Part One: Social entrepreneurs — those who try to tackle major social problems such as poverty and disease while generating revenues — are often well-meaning people. But in their desire to make a difference to society, they sometimes fail to subject their ideas to rigorous tests. Ian C. MacMillan, a professor of management at Wharton, and James D. Thompson, who leads the Wharton Social Enterprise Program, have just published an ebook titled, The Social Entrepreneur’s Playbook, to help entrepreneurs do just that. In the first of a two-part interview, MacMillan and Thompson explain why it is important for social enterprises to subject their beloved notions to tough love.

An edited transcript of the conversation follows.

Knowledge at Wharton: To begin with, please talk a little bit about the work that both of you have been doing with social entrepreneurs for the past 13 years and how that led to the writing of this book.

Ian (Mac) MacMillan: We felt that there was so much need out there for people to be helped, and so much funding being used without really accomplishing too much in the way of impact. [It’s] not because people weren’t well meaning, but because we needed a more managerial way to look at how to provide those systems to people. Since we’re in the entrepreneurship program, one of the things that came to mind as we were talking about this was, can we use entrepreneurship as a weapon to tackle social problems?

Both of us feel that there are practical things people [can] do. We decided that one of the ways to really come up with [what works] was to actually go out and try to do it ourselves and learn our way into what the methodologies would be to create sustainable organizations that don’t create dependence, but rather create self-sufficiency. That was the basic theme. Jim was the first to go out there and actually begin to try to do it, working with an entrepreneur who wanted to develop a feeds program to raise chickens.

James D. Thompson: One of the key distinctions of the approach we took was the use of field research. Social entrepreneurship back then wasn’t what it is today. When we started out, there wasn’t a lot to go on…. To Mac’s point, one of the key outcomes of the research that we were looking for was a framework, a tool. How do you go and do this and do it in such a way that you increase your chances of success and minimize the resources used in attempting to do what you’re trying to do? We used field research to learn our way into the space. The book is the fruit of the last decade-plus of field research.

Knowledge at Wharton: One of the ideas that you really emphasize in the book is the notion of “pressure testing” the core idea of the social enterprise. But why is it important for a social enterprise to subject itself to this kind of a pressure test?

MacMillan: The theme, if you think about it, is if there were an easy entrepreneurial solution to the problem, it would have been developed already. These are very, very tough, intractable problems. The characteristic feature of these types of enterprises is huge amounts of uncertainty. It’s so easy to go charging down the road spending other people’s resources only to find out that your idea wasn’t well backed in the first place. The theme of the book is to give the would-be social entrepreneur a series of questions they need to ask themselves. If at the end of that particular due diligence phase you can’t answer “yes” to most of those questions, you’ve failed the pressure test and you should abandon [the project]. Get out early and cheap and conserve those resources for something that might work.

Thompson: Adding to what Mac just said, the distinction we make by using the term “pressure test” is that we suggest in certain instances, particularly where there’s really high uncertainty, or what we call “near-Knightian uncertainty,” that rather than trying to prove you’re right, it is sometimes smarter to try and prove you’re wrong, provided you’ve structured your activity in the right manner. That’s the pressure testing [concept].

It’s doing the due diligence up front and not trying to force your case in a highly uncertain environment, but rather trying to find ways to show where you’re wrong so that you can learn, adapt, redirect and build your enterprise.

Knowledge at Wharton: To go back, Mac, to the point that you raised a little earlier, all startups face risks. But you said that social enterprises face a much greater degree of uncertainty than normal startups. Why is that the case, and what can be done about it?

MacMillan: We use the term “uncertainty” in the terms of an economist named Frank Knight. Frank said that when you have a distribution of possible outcomes, that’s risk. When you don’t even know what the distribution is, that’s uncertainty. This is one of the problems with a startup. You don’t know whether there’s going to be appropriate governance; you don’t know whether there’s a market; you don’t know whether there are customers; you don’t know the prices; you don’t know what materials are going to cost and so on. There are just huge amounts of uncertainty…. You just don’t know what’s going to happen. That’s why we coined the phrase, “near-Knightian uncertainty,” where the levels of uncertainty are enormous.

… What we’re trying to do here — by putting would-be social entrepreneurs through their paces and giving them what we call these tough love questions to ask — is [to drive] the risk out. The uncertainty doesn’t go away. But if you’re able to configure your enterprise in such a way that you have driven out the risk, then you can afford to take on uncertain projects.

Knowledge at Wharton: Jim, who was this book for? It sounds like you’ve written it for social entrepreneurs, but would it be relevant to other people, including conventional entrepreneurs?

Thompson: Absolutely. We’re reticent to make very, very broad and general claims of applicability. But as we’ve put the drafts of the book out to various communities, we’ve received overwhelmingly positive responses…. For example, in Penn’s School of Social Policy and Practice, the nonprofit students are finding ways to use this material. The nonprofit sector … might find this very useful. So that’s one: people in nonprofits trying to do more with less. This book will help them do that.

The second is the funding community: foundations, philanthropists. One of the big cries out there today is for transparency. How do we know when these activities are doing what they claim they’re doing? How do we compare them one against another? Let’s face it: nonprofits face the equivalent levels of competition for funding that a regular firm does. We think that this book will give them tools to communicate to their funding communities fairly strongly how it is they are doing what they are doing, and how they’re measuring the social impact that they are having.

The third is corporations. Many, many companies around the world today are looking at social impact indices and are getting measured on corporate social responsibility programs. A lot of the folks we’ve spoken with in these companies say, “Look, this is not what we’ve typically done. How do we do it responsibly?” They have stockholders. They have stakeholders in the firm, out of the firm. We think this will give them a set of tools to begin to think about what they’re doing, and do it in a manner that gives them greater impact with the resources that they dedicate to these programs.

Knowledge at Wharton: Mac, how does your model help social entrepreneurs move from uncertainty to risk, or in other words, from what is plausible to what is plannable?

MacMillan: The basic idea is to give them a series of exercises to go through. You start off really subtly identifying what the real problem is and how it’s dispersed. For instance, is this problem something that’s unique to a small territory, or is it something that [exists] across a whole continent? Make some decisions about who the initial target segment would be that’s going to benefit. You go for the segment that will benefit the most, but will also adopt your offering the easiest. Then, the next step is to start to think pragmatically about what is the competition today for the solution to the problem, and oftentimes [the competitive alternative is] simply doing nothing.

People have existed in many cases for dozens, if not hundreds, of years suffering from malnutrition or hunger or lack of education. It’s something that they’re used to. [That is what you are] competing against. Unless you can come up with something from the beneficiary’s point of view that is better than the nearest alternative, you’re wasting your time. We have a look at the market characteristics, and we look at the competition and we have a look at finding the segment where you’ll get the most traction as soon as possible. Then, begin to think a little bit about the politics of going into the space and what you need to do to make sure that you don’t fall foul of the politics. What you have is a systematic unfolding of more and more insight into what it’s going to take to really do this and make this happen.

Knowledge at Wharton: Great. Jim, since you mentioned fieldwork — it was a big part of the way in which you worked on this book — could you tell me a little bit about what are some of the most common mistakes that you found social entrepreneurs make by not following the process that Mac just outlined?

Thompson: That’s a good question. Possibly at the top of that list is the formulation of a plan by a group of individuals with the best of intentions to go somewhere else in the world that they don’t know a lot about. They may know a lot about the subject that they are attending to in the part of the world they come from. But conceiving this plan on another continent, for example, [is not the same]. They raise resources, sometimes significant amounts of resources, to go do what they believe to be a wonderful activity. They get there and realize that the way they envisioned it to work was never going to work. Yet they have committed themselves to this unilateral course of action — a business plan, if you will. They have spent two, three, four, five years floundering and learning why it’s not going to work the way they envisioned it would. That would be the top.

Another that comes to mind is cash flow management…. What we find is that there’s even greater uncertainty with respect to cash flow in these types of environments. This is not new to anybody in entrepreneurship, but in these environments, it can be even tougher to manage cash flows for all sorts of reasons: regulatory, availability of foreign exchange, etcetera.

The third one to mention is the idea of redirection. How does one think about redirecting as the reality of being on the ground unfolds? What we’ve tried to do in this book is attend to that, because we know it happens. We’ve seen it in every single case we’ve been involved with: this realization that your plan needs to change if you want to keep doing what you’re doing. But now you’ve got to redirect. That means getting all your stakeholders on board to redirect, reconfiguring your operations model, sometimes reconfiguring your funding model.

MacMillan: One of the big tragedies is that people assemble a wonderful solution to a problem that they have not really studied hard enough for the context where it’s going to be implemented. Then they will go over with all of that money and all of that energy and all of that excitement and find that the so-called beneficiaries — the recipients of this largess that they’ve put together — they could care less or they are very, very resistant. All of that money, which is desperately needed to help people who are in need, just goes to waste because people have been thoughtless.

Another big problem is that people set in motion a program and then find that they can’t sustain it. Then they have to walk away from what they set up in the first place. A specific example here was a case that was identified by [Paul Theroux in his book, Dark Star Safari]. He went to east Africa, and while he was there, he ran into a group of people who were feeding children. And what had happened was that mothers had stopped nursing their children and fed these children with what they called wet feeding. And they ran out of funds. And so what they did now is they just packed up their tents and went on. All those women who would have been able to continue feeding their children by breastfeeding now could no longer do it; they were no longer lactating…. Nobody really thought through what the outcome would be in the event of failure. So, you create dependence and then you fail.

One of the big learnings that we got out of this program in observing what was happening over in Africa and other countries is the whole idea to think about having to leave the project before you even start it. Think about how, if you have to leave, you leave behind what we call a light footprint. If you do have to go, you have had minimal damage on the people who were supposed to be the beneficiaries of what you were doing.

To download the ebook, which is free until July 15, 2013, visit