Scaling up innovation is rarely as simple as investing in a company. The best social innovations aren’t companies – rather they are social movements, coalitions co-created by businesses, social sector organizations and governments working together. But how do you fund and scale up a movement? The remarkable story of Aravind Eye Hospitals offers some insights. Aravind is a chain of eye hospitals founded in India that pioneered a new way of delivering ultra-low cost cataract surgery for the rural poor.
In 1992, a social entrepreneur named David Green, (Seva Foundation Board Member), who had been working with Aravind to develop their social business model, teamed up with Aravind and Seva Canada to set up a company to make the lenses needed for cataract surgery.
Green had noticed that the world market for such lenses was dominated by a handful of firms who were charging huge margins. At that time, the market price for such lenses was around $300. Aurolab, the company that Green founded, began selling them at $10, profitably. The combination of Aurolab’s low-cost lenses and Aravind’s revolutionary delivery model together led to a global surge in affordable eye surgery. Today, Aravind hospitals and others based on their model perform nearly one million surgeries each year, and Aurolab has approximately 9% of the global market share.
The Aravind-Aurolab case study provides valuable insights into how the right kind of funding model can help social / business partnerships scale up:
1. Use philanthropy for start-up costs and investment for growth The start-up social business is often unattractive to commercial investors because the risk/return of such ventures rarely meets their requirements. It is tough enough raising capital for a commercial enterprise, let alone one that deliberately seeks out low-income customers. Sometimes there is only one funder who can step into fill this early stage gap – the philanthropist. “I could never have launched Aurolab by raising money from venture capitalists,” says David Green. “We could not have offered them the financial returns they need.” Instead Green raised a substantial grant from Seva that enabled him to build a state-of-the-art factory in Madurai, India. Freed from the financial constraints of venture capital, Aurolab did not need to price in margins to provide for a high cost of capital, and could instead price to maximize distribution. By having philanthropic capital funding the start-up risk, and then bringing in investors to scale up proven projects, social business partnerships can often scale their impact much quicker.
2. Scale through Replication It’s not a movement if only one player is involved. True social change takes place when others adopt and replicate the model. Once Aravind had proven the effectiveness of its model, it began to spread that knowledge to others, setting up a consultancy LAICO to share the knowledge with as many partners as possible. Today the model has been replicated in more than two dozen countries around the world. Philanthropic funding, with support from Seva and others, was the ideal funding source to support this strategy of scaling through replication.
3. Create a Campaign Scratch the surface of a new social business venture, and you’ll often find a campaign to change consumer behavior and build a new market. Consider the challenges of launching a recycling business at a time when households were unused to the idea of sorting waste into “recyclable” and “non-recyclable.” Yet these challenges were overcome – today such practices are the norm in much of Europe. Here social business partnerships may be ideal. Governments and foundations can play a key role in public education, highlighting social causes such as the need for recycling. Businesses can focus on providing products and services to meet the market need. And donations and investment can be channeled to each accordingly.
4. Find Different Roles For Different Funders Sometimes investors want to support a social enterprise but have very different risk appetites. If donors don’t need a financial return, why not ask them to fund the more risky or purely social aspects of a venture? For example, Fair Finance, a UK-based social enterprise which provides loans and debt advice to financially excluded individuals in London, entered into a partnership with several commercial banks to greatly increase the size of its lending. By first finding social investors who were willing to underwrite any expected “first losses” in the lender’s portfolio as well as working capital, Fair Finance was able to bring on board the more risk-averse banks. As a result, it raised nearly ten times the amount of funding that it could have raised from grants alone. Donors and investors are used to operating in different worlds. Increasingly, by working together, they are finding the formula for scaling up social innovation.