How can you distinguish a business entrepreneur from a social entrepreneur? The answer is not as straightforward as it once was, says Abraham George, founder of The George Foundation, an NGO focused on poverty alleviation in southern India. Both are focused on profitability, margins and returns on investment. But social entrepreneurs go a step further, not only aiming to use their business activities to benefit society, but also involving society’s poorest members — now often referred to as the “Bottom of the Pyramid” — in efforts to reduce poverty and raise standards of living.

That’s all well and good, explains George in this opinion piece, but it is increasingly unclear who “the poorest of the poor” are. Definitions vary widely, which often means marketing strategies, growth plans and even products and services are not catering to the world’s poorest people. In the worst cases, even well-intentioned social entrepreneurs are misleading investors and the general public — and more importantly, letting down the billions of people living in poverty.

The concept of social entrepreneurship as a characterization of social responsibility for business organizations has gained considerable popularity. There is growing belief in development and donor communities that this form of for-profit activity might be the long-sought way to alleviate poverty at the so-called Bottom of the Pyramid (BoP) — the poorest segment of society. Yet, there is no consensus within these communities about what social entrepreneurship is and how the BoP is defined, making it easier for conventional for-profit activities to claim a higher social-service status than many ought to. What constitutes social entrepreneurship serving the BOP segment, and how can BoP be defined so that the poor are better represented?

At the heart of a social entrepreneur’s activities are business principles that organize, create and manage a venture to bring about social change. Social entrepreneurs usually have novel solutions to society’s pressing problems. Some work through non-profit or citizen groups, and most are now in the private sector.

While both business and social entrepreneurs measure performance in terms of profitability and return on investment, a social entrepreneur also includes the impact she or he makes on society — the so-called “double bottom line.” The main aim of a social enterprise is to further social and environmental goals for a good cause in a financially sustainable manner. In its purest form, social entrepreneurships are non-profits that reinvest the money they make to achieve a social goal. Most social enterprises are built on business models that combine a revenue-generating objective with social-value generation. Put another way, they redefine entrepreneurship as we have long known it by adding a social component.

Business entrepreneurs are constantly seeking ways to increase profits through more sales, higher margins, new markets and product expansion. Social entrepreneurs may also seek higher profits, yet be willing to accept lower margins and operate in more difficult market environments as long as they are able to offer social benefits. The very nature of their field activities may reflect a pursuit of what they call a “mission-related impact,” as opposed to normal businesses that are more concerned about such issues as competition and product differentiation.

Unlike activities that focus solely on contributing to social-service causes, social entrepreneurs must find a way to balance the mission-related impact and the desire to maintain or enhance profits. Social entrepreneurs often emphasize cost reduction to achieve sufficient margins, and use innovative techniques to serve their market. The degrees to which social entrepreneurs pursue social impact as opposed to profitability vary considerably, but in all cases financial sustainability is fundamental. However, external investors in social enterprises usually do not have high return expectations and are often willing to forgo returns if they can see significant social benefits from an enterprise’s activities.

The Quest for Economic Equality

Today, many ventures claim to be social enterprises, some with the professed goal of poverty alleviation. However, in the frenzy of associating with social good, many of their assertions are not scrutinized sufficiently. In the absence of precise conditions to validate their claims, it is difficult to identify the entrepreneurs whose main goal is wholly focused on reducing poverty.

A social entrepreneur aims to add value via incremental benefit, which accrues to a segment of society. Social entrepreneurs who aim for economic equality target an underserved or highly disadvantaged population that lacks the financial means to achieve transformative benefits on its own.One well-known social entrepreneur is Muhammad Yunus, who founded Grameen Bank to provide microfinance in Bangladesh, for which he received a Nobel Peace Prize in 2006. His pioneering work was based on offering credit to people unable to obtain loans from banks and other conventional sources so they could set up and run their own small business ventures. Grameen and several other organizations that have improved the lives of disadvantaged people certainly fit the definition of a social enterprise.

Subsequently, a new microcredit industry mushroomed in developing countries, with most providers claiming that they can lend money profitably to the poor. They present themselves as organizations serving the BoP, and by default, the poor. However, there is reason to be skeptical about their motives, business practices, performance and the benefits they offer. Usually, the general public believes that microcredit and other for-profit companies primarily operating in the rural parts of developing countries have made poverty reduction one of their primary goals.

I would like to offer some clarity here. Social entrepreneurship can come in many forms, creating products and services that improve consumer safety, offer environmentally friendly goods or services, and contribute to poverty alleviation and other worthwhile initiatives. Many of these ventures are valuable to the economy and society in general. The problem arises when some of the initiatives say their main goal is to alleviate poverty, often in the hope attracting public support and investment from the philanthropic community, despite the fact that they do not meet the minimum criteria to be a poverty-alleviating enterprise.

According to much BoP literature, a BoP venture is a revenue-generating enterprise that sells goods to, or sources products from, people at the “base of the pyramid” in order to improve their standard of living. Some observers have refined the definition as revenue-generating enterprises that directly create “social value” for BoP communities through a product or service. Recent studies go so far as to exclude companies that sell non-essential items to BoP communities. All this aside, a for-profit venture that claims to be a social enterprise alleviating poverty must meet at least one of the following criteria:

  • Employ and/or train proportionately significant numbers of poor people in its main business activity (for example, making mosquito nets or processing vegetables) rather than using them as sweepers, porters or other cheap manual labor.
  • Produce or offer essential products or services (health care, education, housing, food, clean water and the like) at affordable prices to people who earn US$2 or less a day.
  • Make credit available to poor people at reasonable rates (no higher than twice the rate charged by banks to their creditworthy clients) for personal or business uses without unfair or unethical lending practices.
  • Offer technical, material or financial assistance to enable the poor to engage in family-run businesses, with returns to investors generated from products made from the activities (producing dairy products from cows and buffalos, making designer quilts and cushions sold at attractive prices to affluent consumers and so on).

In each of these criteria, a social enterprise employs the poor in its business activity (beyond menial labor) at fair wages, makes it possible for them to start their own entrepreneurial ventures, and/or offers essential, yet affordable, products or services. The poor must benefit directly from the activities and be from the BoP.

Saying the poor will benefit from the trickle-down impact of a regular business that is run by or for people with higher incomes does not qualify that business as a social enterprise; otherwise, every corporate entity, including Wal-Mart, would fit the definition of a social entrepreneur. What’s more, the product or service purchased by the beneficiary must be affordable. Without such qualifiers, classifying social enterprises would mean accepting exploitation of and extortion from the poor in the name of social good, as in the case of local money lenders who charge exorbitant interest rates to people who badly need loans to meet emergencies.

Who Is and Isn’t BoP?

The way to know whether a social entrepreneur is reducing poverty is to determine if she or he is involved directly in serving the poor. Investors must differentiate between for-profit ventures set up in poor areas or employing low-wage labor, and others that are clearly designed to improve the lives of poor people at the BoP. Without making such distinctions, every business operating in deprived communities or selling products and services to the poor and the not-so-poor will be able to call themselves social enterprises engaged in poverty alleviation.

C. K. Prahalad, in his book titled, The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits, describes an untapped market consisting of poor people who have not yet been targeted by major companies. According to Prahalad, this market of an estimated five billion people globally earn less than US$2 a day and can be reached by creative entrepreneurs offering affordable products and services. In doing so, he says, both the entrepreneur and the poor benefit immensely, creating wealth and reducing poverty.

The idea of a huge win-win opportunity has encouraged many academics and researchers to explore this underserved market. The development community focuses primarily on the needs of people forming the base of the pyramid, while others argue that a much larger segment of the low-income population deserve corporate attention. Accordingly, Prahalad’s estimate of the BoP market size was expanded to include people living on more than US$2 a day. This resulted in the inclusion of different segments, from the absolute poor to those having significant discretionary income.

According to a report published by the World Economic Forum in January 2009 titled, “The Next Billions: Unleashing Business Potential in Untapped Markets,” the BoP market consists of some 3.7 billion people globally who earn less than US$8 per day per person, with an aggregate annual income of US$2.3 trillion. Of them, 2.7 billion people have little to significant discretionary income to make the market attractive for businesses. Meanwhile, an article in The Economist described a market of 2.6 billion people earning between US$2 and US$13 a day at 2005 purchasing power parity. Whatever the overall size, if these people can be engaged as producers, consumers and entrepreneurs, new wealth can be created and poverty significantly reduced, conclude both publications.

Unfortunately, in most definitions, people earning less than US$2 a day are grouped under the BoP umbrella along with others earning as much as US$13 a day. Granted, people composing the BoP are far from homogenous, and the multifaceted nature of poverty makes a consensus definition of the BoP elusive. However, the consumption pattern in the lower half of this wide range is different from the upper half. Numerous studies show that people in the former group spend all, or nearly all, their income on essentials. To view this population as potential consumers is grossly inaccurate; they try to survive each day on what little income they earn.

The trouble with Prahalad’s claim of a fortune waiting to be made is his assumption about the purchasing power of the BoP population living on less than US$2 per day per person. Affordable consumer goods can raise the standard of living of the poor, but first their incomes must rise to have any sort of purchasing power. Experts like Aneel Karnani, a professor at the University of Michigan, advocate greater engagement of BoP communities as suppliers, and maintain that the only way to alleviate poverty is to raise the real income of the poor. Without sufficient skills and capital, the poor often end up being sources of labor and rarely suppliers of products, and many earn far less than US$2 a day. To conclude that they are a worthwhile market as consumers or suppliers for entrepreneurs is unrealistic. To group them with others is not only misleading, but also provides an opportunity for businesses to inaccurately portray themselves as serving the poor.

The Bare Necessities

The George Foundation’s experience in the field in Tamil Nadu, India, has shown that people living on less than US$2 per day are unable to venture into businesses they are unfamiliar with or don’t have the technical skills to conduct.Apart from farming on small parcels of land or maintaining some sheep, a cow or two, or a few hens, the poor can only engage in non-skilled activities, such as selling produce from roadside stalls. They do not have the capacity to start, say, a tailor or bicycle repair shop. Anyone engaged in such skilled activities is not in the US$2-per-day BoP described by Prahalad.

Surveys covering around 16,000 people in 17 villages in the Krishnagiri district of Tamil Nadu by our foundation consistently show that this segment of the population cannot even afford their medical or educational needs. Their priorities are usually a place to live, food, medicine and a place for worship, mostly in that order. Yet these poor people live in single-room huts with leaking roofs, eat non-nutritious food in inadequate quantities, seek medical attention only when their health deteriorates badly, and worship modestly decorated idols under banyan trees set aside for “lower castes.” It is unrealistic to assume that they would purchase purified water or toothpaste instead of rice and lentils to feed their families, though these items are essentials for consumers in developed countries.

According to a recent World Bank estimate, 42% of India’s population lives below the new international poverty line of US$1.25 a day; this works out to over 500 million people as of the end of 2009. Over 900 million people, or 75.6% of the population, in India are now earning less than US$2 a day. In sub-Saharan Africa — the poorest region in the world — nearly 600 million people, or 72.2% of the population, are below US$2 a day. As mentioned, these poor people are not presently consumers of discretionary products, and they are not likely to be any time soon unless their incomes rise dramatically. As the experience of NGOs BRAC in Bangladesh and Aravind Eye Care in India shows, those who are considered poor by the World Bank’s definition of below US$2 a day can have access to services and products other than those that are absolutely essential only if they are provided free of cost.

Further complicating the subject is the concept of family income. A single person with no dependents might be prepared to spend money on discretionary items if she or he earns, for example, US$8 a day. However, this person is unlikely and unable to spend this income if she has to support four family members. The average family size is more than five members in most developing countries, with no more than two members earning an income. Poor people prefer to live in family units, supporting each other and caring for their parents. Even if a family income is US$10 a day, the average income per person in a family of five is only US$2 per person — the upper limit for those traditionally included in the BoP. These families have very little left to spend on non-essentials, regardless of how beneficial the items would be to them.

However, if the poor can be engaged as producers and entrepreneurs, they might one day have the purchasing power to be consumers of discretionary products and services. Income generated from gainful employment or entrepreneurial activities can elevate their economic status to be consumers of non-essential items. They can be engaged as suppliers in labor-intensive activities, such as grinding spices, packing agricultural produce or weaving baskets, provided they are given all the requisite ingredients and tools. That’s why grants are needed to cover their start-up costs, even for small ventures. As some experts note, for all the promise of market-based business models, most ventures are viable in markets in which the poor have at least some income or assets.

There is a clear distinction between employing the poor as trained labor in the production process, whether in a factory or at home, and enlisting them as independent suppliers — but often neither is feasible. But the poor can be engaged in the distribution and sale of goods in markets, provided the entrepreneur assures a sufficient number of buyers. The poor are able to earn more this way than working in manual labor for someone else, and all risks are borne by the entrepreneur.

Many poor families prefer to be involved in family-run micro businesses, such as raising cattle or poultry, but are unable to do so because they lack resources. They need seed money, not least because there is often a gap of several months between when they start running the business and when revenue begins to come in. During this time, they might be forced to borrow money at very high interest rates from local moneylenders to meet their daily living expenses. What’s more, despite the hard work and risks they take in such endeavors, there is no assurance of a revenue stream.

Only through hands-on, third-party guidance and direct assistance in the form of donations can the poor hope to be engaged in sustainable activities. Businesses started with loans carry the heaviest burdens and are often forced to fold because of a lack of capital if a loan needs to be repaid and, as is often the case, the family incurs even more financial obligations. What the poor want today to improve their lives is not microloans they cannot afford to repay, or the innovative products they cannot buy even at very low prices; they need steady jobs and income-generating assets, such as animals and cultivable land, without incurring debts as a result.

Top, Middle, Bottom

Now, with the wider definition of BoP at US$8 per day per person, there is greater room for many so-called social entrepreneurs to claim that they are reducing poverty. Even credible organizations like Acumen Fund will probably accept the fact that their loans and investments are directed at entrepreneurs well above US$2 per day in income, and their customers are also usually in the same category. That is not to say that organizations like Acumen are not helping businesses engaged in socially beneficial activities.

The confusion over the meaning of BoP could be resolved by defining three segments of the pyramid. The top segment includes people who have sufficient discretionary income to purchase goods and services beyond essentials. The middle segment — people earning between US$2 and US$5, or even US$8, a day — have some capacity to buy discretionary items. The third segment comprises people truly in the BoP, who are on less than US$2 a day and do not have the capacity to spend money on anything beyond bare essentials.

Most people falling into the Middle of the Pyramid, or MoP, are lower middle-class individuals who occasionally have discretionary income or savings to purchase essentials such as toothpaste, an electric fan or even a small refrigerator. They are unlikely to buy big-ticket items or what they consider luxuries, and are highly price sensitive. Over time, they are likely to improve their economic status by seeking higher skilled jobs and working in small businesses. As their income increases, they are able to afford more discretionary products and services, and might be an untapped market for small entrepreneurs and even larger companies.

To cater to them, businesses need to be creative about developing and delivering their low-cost products and services without creating a perception of inferior quality. A significant proportion of people in the MoP have both basic education and work skills, so they are more likely to produce and supply some types of goods and services. This is also a market where both impact and scale can be achieved. Social entrepreneurs, such as microfinance companies, will be doing a worthwhile service catering to the MoP market.

As poverty programs take hold, many poor people in the BoP might move to the MoP. With an increasing number of people falling into the MoP bracket, it might well be the fortune Prahalad has been asking his followers to go after. But simply raising the upper limit for the BoP’s definition does nothing more than create the erroneous impression that a very large, untapped market segment with significant purchasing power is ready to generate substantial profit for companies and reduce poverty.

For anyone engaged in poverty alleviation, a more sensible definition of the BoP would be below the original level of US$2 a day. The World Bank refers to people below the US$2 level as poor, while those below US$1.25 as extremely poor. Even under the US$2 mark, around 50% of the population of the developing world, or nearly three billion people, are poor. This is by all measures a large enough segment to deserve special attention.

The strategies needed to make an impact on the BoP are very different from the consumer, producer or supplier models suited for the MoP market. It is unlikely that many people in the BoP have the entrepreneurial skills, capabilities and resources to succeed in businesses that offer more than subsistence income. In addition, the relatively greater dearth of outside capital restricts the number opportunities and shapes the trajectory of a new venture’s growth.

Governments, international agencies, NGOs, donors and private companies are needed if poverty is to be significantly reduced within a reasonable period of time. The assumption that MoP ventures will somehow reduce poverty within BoP is unsubstantiated.

The private sector, including businesses not considered social enterprises, can play a major role in poverty reduction by locating factories and other facilities in or close to rural and deprived urban areas. Governments can motivate businesses to do so by providing infrastructure and fiscal and monetary incentives. Direct help such as job training, employment at higher wages and benefits, better and affordable health care, and quality education will help the poor move into the MoP in a few years. Meanwhile, subsidies and concessions have to be offered to give them access to important services. The focus of poverty reduction should not be in selling to this market or trying to turn them into entrepreneurs; only through vibrant economic activity that generates employment can there be sustainable change.

Social entrepreneurship is a noble business activity that can serve all segments of society. But it is not necessary to appear to be helping the poor to gain an elevated social or moral status in business. Some entrepreneurs might prefer to invest in social enterprises rather than in regular for-profit businesses, but investment must be sought under the right premise. Not to do so is highly unethical, especially because it relates to the poor.