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Episode
99

Neil Malhotra

Edith M. Cornell Professor of Political Economy

Ep
99

The Role of Social Innovation in the 21st Century - Neil Malhotra of Stanford Graduate School of Business

Feb 22, 2022
With
Neil Malhotra
44:28

Social Innovation and Social Entrepreneurship

Social innovation is all about designing and applying solutions to improve people’s lives, and this is something Stanford Political Economy professor, Neil Malhotra, teaches and knows extremely well. As the Director of the Graduate School of Business' Center for Social Innovation, Neil begins with an introduction of what they do at Stanford in terms of social innovation and Stanford’s connection with Silicon Valley as the startup scene. 


Neil talks about a book he co-authored with his colleagues entitled Frontiers in Social Innovation. He tells us what inspired them to write this book and the valuable insights that they share with their readers. Whether you’re a seasoned businessperson or early stage entrepreneur, Neil and his co-authors provide advice that will equip you with the skills and tools you need to create and scale your impact-driven business. 


Neil explains how you can carry out impact measurement in the right way, analyzing the correct metrics, and he also highlights the fields are already oversaturated with businesses and which ones need more attention. One important concept he talks about is the theory of change and how to apply it so that your business model translates into impact. There are some nuggets of wisdom in this episode, so listen to find out more.


Neil’s key lessons and quotes from this episode were:

  • “Having a good theory of change is a really good starting point.” (14:40)
  • “Don't be intimidated. Don't immediately go to lean approaches. A lot of these more rigorous approaches are in the hands of your toolkit that you might not realize.” (17:03)
  • “The more skepticism you can decrease, it's not only the right thing to do, but it's going to be the most effective in growing your enterprise.” (24:38)
  • “If there's not a trade-off, then there's no such thing as social entrepreneurship. It's just entrepreneurship. There is no such thing as impact investing. It's just investing.” (33:51)


In this episode, we also talked about:

  • Neil’s book Frontiers in Social Innovation (5:46)
  • Neil’s advice on how to effectively measure impact (14:28)
  • Standardization in the impact space (26:04)
  • What to do and what not to do when creating an impact-driven business (30:22)
  • The future of social innovation according to Neil (40:11)

Transcript of the episode

Maiko Schaffrath  00:00

This episode is brought to you by Content Multiplied. It's not a secret anymore that content creation is really important, but very few people talk about the importance of consistency, and I myself have really struggled with that consistency. And for that reason, I looked for a solution, and Content Multiplied was a really good one for me. Since using them, I've been able to focus on what I enjoy the most which is recording podcasts while Mhyla and her team are really taking care of everything else. Whether you have a podcast, you're holding keynote speeches, you're doing a YouTube series, you're writing a blog, a newsletter, a book, the Content Multiplied team can really take whatever you're producing and repurpose it into a series of micro content. And suddenly, you have dozens and dozens of pieces that can be shared for you, and Content Multiplied even takes care of that for you. Unlock your content superpower with Content Multiplied and go to contentmultiplied.com today. That's contentmultiplied.com. Thanks, Mhyla, and let's go into the show. You are listening to Impact Hustlers, and I am your host, Maiko Schaffrath. I have made it my mission to inspire the next generation of entrepreneurs to solve some of the world's biggest social and environmental problems. And for this reason, I am speaking to some of the best entrepreneurs out there who are solving problems such as food waste, climate change, poverty, and homelessness. My goal is that Impact Hustlers will inspire you, either by starting an impact business yourself, by joining the team of one, or by taking a small step, whatever that may be, towards being part of the solution to the world's biggest problems. In today's episode, I speak to Neil Malhotra, Stanford Political Economy professor and the Director of the Graduate School of Business' Center for Social Innovation. Neil just published a book named Frontiers in Social Innovation with Harvard Business Review Press, and the book serves as a really comprehensive and good guide for both experienced and first-time entrepreneurs, especially social entrepreneurs, founders that are solving the world's biggest social and environmental problems. It combines a range of insights from researchers and practitioners across impact measurement, but also measurements like design thinking and some of the biggest challenges in social entrepreneurship nowadays. I'm really excited to have Neil on the show and to share more about the book and your work as well.


Neil Malhotra  02:45

Thank you so much for having me. This is a pleasure.


Maiko Schaffrath  02:48

Thanks so much. I was really excited to have you on. I talk, obviously, to a lot of startup founders. I think sometimes bridging the gap between different players in society, especially between academia and startup founders, especially in the social impact space is so important. I really enjoyed reading your book, not just written by you, but by loads of interesting contributors from Stanford. I'm really interested in extracting some of the lessons that you share in the book for our listeners today and get them to buy the book and learn more. Maybe before we do that, though, I'd love to jump into your personal journey. So, what got you to be a professor at Stanford researching and teaching social innovation? What drives you and why are you doing what you do?


Neil Malhotra  03:45

Sure. So, my background is that I'm a political scientist by training, and much of my research centers around the relationship between business and society, business and government, business and politics. Obviously, social innovation and social entrepreneurship are really at the center of those issues as well, how business can improve society and account of the needs of stakeholders. Because of my research background, I was appointed to be Director of the Center for Social Innovation at Stanford. For people that don't know, this is a center whose history doesn't even stretch back to its founding in the 1990s, but really goes back to the 1960s with Dean Arjay Miller, who used to be the president of Ford, but he was one of the first people to really talk about social responsibility and stakeholder capitalism very much earlier before those were terms in vogue. The center has created a lot of thought leadership in this space. It founded the Stanford Social Innovation Review, which is one of the preeminent journals and publications people in the industry read. Directing the curriculum, we had been getting emails maybe multiple times per month. Someone says, "Can you help my startup? What can we learn from this Center for Social Innovation? Can you come and give a talk and we take coursework?," and we just didn't have the scale to meet all of these needs. But I've always been a big believer that education should not be confined to the ivory tower, that ideas should be spread and shared and that they're goods that should be not proprietary, but open source. And so, part of the idea of this book is to share our learnings, because there seemed to be a lot of demand for it, but we didn't have really a mechanism to scale and spread these ideas.


Maiko Schaffrath  05:29

Amazing. It's a great way to spread those ideas. So, give us a brief summary on some of the key lessons that you're trying to share with the book. What is it that you're trying to get across to entrepreneurs?


Neil Malhotra  05:46

Sure. So, the book has four sections, and I think that all four sections apply to both seasoned entrepreneurs as well as young students. The nice thing about the book is that you can pick and choose what sections are most relevant to you. The first section is really on leadership, and it talks about the unique leadership skills people in the social sector have, which are very distinct from a pure for-profit, market driven business. The second section is about impact measurement, and I think this is really important because a lot of sources of capital, like philanthropic foundations as well as impact investors, this is a key criterion they use to select investments. So, figuring out ways to measure impact in your organization is quite important. And then, there are other sections basically on educational models for training people and incubating social entrepreneurship, basically how we teach this at Stanford and getting you under the hood. And then, the final section applies the learnings and concepts into specific areas like healthcare, environment, education.


Maiko Schaffrath  06:55

Great. We'll dive deeper into that in a second. One of the thoughts I had when I was preparing [for] this as well, in your introduction to the book, you write about how far social innovation has come where in the past, it was seen to be the thing of governments and NGOs, and business a separate thing. At best, businesses may donate to those NGOs a little bit, and that's about it. Obviously, we see this massive shift where there's this movement of impact-driven companies being started, a lot of them collaborating with government, with NGOs, and a lot of collaboration happening. Stanford itself, I'm really keen to understand that, but Stanford itself is really at the heart of Silicon Valley, and there's a revolving door between the tech startup scene and Stanford in terms of like for-profit businesses, loads of startups started there. What has the role of social innovation been? Has that usually been something that maybe was quite ignored by a lot of people in Silicon Valley for a while and has just only recently been picked up more? Was the social innovation work always tucked in the corner somewhere and now, people are slowly much more interested in that? Can you tell us a bit about the dynamics in Silicon Valley and at Stanford on that topic?


Neil Malhotra  08:28

I think it's a really interesting question. I think it's complicated. The history of Silicon Valley and Stanford are really intertwined, and I think you can't really say what caused what, so did Silicon Valley cause Stanford to be a great university or did Stanford cause Silicon Valley to be a center? I think they had a mutual relationship. I don't think the people back then in the 1960s thought of it as social innovation. They thought of it is discovery. But if you really think about one of the few businesses or business innovations that has had the greatest impact socially, I mean, the semiconductor, the amount of GDP and well-being it's created through its invention, I don't think there's been anything really- maybe the printing press. There [are] very select inventions that have done that. But I think if you talk to young people today, they more explicitly want to embed social innovation into their careers. But at the same time, some of them want to be nonprofit leaders, but that's not really how they view it. They view the private sector as the engine for making society a better place. And so, they really want to have that stakeholder mentality as they're building their for-profit careers. I would also note that even though I think a lot of your audience is entrepreneurs, I think that Stanford and the CSI and the book really try to talk about intrapreneurship as well. What I mean by that are people who work for large companies, Fortune 500 companies, but try to innovate within those organizations to make social change. And so, there [are] just many examples of that, where people have been intrapreneurs. Just a couple of examples; with eBay, a lot of the young people there push them to have better carbon neutrality for their data centers. In Alaska Airlines, one of the young executives pushed them to improve gender equity by allowing new mothers to keep their frequent flyer miles on leave and hold and their status. I'm saying there's a lot of creative ways that people can innovate outside of startups.


Maiko Schaffrath  10:33

I'd love to talk about that in a little bit. I think my personal journey has been interesting, because even as a student in school, I was working as a charity fundraiser and worked with different charities throughout that time. I actually started politics initially and was a lot in that space as well, and I grew really frustrated a lot with the state of politics and also charities in terms of bringing about change. I was probably guilty of going to the other extreme from thinking, "Charities are the way to go," to thinking, "Nobody needs charities anymore. We have now social entrepreneurs, and who cares about charities and governments? It's going to be the entrepreneurs that make the change?" Do you think that's happening at the moment? Or do you think there's a need to argue for another way of collaboration between those different parties?


Neil Malhotra  11:27

Well, I just think those extreme views are just not correct, and some of the chapters in the book speak about this. For example, nonprofits, I think, and foundations are still going to be a major power player in this space, partly because of all of the preferential tax treatment they have in certain economies, the United States, but also in other countries as well, and the fact that a lot of wealth is concentrated in these foundations, and so they still are the gatekeepers. I just think that the Bill and Melinda Gates Foundation and things like that are still going to be driving a lot of what happens in social innovation. Just look at, for example, the Bezos family, both parts of that family, their money, and I would say on the government front, there's a chapter that explained it's very hard to scale social innovation. Unlike a lot of pure for-profit, which you have this exponential growth in scaling, a lot of social innovations are very difficult, because of the nature of the product and service, the customer base to really scale. And so, governments are oftentimes really a mechanism to scale and to have those public private partnerships. So, I think the view that, "Oh, we don't need nonprofits, foundations, governments anymore. Everything can be done without partnership," is probably not realistic.


Maiko Schaffrath  12:52

I was expecting you to say that, and I do believe that as well. I saw the quote of Chris Sacca the other day on Twitter where he posted something along those lines like, "Government's not going to get it done. NGOs [are] not going to get it done. Let's fund entrepreneurs to solve all these problems." I mean, there's some truth to it, but I think the answer is collaboration between those parties. So, yeah, absolutely agree with that. Let's move a little bit into another theme of the book, which is impact measurement and make it really practical for entrepreneurs. You talk about how there's this whole range of impact measurement from the pure academic way of doing it, randomized control trials, the scientific method, really applying diligently the scientific method to how you measure your impact. And then, there [are] startups that apply it in a very lean way, and most startups are reliant on applying impact measurement in a very, very lean way. Then, there [are] methods like I mentioned before, I recorded an episode with Sir Ronald Cohen. He's advocating a lot for impact-weighted accounts, which is being developed at Harvard, which is another method, but also requires quite a lot of effort to actually pull this off. So, what is it that you can recommend to early stage entrepreneurs that want to have a good, solid, non-greenwashing way of measuring their impact? What would you recommend to them in terms of lessons that they can take when they build a startup?


Neil Malhotra  14:28

That's a great question, and it's very complicated, so just bear with me. There [are] several chapters in the book that speak to this, including impact-weighted accounting. I think one thing that book really argues is having a good theory of change is a really good starting point, because unless you really know the differences between your outcomes and outputs, what your key performance indicators are, what are you actually measuring? An example is in the EdTech space, you can claim you're having a big impact, because a lot of students are using your product or a lot of students are spending a lot of time on it, but that actually doesn't mean you're educating them. So, what is the right impact metric in that space? Is it test scores? Some people criticize those. But critically thinking, what are the key metrics that actually speak to your theory of change is very key. Now, on the point about randomized controlled trials, I actually think, personally, it's quite overblown how expensive they are, and I actually think it is a tool that early stage entrepreneurs can use that does not necessarily mean you move automatically to a lean data approach. What do I mean by that? I think a lot of times, entrepreneurs get very scared, because they see these very famous people like Jay Powell spending millions of dollars on these RCTs, and they say, "I don't have seven figures to spend on this." Well, to be honest, any time you have any resource constraints so that your product or service cannot be rolled out to everybody, well, one way is to randomly allocate, and then you've naturally created that data that's embedded in your organization. In terms of analyzing the data, there [are] many academics that will analyze your data for free as long as they can publish a paper out of it. So, there's basically a whole army of free consultants available to early stage startups. Just an example, I collaborated with a very early stage startup that was trying to improve healthy eating and less meat consumption. We basically were very easily able to embed an RCT in what they were already doing. I think there's a lot of other impact measurement techniques, which rely on data that the companies already collected. An example is Teach For America. They've done expensive RCTs, but they've also done studies where they have data they've already collected and used, for example, arbitrary cut-offs to approximate random assignment, and gotten very similar results that you would get out of an RCT. So, I would just encourage people. Don't be intimidated. Don't immediately go to lean approaches. A lot of these more rigorous approaches are in the hands of your toolkit that you might not realize.


Maiko Schaffrath  17:14

And what would you suggest to actually make it happen? Do you suggest startups to seek an academic partner to conduct those? How should entrepreneurs go about this practically?


Neil Malhotra  17:26

I think that's probably the easiest thing to do, if you just try to Google search who's working on your topic, so if you actually have a social mission. Is your mission to increase healthy eating? Reduce diabetes? Is it to improve education of poor students? Is it to reduce inefficient electricity use? And, find the experts in that, and they're just hungry for data, so if you say, "Well, we have a platform where we're collecting the data anyway," most of these people will be more than happy to work with you for free.


Maiko Schaffrath  18:02

Wow. That's really good advice. You mentioned the theory of change was also one of the concepts you elaborate on, and that's been quite popular actually in the field, but I actually see still a lot of impact startups not talking much about it, at least not publicly. Again, what would be a lean way for impact startups to get started with really thinking about a theory of change and how should they be thinking about that from day one?


Neil Malhotra  18:34

I think it's important, and part of the reason is that even if you don't think it's important, a lot of important people do, including the investor class and investor base. It is something I've noticed that comes up a lot in pitch meetings. Both the foundations and impact investors, they want to know what your theory of change is, because it signals that you've really thought about how the business model translates into the social impact. So, as part of the book, we have online teaching assets. It basically has web assets that help guide you through constructing a theory of change and have templates to do it. And so, I would just encourage people to use those. It's not a huge time investment, and it's just a great way to get started to say, "Okay, if I actually had to write down what my theory of change was in a structured way, would I be able to do it? Do I have a full model of how my business is relating to stakeholders? Am I actually going to achieve behavior change that might be required? How would I measure that?," all those questions.


Maiko Schaffrath  19:39

And how does that then translate to the impact measurement from, if I've got my theory of change, translating that into, how do I actually make sure that I'm following it?


Neil Malhotra  19:48

Yeah, so that's the tricky thing, and I would say that a lot fewer people are doing that. I think many people have written a theory of change. Now, actually seeing, "Is it more than a theory?," is the big question. One key thing is that it helps really distinguish the outputs and the outcomes. So, if you have an RCT or any other measurement device, what the theory of change says is, are you only measuring the outputs or are you also measuring the outcomes? And how would you actually measure those outcomes in a realistic way? So, if you go back to my EdTech example, it's really easy to measure how many students are using your product. But if you actually want to say, did these people's lives improve, are you really going to run a 15-year longitudinal study? No, that's not realistic, either. So, it actually is a way to balance. If you think of a graph with two dimensions, one is, what is the relevance of the metric for impact and how easy it is to measure, there's going to be some frontier there, that clearly, there's going to be important metrics that we are not going to be able to measure in a reasonable amount of time. On the other hand, there's going to be very simple metrics to collect that actually don't tell you anything about your social impact. So, there's going to be this middle ground, that's going to be important. And so, on the EdTech space, for example, a lot of times, assessment is built into the app, so they're not waiting for some assessment that a school agency is doing. They're building in assessments into their app and can see whether the students are learning, they're actually improving, they're engaged, etc. And so, it's going to be costly for a social startup or enterprise to do that, but if you actually care about social impact, and in my belief, it actually will help you grow in the long run, because if you can take data, you're going to get more and more capital to grow. If you can say, "Okay, we actually have proof beyond just intuition or extremely lean metrics," I think that is going to be convincing to the investing community.


Maiko Schaffrath  22:01

That's great. How do you actually hold yourself to account to those metrics that you're setting out to solve? Obviously, that goes almost into impact-weighted accounts or impact reporting. How do you actually communicate your impact in a meaningful way and hold yourself to account both publicly but also maybe in the internal governance structures with your Board and things like that?


Neil Malhotra  22:27

Yeah, I think that's really up to the board. To be honest, I think boards have to really do a better job of that. But part of it is to say in advance what your metrics are going to be that get reported. Because what I've noticed too often is that when they write an impact report at the end of the year, they only report the metrics that make them look good. From a language of RCTs, there's this concept of pre-registration. So, in advance of seeing your data, you say, "These are what the tables are going to look like." The advice I would give you, if you really want to do it honestly, is to write the impact report in January, but don't have any numbers. And then, in December, you just fill the numbers in. Because otherwise, it's going to be very tempting to only report the numbers which make your enterprise look good.


Maiko Schaffrath  23:18

So, it really requires that rigor. I've seen had a chat with some investors, and I think some of maybe not the best startups out there sometimes do it, where they send out investor updates and focus always on the metric that is currently performing the best, while ignoring the ones that are not doing so well, so really going with the flow, always showing positive stuff, but wiping away to stuff that is maybe not as great. And I think this methodology helps with that, like setting out from the beginning, "These are the metrics we're optimizing for," and yeah, writing the report almost and filling it with numbers at the end.


Neil Malhotra  23:57

And I would say this is not just the rigorous thing to do. I actually think it's going to be the effective thing to do. Because if you can tell funders, or foundations, or customers, or the world, the media that this is what your procedure is, people will have more faith, because they say, "Hey, we tied our hands. This is what we believe the metrics were important, and we're reporting them transparently." And so, then, I think even if some of the metrics don't look great, I think people forgive it more, because they say, "Okay, well, this was a transparent process." As opposed to the current metrics, I think people do look at them skeptically. So, the more skepticism you can decrease, it's not only the right thing to do, but it's going to be the most effective in growing your enterprise.


Maiko Schaffrath  24:45

Just a really quick break from this episode to let you know a little bit more about our podcast producer and content agency, Content Multiplied. With all the moving pieces of a business, you can't be stuck managing and creating new content all the time. That's why I've started using Mhyla and her team at Content Multiplied. It's really an all-in-one content management and repurposing solution that can handle all your content needs. Visit them at contentmultiplied.com today. Contentmultiplied.com. Okay, let's get back to the episode. Great. Got it. Do you see some best practices or patterns emerge on standardization? Sometimes, people that are maybe new to this space, they ask me, "How do you measure impact?," and I always feel like it really depends a lot. There [are] some best practices that you've just shared, but impact could be so many different things. It's impossible to have one metric for all the impact startups and measure them by that. I'd love to hear from you, do see frameworks or reporting standards or certain models evolve that seem to become the gold standard that people should follow?


Neil Malhotra  26:04

I think there's so much heterogeneity in the space. What I'll mention is right now, some concepts people have talked about, and nothing I personally agree with them, because there's a lot of debate around them, but I think part of the book is not to put the thumb on the scale and say, "This is the right thing to do," which is expose people. So, one concept that the book talks about, which I think is very controversial, is this idea of additionality. It was Paul Brass and his co-authors, who's one of the authors of the book and introduced this idea, basically, the concept is that to define impact, it's not enough to say, "We sequestered this much carbon," but to say, "This is what the amount of carbon sequestration that goes above and beyond what the market economy would do anyway." That's what his definition is. Because otherwise, there's no difference between either impact investing and investing, or business and impact business. So, an example would be if a carbon-neutral data center was the cheapest thing anyway, the concept of additionality would say that's zero impact. Now, I don't know if I agree with that, but that's just something to think about. It also comes up in microfinance a lot. So, if this was a loan a standard commercial bank would have made anyway, should you be getting impact credit for that loan? And so, the concept of additionality would say no, whereas other people would say, for example, in the microfinance space, if you said, "We moved these many people out of poverty," or, "We allocated this amount of capital to people who make below the poverty level," those would be relevant measures of impact. But there are some microfinance organizations that say, "Just because you make a loan to a poor person doesn't mean that's impact, because if that person had a very high credit rating, they may have that access to that capital anyway." I'm not taking a stand on that, but these are some of the debates that people have around impact measurement.


Maiko Schaffrath  28:10

Got it. And what do you think is a practical way for entrepreneurs to navigate that? Should they be really diving deep into these debates or is there an easy way for them to get started with something?


Neil Malhotra  28:23

Well, I think the nice thing about the book is that you don't have to be an expert. I think it nicely just exposes you to the vocabulary, so that if these issues come up in your pitch meetings, that you've thought about them and that you're willing to defend what your personal view is. I'm just a big believer that like people need to develop their own personal views, because this is very different than the pure for-profit sector. In pure for-profit, investing is just a very simple frontier of risk and return. Not simple. It's obviously very complex, but there's two dimensions. Ince you add this third dimension of impact, it gets really, really complicated. For microfinance, I can construct a loan portfolio, which maximizes risk and return right on that frontier, and I can make a claim, "Well, 20% of people were poor who got this, so I'm making an impact on those people," and that's an argument I have to make. But another person could say, "Hey, you should have compromised on return to increase the percentage of poor people getting the loans to 50%." There's no right answer to that, but I think understanding risk-return impact frontier, additionality, these concepts, will give people the tools that they can argue that they actually are making an impact or that they balanced returns on impact in the right way.


Maiko Schaffrath  29:44

There's actually a chapter as well talking about best practices of social innovation leaders, and I think even broader than that, I'd love you to share maybe some of the lessons learned from some of the best social innovation leaders, especially social impact startups out there that first-time founders can adopt. What are the best practices, not just in terms of impact measurement, but in terms of generally setting up an impactful company? And then, what are the mistakes to avoid and the traps that people go into very quickly?


Neil Malhotra  30:22

Yeah, that's a great question. That section of the book is important, because there's a lot of leadership content that is really geared towards for-profit entrepreneurship and not really specific to the social sector. So, that sector talks about traits that are unique to social sector entrepreneurs. One is resilience, it talks a lot about that, because the capital market for social enterprises is very different than for traditional for-profit businesses. It's very hard to get venture capital funding. Now, people do get it, but it's very hard, because venture capital is looking for unicorns, because that's their business model, "We have to invest in 50 failures to get one unicorn." And so, you don't have any claim to be a unicorn company. If your market is poor students in your city, or the market is poor farmers in Africa, that's not a unicorn market, and it just takes a lot of resilience to not have easy access to capital, so to be able to fundraise, etc. I would also say another important leadership skill that we talked about in the book is adaptability which is how you mix earned revenue and philanthropic capital. Increasingly, I think the most successful leaders understand that earned revenue is really important, not only because it results in sustainability, but also because they spend a lot less time going out in fundraising. So, if you just look at the data and how much time is spent, if you have like no earned revenue, you just spend a lot less time on your business. You're just fundraising a lot from capital sources. Now, if you talk about the downsides, I would say that a potential risk area is this mission creep or mission drift. A lot of people talk about, well, donors can influence organizations in the wrong way, but one thing the book points out is that earned revenue can do the same thing. So, if you're obsessed with earned revenue, is that going to lead you to be diversion from your mission? And what are you going to do to keep yourself accountable to make sure that you're not sacrificing mission goals for earned revenue? I would say that impact investors oftentimes can like lead to mission drift too or board members if they put pressure in some areas on earned revenue that can compromise the mission.


Maiko Schaffrath  32:54

Sir Ronald Cohen talks about how it's important to really inherently link the profit into impact and make impact profitable, and you're just talked about sometimes, there is a challenge of trading off between profit and impact, where if you focus on just the revenue, you may suddenly forget about your impact metrics. I noticed this is a pretty common discussion on people going into the space or profit versus impact, is it a trade-off, or is it possible to combine everything, but what's your view on that? What's the ultimate goal for a founder? What should they be aspiring to do and how should they think in profit versus impact?


Neil Malhotra  33:46

So, in Paul Brest's view, which I generally share, is that there is, of course, a trade-off. And if there's not a trade-off, then there's no such thing as social entrepreneurship. It's just entrepreneurship. There is no such thing as impact investing. It's just investing. The whole reason we have these concepts is to understand how to manage this trade-off. There's not a right or wrong way, because there's several issues that matter to a lot of people. I'll give you an example from microfinance organization I studied. This organization, there [are] many different possible ways their loan portfolio could have made social impact. One is on poverty alleviation. You basically give the loans to the poorest people. So, you can have a loan portfolio and you could calculate how many of these people were the poorest people. The second way you could do it is environmental impact, that you're investing in good environmental practices that reduce erosion, runoff, things like that, not using pesticides. And then, a third could be gender equity. You could say, one point of microfinance system is maybe elevate women in the society, and so what percentage of our loans are going to men and women? And then, there's the financial trade-off. To claim you could just maximize everything is ludicrous. I actually teach an exercise using the loan portfolio in my class to show that's impossible using a real-life possible loan portfolio. So, if you try to maximize environmental impact, you could have 15% of your creditors being women. Is that good? If you maximize financial return, you have only 10% of your people in the lowest poverty level. Is that good? So, really thoughtful people confront trade-offs. They don't just say they don't exist.


Maiko Schaffrath  35:41

Hmm. And do you have some examples for businesses that do that particularly well? Because there are already some. For a lot of mainstream entrepreneurs, they look up to Amazon and Jeff Bezos, and to Google founders, and Elon Musk. Elon Musk may be in that space, but [are] there some role models or examples of companies that do this particularly well?


Neil Malhotra  36:04

I think the ones that have scaled really well or just ones to look out for, I mean, there's a company that was founded at Stanford, d.light, which did African solar, and I think that was a really nice one, because it helped the economics of the people in the region, the safety of the people, and the environmental emissions. Kiva, I've always admired that company a lot, just because of how much it scales. So many of these nonprofits are like, "Oh, okay, we could reach 100 homeless people," "We did one shelter," or, "We can do one charter school," and they're just so difficult to scale. I mean, Kiva is just very magnificent, because of just how much it scales and having that platform. So, yeah, I think they're definitely role models, and I think part of these great role models is that they really thought about, "How do I scale impact, not just scale my organization?"


Maiko Schaffrath  37:06

Great. Yeah. We had Jessica Jackley, the founder of Kiva, on the podcast a while ago, and she's working on a new startup in the education and charity space actually right now, which is super exciting, and I think it's a great role model, definitely in terms of Kiva also just really scaling this space of microloans and access to capital. Absolutely amazing. One more theme that I'm excited to talk about or I'm interested to talk about a bit more is, do you feel like there [are] certain sectors within social entrepreneurship that are overhyped, like certain ideas or problems that loads of entrepreneurs seem to want to solve, but are actually maybe not that impactful? Versus what are underhyped spaces and sectors within social entrepreneurship? Do you see some patterns where everybody seems to want to solve this one problem, but there's this obvious one that nobody really has interest in? Do you see that?


Neil Malhotra  38:11

Yeah, I look at the US a lot and developed economies. I think developing economies could be very different, so I just want to caveat that, but a lot of this is, where in the chain of someone's life does something go wrong? And so, I actually think a very overhyped sector that a lot of money has been poured into, including from Amazon, is EdTech. I think a lot of these things are on the margin. The impact is not measured all that well, and they seem to not address the real systematic issues in education. Whereas I think things that are actually underinvested is in healthcare. I actually think more should be done in that space, and I think a lot of our problems with education, poverty, etc., stem through healthcare issues, especially early in someone's life. And I think that another very underinvested area is housing, because I think that is one of the early aspects of where someone's life can go wrong if they don't have stable housing. That's just my personal belie, but that's what I've noticed.


Maiko Schaffrath  39:32

Starting with the basic needs in Maslow's pyramid of hierarchy of needs, which will unlock more levels for people, right?


Neil Malhotra  39:43

I think it's a really nice way to put it. I think there's underinvestments in the base of the Maslow hierarchy and overinvestment in some of the higher parts of the pyramid.


Maiko Schaffrath  39:53

Got it. Amazing. What do you think does the future hold for social innovation and social entrepreneurship? First of all, where do you think things are moving? And where would you like things to move? Is everything moving in the right direction? Where are we going in the next, let's say, 10 years?


Neil Malhotra  40:11

Well, I think, one, as we talk about in the book, this book tries to respond- I always pronounce his name wrong, Anand Girhousen's book. It's a very strong polemic book, which argues that a lot of people in this space, social innovation, the philanthropist, the impact investors, it's basically saying they're doing the wrong thing, that they're basically using this as a fig leaf, to not have the structural reforms needed to really address all these social problems, and I would say that's too extreme. That's an either/or mentality of the world, but I do agree that social innovators have to embed themselves and connect to the future changes in regulation. So, I would say across the world, what governments need to do is, how do we set up regulations in a way that work really nicely with social entrepreneurs? So, you see some of that already with different organizational forms like B Corporations, but I actually think different tax treatments for social companies, non-social companies, is the right approach. I would say a good future is the one where regulation actually embraces stakeholder capitalism, as opposed to go against it. I'll give you examples. Right now, in the US at least, pensions are very heavily regulated. And so, they're regulated by something called ERISA Rules, and the ERISA Rules basically make it impossible for a pension fund to invest in impact investing. Now, there's been some administrations like the Obama administration had a rule that made that easier. Trump reversed that. But that's something that government can do to help, which is, if people in pensions want to invest their money in good causes, and if you actually interview a lot of these pension holders, like retired teachers, retired fire/police officers, things like that, they actually don't want their money going to bad ESG causes. So, if there [are] mechanisms by which you can obviate these strict rules, the ERISA standards, I think that's the future is that it's not like you have the separate world of government regulation and these social entrepreneurs, the foundations, but they're all working together in a productive way.


Maiko Schaffrath  42:27

Hmm. Is there a space that you think social entrepreneurs should stay away from, because it's too difficult to innovate as a social entrepreneur, and it should be left to governments or NGOs or spaces that are more difficult to solve, especially with profit-driven business models, so to say, that are better solved in different ways through NGOs and governments?


Neil Malhotra  42:48

Well, I think there are sectors where entrepreneurs need to be humble and be respectful of the fact that there's a lot of government regulation and involvement. I mentioned the healthcare sector earlier, and the story of Theranos is basically you cannot treat this space like a food delivery app. This lean startup iteration stuff, it just doesn't work. I've talked to a lot of people in this biotech space, and it's just a different entrepreneurial mindset, where it's way longer exit times, the clinical trials processes are much more complex, there's much bigger valleys of death. And so, there are some fields like healthcare biotechnology, where you need a long-term mindset for it. It's not that we need entrepreneurs working in that space, but we don't want Theranos-like entrepreneurs working in that space,


Maiko Schaffrath  43:46

Especially in these days as we're recording this. So, thank you, Neil, for sharing so many lessons. I've learned a lot. I know the audience has learned a lot from this and really enjoyed this conversation. Thank you for joining.


Neil Malhotra  44:00

Well, thanks so much for having me and all your wonderful questions. It was a terrific discussion.


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