiglmeier and Miller
contend that those individuals who start new organisations, much like business
entrepreneurs, are celebrated for: “traits like boldness, accountability, resourcefulness,
ambition, persistence, and unreasonableness.”63 Bornstein contends that: “The most
important qualities in social entrepreneurship are empathy, the ability to collaborate well
with others and the stubborn belief that it’s possible to make a difference—which
motivates and stimulates people to act.”64 Bornstein also suggests that entrepreneurs are
good listeners, non-ideological, comfortable with uncertainty, have a high need for
autonomy, are biased towards action,65 and rank highly on a measurement of “inner locus
control. They locate power within, rather than outside, themselves. If they don’t have the
skills to solve a problem, they believe they can acquire them by experimenting, by
observing experts, or by getting help from others.”66
61 Mulgan 23. 62 Leadership: Melinda Gates, Co-Chair & Trustee. Bill & Melinda Gates Foundation. Retrieved 17 July 2013 from http://www.gatesfoundation.org/who-we-are/general-information/leadership/management-committee/melinda-gates 63 Phills, J.A., Deiglmeier, K., & Miller, D.T. (2008). Rediscovering social innovation. Stanford Social Innovation Review, 34-43. Retrieved 10 July 2013 from http://www.ssireview.org/articles/entry/rediscovering_social_innovation/ 64 Kawasaki, G. (2007) Social Entrepreneurship: Ten Questions with David Bornstein. How to Change The World: A Practical Blog for Impractical People. http://blog.guykawasaki.com/2007/09/social-entrepre.html 65 Bornstein & Davis 26. 66 Ibid 27.
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As widely important skills, Mulgan notes that strong observation and
communication skills are highly important: “Innovators generally have a wide peripheral
vision and are good at spotting how apparently unrelated methods and ideas can be
combined.”67 Mulgan further expands his observations when he states that: “Some of the
best innovators spot needs which are not being adequately met by the market or the state.
They are often good at talking and listening, digging below the surface to understand
peoples’ needs and dislocations, dissatisfactions and ‘blockages’.”68 Notes Bornstein,
however, social entrepreneurs must proceed with caution as, although “they will go to
extreme lengths to minimize or eliminate risks, painstakingly seeking information to
increase the odds of success…They usually overestimate their chances of success,
however, which is why others perceive them as risk takers.”69
The importance of any social innovator, beyond whatever personal characteristics
that they possess, is that they exist in a larger chain of social innovators and that one
innovator will oftentimes lead to the creation of another, or even many. Bill Drayton,
founder of the revolutionary social initiative and incubator Ashoka, has stated that:
“Every social entrepreneur is a mass recruiter and facilitator of local change-
makers…Because they are role models, other people say, ‘If they can do that, maybe I
can do something like it, too,’ and most of the time the way they get their work done is to
create a movement.”70
Innovators do not generally appear to be a patient sort. Therefore timing can be
everything when it comes to social innovation as “progress is often achieved more
quickly by turning the idea into a prototype or pilot and then galvanising enthusiasm.”71
Innovators do not want to wait for detailed business plans and analyses. Thus one
additional environmental sub-factor of leadership and environment that encourages
67 Mulgan 22. 68 Ibid 21. 69 Bornstein & Davis 28. 70 Bornstein, D. (2012) The Rise of the Social Entrepreneur. The New York Times. Retrieved 15 July 2013 from http://opinionator.blogs.nytimes.com/2012/11/13/the-rise-of-social-entrepreneur/ 71 Mulgan 23.
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innovation might be considered a lack of red tape, regulations and rules, and a significant
amount of unqualified support, governmental or otherwise. High levels of motivation can
ebb in the face of too many obstacles.
According to Mulgan, effective leaders and their organisations should focus on
decision-making across four horizons. These are:
1. Day to day management, in order to fight the fires that invariably continue to
crop up
2. Effective implementation and incremental innovation over the medium term of
1-3 years to encourage incremental innovation, efficiency and general performance
3. Developing more radical innovation options across very different fields that
could become mainstream in 3-20 years
4. Taking account of generational timescales – for example in relation to climate
change and issues like pensions72
By considering all these horizons, leaders can successfully put in place short-,
mid- and long-term visions and goals. Evidence indicates that even in open source
software models, strong leadership remains important. “In practice most of the
influential open source models turn out to be led by influential leaders who can motivate
a dispersed group of developers, and intervene to maintain standards and values.”73
Tidd and Bessant suggest that social entrepreneurs largely share the same
characteristics as business entrepreneurs but are different in their motivation and aims,
which are social means and ends; timeframe, which is long term change, rather than
short-term growth and long-term harvesting; and resources, which is creating a network
of stakeholders and resources rather than reliance on firm and management.74
72 Mulgan 16-17. 73 Ibid 32. 74 Tidd, J. & Bessant, J. (2009) Managing Innovation: Integrating Technological, Market and Organizational Change. West Sussex: John Wiley & Sons Ltd. Retrieved 20 July 2013 from
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Importantly, today’s social entrepreneurs are actively interested in measuring the
impact that their innovations are having through a complex and detailed set of metrics, in
order to better improve innovations. For example, “The Acumen Fund has created a
management system called Pulse that establishes metrics to determine these very things
in delivering social good. Room to Read measures every dollar against the number of
schools, libraries, books published and distributed, and the time it takes to accomplish
each task.”75 Such metrics allow social initiatives to share their success in tangible ways
with the public and also with backers, to gauge their own progress, and to allow leaders
to adapt their strategies accordingly.
In larger companies and established NGO’s, a culture of leadership that fosters
innovation is recognized to be very important. Without sufficient innovation and
adaptation to changing times, a company will almost inevitably falter. Mulgan suggests
some relatively easy mechanisms to encourage the ongoing process of innovation. These
include “board directors with responsibility for ensuring a strong flow of new
innovations; events, rewards and competitions for new ideas; pay review systems that
give weight to entrepreneurialism and healthy risk taking; audit cultures that do not crush
creativity.”76 He further notes that: “This is also territory where what leaders say matters,
as well as what they do.”77 Ultimately, whether in a large or a small innovation, in social
innovation progress is often messy and unpredictable “but is encouraged by leaders who
visibly encourage and reward successful innovation and who can straddle different
fields.”78 Ultimately however, while there is no one model for a successful entrepreneur,
management expert Peter Drucker argued that while some people might be born with
greater entrepreneurial characteristics than others, most people can learn to behave like
entrepreneurs if they choose.
http://books.google.de/books?hl=en&lr=&id=CVuYk25bkfsC&oi=fnd&pg=PT7&dq=%22managing+innovation%22&ots=X73dw1-Uco&sig=7msAvdW9ysX-4eSqxiNpq52HxRw#v=onepage&q&f=false 75 Shapiro, R. (2012) Review: The Real Problem Solvers. Stanford Social Innovation Review. Retrieved July 10 2013 from http://www.ssireview.org/articles/entry/the_real_problem_solvers 76 Mulgan 37. 77 Ibid 37. 78 Ibid 6.
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V. Environment
“Chance favours the connected mind.”
– Steven Berlin Johnson, Author of “Where Do Good Ideas Come From”
Without the appropriate connectors and support system, sometimes an idea will
remain an idea, or an innovation will remain permanently small scale. “Many
contemporary scholars stress that to understand the sources of innovation we need to
understand the milieu in which creativity takes place. There must be an ‘environment’
conducive to the creation of new ideas and a ‘context’ in which a new idea is socially
innovative.”79 An environment that is conducive to social innovation involves a number
of factors acting together. These are “the physical, social, technological and economic
conditions — in which successful innovation occurs. The premise here is that good ideas
and their successful execution are a result of connections and existing knowledge
embedded in a particular context. The individual, of course, plays an important role, but it
is defined more by collaboration than by solitary brilliance.”80 It is notable, however,
from this quote that the term “environment” can encompass a number of different sorts of
environments. Thus the various aspects that form an environment must be examined.
Firstly, the term “environment” can refer to the people that one is immediately
surrounded by. While the focus of innovation has very often been on the solo innovator
leading the charge, additional consideration is now being given in the field to recognizing
another important element: the internal team environment in which the innovation is
generated and then subsequently fostered. According to Sally Osberg, president of the
Skoll Foundation: “social entrepreneurs excel at togetherness.”81 In her view, the work
of social entrepreneurs is not only “social” in the sense that it characterizes the name of
their work as well as their work methods, but also that, rather than operating merely as
individual actors, the cooperative element of social innovation is an inherently key aspect 79 Pol & Ville 884. 80 Koehn, N.F. (2010) People and Places That Innovate. The New York Times. Retrieved 15 July 2013 from http://www.nytimes.com/2010/09/05/business/05shelf.html?pagewanted=all 81 Bornstein, D. (2012) The Rise of the Social Entrepreneur. The New York Times. Retrieved 15 July 2013 from http://opinionator.blogs.nytimes.com/2012/11/13/the-rise-of-social-entrepreneur/
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of success in this field.82
Innovations stem from ideas. Johnson contends that the pattern he has uncovered
in his analysis is that an idea is a new network in the brain. He further suggests that the
way to get the brain to generate these new networks is to build innovative spaces.83 The
internal environment of the organization or body within which one operates is thus
extremely important. Some organisations use established, structured methods to generate
possibilities, including those devised by Edward de Bono, the design company Ideo, and
the consultancy What If?, “all of which aim to free people to think more laterally, and to
spot new patterns.”84 Such methods force participants in the innovative process to think
in ways that they might not be accustomed in order to generate new levels of creativity.
By creating work spaces such as Google’s legendary business workspace (which includes,
amongst other things, free organic lunches, Ping-Pong tables and puzzles galore85) that
encourages open thinking and exchanges of ideas, new ideas can be formed which lead to
tomorrow’s innovations in a socially innovative context as well.
Though the impact of a single individual can be powerful, and indeed essential,
generally the impact that one individual, or a few individuals acting alone can have is
more limited than if that individual has a team or network upon which to rely.
Collaboration is a powerful tool, and networking with like-minded individuals is key to
attaining this. By understanding this, and understanding the role of all these individuals
across different levels acting in conjunction, one can clearly see the critical role that the
overall environment plays. As Bornstein points out, “Individually many of the actions
seem small, but they are interconnected and mutually reinforcing. Taken together, they
add up to more than the sum of their parts.”86 Furthermore, there exist ‘connectors’
within this system which serve to bolster entrepreneurial ventures. These are “the
brokers, entrepreneurs and institutions that link together people, ideas, money and power
– who contribute as much to lasting change as thinkers, creators, designers, activists and 82 Ibid. 83 Johnson, S.B. (2010) Where Good Ideas Come From. New York: Riverhead Books. 84 Mulgan 22. 85 Berkun, S. (2007) The Myths of Innovation. Sebastopol, CA: O’Reilly Media, 2. 86 Bronstein & Davis xxi.
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community groups”87. They allow innovation to move forward from the idea or infancy
stage into actualization and ultimately success.
Location is also an extremely important component of the external environment.
However, there is a lack of empirical data in the field of entrepreneurship comparing
social innovation with location. Yet by considering the factors that the Global
Entrepreneurship Monitor (GEM) reviewed when assessing business innovation in the
form of entrepreneurship, it can easily be noted how these have cross application to social
entrepreneurship. GEM’s findings, derived from asking experts and normal individuals
across 52 countries, identified three major factors that stood out as highly important in
relation to entrepreneurship and location. Firstly, GEM looked at technical and scientific
infrastructure. This assessed how easy it is to lease or purchase real estate, the
availability of highways and universities, the speed of the Internet, and the availability of
public help. Secondly, it assessed entrepreneurial inertia by reviewing the amount of
nascent entrepreneurs, and the number of individuals thinking about becoming
entrepreneurs. And finally, it assessed society’s attitude towards entrepreneurs by
looking at whether there was admiration or disdain for entrepreneurs, and the attitude
towards failed entrepreneurs.88 Combined, these factors were highly predictive of
whether an entrepreneurial venture would succeed in a given location.
Another aspect of environment is the governmental and private institutions
already existing. As previously discussed, it is increasingly the case that governments are
again becoming a key element in respect of the financing drivers of social innovation.
They are able to provide innovators with access to funds and ultimately the ability to
affect systemic change, which is the optimal outcome of any social innovation.89 “It is
notoriously difficult for government to close even failing programmes and services, and
87 Mulgan 5. 88 Xavier, S.R., Kelley, D., Kew, J., Herrington, M., & Vorderwülbecke, A. (2012) Entrepreneurship Monitor 2012 Global Report. Global Entrepreneurship Monitor. Retrieved 20 July 2013 from http://www.gemconsortium.org/docs/download/2645 89 Murray, R., Caulier-Grice, J. & Mulgan, G. (2010) The Open Book of Social Innovation. The Young Foundation. Retrieved 28 June 2013 from http://www.nesta.org.uk/library/documents/Social_Innovator_020310.pdf
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there are few incentives for either politicians or officials to take up new ideas.”90 Stephen
Goldsmith, an expert in the field of social innovation, believes that whilst governments
have in the past been the actors of innovation, in the new era “government will tap the
ability of the private sector, for-profit and non-profit, to deliver ‘disruptive,
transformative innovation’.”91 Private actors can also step in to innovate and provide
impact investment as well. In Canada, for example, the creation by the Centre for Social
Innovation of a “community bond”, a debt instrument that allows the issuer of the bond (a
mid- to large-size social innovation) to promise its community of lenders (the holders of
the bond) the principal amount borrowed plus interest, will allow many smaller
innovators to be assisted with financing.92
As well, governments and private interest groups can assist in institutionalizing
social innovation through the provision of incentives to social innovators and their
ventures.93 As noted above, such incentives can, for example, involve monetary
incentives or prizes to reward innovation. In respect of both private and public
institutions, the bees and trees concept is again revisited. According to NESTA’s
handbook “The Process of Social Innovation”, ‘bees’ need to find supportive ‘trees’ that
can assist them. These ‘trees’ have the necessary mechanisms in place to make things
happen, sometimes on a large scale. This however is where an overlap with finance is
noted yet again, as these trees will often require formal methods to persuade potential
backers, including “investment appraisals, impact assessments and newer devices to
judge success like ‘social returns on investment’ or ‘blended value’.”94
Legal considerations are also highly related to the environment for social
innovation. The debate continues as to whether the concealing of information through
patents and intellectual property protection is in fact limiting rather than fostering
90 Mulgan 34. 91 Social Innovation: let’s hear those ideas. The Economist. Retrieved 12 July 2013 from http://www.economist.com/node/16789766 92 Ip, M. (2013) Social innovation triggers impact investment in Canada. The Guardian. Retrieved 24 July 2013 from https://socialenterprise.guardian.co.uk/ja/articles/social-enterprise-network/2013/jun/21/social-innovation-triggers-investment-canada 93 Pol & Ville 883. 94 Mulgan 23.
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innovation. It has long been believed that property rights were crucial to the stimulation
of innovation, and that their lack was one of the main reasons why the public sectors and
non-governmental organisations were less innovative than the private sector. “But there
are now plenty of sceptics who point out that most fundamental innovations were not
protected as patents. It has been argued that, in fact, patents may crush innovation in
fields like software and that patents for business ideas (like Amazon’s protection of its
One-Click purchasing system) constrain innovation rather than encouraging it.”95
Whether in business or in social innovation, the new thinking proposes that if innovators
and organizations can seek out transparent information across a wide scope, more
innovation will occur. “Organizations that widely search distributed knowledge sources
and, more importantly, can successfully assimilate external knowledge into their own
innovation process, are in a more advantageous position than their competitors.”96
Another way in which the law can impact social innovation is through changing the very
structures within which social entrepreneurs act. On July 17 2013 the American state of
Delaware, birthplace and home of many U.S. companies, approved a new form of
incorporation, the B-corp, which is short for ‘benefit corporation’. This is a revolutionary
concept, as “these are companies explicitly charged with a dual mission: to earn profits
for shareholders, the traditional business goal, and also to pursue the social good in other
ways, ranging from protecting employees to safeguarding the environment — even if
these goals come at the cost of short-term financial gain.”97
Just as external environment can foster success and be a driver of expansion and
the greater success of an innovation, however it can also lead to failure. A prime
example of this is the lack of government support that Teach for America received in one
of the United States’ most troubled cities, Detroit. Despite a need for the initiative there
as well as the necessary funding and internal leadership to be successful, within a year
Detroit became the only city from which Teach for America has ever withdrawn.
According to one leader of Teach for America: “We build a fair amount of grassroots 95 Mulgan 44. 96 Chalmers, Dominic. (2013) Social innovation: An exploration of the barriers faced by innovating organizations in the social economy. Local Economy, 18. 97 Freeland, C. (2013) Capitalism, but With a Little Heart. The New York Times. Retrieved 18 July 2013 from http://www.nytimes.com/2013/07/19/us/19iht-letter19.html?src=recg&_r=0
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support… Principals really like us. . . We build relationships in the political community.
Parents like Teach For America corps members. Once we’re in, we’re usually in pretty
good shape.”98 This however did not prove to be the case in Detroit. In 2002, Teach For
America corps members entered city schools for the first time, but soon found that school
districts were moving its members to new schools, would not pay members, and were
vague about whether they would welcome back the foundation’s teachers for the second
year of their contract. Due to this fundamental lack of municipal support and the
associated uncertainty that it engendered, the expansion of this worthy initiative was
curtailed.
Another aspect of the environment is the overarching timing in which an
innovation occurs. Advancing social innovation is relevant across multiple sectors but is
most likely to be most beneficial “in fields where problems are intensifying (from
diversity and conflict, to climate change and mental illness), in fields where existing
models are failing or stagnant (from traditional electoral democracy to criminal justice),
and in fields where new possibilities (such as mobile technologies and open source
methods) are not being adequately exploited.”99 Where these conditions are not present,
there may be no perceived need for innovation and therefore less momentum to drive it.
And social innovation does not only lead to systemic change, but it can also be driven by
systemic change. “When systemic change does happen – for example the rise of welfare
states fifty years ago, the shift to a more knowledge based economy in the last decades of
the 20th century, or the shift to a low carbon economy in the early 21st century – the
opportunities for social innovation greatly increase.”100
It is clear from all of the foregoing considerations that the importance of
environment cannot be overestimated. Some commentators go so far as to say that
innovation itself is fundamentally tied to its environment. In the recent book “The
Innovator’s Way”, the authors define innovation as “the adoption of new practice in a
community,” and set out eight practices vital to this success: sensing, envisioning, 98 Goldsmith, S., Georges, G., & Burke, T. G. (2010). The power of social innovation: How civic entrepreneurs ignite community networks for good. San Francisco: Jossey-Bass, 11. 99 Mulgan 7. 100 Ibid 19.
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offering, adopting, sustaining, executing, leading and embodying.”101 These practices
ultimately allow for the integration of innovations into communities in a meaningful way.
VI. Barriers
“Innovation and change demand the recombination of knowledge – new recipes, not just
more cooking.”
- Social Entrepreneurship, What Everyone Needs To Know
An understanding of the drivers of social motivation would not be complete
without an understanding of the barriers to social innovation. As Mulgan points out, “In
some societies social innovations are strangled at birth, particularly societies where
power is tightly monopolized, where free communication is inhibited, or where there are
no independent sources of money.”102 Such barriers are numerous and difficult to
overcome, though exceptions can and do occur, particularly thanks to modern
telecommunication advances such as the Internet, radio, television and cassettes.103
These barriers can include, amongst others: efficiency (the innovators’ dilemma of riding
the wave); those interests which are closely aligned with the status quo; minds which are
locked into the entrenched norms, values, assumptions and organizational memory; and
existing relationships which are tied to the stability of the existing order.104 Another
expert has identified as common barriers to proliferation of social innovation the
following: protectionism and risk aversion; problem-solving complexity; and network
barriers.105 In order to break through these barriers and move from the margins of society
towards the mainstream, a social innovation must possess strong characteristics as well as
the drivers noted above. “Barriers exist, both in the conceptualization of social
innovation and in the larger social innovation system, that restrict or disincentivize such
activities. These barriers include: market protectionism, risk aversion, problem 101 Denning, P.J. & Dunham, R. (2010) The Innovator’s Way. Massachusetts: The MIT Press. 102 Mulgan 33. 103 Bornstein & Davis 9. 104 Mulgan 18-19. 105 Chalmers 21.
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complexity, access to networks and access to finance.”106
These barriers however are not unique to any one community, nor are deficits in
the above-identified factors of finance, leadership and environment unique. In order to
improve the overall situation, Mulgan suggests that the way ahead lies in favouring
“cross national innovation pools which bring together a group of interested governments
or foundations from several countries for an aligned innovation process”.107 A precedent
for this exists in the way that cities share data about transportation. Finally, one of the
biggest barriers that exist is the perception of ‘success’ in social innovation versus
business innovation. As we will see in the following section, where in business often the
greatest measure of success is typically considered to be profit, this does not hold true in
social innovation, where success should be considered not only in metrics but also
subjectively and should vary depending on which sector is engaged and which outcome is
sought.
VII. Business Innovation
Successful entrepreneurs do not wait until “the Muse kisses them” and gives them a
“bright idea”: they go to work.108
- Peter Drucker
What is business innovation? From the perspective of the renowned academic
Drucker: “Innovation is the specific tool of entrepreneurs, the means by which they
exploit change as an opportunity for a different business or service.”109 Almost twenty
years later, in 2004, the Innovation Unit of the UK Department of Trade and Industry
suggested that: “Innovation is the successful exploitation of new ideas”. Both definitions
reflect the theme of exploitation of ideas, though without any apparent motivation
106 Chalmers 18. 107 Mulgan 39. 108 Drucker, P. (1993). Post-Capitalist Society. New York: HarperCollins. 109 Drucker, P. (1985) Innovation and Entrepreneurship. New York: Harper & Row.
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provided in either definition. Dr. Holger Ernst, however, goes a blunt step further and
states that the manager’s view is that innovations are: “Great new ideas that are turned
into hard cash.”110 It should be noted here though, that although many well-known
business innovations are products, that business innovation, according to Tidd and
Bessant, can fall into under four categories, or P’s: product innovation, process
innovation, position innovation and paradigm innovation.
Looking to the roots of business innovation, there is the popular myth of the
“epiphany”. Mihaly Csikszentmihalyi has conducted extensive research into the concept
of this type of idea in order to better understand the epiphany and how it is meant to
occur. He noted through his research that in fact, rather than being a lightning bolt from
the blue, “epiphany” in fact has three parts, roughly described as: early, insight, and
after.111 It therefore did not merely consist of a “eureka” moment, but rather an insight
that was commonly preceded by months and even years of preparation and learning, and
subsequently followed up with further development. Any major innovation is generally
perceived as the moment when the final piece of a difficult puzzle is put in its place, or
when the dots finally connect. “But unlike a puzzle, the universe of ideas can be
combined in an infinite number of ways, so part of the challenge of innovation is coming
up with the problem to solve, not just its solution. The pieces used to innovate one day
can be reused and reapplied to innovate again, only to solve a different problem.”112 It is
also worth noting that, “the big insights, if they happen, occur during the depths of
incubation: it’s possible these pauses are minds catching up with everything they’ve
observed.”113
Innovation is a key component of strategic advantage over competitors in the
modern world of business. Companies can innovate in many ways, such as offering a
novelty in product, service or process, offering something which others have difficulty
110 Ernst, H. (2013) Strategic Intellectual Property Management – Session 1, Slide 4. WHU-Otto Beisheim School of Management. 111 Csikszentmihalyi, M. (1997) Creativity: Flow and the Psychology of Discovery and Invention. New York: HarperPerennial. 112 Berkun 10. 113 Ibid 11.
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mastering, having a first mover advantage, rewriting the rules, reconfiguring the rules,
and in a variety of other ways. Joseph Alois Schlumpeter, a pioneer in the field of
innovation, discussed “a process of ‘creative destruction’ where there is a constant search
to create something new which simultaneously destroys the old rules and establishes new
ones – all driven by the search for new sources of profit”.114
When it comes to leadership in business innovation, Scott Berkun writes in The
Myths of Innovation that “most innovators, recognized a set of opportunities—scientific,
technological, or entrepreneurial—and set about capitalizing on them.”115 Tidd and
Bessant go another step further and state that: “One person’s problem is another’s
opportunity and the nature of innovation is that it is fundamentally about
entrepreneurship,”116 and that “innovation is driven by the ability to see connections, to
spot opportunities and to take advantage of them.”117 It is worth noting here as well, with
reference to the previous discussion on social innovators, that: “in terms of temperament,
skills, drive, the way they ask questions and think about problems—social and business
founders are very much the same creatures.”118
The main driver of business innovation is widely held to be the desire to create
financial reward.119 “It is generally agreed that business innovation is profit-seeking
innovation, that is, the creation of new ideas with the intention of making money. It is
also generally agreed that business innovation consists of either technological innovations
(new or improved products or processes) or organizational innovations (changes to the
firm’s strategies, structures or routines).”120 Bornstein and Davis suggest however that,
along with the maximization of profits or the creation of shareholder wealth, business
entrepreneurs might seek to “build an ongoing, respected entity that provides value to
114 Tidd & Bessant. 115 Berkun 14. 116 Tidd & Bessant. 117 Ibid. 118 Kawasaki, G. (2007) Social Entrepreneurship: Ten Questions with David Bornstein. How to Change The World: A Practical Blog for Impractical People. http://blog.guykawasaki.com/2007/09/social-entrepre.html 119 Tidd & Bessant. 120 Pol & Ville 881.
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customers and meaningful work to employees.”121 Schlumpeter also stated that:
“entrepreneurs will seek to use technological innovation – a new product/service or a new
process for making it – to get strategic advantage.”122 Schlumpeter’s theory serves to
unify the two components of innovation to show that an innovator will use one
innovation (technological) to improve another innovation (strategic).
The study of business innovation is a fairly modern one. As recently as 1989,
Humble and Jones believed that only technology or personal individual curiosity were
driving forces for innovation123, and that for most operating businesses, innovation was
“an unnatural act” because “the uncertainty is too high, the time horizon too long, and the
investment too large, given the risks.”124 There has, however, been a fundamental change
in the perception of the importance of innovation in the business world. Business
innovation in the modern world has taken on this greater importance due to an
increasingly shortened product life cycle: whereas product life was once calculated in
years and perhaps even decades, product model life is now calculated in months rather
than years. Therefore the creation of new products is more important than ever before. In
today’s business world, “being able to replace products frequently with better versions is
increasingly important.”125
Business innovation has a number of widely held drivers beyond financial reward
however. Therefore whilst it is “motivated by profit maximization and diffused through
organizations that are primarily motivated by profit maximization,”126 there are a number
of models that suggest a number of different innovation processes are involved.
Innovation, according to Steve Jobs, cannot be systemized127, but some studies have
121 Bornstein & Davis 30. 122 Tidd & Bessant. 123 Humble, J. and Jones, G. (1989), ‘Creating a Climate for Innovation’, Long Range Planning, Vol. 22, No. 4, August, pp. 46-51. 124 McLaughlin, P., Bessant, J. & Smart, P. Developing an Organisational Culture That Facilitates Radical Innovation in a Mature Small to Medium Sized Company: Emergent Findings. Cranfield University School of Management. Retrieved 15 July 2013 from https://dspace.lib.cranfield.ac.uk/bitstream/1826/858/2/SWP0405.pdf 125 Tidd & Bessant. 126 Mulgan 9. 127 Berkun 44.
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found ways in which to establish a New Product Development Process Benchmarking
Framework.128 According to Kahn, Barczak and Moss, six factors to be included in this
framework are: strategy, portfolio management, process, market research, people, and
metrics and performance evaluation. There are considerable issues involved with creating
benchmarks for success however. As Tidd and Bessant point out, “The trouble is that
markets are not made up of people wanting the same thing – and there is an underlying
challenge to meet their demands for variety and increasing customization. This
represents a powerful driver for innovation – as we move from conditions where products
are in short supply to one of mass production so the demand for differentiation
increases.”129
The original Rothwell model contemplated innovation as an internal process that
is very much research and development driven, or rather due to a “technology pull”,
without much consideration for external stakeholders. However the Tidd and Bessant
model recognizes the pull of “need” as a powerful driver for innovation, and they suggest
that user-driven need pull is one of the main drivers of innovation. “We should recognize
that another key driver of innovation is need – the complementary pull to the knowledge
push. In its simplest form it is captured in the saying that ‘necessity is the Mother of
invention’ - innovation is often the response to a real or perceived need for change.”130
It is also further suggested by Tidd and Bessant that: “‘Squeaking wheels’ and other
sources of frustration provide rich signals for change – and this kind of innovation is
often something that can engage a high proportion of the workforce who experience these
needs first hand.”131 Therefore, in order to avoid stagnation, listening for the squeaking
wheels is an important task of a leader in business innovation. It is also suggested that,
once innovation has been decided upon, there is a generic process by which innovation
can be created. They outline this as: searching, selecting, implementing and learning.132
128 Kahn, K.B., Barczak G., & and Moss R. (2006) Perspective: Establishing an NPD Best Practices Framework. The Journal of Product Innovation Management, 108. 129 Tidd & Bessant. 130 Ibid. 131 Ibid. 132 Bessant, J. (2005) Enabling Continuous and Discontinuous Innovation: Learning From the Private Sector. Public Money & Management. Retrieved 20 July 2013 from http://johnbessant.net/uploads/books/18.pdf
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From this, they derive three essential components of an innovation strategy: (1) the
position of the firm, (2) the technological paths, and (3) the organizational processes.
Importantly, incorporation of some of the tools that drive business innovation has
led to a fundamental change in respect of how social innovation is managed.
Approaching social issues with a business mindset has led to strategic changes on a
number of levels. “These changes have primarily manifested in three ways: (1) a blurring
of the demarcation between for profit and nonprofit activities; (2) an increased emphasis
on results and measuring impact; and (3) a focus on scale—how to find successful
innovations and cause them to proliferate widely to create the greatest societal
change.”133 Much as with social innovation, environment is also a key driver of business
innovation when applied effectively. The classic example of environment supporting
thriving business innovation is Silicon Valley and, as previously mentioned, incubators
have also played a profound role in launching successful business innovations.
Some modern scholars also view sustainability as a new driver of innovation.
“Indeed, the quest for sustainability is already starting to transform the competitive
landscape, which will force companies to change the way they think about products,
technologies, processes, and business models.”134 Another potential driver beginning to
be assessed is the previously noted ‘open-source’ concept. Though this idea first
emerged in relation to software development, it has now expanded far beyond community
programming code development. “From legal research to biotechnology, open-business
practices have emerged as a mainstream way for collaboration to happen online. New
business models are being built around commercialising open-source wares, by bundling
them in other products or services.”135 The label ‘open source’ now applies to any
enterprise or endeavor that allows for a community of individuals to develop something
that is readily available to all, which is a new and revolutionary consideration in business. 133 Shapiro, R. (2012) Review: The Real Problem Solvers. Stanford Social Innovation Review. Retrieved July 10 2013 from http://www.ssireview.org/articles/entry/the_real_problem_solvers 134 Nidomolu, R., Prahalad, C.K. & Rangaswami, M.R. (2009) Why Sustainability Is Now the Key Driver of Business Innovation. Harvard Business Review. Retrieved on 15 July 2013 from http://hbr.org/2009/09/why-sustainability-is-now-the-key-driver-of-innovation/ 135 Open, but not as usual. (2006) The Economist. Retrieved 5 July 2013 from http://www.economist.com/node/5624944
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It is important to note that social innovation and business innovation are not
necessarily diametrically opposed to each other, nor are they necessarily separate. The
Body Shop is perhaps one of the most successful examples of the integration of a social
mission with a business mission.136 For example in 1996 The Body Shop became one of
the first companies to publish a ‘Values Report’.137 According to one scholar, The Body
Shop is an excellent example of John Elkington’s corporate honeybee. In 1994,
Elkington coined the term “triple bottom line” to describe the innovative concept that
corporations should focus not only on the economic value, but also on the environmental
value and social value that they are adding.138 Further illustration of Elkington’s division
of corporate characteristics in a ‘chrysalis economy’ into four categories can be reviewed
in Table 1. “The Body Shop’s business model possessed very special attributes like
connecting its money-making logic to the logic of doing well and the creation of
multidimensional values for politically motivated customers. The specific money-making
attitude and value propositions were related to an ‘organically’ grown business model
architecture.”139
136 Mulgan 31. 137 Purkayastha, D. & Fernando, R. (2007) The Body Shop: Social Responsibility or Sustained Greenwashing? ICFAI Hyderabad, 227. Retrieved 19 July 2013 from http://www.oikos-international.org/fileadmin/oikos-international/international/Case_competition/Inspection_copy_ICFAI2007.pdf 138 Elkington, J. (1997) Cannibals with Forks: the Triple Bottom Line of 21st Century Business. Oxford: Capstone. 139 Lüdecke-Freund, F. (2009) Business Model Concepts in Corporate Sustainability Contexts. Centre for Sustainabilitiy Management, Leuphana Universität Lüneburg. Retrieved 17 July 2013 from http://www2.leuphana.de/umanagement/csm/content/nama/downloads/download_publikationen/FlorianLuedeke_Freund_Business_Model_Concepts_in_Corporate_Sustainabilty_Context.pdf, 29.
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Figure 1140
It is worth noting that The Body Shop is no longer unique or rare in its
integration; there is no longer a bright line division between business and social
innovation. Previously, it was an unspoken requirement of social innovation that it be
non-profit. To do good, common practice and general wisdom said, it was not also
possible to do well financially. This concept is now changing. The Body Shop was a
first mover in combining business and social innovation into a unified mission, which is
no small feat, and it has continued to thrive. It helped break down the strict division
between profit-making and non-profit. This was highly innovative and challenging
because sectors which are often the focus of social innovation require models of
innovation that are very different than those which have shaped the innovation
surrounding cars, microprocessors and biotechnology.141 “Whereas in business the firm
is the key agent of innovation, in the social field the drive is more likely to come from a
wider network, perhaps linking some commissioners in the public sector, providers in
social enterprises, advocates in social movements, and entrepreneurs in business.”142
140 Ibid 27. 141 Mulgan 5. 142 Murray, R., Caulier-Grice, J. & Mulgan, G. (2010) The Open Book of Social Innovation. The Young Foundation. Retrieved 28 June 2013 from http://www.nesta.org.uk/library/documents/Social_Innovator_020310.pdf
37
Today, not only do innovators believe that it is possible to do good works and to
do well, but other aspects of the former mind-set are also falling away in creating socially
entrepreneurial ventures. “Many of these organizations come with skilled and passionate
people, innovative funding streams, and new ideas about solutions to our social problems.
And many nonprofit organizations are developing profitable income streams to help both
their constituencies and the sustainability of their organizations.”143 So whilst previously
many innovations (including cars, electricity and the Internet) were tacitly dependent on
social innovation just as much as commercial innovation144, it is now overtly recognized
that social innovation and business innovation are both crucially important for strong
economic and social growth and the corporate “triple bottom line”.
VIII. Crowdfunding
“We need to build a propositional movement, not just an oppositional movement. We’ll
need to tap into people’s enlightened self interest.”145
- Harry Parish, president of crowdfunding platform “Mosaic”
In open source software development, there is the expression that: “given enough
eyes, all bugs are shallow.” This means that, with enough individuals collaborating on a
project, even the most complex of problems can be successfully resolved.146 With the
concept of crowdfunding, one might now be able to extend this concept further and
extrapolate that perhaps, given enough bank accounts, all worthy projects can be funded.
Crowdfunding is still in its youth but indicators, such as President Obama’s massive
presidential fundraising campaign, hint at a vast potential that is waiting to be tapped.
143 Shapiro, R. (2012) Review: The Real Problem Solvers. Stanford Social Innovation Review. Retrieved 10 July 2013 from http://www.ssireview.org/articles/entry/the_real_problem_solvers 144 Mulgan 5. 145 Bornstein, D. (2013) Crowdfunding Clean Energy. The New York Times. Retrieved 23 July 2013 from http://opinionator.blogs.nytimes.com/2013/03/06/crowd-funding-clean-energy/ 146 Mulgan 32.
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As previously noted, social change, according to Mulgan, depends on an alliance
between bees and trees.147 Trees are bad at creativity but good at implementation, whilst
bees are “mobile, fast and cross-pollinate”148. One issue that bees often have however is
finding trees to finance and support them, so that they can go grow and expand. However
what if a bee was able to find other bees to support them in the innovation process, rather
than accept the need to attempt to persuade a tree? This is essentially the concept of
crowdfunding. It bucks the “bees and trees” theory in respect of financing and also
sometimes in respect of overall support. It is a rapidly emerging disruptive concept of
financing and involvement in projects that brings new resources into play that previously
would have been inaccessible to entrepreneurs and innovators. It is not yet fully
understood how to best mobilise crowds but this has not stopped a large number of online
platforms from springing up to attempt, and sometimes succeed, in this endeavor.
Crowdfunding is a powerful tool that is increasing in usage by entrepreneurs and
innovators in order to actualize and propel forward their projects and businesses. It also
addresses one of the key drivers that propels any innovation forward – that of financing.
Given time to gain wider usage and understanding, crowdfunding has the potential to soar
past conventional methods of financing into a new and democratic way of financing
innovation.
The term ‘crowdfunding’ “refers to a group of methodologies for the collection of
funds for a certain purpose from a large, uncoordinated group of individuals.”149
Individuals are able to choose to donate or invest in project plans of their choice in order
to join together in order to successfully execute an idea or project. The platforms through
which these proposals are submitted and subsequently accessed are online sites that
inform the investor about the project, provide easy to use payment methods, and
generally provide project-specific updates. This is similar to crowd-authored platforms,
which include initiatives such as open source software, for example Linux, and
Wikipedia. 147 Mulgan 20. 148 Ibid 5. 149 Vroeman, T. & During, R. (2011) Crowd-Funding. Social Innovation Europe. Retrieved 2 July 2013 from https://webgate.ec.europa.eu/socialinnovationeurope/magazine/finance/special-features/crowd-funding
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The parent concept of crowdfunding is crowdsourcing. Crowdfunding is in fact
essentially crowdsourcing as applied to finance,150 and is a powerful innovation tool in its
own right. Crowdsourcing offers the chance to seek out opinions and skills from a wide
breadth of individuals, maximizing their knowledge to tap into the greater collective
resource. Crowdsourcing can operate on both a micro- and a macro-scale, affecting both
small projects and large. One example of the expansion of crowdsourcing is through the
lens of Corporate Social Responsibility (‘CSR’). One Stanford researcher interviewed
200 top executives and discovered that, as of March 2010, 44 percent of those executives
already tapped into the wisdom of crowds. 95% of those individuals considered it
beneficial in helping to both generate ideas and assist in decision-making amongst
existing ideas in CSR programming. They stated that it: “surfaces new perspectives and
diverse opinions (36%), builds engagement and relationships with key audiences (25%),
invites clients and customers from nontraditional sources to contribute ideas and opinions
(22%), and brings new energy into the process of generating ideas and content (16%)”151.
The next step in this evolution would be to allow employees to allocate and distribute any
funds intended for CSR by way of a modified version of crowdfunding, what could be
referred to as crowd selected distribution. The next evolution of crowdfunding will
potentially be the success of websites that combine crowdfunding and crowdsourcing for
social and business initiatives. An online platform, GOODFRUIT, which attempts to
tackle exactly this challenge, will launch in the autumn of 2013, and its results are the
subject of keen anticipation.
The financing antecedent of crowdfunding was microfinancing, also known as
microcredit. This was perhaps one of the first forms of impact investment.
Microfinancing has deep roots in the form of an initiative called the Irish Loans Fund,
which was created by Jonathan Swift (famed author of Gulliver’s Travels). This fund
provided loans without collateral to Irish peasants in the early 1700’s. Through
150 Crowdfunding. The P2P Foundation. Retrieved on 23 July 2013 from http://p2pfoundation.net/Crowdfunding 151Stepanek, M. (2010) Crowdsourcing Social Change. Stanford Social Innovation Review. Retrieved July 10 2013 from http://www.ssireview.org/blog/entry/crowdsourcing_social_change
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microfinance, as reimagined and reinvigorated in the modern era by Muhammad Yunus
and the Grameen Bank following the Bangladeshi war of independence, the few (in the
form of governments, aid agencies and financial institutions) were able to provide finance
to the many (located in underprivileged countries) for a reasonable rate of return, thus
empowering individuals. Yunus is considered a pioneer in the field of innovative
financing with his concept of “social business” and one might argue that subsequent
crowdfunding platforms are second movers that have taken an innovating financing idea
and expanded upon it to include obtaining financing from individuals. “Despite
questions about the overall impact and effectiveness of microfinance, many believe it is
more effective, efficient, sustainable, and just than existing solutions. In addition, though
there are exceptions, the bulk of the financial value created by microfinance institutions
accrues to the poor and the general public rather than to individual entrepreneurs or
investors.”152 The same observation might well be made about crowdfunding. With
crowdfunding, the many can now give (or invest, depending on the project) to the few, in
any location and for any reason, as the explosion of niche websites on the market has
indicated.
To fully understand crowdfunding, a clear taxonomy is useful as it has several
variations. Crowdfunding typically falls into three categories: donations (which provide
a social return), pre-ordering (which promises an ultimate material return) and financing
(which permits a financial return).153 There are also hybrids of these three types,
however, and variations do occur, particularly depending on the specific type of project
that is seeking investment.
Between donations and pre-ordering fall: donations without incentives, donations
with incentives, donations awarded a gift with a lesser value that the donated amount, and
a pre-ordered product. Between donations and financing are donations with no financial
152 Phills, J.A., Deiglmeier, K., & Miller, D.T. (2008). Rediscovering social innovation. Stanford Social Innovation Review, 34-43. Retrieved 10 July 2013 from http://www.ssireview.org/articles/entry/rediscovering_social_innovation/ 153 Vroeman, T. & During, R. (2011) Crowd-Funding. Social Innovation Europe. Retrieved 2 July 2013 from https://webgate.ec.europa.eu/socialinnovationeurope/magazine/finance/special-features/crowd-funding
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return to the donor, zero-return microfinancing (i.e. with no interest generated),
crowdfunded debt, and crowdfunded equity. The latter two are also referred to as
“crowd-financing”. Of note, crowdfunded equity has been legal in the United Kingdom
for some time, and with the passage of the JOBS Act in April 2013 American
crowdfunded equity has also become legal (subject to a variety of conditions being met)
there as well.154 Between pre-ordering and financing can be found pre-ordered products
(which allows this cash to be used for start-up finance), material-return debt,
crowdfunded equity through dividends paid in products, and crowd-financing by way of
debt or quasi-equity.155 Crowdfunded equity is particularly notable, as it will now offer
innovators to invite geographically diverse investors to participate in the innovation
process.
Many crowdfunding models use a threshold-pledge model. This means that a
target amount for collection is set within a limited timeframe. When the deadline passes,
if the threshold has been met, the project will proceed and the funds are transferred to the
project. If not, the money is returned to the individual investor/donor. This creates a
safety valve by way of selection condition. If a project cannot garner sufficient funds to
proceed, there is either limited awareness of it or the project has been deemed of no
interest to small investors, for reasons ranging from subject to expense.156 Others, for
example on Indiegogo, also use a “Flexible Funding” campaign to generate a variable
amount of funding, generally either in the case of a reward (for example, a campaign to
reward heroism157 or to partially fund a project to the greatest extent possible).
Crowdfunding can be used as a business innovation tool, as it can also serve as a
financing tool for entrepreneurs. By soliciting funds via these platforms, entrepreneurs
154 U.S. House. 112th Congress. 2nd Session. H.R. 3606. Jumpstart Our Business Startups Act. Washington, Government Printing Office, 2012. Retrieved 19 July 2013 from http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf 155 Vroeman, T. & During, R. (2011) Crowd-Funding. Social Innovation Europe. Retrieved 2 July 2013 from https://webgate.ec.europa.eu/socialinnovationeurope/magazine/finance/special-features/crowd-funding 156 Ibid. 157 O’Donnell, M. (2013) Reward the heroes scholarship fund Temar Boggs and Chris Garcia. Indiegogo: An International Crowdfunding Platform to Raise Money. Retrieved 22 July 2013 from http://www.indiegogo.com/projects/reward-the-heroes-scholarship-fund-temar-boggs-and-chris-garcia
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can offer either a pre-ordering service or a financial return on investment, or one of the
hybrid models. This is particularly of importance as U.S. venture capital rates have
begun to fall in early stage investments. In 2012, “Most of the drop was felt by
companies in the earliest stages of forming – seed level investment fell 22 per cent in
dollars, while early stage investment fell 21 per cent – solidifying a trend analysts have
noted throughout the year.”158 Therefore alternate methods of fundraising for innovation
ventures are of renewed importance.
The concept of crowdfunding is not a new one. From traditional church
collection plates and donation boxes, to professional foundations soliciting for much
larger projects and political campaigns, crowd donations are the essence of traditional
fundraising and of philanthropy generally. The former options however lacked focus and
were limited in scope, whilst the latter example of philanthropy was often targeted at a
small percent of the population who were able to give in large amounts. The innovations
reviewed in this thesis are the methodologies that are smashing the previous limitations
on crowd collection by vastly expanding the scope of and access to financing, and also
the speed with which financing is possible. Internet-based crowdfunding is the 21st
century version of this ancient idea. It is in large part only the platform that is new,
however this mechanism enables a much wider audience to be reached. This has also
enabled entrepreneurs (in the form of individuals, organisations and even governments)
to access segments of society that previously would have been unaware and therefore
would have remained untapped. Crowd-sourcing runs along similar lines, however it
permits individuals to share their time, skills, knowledge and information – some of
which are beyond the value of financial investment.
Crowdfunding platforms are themselves innovations of the 21st century. Modern
crowdfunding has been made possible by a key combination of impressive technological
innovations of the last half-century, namely the PC, the Internet and various related
technologies. Consider first the rapid accelerator of the process of technological 158 Dembosky, A. (2012) US venture capital investment declines. The Financial Times. Retrieved 20 July 2013 from http://www.ft.com/intl/cms/s/0/f83d3244-1a0a-11e2-9922-00144feabdc0.html#axzz2ZtJRMD2f
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connection via the Internet. Moore’s Law is a computing term that, in its simplified form,
states that processor speeds, or overall processing power for computers, will double every
two years. “A quick check among technicians in different computer companies shows
that the term is not very popular but the rule is still accepted.”159 But of what relevance is
processor speed to innovation? Fundamentally the speed with which computers now
work allows transactions to be conducted at a rapid pace and large networks to be built
very quickly. The creator of the Ethernet, Robert Metcalfe, proposed what has become
known as Metcalfe's Law. Metcalfe’s Law states that the value of a network goes up as a
function of the square of the number of participants, has particular relevance when one
considers. With the development of the Internet and subsequently Metcalfe’s Ethernet
(and now with the advent of wireless networks), vast networks have been created which
connect individuals as never before. Metcalfe himself sees the Internet as a valuable tool
for shattering barriers. With reference to Massively Open Online Courses (MOOCs),
which are a direct challenge to traditional models of higher-level education, he believes
that even an educational paradigm shift is possible. "Like we solved bandwidth with the
Internet, we're now going to solve ignorance with the Internet.”160 Thus by expanding
the process of network creation through technical innovation, larger groups of individuals,
or “crowds” now share common information, interests and opportunities, in this case for
financing of social investment. This faster world of technology assists in the creation of a
vast community of potentially interested donors and investors, who can now be accessed
in order to solicit their knowledge, gain their skills and utilize their financing ability in
order to successfully innovate.
The pioneers of modern crowdfunding platforms include ArtistShare (established
in 2000) and JustGiving (also established in 2000), both of which are still active
platforms. Subsequent notable second movers include Kiva.org, Kickstarter, RocketHub
and IndieGoGo. Since the inception of these online platforms, crowdfunding has now
exploded to include a variety of niche sites. These are now too many to comprehensively
list but the list of niche crowdfunding platforms includes, as examples: Microyza 159 Moore’s Law, Or How Overall Processing Power Will Double Every Two Years. Retrieved 24 July 2013 from http://www.mooreslaw.org 160 Kerner, S.M. (2013) Metcalfe’s Law: How Ethernet Beat IBM and Changed the World. Retrieved 25 July 2013 from http://www.enterprisenetworkingplanet.com/netsp/metcalfes-law-how-ethernet-beat-ibm-and-changed-the-world.html
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(research-oriented), Citizinvestor and Lucky Ant (local communities), Kiva (projects in
the developing world), CircleUp and Seedrs (equity), ProFounder (small businesses),
Donors Choose (teachers) and Crowdrise (charity). Within more mature websites, the
modern crowdfunding concept has also expanded to include Peer-to-Peer lending. This is
done by way of matching “the philosophy, interest and goal of supporters, donors or
backers with the projects and creators who make them.”161 The potential donor/investor
can read and inform themselves about the innovator and their project, and often will
receive updates on how the project is proceeding, thereby truly making the donor a part
of the project and creating a sense of ownership in a successful outcome. Kiva’s Green
Loans program, for example, has provided “over 2,600 small-scale loans for renewable
energy projects in developing countries.”162 In this way, crowdfunding has also followed
the pattern laid out for social innovation in markets. Social innovations usually begin in
the form of embryonic niches in which enthusiasts both produce and drive the market.
This is followed by the evolution of niche markets, which are led by small companies and
driven by shareholder/consumer activism. Finally the innovation is co-opted into the
mainstream.163 One example of this phenomenon is American domestic microfinancing.
This began in 1973, with the first community development and environmentally
conscious banking company, the ShoreBank Corporation, which operated in some of
Chicago’s most underserved and disadvantaged neighbourhoods. Today this innovation
has now extended to commercial banks offering micro-lending to customers with the goal
of profitability.164 It can be argued that the final step of mainstreaming is now gradually
beginning to occur with regard to crowdfunding as well, particularly with regard to the
previously notes recent changes in American legislation. Though no major companies
have yet attempted to buy into the crowdfunding market, some existing players are
becoming more influential and expanding their scope and size.
On this larger scale, crowdfunding holds tremendous promise as a social and 161 Ogunbowale-Thomas, A. Crowdfunding 2.0: What Will It Look Like? Dowser: Who’s Solving What and How. Retrieved July 6 2013 from http://dowser.org/crowdfunding-2-0-what-will-it-look-like/ 162 Koteles, B. (2013) Crowdfunding Capitalism: Likely to Keep Growing in 2013. Dowser: Who’s Solving What and How. Retrieved July 6 2013 from http://dowser.org/crowdfunding-capitalism-likely-to-keep-growing-in-2013/ 163 Mulgan 30. 164 Bornstein & Davis 32.
45
peer-to-peer investment platform. To date, some platforms have revealed a glimpse of
the tremendous investment prospects that crowdfunding holds. Combined, peer-to-peer
loan platforms such as Prosper.com and Lending Club “have brokered over $1.8 billion
in loans, offering lower interest rates and higher returns than borrowers or lenders could
get from banks.”165 This is a striking amount for online platforms to generate, which is
only likely to grow. In respect of investing in social innovation, in January 2013, the
crowdfunder Mosaic first introduced a platform that “makes it possible for small, non-
accredited investors to earn interest financing clean energy projects.”166 Its first four
investment opportunities, solar power projects that offered 4.5% returns to investors with
loans as small as $25, were completely sold out within 24 hours (having spent a mere
$1,000 on marketing!). To date, the company has raised $1.1 million USD for twelve
projects, and has a waiting list of 10,000 people waiting to invest.167 This example
suggests the possibility that crowdfunding as a social investment opportunity could thus
be equally applicable to initiatives across both the developing and the developed worlds.
Crowdfunding is in fact so new and innovative that it appears to be overlooked in
much of the academic consideration of the sources of social investment. Bornstein does
not mention it in either of his important texts on the field168 and Mulgan omits it
completely in a list of the seven main sources of social investment. Instead this list
includes: special investors in undercapitalized areas; specialist lenders to civil society
organisations; specialist divisions of mainstream lenders; venture capitalist funds which
pursue social goals as well as profit; government investment agencies; philanthropists or
angel investors; and grant-making foundations.169 Whether this list is measured by
numerical value of donation is not indicated, but the absence of crowdfunding,
considering its disruptive potential for social innovation, is notable. Forbes Magazine
projects that, due in part to the passage of the previously discussed JOBS Act, which
165 Bornstein, D. (2013) Crowdfunding Clean Energy. The New York Times. http://opinionator.blogs.nytimes.com/2013/03/06/crowd-funding-clean-energy/ 166 Ibid. 167 Ibid. 168 How to Change the World: Social Entrepreneurs and the Power of New Ideas, and Social Entrepreneurship: What Everyone Needs to Know (co-authored by S. Davis) 169 Mulgan 51.
46
legalizes equity crowdfunding, crowdfunding has the potential to have a seismic impact
on the financing scene. “Estimates for annual crowdfunding transactions go as high as
$500 billion annually compared to 2011’s $1.5 billion (anticipated to be $3 billion in
2012). If crowdfunding even begins to approach that scale, it will completely change the
landscape for start-up financing.”170
Crowd mobilization is perhaps the ultimate expression of Bornstein’s conviction
that: “Everywhere you look, conceptual firewalls that once divided the world into social
and economic realms are coming down and people are engaging the world with their
whole brains.”171 Thanks to hybrid social business innovations, which have now
manifested in the form of crowdfunding, what is social is now gradually becoming the
responsibility of each individual to advance those innovations that they believe are
worthy. Thanks to the technological innovations of the past two decades, individuals
now also have the platforms and thus the power to be informed about change and to
advance it. Through crowd mobilization and particularly through crowdfunding, it now
becomes possible that “the role of the consumer changes from a passive to an active
player: to a producer in their own right”.172
IX. Conclusion
“Today’s changemakers share one common feature: they are building platforms that
unleash human potential.”
- Social Entrepreneurship: What Everyone Needs to Know
Social innovation is a messy but exciting and progressive field. As previously
noted, a social innovation is “a new idea (which) has the potential to improve either the
170 Thorpe, D. (2012) Why Crowdfunding Will Explode in 2013. Forbes Magazine. Retrieved 22 July 2013 from http://www.forbes.com/sites/devinthorpe/2012/10/15/get-ready-here-it-comes-crowdfunding-will-explode-in-2013/ 171 Shapiro, R. (2012) Review: The Real Problem Solvers. Stanford Social Innovation Review. Retrieved July 10 2013 from http://www.ssireview.org/articles/entry/the_real_problem_solvers 172 Murray, R., Caulier-Grice, J. & Mulgan, G. (2010) The Open Book of Social Innovation. The Young Foundation. Retrieved 28 June 2013 from http://www.nesta.org.uk/library/documents/Social_Innovator_020310.pdf
47
quality or the quantity of life.”173 With this in mind, this thesis has provided:
• A discussion on the emerging concept of modern social innovation, including its
history, actors and existing barriers;
• An overview of the apparent drivers of social innovation;
• An assessment of business innovation drivers and how they can differ from the
drivers of social innovation;
• A comprehensive analysis of crowdfunding, which combines the best parts of
both social and business innovation.
While the drivers of social innovation do share some commonalities with the drivers of
business innovation, and it is clearly possible to create a business plan with a social
mission, the differences are significant enough that the models that guide business
innovation strategies should not be directly applied. Success in social innovation is
clearly assisted by the application of business processes and technological innovations (as
in the example of crowdfunding), but after extensive research, it is evident that the three
main drivers of social innovation are: (i) an appropriate, adequate and consistent source
of funding, (ii) the availability of leaders with the necessary skills who are motivated and
compelled to socially innovate, and (iii) an internal and external environment that is
conducive to and supportive of innovation and would-be innovators. These factors
consistently empower social innovation and drive the creation of strong platforms and
networks, which are key to the success of any innovation.
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