How Mark Zuckerberg Can Help the Bay Area’s Poorest Schools

By Kristiana Raube

Wicked public challenges, such as providing high-quality education or breaking the cycle of poverty, require collaboration between all sectors – government, philanthropists, for-profit businesses, and the communities themselves.

But harnessing all those elements is harder than it sounds, even when you have a dedicated source of funding for an ambitious new effort.

The Bay Area is about to become a laboratory for exactly this kind of opportunity and challenge. Mark Zuckerberg, the founder of Facebook, has pledged $120 million over five years to revitalize public schools in several of this region’s most underserved communities.

Public Schools California

It’s a courageous and praiseworthy move by Zuckerberg and his wife, Priscilla Chan. Unfortunately, as they themselves know first-hand, money and good intentions do not guarantee success. Since 2010, the couple has pumped $100 million into an attempt to radically revamp the schools of Newark, N.J.

But as the New Yorker magazine reported in May, that effort has produced a lot of conflict and local criticism without – at least so far – significant improvements in educational outcomes.

It’s wrong to dismiss the Newark effort as a failure. Impoverished school districts face a complex tangle of challenges, from budget woes to social turmoil. There are no simple solutions, and almost any proposed reform will spark conflict. Even if a reform is exactly what a school district might need, it still takes years to produce a measurable improvement in overall student performance.

But since Zuckerberg and Chan are taking a second bite of the apple, it’s important to reflect on the lessons so far about the interplay between private and public efforts in solving public problems. This is a precious opportunity, but it’s an easy one to fritter away.

As Zuckerberg and Chan themselves have remarked, even $120 million is a “drop in the bucket.” The Oakland school district’s annual school budget alone is more than $1 billion.

The real opportunity here is for innovation, for testing promising ideas and building on the results.

Governments have the scale to reach the entire public, but they are inherently risk-averse and weak on innovation. Philanthropists like Zuckerberg and Chan have more freedom, and can play a role similar to that of venture capitalists. They can provide seed funding for new strategies, and accept the risk that many of their projects will not work out as hoped. If a project does produce measurable benefits, however, it offers a template that countless other school districts to replicate at much less risk than if they had started out from scratch.

If Newark showed one thing, it was the dangers of over-confidence. Then-mayor Cory Booker declared at the outset that “we know what works.”

That should have been a red flag. No matter how good an idea might be, it’s dangerous to impose it from the top down. It’s crucial to listen to people in the community – parents, teachers, local community leaders. If people in the community feel that a reform is being imposed on them from outside, even great ideas will either be blocked at the outset or wither and die from apathy. Even altruistic reformers can provoke powerful resentment among parents and educator.

It’s important to remember that parents, teachers and local community leaders have crucial knowledge. They are the ones on the front lines, and they understand the nuances of the challenges in a particular neighborhood or school. These are also the people who have the highest stakes in their schools, and they will be around long after the philanthropic money has been spent.

To their credit, Zuckerberg and Chan are thinking along these lines. In a column for the San Jose Mercury News, they emphasized the importance of “listening to the needs of local educators and community leaders so that understand the needs of students that others miss.” They also seem to be targeting modest goals: grants to provide more computers and connectivity; teacher training; leadership training for principals; programs to ease the transition between middle and high school.

All this is good. Ironically, however, the new risk may be excessive humility.

If Zuckerberg and Chan’s foundation, Startup:Education, simply supports a wish-list from local school administrators, it’s easy to imagine their money being frittered away with almost nothing to show at the end.

There is no shortage of genuine bread-and-butter needs. California ranks almost dead last among the nation’s 50 states in per-capita spending on public schools. Schools need everything from computers and books to lab equipment and teachers’ aides.

Those aren’t problems that philanthropists can solve with a one-shot injection of money. They require ongoing funding from local, state and federal taxpayers. “Philanthropy is no substitute for government funding. You can’t say that loud enough,” Robert W. Conn, president of the Kavli Foundation, told the New York Times.

What philanthropists can and should be doing is underwriting innovation and bold ideas. Today’s schools still tend to be based on assumptions about the workplace of the 1950’s and 1960’s rather on than today’s hyper-connected and fast-changing information economy. Educators themselves need training to keep up and catch up with the changing nature of work itself.

We are all groping for answers, especially for students who wrestle with huge social and financial obstacles in their day-to-day lives. But that isn’t a reason to think small. It’s a reason to focus on the big questions, try bold ideas that schools can’t or won’t try themselves, measure the results, and learn from both the successes and failures.

Over the long-term, those are the kinds of investments that will really pay off.

How Our “Better Angels” Can Affect Economic Decisions

By Ernesto Dal Bó

Do moral ideas have power? We would like to think so. We all appeal to certain actions being “right” as a way to justify why we want certain things done. And implicitly, we expect those moral appeals  to carry force, to disarm opposition, to persuade, and to drive changes in the concrete world of policy, conflict, jobs, and money.

The ubiquitous nature of moral appeals can be puzzling to an economist: We have traditionally assumed that we live in a material world, and that material incentives are the most powerful driver of actions.

That said, behavioral economics and the exploration of non-material motivations have taught us much over the past two decades. Economists now accept the fact that individuals can be altruistic, and that they are sensitive to the intentions and motivations of those with whom they interact. We have learned that we are highly social animals: We care strongly about what others do, and we are reluctant to fall out of line.

Experiments in psychology and economics have shown that it is possible to affect behavior by indicating that a particular action is popular. For example, hotels have found that a good way to save money on laundry is to get customers to re-use their towels, and an effective way of achieving this is to tell customers that the vast majority of other customers re-use their towels.

But manipulating beliefs about what “the majority does” appeals to a herd mentality, which can often lead people to immoral acts. To me and my brother Pedro Dal Bó, an economist at Brown University, it seemed crucial to learn whether strictly moral ideas can be used to affect behavior. Could we prove that pure moral suasion, which is so widely attempted, actually works? And could we do this by invoking unadulterated ethical principles, devoid of any herd mentality or social components?

For me, this was a personal question. Every spring, I teach Ethics to nearly 240 Berkeley-Haas MBA students. If ethical discourse has no impact on behavior, why train people to think and express clear moral ideas?
As strange as it may sound, a rigorous, experimental investigation of the power of strictly moral ideas to affect behavior had never been conducted. My brother and I performed a series of experiments in Berkeley’s XLab, the results of which we recently published in the Journal of Public Economics.

In our experiments, subjects played games where everyone did better when individuals cooperated but each person had a material incentive to withdraw cooperation for the sake of individual profit. Individuals got to interact a total of 20 times. Halfway through their play, some people were randomly “treated,” as in a clinical trial, with moral messages. One message was based on the Golden Rule, that you should treat others as you would want others to treat you. Another was based on the utilitarian principle that an action is moral if it benefits the overall group. Other subjects were treated with different, non-moral messages.

We found something a hard core economist should find surprising: Compared to non-moral messages, the “immaterial” moral messages made people more cooperative… but only for a while. On its own, the moral appeal lost much of its impact as the game went on. But that changed when the game allowed players to punish those who had been uncooperative. Under the punishment option, people could reduce the returns to people who cooperated very little. When that option was available, moral suasion worked permanently. In other words, we found a powerful interactive effect between a very material element of punishment and the very non-material element of moral sensibility.

We then investigated the mechanisms behind the moral suasion effect. It’s possible that exposure to moral ideas makes us more cooperative, regardless of what others do. Another possibility is that moral suasion leads us to expect better behavior from others, and we become more cooperative because we want to be “closer to the pack.”

With two additional experiments, we demonstrated the presence of both effects. Moral suasion does change our preferences, but it is much more powerful when people know that others are getting the same message. This implies the existence of a “moral social multiplier.”

These findings have important implications for the management of organizations: Moral discourse can be an effective way to promote cooperation, especially when everyone knows that shirkers can be punished and that everyone got the memo.

The more general takeaway is that moral ideas can be wielded to affect material outcomes. In a recent book, Steven Pinker claims that what President Lincoln called “the better angels of our nature” have played a gradual role in making the world a less violent place. Our findings suggest that we can talk to those better angels and put them to work for the common good.

Berkeley-Haas Takes Stock of Its Broader Mission

It’s no secret that one of Berkeley-Haas’s defining characteristics is its emphasis on placing business in the larger context of social and environmental responsibility.

The school’s four defining principles, starting with “Question the Status Quo” and “Beyond Yourself,” are imbued with the idea of redefining business leadership and looking for ways to alter the trajectory of trends that are increasingly unsustainable.

But the range of programs and activities tied to that broader mission is so wide that even people immersed in the Berkeley-Haas community have only a fragmentary sense of what’s happening or who is driving it.

The Institute for Business and Social Impact — which includes the Center for Responsible Business, the Center for Nonprofit Leadership and Management, the Graduate Program in Health, and the Global Social Venture Competition – is a big part of that effort.

But the broader mission to spur “path-bending” leadership permeates every corner of the school. It is embedded in the core curriculum as well in electives and our experiential courses in applied innovation. It is a major focal point of research, in areas as diverse as clean technology, sustainable business products, social entrepreneurship, and poverty reduction. It is part of a constant dialogue that occurs through conferences, speakers series, published research business-plan competitions and student-run activities.

Now there is more complete picture. Earlier this month, the school submitted a comprehensive report on its efforts to carry out the United Nations Principles on Responsible Management Education – or PRME.

Under PRME, business schools around the world have pledged to promote and advance principles aimed at developing leaders and strategies to address urgent global problems, from climate change to entrenched poverty. Business schools that sign on to the PRME principles are required to document their progress, as well as the work they believe still needs to done, every two years. Berkeley-Haas signed on in 2012, and this is its first report.

The new report is packed with information, starting with a description of how the school’s defining principles and values shape admissions, the curriculum, research and student activity.

As the report makes clear, this is both a top-down and a bottom-up effort. Berkeley-Haas has a long tradition of social sector innovation and the development of new strategies to harness the power of markets toward a more sustainable future.

“We see it as our responsibility to equip each student with the tools and the mindset to become an innovative leader and to make that difference, one at a time,’’ writes Dean Richard Lyons in an introductory message. “We have codified a culture that values questioning the status quo and becoming stewards of something larger than ourselves.”

The report notes that Berkeley-Haas both requires and enables business students to assume their broader responsibilities. The curriculum includes required courses on ethics, for example, as well as a vast array of electives and courses in applied innovation. But students themselves play a leading role through dozens of student-run organizations. The annual Global Social Venture Competition, in which social-enterprise start-ups from dozens of countries compete for $50,000 in awards, is one of many such efforts.

That is just the tip of the iceberg. Berkeley-Haas is a hub for public-private partnerships in clean technologies; cutting-edge research on new strategies for poverty reduction and health care; new studies on the role of women in business; and new ways to challenge conventional wisdom.

The report cautions that this remains a work in progress, and it outlines objectives for the years ahead. But it leaves no doubt that the defining principle of “beyond yourself” is deeply and permanently embedded in the Berkeley-Haas DNA.

Laura Tyson: The Government as Venture Capitalist

The American public’s attitude toward government, writes Laura Tyson in a new column for Project Syndicate, recalls a classic scene in Monty Python’s “Life of Brian.”

“What have they ever given us in return?” fulminates John Cleese, playing a Judean revolutionary. “The aqueduct,” concedes a sheepish co-conspirator. “And sanitation,” says a second, as others pipe up with more examples.

“All right,” Cleese erupts in exasperation. “But apart from the sanitation, the medicine, education, wine, public order, irrigation, roads, the fresh-water system, and public health, what have the Romans ever done for us?”

The scene captures America’s cantankerous and contradictory zeitgeist. On one hand, public trust in government is at an all-time low. On the other hand, Americans are deeply frustrated with gaping holes in health care, education, equality of opportunity, infrastructure, and environmental protection – goods and services traditionally provided by government.

How to unlock solutions?

Tyson cautions that the blanket distrust of government is misplaced. Like it or not, she writes, the reality is that there really are “public goods’’ – health care, universal education, infrastructure, security – that neither the marketplace nor the nonprofit sector can provide on its own. The United States has seen a surge ambitious private activity, such as billion-dollar efforts by non-profits like the Bill and Melinda Gates Foundation and Bloomberg Philanthropies, to address social problems. These new efforts also include social-enterprise start-ups and impact-investing platforms that seek both social and financial returns.

But while these private and nonprofit initiatives generate crucial innovation, Tyson writes, only government has the resources to implement the best strategies on an national scale.

One answer, Tyson argues, is to put the government in the role of venture capitalist. Its task would be less to design and implement top-down programs than to solicit, support, evaluate and scale up successful strategies developed by state and local governments, businesses and non-profits. Tyson cites a growing number of examples of how this is already happening.

The US Department of Education’s Race to the Top Fund spurred local school innovation by offering $4 billion in grants to districts that developed the most successful reforms. The federal government also operates Challenge.gov, an Internet platform to facilitate new prize competitions aimed at solving complex problems. After the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, the Obama administration teamed up with the X-Prize Foundation to offer a $1.4 million prize to the group that produced the most efficient oil-recovery solution. The winning approach was three times as efficient as the industry’s previous best rate. Since 2011, some 50 public agencies have sponsored more than 260 challenges over Challenge.gov.

Federal, state and local government agencies are also turning to “pay for performance” contracts, sometimes known as social-impact bonds. In a social-impact bond, the government contracts with an outside provider to achieve a measurable social goal (like reducing recidivism among juvenile offenders), and private impact investors finance the program’s upfront costs. The government promises a return to investors if the program’s targets are achieved. The key idea is that the government acts as a catalyst for new ideas and then helps scale up the strategies that demonstrate real results.

With the government acting as a venture capitalist, the private sector can create effective new programs to address social problems. But scaling up good programs will require government resources. The Gates Foundation may devise breakthrough innovations for public schools; but, even with its billions of dollars, it lacks the resources to revitalize education at the national or even the state level. As former New York City Mayor Michael Bloomberg recently observed, philanthropists should test innovative policy ideas and then rely on government money to implement them widely.

Only governments can provide public goods and address social challenges on a national scale. But there are numerous ways in which governments can work with non-profits, investors, businesses, and citizens to find the best ways to achieve these goals – and thus restore public trust in government itself.

Prize-Driven Innovation Gets a New Push From an Unexpected Sponsor

By Paul Jansen

Prize competitions for innovation have a long history of producing beneficial change – from the 18th-century Longitude Prize, which enabled more accurate transoceanic navigation, to Napoleon’s food preservation prize that led to long shelf-life canned foods, and the Braent Prize that produced a cure for cholera. But as the use of patents and research grants grew, prizes became more peripheral to innovation.

Today, however, prize competitions are booming again – and government is embracing them to better tap the creativity and skills of the public at large.

In 2009, a team from McKinsey took a fresh look at whether prizes still had relevance as a tool to drive social change and innovation. You can read our report here. We discovered a thriving ecosystem of organizations that used incentive prizes to drive innovation by tapping the power of the crowd to solve tough problems. These organizations, be they nonprofits like the XPrize Foundation or for-profits like Innocentive or Netflix, embraced incentive prizes for the simple reason that they work. That’s because, almost by definition, prizes pay only for desired results rather than for noble but unsuccessful attempts. The power of prizes to stimulate innovation comes from their ability to mobilize resources, intellectual as well as financial, and their power to draw attention that can influence the perceptions and actions of targeted communities.

Government agencies played a role in all this, but it was still limited at the time of our report. Our research showed about 17% of new prize capital from 2000 to 2007 came from government sponsors. But it was the signing of the America Competes Reauthorization Act in 2010, and the creation of Challenge.gov, that unleashed federal agencies. The new law gave government departments the authority to uses prizes to leverage solvers around the world. Agencies embraced the tool, as well as the challenge.gov platform and the technical support provided by experienced prize designers from NASA.

According to Challenge.gov, 260 prizes, sponsored by more than 50 agencies, have been offered since the site opened in early 2011. The prizes vary greatly in intent and prize value. At one end of the spectrum is the Department of Energy’s $15 million Bright Tomorrow Light Prize seeks to substantially accelerate America’s shift from inefficient, dated lighting products to innovative, high-performance alternatives. On the other end is the National Institute of Health’s Center for Scientific Review, which launched a $10,000 challenge to uncover the best ideas for detecting possible bias in the peer review of scientific grants.

It’s not only the federal government that has gotten into the prize act. In July 2012, the Mayor’s Office of New Urban Mechanics in Boston launched a project called Street Bump, an app that allows drivers’ smartphones to automatically report road hazards to the city as soon as the phone picks up the distinctive “thud” vibration of a pothole. Initially, however, the app generated too many false reports, which caused the city to waste scarce resources chasing down non-existent potholes. The city contracted with InnoCentive to improve Street Bump, which launched a $25,000 prize to its network of over 400,000 solvers. Good ideas came in from many sources and the result, while still not perfect, is a large improvement. According to the Street Bump website, thousands of bumps have been accurately detected. It’s a quantum leap over the manual, antiquated method of reporting potholes that is still being used by most public works departments.

So what is the future of prize use by government? Eighteen prize competitions are currently open on Challenge.gov right now. Some competitions will fail to deliver the desired result, because they are poorly designed or marketed. Other prizes will go unclaimed. Not every problem has a quick solution. But government at all levels seems to be getting a good return on the investment in prizes, in part because they tap into the power of crowds to attract unconventional ideas from unexpected sources. As a result, we are likely to see more prize competitions in our future – some of which may be waiting for your own ideas.

 

Beyond Good Intentions: The Business Value of Reducing Solid Waste

By Omar Romero-Hernandez, Tiger Li, Tanya Shiu and Jorge Zapata Barbara.

Each year, the world’s human population generates well over 1 billion tons of solid waste, and that volume is on track to grow 70 percent by 2025. A growing share of that is in plastics and organics, which are recycled much less than paper or glass, and in complex waste such as electronics.
This rising mountain is a major issue for governments around the world, especially for those in developing nations. It’s also a growing concern for corporations, which want to reduce the direct costs of waste and get ahead of ever-tougher government regulation. Many companies also worry about potential damage to their brands and public reputations.

Yet our research shows a startling missed opportunity. Over 90 percent of Fortune 75 companies publish corporate social responsibility reports, and the vast majority of those reports include initiatives to reduce and recycle solid waste. Yet less than one quarter of these firms report to profit directly from those practices.

This doesn’t have to be the case.

We have been studying best practices at the Institute for Business and Social Impact, with funding support from the Sustainable Products and Solutions Program at the Haas School of Business. We find that smart companies are turning waste into sources of new revenue, increased efficiency, and higher profit. Over the longer term, these strategies strengthen a company’s brands and public reputation.

Put simply, investing in waste reduction offers solid returns.

Solid waste trends
We find three key ways that companies can reap direct value from smarter waste management:

*By selling waste during or after the product manufacturing process, producing a new revenue stream;
*By eliminating waste through better designs or leaner operations, which reduces cost.
*By preparing in advance for changes in consumer behavior and regulations, which enhances a company’s brand and reduces the risk of being strait-jacketed into inefficient solutions.

General Motors earns $1 billion a year from recycling and re-use activities, including $20,000 a month just from recycling cardboard. At a factory in Rochester, NY, GM earns 2 cents per pound of cardboard instead of paying 3 cents per pound to dump it at a landfill.

Texas Instruments re-sells more than 20 tons a year of scrap silicon wafers to manufacturers of solar voltaic equipment. Instead of paying for disposal, it generates as much as $3 million a year in additional revenue.

Coca-Cola has saved $180 million over two years – and a substantial amount of post-consumer waste –by reducing the weight of its bottles and cans. It has reduced the weight of its plastic bottles by 25 percent; the weight of its aluminum cans by 30 percent; and the weight of its 8-oz. glass bottles by 50 percent.

But there is more to this story than the direct cost savings or revenue enhancement. Consumers are increasingly interested in sustainability issues, and companies know this. In a recent Nielsen survey of consumers around the world, two-thirds of respondents said they preferred to buy products from companies that give back to society.
More than half said they were willing to pay more for products from companies that do so. Governments, grappling with increasingly scarce landfill space and with public pressure, are imposing stricter regulations. Wealthy nations already have high recycling rates and rising landfill costs, but fast-growing developing nations are now moving in the same direction.

Smart companies are getting out in front of these trends. Apparel manufacturers, led by Patagonia, have joined the Sustainable Apparel Coalition, which quantifies the environmental impact of a product’s materials and packaging. Patagonia went a step further in 2011, launching its “Don’t Buy This Jacket” advertising campaign, which encouraged consumers to repair and re-use their clothing for years or even decades.

All of this constitutes an emerging field of competitive activity. Some strategies contribute immediately to a company’s bottom line. Others contribute to the company’s long-term strength and brand identity.

The key is to recognize that the opportunities are real. Our research indicates that, overall, companies are doing less than they can or should be doing. That may be because investing in leaner production or lighter packaging is still managed as a solid waste affair instead of being part of the firms strategic plan, run by the executive arm of corporate director. In very few occasions, waste management initiatives may be at the cost of not seem to generate any returns (that is very unlikely, over a holistic analysis).

But it’s clear that waste is a resource with hidden value. It’s also clear that waste-reduction expertise is a competitive advantage in its own right. The earlier a company invests in it, the bigger its competitive advantage and the higher those returns will be down the road.


Omar Romero-Hernandez is faculty member on Corporate Sustainability at the Berkeley Haas School of Business, and leader of the Sustainable Product and Solutions Program at the Center for Responsible Business, which is part of the Berkeley-Haas Institute for Business and Social Impact.
Tiger Li is a 2015 MBA candidate at the Berkeley Haas School of Business.
Tanya Shiu is a research data analyst at the Sustainable Product and Solutions Program at the Berkeley Haas Center for Responsible Business.
Jorge Zapata Barbara is a 2014 MBA graduate at the Berkeley Haas School of Business.

How CARE USA Became a Social-Venture Start-Up

By Kristiana Raube

Is it possible to marry the nimbleness and innovation of a social entrepreneur with the reach and experience of a big, established nonprofit institution? Can a seemingly traditional relief charity embrace cutting-edge strategies for tackling hunger and poverty?

The answer is yes. Dr. Helene Gayle, chief executive officer of CARE USA, vividly described how her venerable organization has reinvented itself to meet changing needs.

Helene Gayle, CARE

Delivering the inaugural address in the Institute for Business & Social Impact’s Distinguished Lecture series, Gayle said CARE had no choice but to change. Founded shortly after World War II, initially delivering its famous Care packages of food relief, CARE now operates a wide range of programs in 86 countries.

But times change. Donors were increasingly besieged by appeals from competing causes. Big donations of $150,000 or more were hard to come by. People were still generous about donating for relief from specific disasters, but CARE needed a new model for tackling entrenched hunger and poverty. About 30 percent of CARE’s work is still in emergency response, but more than two-thirds of its money now goes to programs aimed at long-term solutions to poverty.

That’s a more complicated objective. Instead of being a direct provider of services, the organization now works primarily as an enabler. It has substantially reduced its own staff, putting more of its effort into working with other agencies. But its key strength remains its long-standing local presence and deep understanding in countries that need the most help.

Part of the new strategy, Gayle explained, is to focus at the intersection of business and social enterprise. Many corporations see big opportunities in developing nations, such as those in sub-Saharan Africa. They want to “do well by doing good,” both as part of a market-entry strategy and as a way to build long-term goodwill with customers and employees. That’s especially important in countries where the middle class is expanding and where today’s low-income families are likely to have steadily more buying power in decades to come.

The problem, Gayle said, is that companies often have little knowledge about local culture or the economy. CARE, with its deep roots and relationships, helps identify useful projects and find people to carry them out.

In many cases, this is classic social entrepreneurship. In Egypt, CARE teamed up with Danone, the French yoghurt giant, on a project to buy more milk from household farms – most of which are run by women. It was a way to increase farmers’ incomes and help them improve their milk quality – a benefit to Egyptian society as well as to the company. Up to that point, local dairy production had been fragmented and couldn’t deliver the volumes or consistent quality that Danone needed. Part of the problem was that household farmers were being drained by local dealers, who monopolized the trade.

Working with CARE, Danone set up a system of milk-collection centers that provided storage, analysis and accurate weighing, as well as training to boost productivity and quality. By 2012, the first two collection centers were collecting 4.5 million tons of milk per day. Today, Danone gets 20 percent of its dairy needs in Egypt from local household farmers. You can read about the project here.

Danone-Millk-Collection-Communities

Gayle talks about a “golden triangle” between civil society groups, business and the government. Governments can provide initial funding, policy frameworks, and regulation. Nonprofit social enterprises can provide local expertise, mobilize volunteers, and foster distribution networks. For-profit businesses can bring investment, buying power and access to global markets.

Here at the Institute for Business and Social Impact, we focus a lot of attention on innovative social-venture start-ups. Start-ups are inherently innovative and flexible. They tap into the latest strategies, take advantage of new technologies, and leverage new market trends. Berkeley-Haas students have launched more than a few thriving social enterprises, including Fair Trade USA and Revolution Foods.

But social-venture start-ups don’t have scale and infrastructure, which is crucial to having a real impact. Gayle drove home the point that bigger and more established nonprofit institutions, such as CARE, can provide a crucial link. They have decades of on-the-ground knowledge. They have local organizations and well-developed relationships. In a word, they have trust – an often crucial ingredient for any project.

It’s a long way from the days of delivering CARE packages, and proof that social entrepreneurship and enterprises come in all shapes and sizes.

 

Try It, You’ll Like It: Testing Models for Sustainable Business in Asia and Africa

By David I. Levine
A successful salesman in Cambodia, let’s call him Mr. Bun, had a problem: The owner of his favorite noodle shop would not buy his fuel-efficient cookstove, even though the new stove would save the restaurant money on fuel and reduce unhealthy smoke.

“I don’t have the money to buy it,” the shop owner explained, though Mr. Bun suspected that the owner was also concerned the stove might not save much money or might not cook well.

“No problem,” Mr. Bun replied. “Take the stove for a free trial. My two sons and I will come for noodles each morning. Noodles cost you less than the stove saves you each day. That way you can use the money you save on fuel to pay for the stove over time.”

Mr. Bun’s “noodle contract” meant the noodle shop owner could get the efficient stove without needing a big up-front payment. The shop owner also had the choice to stop the free breakfasts if the stove did not meet his needs or if it broke.

The problems this noodle contract solved—lack of funds, uncertainty about product quality, and concerns about durability—apply to many other new products that can help break the cycle of poverty and increase sustainability in low-income communities. Many of these products ought to be good business opportunities, but they require new business models that address social and financial obstacles.

Getting efficient and safe cookstoves into the hands of more cooks is particularly imperative. The World Health Organization estimates that smoke from unsafe stoves kills a million or more children a year in developing countries. In addition, the high fuel use of inefficient traditional stoves increases poverty, deforestation, and global climate change.

With my colleagues in Uganda, I have been testing a novel sales offer that shares the advantages of Mr. Bun’s noodle contract: a free trial, time payments, and the right to return the stove if it does not work. With this sales offer, the customer pays all or most of the cost of the new stove with money she has already saved on fuel. That removes almost all risk in trying and keeping an improved cookstove.
Ugastove for David Levine post
Figure 1: Ugastove charcoal-burning stove

We have run two randomized trials in Kampala, Uganda, of the novel offer with the charcoal-burning Ugastove, which retails for $7-$11 (Figure 1). We then repeated the test with a wood-burning Envirofit stove in rural Uganda.

Only about five percent of people who were offered a traditional cash-and-carry offer bought the new stove – even though we gave them a week to gather funds or check with other family members. In contrast, among the 355 potential customers, or 47 percent of those who received the novel offer in Kampala, accepted the free trial. And among those customers, only 2 percent returned the stove. While some moved away or defaulted, we received over 97 percent of scheduled payments. We also found that the offer increased sales about twice as much as offering just the free trial or just time payments plus the right to return.

Results were just as strong in rural Uganda. As in the city, about 5% of those given the option to purchase for cash (either that day or a week or so later) purchased a stove. In contrast, 57% of attendees at meetings who were offered a free trial followed by rent-to-own purchased a stove. Overall, we received 99% of the funds owed – a rate even higher than in the urban study.

These results are very promising, but not yet a business model. For example, in the urban study we paid college-educated data collectors to drive to a neighborhood and collect a handful of $2 payments.

The rural study came closer to a business model, as we paid our local promoters (who had organized the marketing meetings) a 10% commission to collect the time payments. Even so, it took a lot of management time to encourage them to collect payments from the more distant customers.

There was also an occasional problem where the promoter collected a time payment and then an emergency arose and the promoter spent the money before turning it over to us. Our supervisor was able to retrieve all collected funds, but these few incidents are related to what can be a bigger problem: Those collecting payments have an incentive to claim the customer defaulted, while actually keeping the money.

We could avoid this problem if vendors were the ones making the loans. The problem is that vendors themselves have limited liquidity. We also found that the vendors we worked with did not like giving credit to customers. Although we found that Ugandans are very trustworthy, they are not very trusting.

We have experimented with several strategies to overcome these challenges. If customers make their time payments with mobile money, then vendors do not need to walk to each home to collect payments. And because the payments flow directly to the distributor, there is no risk that the local promoters might keep the payments. We tried selling Ceramaji water filters in rural and peri-urban western Kenya using this sales offer, coupled with time payments paid over M-PESA, Kenya’s mobile-money platform.
Ceramaji filter for David Levine post
Figure 2: Ceramaji filter

M-PESA is a very widespread mobile payments platform in Kenya. One 2011 study found that over 70% of poor people in Kenya had used it.

As we had seen with stoves, the combination of a free trial followed by time payments increased uptake enormously. No households owned a Cera Maji filter at baseline, although our local NGO had been offering it for some time. By the end of the study, 29% of those to whom we offered the free trial, followed by the MPESA time payments plan, had purchased a filter.

Unfortunately, sending a bill by text message and then waiting for mobile payments did not work well. The customers’ mobile phones were often turned off or lacked charge. In other cases, the husband owned the phone and received the text message, while the wife was responsible for the payments. Even when the message got through, these customers were not used to receiving a bill by text message, walking to the nearby store that served as an MPESA agent, depositing a few dollars in payment, and then sending the payment.

Customers eventually paid for almost all the filters, but it required in-person collection in far too many cases to make this business model financially sustainable. It is plausible that collecting time payments by mobile phone will work in less poor communities or in more urban areas with more familiarity with MPESA. In fact, the same offer might work a few years from now in the same kinds of areas that we worked in.

Our results were more encouraging when we sold water filters in Dhaka, Bangladesh (Figure 3). Again, we compared a lump sum payment (with a week’s notice to gather funds) to time payments and a free trial. Unlike with the cookstoves, the free trial was not necessary to increase demand – perhaps because the filter was a visibly attractive consumer item.
water filter for David levine post
Figure 3: Filter we sold in Dhaka, Bangladesh

As with the cookstove, however, the offer of time payments increased demand a lot. At a price of $28 (roughly the market price), for example, demand was 12% with the one-payment offer and almost half (47%) with time payments.
We compared time payments with a related sales offer, layaway plans. In a layaway, consumers make a series of partial payments and receive the filter when they complete the payments. Layaway is attractive to vendors because they are not lending out a product (so they do not face liquidity constraints) and do not need to trust consumers to complete payments.

We had thought consumers would be less attracted to layaway plans because they wouldn’t receive the filter until they completed payments and would have to trust the vendor to actually deliver the filter.

Much to our surprise, however, the layaway offer increased demand just as much as the offer of time payments!

Some of this high demand may be unique to our distribution partner: icddr,b. They run a well-known cholera hospital in Dhaka, which probably increased customers’ trust. It is important to test how well these encouraging results generalize to other products and settings.
We are continuing to explore sales offers and relations with vendors that can overcome liquidity constraints, uncertainty about product quality and other barriers to adopting products that can save lives and break the cycle of poverty.

Based on our results so far, we think this will be a very fruitful area of research.

Pioneering Social Ventures from 50 Nations

The annual Global Social Venture Competition, launched by students at Berkeley-Haas in 1999 and still run by students today, attracted 575 entries from 50 countries this year. The winners, determined in the finals here on April 10 and 11, shared $55,000 in prize money.

Sampurnearth GSVC winner

What was striking this year was how many of the start-ups were already up and running, not simply business plans. The winners included a Mumbai-based waste-to-energy venture that has already built a biogas facility; a London-based firm that produces low-cost water sensors for aqua-farmers in Asia; and a Kenyan venture that sells products to drastically reduce the cost of bicycle repairs.
“Today, it feels like there’s a much broader acceptance of mission-driven businesses, because there’s a recognition that mission-driven businesses often have very valuable brands,” said Kirsten Saenz Tobey, a Haas MBA and co-founder of Revolution Foods, which won the GSVC in 2006. “There’s been a consumer shift in the tide, but also a major shift in capital.”
The Winners:

First place ($25,000): Sampurn(e)arth, India, which develops end-to-end, environmentally friendly and profitable strategies for collecting and recycling solid waste.

Sampurnearth GSVC winner
Second place ($15,000): Odyssey Sensors, United Kingdom, which developed low-cost water sensors to boost yields for Southeast Asian shrimp farmers and other aquaculture.

gsvc_odysseysensores
Third place: ($7,500): Baisikeli Ugunduzi, Kenya, which designed and builds bicycle products—including a low-cost solid tire—that drastically reduce repair costs.

gsvc_ugunduzi
Who made it happen: Berkeley-Haas students—some 29 organizers, encompassing 11 percent of MBA candidates, with assistance from the Lester Center for Entrepreneurship. The co-chairs were Ali Kelley, Khadar Ahmed, and Christine Hamann, all MBA 15. The lead sponsors included Dow Chemical, Intel, Gray Ghost Ventures, and Hanson Bridgett. Nine universities around the world collected and vetted proposals.
The challenge: Social entrepreneurs presented business plans for path-bending new strategies and products that promise to promote social and environmental stability—especially in the world’s poorest communities. Winning plans are chosen on the basis of their innovative boldness; potential social or environmental impact; practicality and scalability.
The race: Teams went through three rounds of competition: an executive summary round, regional competitions hosted by nine universities; and the final judging hosted at Berkeley-Haas. Teams received mentoring and guidance along the way on how to strengthen and sharpen their plans. Eighteen teams reached the final round, many of them traveling to Berkeley from Europe, Asia, Latin America and Africa.
What made them winners:

Sampurn(e)arth, founded by three recent graduates of Mumbai’s Tata Institute of Social Sciences, impressed judges by their creative and localized strategies to make better use of municipal waste. The company trains and employs waste-pickers to collect and recycle waste, and develops local facilities for biogas production, composting and recycling.  The judges were impressed by the company’s ability to re-think a growing global problem from the ground up.

Odyssey Sensors impressed judges by their identification of very low-cost technology that both increases the yields of impoverished shrimp farmers in Bangladesh and spurs healthier environmental practices. The firm has also developed a low-cost sensor to monitor trough water levels in remote livestock farms.

Baisikeli Ugunduzi charmed judges and attendees with their line of extremely simple-yet-valuable line of bicycle component products. Bicycles are essential pieces of income-earning transportation equipment to many people in Kenya, but tire repair costs and downtime can reduce the income of people who rely on bicycles by 25 percent. Baisikeli developed an inexpensive solid tire, made from recycled materials, that never goes flat. It also developed a novel interior liner that reduces punctures in conventional tires, and a cheap, fast tire-repair compound.
Memorable moment: Two of the finalists—LegWorks of the United States and SwissLeg of Switzerland—both presented potentially revolutionary new artificial joints for leg amputees in the world’s poorest nations. LegWorks presented a functioning artificial knee that can be manufactured for only $100. Co-founder Brandon Burke, an amputee himself, was wearing one of the knees during the team’s presentation. SwissLeg unveiled a low-cost prosthetic lower limbs. Before the finals were over, the two teams were talking about areas of possible collaboration.
The Haas Takeaway: Once again, students did the vast bulk of preparing and organizing a competition that attracted hundreds of attendees and many leading social entrepreneurs. The final day included breakout sessions on the nuts and bolts of launching social ventures, as well as keynote speeches by two Berkeley MBA’s who did it themselves: Priya Haji, co-founder and CEO of SaveUp; and Kirsten Saenz Tobey, founder and chief impact officer of Revolution Foods. It was an organizational effort that began months ago but that Berkeley-Haas students have honed to a science. As in past years, second-year students show first-year students the ropes, but first-year students run the actual planning and preparation. “It’s like running a small organization with a very targeted objective every year,” said Christine Hamann.

 

The White House Embraces a Venture Capital Strategy to Social Innovation

It doesn’t get much attention, but the Obama administration has embraced a venture-capital approach for catalyzing innovative solutions to urgent social problems.

Laura Tyson and Jonathan Greenblatt, director of the White House’s Office of Social Innovation and Civic Participation, outline the approach in a column for the New York Times Economix blog.

Spending for non-defense programs, from early childhood education and workforce re-training to revitalizating low-income communities, is lower in real terms than it was before the Great Recession and is on track to hit a record low as a share of the nation’s gross domestic product.
That puts the federal government under intense pressure to focus scarce resources on the most cost-effective strategies possible. One way to do that is through a form of social-impact investing, in which the federal government partners with the private sector and the social sector to finance and evaluate promising new strategies. The strategies that get the best results get more financing, while those that are ineffective are cut off.
Tyson and Greenblatt describe one of the administration’s first efforts of this sort, the Social Innovation Fund:

It operates much like a fund of funds…[that] makes grants to social sector intermediaries like foundations, nonprofits and social enterprises on a competitive basis. It requires up to a three-to-one match of private money with government dollars…. Funding over the life of a grant in large part depends on the ability of the intermediary to expand, evaluate and improve these programs. This conditional approach is similar to that used by venture capitalists who invest in early rounds of a start-up, maintaining funding in further rounds only if the start-up grows and demonstrates success.

Thus far, the fund has awarded more than $175 million in grants and catalyzed more than $420 million in private capital. More than 200 organizations have received money.
On a second front, the Small Business Administration operates the $1 billion Small Business Innovation Company Impact Fund. Created in 2010, this fund private up to a two-to-one match on private capital for ventures that have both financial and social objectives. Its focus is on education and clean-energy projects.
President Obama has also proposing a $300 million “Pay for Success Incentive Fund,” operated by the Treasury Department, that would provide matching federal money for innovative new state and local programs.
This is more nimble and more modest approach to federal leadership. The government becomes a catalyst rather than a builder. It fosters experimentation, reflecting a recognition that non one has a monopoly on good ideas and that innovation never stops.   The government uses its scarce capital to spur investment from the private sector and philanthropic sources, and it creates a results-based setting in which the best new solutions rise to the top.