The Case For Social Enterprise
A social enterprise is, at the most basic level, a business that tries to do something good as well as making money.
That might range from a charity running a store to generate revenue, to a more traditional business making products and delivering services that do something helpful for people and the planet.
There is no singular social enterprise model, nor is there a special social enterprise legal structure, at least not in most countries today.
That leaves the field open to a wide spectrum of businesses, charities, government initiatives and startup entrepreneurs, who are all trying to do the same thing: stay afloat and solve important issues.
In this article, we’ll look at the most common questions about social enterprises, explore why the field is so important, and why it’s so hard to run one in a sustainable way.
We’re fans of social enterprise, and are radically honest about the pros and cons.
What Constitutes A Social Enterprise?
There are no strict rules, although some groups would like there to be strict rules, but please don’t mistake these for obligations.
There are two guiding principles behind most social enterprises:
1. The organization is trading something, either by selling a product or delivering a service, usually to a paying customer.
This is different to seeking a donation or receiving a government grant to deliver a project.
E.g. UNICEF is a good cause but not a social enterprise, whereas OXFAM run some social enterprise stores that sell crafts made by artisans in developing countries.
2. The organization is deeply committed to making positive social change.
This change might come through what the enterprise sells, how it operates, or what it does with it’s money, and it influences their decision making.
e.g. Who Gives A Crap donating 50% of their profits makes them a social enterprise, but Coca Cola donating money to a good cause won’t make it a social enterprise, that would be Corporate Social Responsibility.
The most important thing is that a company does a good job at both.
If they enterprise loses a lot of money, it either has to close or rely on donations.
If the enterprise has only a token social impact or does harm through trading, it doesn’t deserve to be called a social enterprise.
There might not be a legal issue, but the court of public opinion loves to punish a hypocrite.
What About Legal Structures?
This is the most common question asked by people thinking about setting up a social enterprise, but it’s surprisingly unimportant.
Profit is not evil, it is fuel.
You can use that fuel for whatever you think is important for your cause.
Being a not-for-profit doesn’t make you a saint, there are plenty of bad charities that waste money and ruin a good opportunity.
Being a for-profit doesn’t make you a sinner, there are plenty of good companies that create real change and make a genuine difference.
Not-for-profits make a profit too, they just call it a surplus.
They have to, because the alternative is that they make a loss, and that can’t happen for too long.
The main difference between profit and surplus is who the money can go to – a profit can go to shareholders, whereas a surplus can’t.
That’s probably a good rule, although bad not-for-profits find other ways to mis-use their funds.
But the task for all companies is the same: to bring in more money than they spend.
A better question is: “For what we want to achieve, is it easier to be a great not-for-profit or a great for-profit?”.
The answer probably comes down to what supports are available, and what your audience is willing to trust.
If there are grants or subsidies that you can only access as a not-for-profit, or if customers won’t trust you if you’re seen as being profit-oriented, then that might seal your decision.
If you have more freedom to operate as a for-profit or can grow faster through investment, then that might sway you as well.
Be wary of anyone who gives you a sweeping definitive rule, their experience might be true but it’s not automatically relevant for your circumstances.
How Does A Business Create Change?
There are three main ways in which a business can do something good for the world, and they correspond to the Three Lenses Of Innovation (Desirability, Feasibility and Viability).
Desirability: Making a product or delivering a service that is fundamentally good for the world.
This might be by making an environmentally friendly product more appealing, or by making beneficial services more affordable/accessible/relevant.
You might create something that directly benefits the customer/end user (e.g. a more nutritious snack), or persuade people to take actions that benefit someone they might not see (e.g. a substitute for single-use plastics).
The great thing about this approach is that growing your sales is the same as growing your impact, even if you’re not making much of a surplus.
Feasibility: Making positive change through your operations, methods and payroll.
This might be through the people you employ, who might come from marginalized or under-represented groups.
It might be through your choices in materials or how you make your products – using fewer resources or exclusively renewable components.
It might also be through your choices of partners and suppliers, creating opportunities for other groups whose work you think is important.
The great thing about this approach is that your customers might not even know that they’ve made a contribution, so you’ve turned their potentially mundane purchases into real impact.
Viability: Using your profits or assets to support good causes.
This might be by making money and giving it away, or by giving ownership of your assets to a marginalized or under-represented group.
Your products and services themselves might not generate any positive change on their own, but the proceeds can be used to fuel other projects.
The more profit you generate, the more money you get to contribute.
Ownership is powerful, and can be more valuable to a cause than a once-off donation.
e.g. giving a community group control of an asset, so that they can make good choices and the benefits remain in the community.
You don’t have to limit yourselves to just one of the three, lots of social enterprises use two or three of these approaches through their design.
It might influence what they choose to sell, who they choose to work with, who they choose to employ, how they run their systems, where their funds go and who gets to make decisions.
It’s also good to check that you’re not unintentionally creating harm through any of these approaches; a cigarette company that donates profits to charity probably shouldn’t be called a social enterprise.
Nor can a business claim to support mental health and wellbeing, only to implement a culture of bullying and toxicity for their team members.
We like to use The Breakeven Test: if the business broke even next year, and gave away no profits, would it still have made a helpful contribution?
The best social enterprises can answer with a resounding “Yes”, whereas a profit-donation-only model would struggle to make a compelling case.
Donating 50% of zero is still zero.
How Much Change Can A Social Enterprise Create?
The two worlds of business and changemaking have often been quite far apart – philanthropists liked to make money by any means possible, then donate their proceeds to noble causes.
e.g. people like John D Rockefeller and Andrew Carnegie made fortunes through ruthlessness, then spent the last portions of their lives giving money to libraries and social programs.
That worked for a time, but society has questioned whether or not this is an acceptable approach going forward.
Today, both the charity and corporate systems seem to be broken.
Charities are struggling to maintain steady donations; fundraising is difficult at the best of times, but particularly when there are economic pressures.
You can talk to anyone working in fundraising and they’ll likely tell you the same thing; it is getting harder to create donor loyalty through stories and impact reports.
For a lot of people, their bucket of money for donations is a lot smaller than their bucket for groceries, travel, clothing, entertainment, gifts or professional development.
Investors are struggling to justify unethical business practices that make them more money. In truth, a lot of the challenge comes back to their constitutions and an obligation (real or perceived) to “create shareholder value”.
That means a business is incentivized or expected to make choices that maximise profits, even if it at the expense of their team, the environment or the welfare of their end users.
But young people are showing signs that they are less willing to enforce such selfish policies through their work, especially since they aren’t the shareholders who reap the benefits of moral grey areas.
Realistically, a social enterprise would struggle to create as much change as a charity in a short space of time.
e.g. a charity can do more good this year with a $3m budget than a social enterprise with $3m in turnover.
On the other hand, the social enterprise with $3m in turnover will likely do more good than a corporation with $30m in turnover making a $100k donation.
This is the appeal of social enterprise – they can be generative and sustainable, not requiring more and more donations or grants each year.
And at the same time, the business can do more for a cause than just donating profits, it can use all of its systems and resources towards important goals.
You can bake your impact model into the way your business operates, so that each sale or new partnership automatically boosts your social impact contribution.
The Future And Today
There are a lot of mixed messages about social enterprise as a concept and as an industry.
Most of the messages are true, but perhaps refer to different timelines.
For example, there is a lot to celebrate and there is genuine momentum; more and more people know what a social enterprise is, or they’ve shopped with them before, or they see social enterprise as a good option for future ventures.
Young people are particularly keen to shop with businesses that have strong ethics and transparent operations, and will call out hypocrites and evil practices.
Governments love social enterprise as an alternative to constant aid or “handouts”, seeing value in setting up industries that can support over time.
When you zoom out, a lot of signs point to social enterprise being a standard part of business culture in the future.
And yet, if you talk to anyone running a social enterprise today, they probably won’t look quite so excited.
It’s been a really tough time for social entrepreneurs, particularly through global pandemics, supply chain issues, inflation and a cost-of-living crisis.
Funding has largely dried up, with less money in the system to fund growth or new initiatives.
Social enterprises are vulnerable to every issue that affects other startup businesses, plus additional stresses around their impact model.
Your mission can help you win a customer’s attention or access some funding, but if your business model leaks money, it’s a constant battle to stay alive.
Both perspectives can be true – it’s a tough time to run a social enterprise, and there’s also a gradual movement towards social enterprise becoming the mainstream or default type of business.
What Does A Social Enterprise Need To Succeed?
There are five main decisions for a social entrepreneur to make:
1. What is the mission and vision for this work?
2. What is our Impact Model?
3. What is our Business Model?
4. What is our Financial Model?
5. How will we test each of the above?
The first one is easy, the third and fourth are a part of any business, and the fifth is part of any agile startup.
But putting them all together is difficult, because they affect each other.
Changing one will change the others, and your tests might show you that you need to change some more.
When a social entrepreneur is working through these five decisions, the two things they need are adequate funding and a supportive team.
Neither of these need to be expensive, but if either of them are absent, it will be hard to focus on those five big strategic choices.
Some social enterprises are set up with some grant funding while they work out a sustainable model – that was certainly the case for us at The Difference Incubator.
We had five years of support and subsidies from a funder, which became our runway for sustainability – and we got there in three.
There are various programs and pots of money designed to bolster social enterprises as they work through the design process, but money can’t get you out of a flawed model.
If you don’t end up with a desirable, feasible and viable business model, external cash will prop you up but won’t help you stand on your own two feet.
If you don’t have an impact model that can achieve genuine change, customers and funders are going to end up underwhelmed and will rightly take their money elsewhere.
By all means, take all the support you can get, but support isn’t a substitute for a strong model.
Navigating Trade-Offs
Social enterprises are constantly facing trade-off decisions, where there’s a good argument for several competing options and no “right” solution.
e.g. do we pay our staff higher wages, or reinvest in growth, or fund important projects, or keep the money as retained earnings for a rainy day?
These expose tricky philosophical decisions, like when to use your funds to sustain the business vs when to use your funds on the most impactful projects.
Then there are decisions around pricing and inclusion – does everyone have to be your customer, or should some people miss out?
Trade-offs are tough because you’re choosing between good options, but trade-offs are the essence of strategy.
You’re deciding what to say “yes” to, and therefore decide what you’re going to have to say “no” to, even when the “no” list could speed up your impact model.
e.g. staying within your budget, limiting your commitments, hiring people who already have the skills you need, reinvesting in growth rather than into impact projects.
Best (And Most) Of Both Worlds
The truth is, a social enterprise can have the best of both worlds, in terms of meaningful impact and financial sustainability, but they also take on the obligations of both worlds.
There is more to be done, more factors to consider, more trade-offs to make, more reports to write, and a lot of conversations with people who will misunderstand what you’re doing.
A social enterprise is not immune from any of the challenges or burdens facing a traditional business or startup.
However, they also benefit from a few advantages:
· A naturally interesting and shareable story about your work, which a lot of “me too” startups won’t have
· A good feeling for customers who shop with you, especially when they can see the outcomes that stem from their purchase and loyalty
· A more motivated team culture, who are coming to work for more than just money, but to make a meaningful contribution
· The possibility of grant funding, either from philanthropy or government initiatives, as funders want to support the social enterprise ecosystem over the next decade
Starting a social enterprise is difficult – and you’re unlikely to hear any practitioners say otherwise.
What you will hear is that they are worth building.
If you see the potential to make money and create real change at the same time, then the hard work is unlikely to put you off.
It is still a hard time to start a social enterprise, but it’s likely better than starting a charity that constantly needs donations, or a soulless company that can make token contributions when profitable.
Our encouragement would be to spend the time in the design process, to work out exactly what it is that you want to build.
That means understanding yourself and what you care about.
That means articulating your recipe for change.
That means drafting a strong business model.
That means knowing your numbers.
That means running lots of tests and experiments to check your assumptions.
And luckily, this is an industry with a vibrant and welcoming community.
You’ll find good programs, pre-accelerators, coaches, mentors, meetups and online groups who can answer questions, offer guidance, and keep you motivated along the way.