Building an entrepreneurial society

Archive for the tag “Social enterprise”

Social Business Part 1 — The stalled emergence of the social enterprise

The concept of the social enterprise is increasingly found in the news, social media and in the organizations arising to support them.  The social enterprise is expected to provide solutions to social issues while also being sustainable.  This sustainability is accomplished through a hybrid of not-for-profit and for-profit business models.  In my observation these entities start out on the drawing board as hybrids but tend to slide back towards traditional not-for-profits.   As this article will propose, we have not broken free from out-dated thinking that is needed for a new form of social enterprise to emerge.  I will present my thoughts in two separate posts.

The social sector has traditionally been not-for-profit organizations and government.  These groups addressed problems or needs where for-profit organizations were not engaged.  That is, there was no opportunity to make a profit so the private sector was not interested in investing.  The problem with this scenario is that the social problems and the cost of solving them has outstripped the supply of funding available.  On the flip side the funding that runs through the private financial system is building up and seems to be overrunning the investment opportunities in the private sector.  In parallel with these two trends the concept of social business and social finance has emerged.  Unfortunately, unlike the clear private/social poles that existed before, no one really knows how this new hybrid should work.

One thing we know from experience is that money flows quickly like water to where it can earn a return.  People and organizations don’t move at that pace.  They tend towards increment change.  As a result we are seeing social finance organizations emerging ahead of the organizations they need to invest in.  The band is starting to play but no one is on the dance floor.  We are also talking about impact investing before we fully understand what impact is and how we will measure it.  If we don’t solve this problem we will see poorly designed metrics and money chasing poor investment opportunities.  We need to shift our focus towards building sustainable social enterprises that we can invest in and we need them in large number.

For some there seems to be the expectation that existing not-for-profits and governments will tack on some form of impact measure and then carry on as usual.  This might be fine if what we have now is working effectively and efficiently and I don’t believe that is the case.  We have also seen private sector companies using superficial social measures to create the illusion of social impact.  Again most people don’t believe this is true on a wide scale.  The third alternative is the creation of a new set of organizations called social businesses.  They will have the joint social/financial outcomes baked in from the start.  The few that have been created tend to look like either a traditional not-for-profit or private sector company and mostly the former.  Founders tend to use one of these poles as a starting point when creating the business model.  With some exceptions they have not been very effective in creating large scale change or in being sustainable.

We need to break free from the status quo thinking that underlies the two primary business types in order to deal with social issues in a sustainable way.  In my next post I will discuss approaches for breaking away from these old ways of thinking that will enable us to successfully start building true social businesses.

A hybrid business model

There is a person in a country somewhere in the world who has initiative and insight and wants to make a difference.  There is a drive and independence that makes this person an ideal entrepreneur.  Finally and most importantly, a burning social need has been identified that should be addressed.  How does this person move forward to resolve this need while also earning some return for the time being expended and risk being incurred?

Our entrepreneur spends time to analyse this need to find out who has it, whether they consider it significant and that they want to do something about it.  In speaking with the people with the need this person finds that there is little ability to pay for the currently available solution.  There is also little ability to pay much for any solution.

The venture has to be able to produce a low cost solution that is affordable for the target audience.  There are also opportunities to look at the need in a way that current service providers don’t.  A sub-segment of the target market for the existing solution finds that one to be costly and more complex than they need.  They have the ability to pay for the new solution.  Between lowering the cost, developing a new business model and finding a group that can subsidize other users our entrepreneur has a way to provide a solution for the need.

The initial working capital to get the venture off the ground may have been provided by a development grant or loan, personal savings, a social venture fund or a member of the community that is able to assist.  The objective of the business is to get to sustainability quickly using revenue from sales to carry the business.

Our entrepreneur has created what would be called a social enterprise that serves a social need but also uses market mechanisms to generate revenue and sustain the business.  At no time in this story did this person think about whether to start a not-for-profit or profit-driven enterprise.  There was no struggle with whether it was ethical to make profit while solving a social good or whether there was a sufficient return for a venture capital investor.  A need was found and our entrepreneur found a way to meet it using a business model that fit the situation.  There was a clear objective and the measure of success was the ability to meet this social need by creating and delivering value someone was willing to pay for.

If these types of enterprises form in large numbers what will that do to the existing not-for-profits and companies serving low end markets?  Will they be so caught up in their current models that they become irrelevant in these circumstances or will they find ways to evolve to keep pace?  There is a need to put aside pre-conceived notions of what a social enterprise is and focus on the jobs to be done.

Social entrepreneurs as catalysts for building entrepreneurship

In the last post we identified the need to have entrepreneurs become the leaders in building an entrepreneurial society.  We also acknowledged that these entrepreneurs would have to choose to take a leadership role and that is not always easy to encourage.  But there may be a sub-segment of the entrepreneurial community that would be predisposed to leadership and that is social entrepreneurs.

Social entrepreneurship is a rapidly emerging segment and will eventually evolve to the point where the social prefix will no longer be necessary.  But social entrepreneurs do bring a unique approach and that is one of being substantially driven by passion.  They also have to overcome many obstacles not experienced by traditional entrepreneurs since they tend to work with difficult problems.  Finally, they have been forced to support each other since they fall into a gap between traditional not-for-profit and traditional private enterprise.

It might also be possible that regions with low levels of entrepreneurship have more social issues to deal with compared to thriving entrepreneurial communities.  We should consider starting to build an entrepreneurial community with social enterprises led by social entrepreneurs.

Social entrepreneurs will also rely on the same support networks that traditional entrepreneurs require.  As the entrepreneurial community builds the support networks will become stronger.  These entrepreneurs will also serve as role models and mentors for traditional entrepreneurs.

Finally, if we look at a major objective of an entrepreneurial society it is to resolve the challenges we face through multiple entrepreneurial ventures.  Since that is what social ventures are about we could find ourselves better off by having them take the lead.

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