When you read book chapters or articles about what social entrepreneurship is, you often come across a framework called the “hybrid spectrum” or “social entrepreneurship spectrum” – a continuum suggesting that social enterprises lie somewhere between purely philanthropic organizations and commercial businesses. This makes sense as a conceptual tool, but you should look at those images with caution. The reason for this is that they subtly suggest the message that social enterprises are halfway between mission-led charities and commercial businesses. However, in truth, social enterprises are different from the former in almost every way, except for their mission and their need to measure and report social impact. In contrast, these very two points are the only things that set them apart from commercial business. Social enterprises are thus much closer to commercial businesses in nature than traditional charities.
The sooner a budding social enterprise realizes that it needs to think about business in virtually the exact same way as a commercial business, the more chances it will have to be competitive and, eventually, successful. A social enterprise’s mission remains of supreme importance, so no commercial decisions can be taken that will be detrimental to this aspect of the organization’s work. But there are a whole range of other decisions—from pricing, teambuilding, organizational structure, marketing, investing, scaling and more—where social enterprises should think like a business, because that is what they are!
I have worked with several dozen social enterprises in several countries over the past few years, and there is one clear difference between the ones that are tasting success and those that are still struggling. Representatives of the second category often repeat two questionable phrases. The first one goes something like “The state should consider giving us a tax break – we’re tackling social issues and that makes it more difficult to run a social enterprise than a commercial business.” I consider this to be harmful to the social enterprise because it encourages a mindset of difference – if you believe you need help and you’re weaker than the commercial businesses out there that offer products and services similar to yours, how do you expect to have a winning mentality when competing with them? Instead, social enterprises should learn to leverage their social impact while striving to provide a product or service that is not inferior when it comes to quality, design, or the customer experience in general. There are studies that suggest that some customers are willing to pay more when it comes to social impact, so it could even be a strategic choice to price yourself higher than the competition, but the truth is that this is still a niche market in most countries. The key takeaway here is that you cannot afford to offer a product or service inferior to those of your competitors and expect regular customers to come to you simply because you have social impact. Much as we like to tell ourselves (and our stakeholders) this, consumers simply do not behave this way.
The second questionable statement I often hear from struggling social enterprises sounds something like this – “We are looking for a grant to fund the next stage of our growth, and I’m sure we will be competitive/successful after that.” While it is wonderful to have access to grants as a social enterprise, it is a big mistake to expend more energy and time than necessary on pursuing these opportunities. The main ways businesses fund their growth is by using their profits, by taking out loans, or by seeking investments. All three paths are usually open to social enterprises no matter where they operate. When you get a grant, this means that you have managed to convince someone that your idea (or growth plan) is worth funding. There is nothing wrong with this, except that the party providing your grant (usually a local or international donor organization, sometimes the state or a corporate foundation) has an agenda that does not completely align with yours. In the best-case scenario, your donor wants to help solve the social problem at the heart of your mission, so they give you money in the hope that you will further that cause. In the worst-case scenario, the donor wants a public relations boost or they have to show their donor that they are spending the money they were given. Either way, there is one clear gap – none of these donors financed you because they were certain that you were going to be a success financially. They probably sincerely hope you will, but they are usually not qualified to evaluate your potential for financial success, nor would they suffer much material loss if you failed. On the other hand, when a business seeks funding from the market, a bank, or investors, its potential for financial success is scrutinized in great detail. Customers do not keep buying from a company if it disappoints them. Banks and investors do not put money into an enterprise if they do not expect to get more money back from it. So, as a social enterprise, when you seek to fund your growth this way, you actually test yourself and ask the experts to give you one of two very valuable things – 1) money, if they believe you are doing things right, or 2) feedback, if they think you are not going to make it. They do not want to fund you if they don’t think you are going to make money. If you are averse to paying dividends as a social enterprise (the jury is still out on that one), that still leaves reinvesting profit or seeking loans as viable options.
So far, we have talked about how social enterprises should be much closer to commercial businesses in their nature and mindset, but what about competitiveness? Is it possible for a social enterprise to be a competitive business and grow to be a big success story? If you close your eyes and try to recall big corporations, you can probably easily come up with several dozen names. Can you do the same for big social enterprises? Unfortunately, you’ll probably find that you cannot recall many “big businesses” in the social entrepreneurship scene. But this isn’t because social enterprises cannot grow big. It is mainly because of two reasons – 1) the history of social enterprises does not go far back enough to allow enough time for large growth. Many of the big businesses we can name today (with the exception of the IT giants) were founded decades ago, while there are few social enterprises that have a history stretching into the twentieth century. 2) Some social enterprises choose not to grow big in the same way as a commercial business. Let’s look at a couple of large social enterprises to demonstrate these points.
In 1976, Muhammad Yunus, a professor of economy at a university in Bangladesh ran a social experiment of sorts by lending small amounts of money to very poor people in his community in order to help boost their small businesses and lift them from extreme poverty. This soon led to the establishment of Grameen Bank and the field of micro-financing as a whole. Grameen Bank has been operating for close to four decades, and its 2018 Annual Report states that they have more than 9 million customers and cover over 93% of the villages in Bangladesh. In addition, the Grameen Foundation, established as a way to forward the same mission globally, supports similar institutions in more than 25 countries around the world. Because the mission is the highest priority, Grameen Bank did not expand to other countries through direct market entry, or mergers and acquisitions, like a commercial company would. But there is no doubt that it is a growing and competitive entity both at home and abroad.
Another good example is The Big Issue. This was a social enterprise founded in 1991 to help homeless people, offering them a way to make money by selling a street magazine. During its existence over the past three decades, its growth chart has seen both ups and downs. But the company has not just limited itself to the specific commercial activities of printing and distributing a magazine. In order to better serve the mission it has chosen, The Big Issue has grown to a group of entities that include Big Issue Invest (and organization that finances other social enterprises), the Big Issue Foundation (helping homeless vendors get the other vital services they need to rebuild their lives), and the Big Issue Shop (making social and ethical shopping accessible to broader range of consumers). A traditional business would not have invested so much time and effort in “non-commercial” activities, while a social enterprise chooses this path, without compromising its business competitiveness, because it contributes to the achievement of its mission.
There are other examples of growing social enterprises around the world – it is truly exciting to see how some people are finding business success while helping solve some difficult social problems. There is something truly commendable in founding an organization that can compete on an equal footing with the best in the field while having significant social impact. Let’s stop pretending that social enterprises are “privileged non-profits” that can count on tax breaks and cater to only a socially-minded customer base. Once you see how similar you are to a commercial business, you will realize that you should no longer wait for the “social entrepreneurship ecosystem” to boost your growth. All you need is the right mindset and the willingness to take some risks – just like any other business!
Nazareth Seferian has been working in sustainable business for more than ten years. He started working in the field of Corporate Social Responsibility (CSR) in Armenia in 2008 and managed sustainability projects at Orange Armenia for four years before shifting to a career as an independent consultant in several countries. Since 2015, he has worked with more than fifty non-profit organizations seeking to transform into social enterprises, as well as the donor organizations that have supported the growing field of social entrepreneurship in Armenia. He also teaches university-level courses and runs training sessions on a range of business topics, including strategic sessions on CSR and SE. Nazareth holds a post-graduate certificate in sustainable business from the University of Cambridge and is currently pursuing an Executive MBA from the European School of Management and Technology (ESMT) in Berlin. He can be contacted via LinkedIn and also tweets on sustainable business issues.
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