With the world social enterprise forum having taken place in Calgary last week, it’s an appropriate time to step back and take a look at the challenges such organizations face.
By definition, a social enterprise is a for profit business that also carries a strong social mandate. As such as a start-up it faces some of the same challenges any incubator company may have. However it also carries certain advantages and disadvantages to market.
Recent experiences with two new SE’s suggest they have more support at the front end than the entrepreneur who needs to establish proof of concept before attracting investment capital. Loans from sponsoring agencies and foundations, as well as available government grants, provide an initially solid operating basis. That capital can dissipate rapidly however if the business case is not validated in the market and the enterprise is handcuffed in its ability to be nimble and scalable. Third party validation of the business concept is a critical early step. It removes the social bias and helps benchmark best practises within the launch market. Usually, work force training and integration is integral in the social return sought by the sponsor. Over aggressive targets to that end and ignoring the need to utilize workers that fall outside the mandate can be a mistake. Stakeholders must appreciate and support the need to succeed in the market as a regular business first, because if the business fails, the reason it was created in the first place, matters not. Whereas stakeholder enthusiasm supplants family and friends as a driving force at the outset, it can turn on a dime if there is a feeling that an overly commercial direction is being taken versus achievement of the social good everyone envisioned. That is why leadership and communication have to be keynotes of the operation. The CEO/COO must bring credibility with respect to the cause as well as relevant business savvy. He/she needs to communicate clearly internally and externally what the enterprise must accomplish in both program and revenue generation in the pursuit of its vision. Faced with a lean support staff or perhaps initially only assistance provided by sponsors, they must be willing to roll up their sleeves. Contracting aspects of the Finance, HR and Marketing functions can keep the enterprise scalable while it is building its business in the marketplace. Fiscal discipline is critical, or like with any start-up, the business will quickly burn through its available cash and the CEO will spend all his/her time searching for new investment.
There is a balance to achieve between leveraging opportunities in the market created by public awareness to the social goals, and having customers utilize your services because of how well you market yourself. Within the industry vertical that the business is in, it is important that companies, who might otherwise be staunch competitors, believe that the enterprise is not out to erode their market share. Rather, they see how the available work force can be enhanced through providing real opportunities to challenged individuals. Initially, contracts and clients, not profits, should be the goal. However, pricing well below the market creates longer term issues for the business and can antagonize companies engaged in the delivery of similar services. Additionally, labour needs to be properly compensated relative to experience and skills. Otherwise, no different than with any other business, quality, production and customer satisfaction will suffer. Social Enterprises inherently have a much higher cost of dedicated HR support for program development which becomes challenging if there is a negative gross margin after cost of sales.
Governance is an important issue. As quickly as possible, the social enterprise should have its own dedicated management team and Advisory Board. The sponsoring agencies need and deserve representation, but business advisors with relevant industry experience, as well as certified professionals in law and accounting, should also be appointed. Advice should be sought relative to the tax implications of its revenue generation model and what must be done to maintain compliance with and qualify for government grants.
At the end of the day, with far too many not-for-profit agencies serving the same constituents, the organizations who survive will be those who learn that in order to make a difference in the community, they need to also differentiate a business that can be effective enabling profits as well as people.
Mark Olson (click to see Mark's profile)
Managing Partner & Principal
The evolution of social enterprises has been determined, by some, as a declining confidence in our capitalistic society’s ability to make positive community change. Is this driven by the values and needs of the next generation? Perhaps, perhaps not. But what we are seeing is more social enterprises being started world-wide than ever before. The good news is that social enterprises the world over are proving that capitalism and conscience are not mutually exclusive. These are the growing number of businesses – often small and medium-sized enterprises – that are run both for social good and, crucially, for profit.
Also worldwide there is an interest in supporting
the evolution of social enterprise through education. In the UK, Oxford University’s Said Business School has the Skoll Foundation, a social entrepreneurship centre founded by eBay billionaire Jeff Skoll. In the US, the Schwab Foundation, the organizer of the annual festival of capitalism in Davos that is the World Economic Forum, is a major backer of the movement. Here in Calgary, the Trico Charitable Foundation hosted the 2013 Social Enterprise World Forum which attracted 1,200 delegates from around the world. This major conference is a feather in the cap of the Trico Charitable Foundation, which was established in 2008. This foundation seeks to provoke innovation and build capacity in social entrepreneurship. Its programs, initiatives and partnerships are dedicated to growing a community of sustainable, entrepreneurial organizations. While some of their programs define social enterprise as "a business operation commonly run by a charity or non-profit organization. Revenue raised by the business operation is reinvested into the charity or non-profit to support their programs and operations," other programs go beyond the non-profit realm and celebrate social purpose businesses that blend social and financial goals.
The Trico Foundation encourages social enterprises to use entrepreneurial innovation and reinvest profits to improve a social mandate. Additionally, a social enterprise will often engage the services of the clients that the organization is supporting. The skills that the clients develop in sales, business operations, and administration may be utilized to access job opportunities outside the enterprise.
Trico Charitable Foundations’ Enterprising Non-Profits (enp) Alberta is a collaborative program that provides matching grants and technical assistance to non-profit organizations to support the development or growth of their social enterprises (i.e., revenue generating businesses). enp holds "Building your Social Enterprise" workshops in the Spring and Fall for non-profit organizations wanting to learn more about social enterprise and how to gain access to enp grants for business planning projects.
The Enterprising Non-Profits Alberta Program uses the term "social enterprise" to refer to business ventures operated by non-profits, whether they are societies, charities, or co-operatives. These businesses sell goods or provide services in the market for the purpose of creating a blended return on investment, both financial and social. Their profits are returned to the business or to a social purpose, rather than maximizing profits to shareholders.
As Mark Olson states in his article "social enterprises have more support at the front end than entrepreneurs". If you are starting a social enterprise on its way, the most difficult part is the first step. Look to others to help you in the first step and build a solid foundation to see success in the future.
Catherine Cook (click to see Catherine’s profile)
Principal
Head of Practice - Not-for-Profit & Social Enterprise
While the concept of raising money for a charitable cause is not foreign to not-for-profits, shifting from a not-for-profit mindset to a for-profit mindset often means taking an Executive Director into unfamiliar and uncomfortable territory. The move to a more advanced and sophisticated fundraising concept of for profit social enterprise can be fraught with philosophical and operational challenges, as well as some traps and obstacles.
Mark Olson, Managing Partner of Osborne Interim Management, has defined social enterprise as "a for-profit business that also carries a strong social mandate". For many people those are two opposing philosophies: "for-profit business" and "social mandate". How does an organization which has as its bottom line the delivery of a charitable service or educational programming, wrap its collective mind around delivery of a strictly financial bottom line? How can those two ideas match up and how does a NFP organization go about achieving a marriage of the two seemingly competing philosophies, and most important of all, how can an NFP be successful at it?
These questions have been debated by NFP Boards and managements quite a bit lately as the popularity of social enterprise businesses as a source of funds is increasing. Following are some tips on how to address the traps and obstacles, plus the inevitable start-up issues that all NFP Boards and Executive Directors must face in thinking about a social enterprise operation:
Board Versus Executive Director:
Issue: Most NFP Boards are drawn from the corporate or private sector. Usually the directors have a passion for the cause and perhaps even a personal connection. However, coming from the for-profit world means that directors will focus on the bottom line above all, and that can mean a clash with a service minded Executive Director. For example, ethics and integrity are usually higher in NFP’s as "must have" elements of a business plan than in for-profits.
Strategy: Before embarking on any planning or business model discussion, the first topic to be settled is that of Board and Executive Director agree on the balance between business practices and NFP philosophy. This will require some compromise by both parties so that one philosophy does not dominate over the other. Without that meeting of the minds, the enterprise will likely fail owing to one side or the other not buying into the business model.
Viability and Sustainability:
Issue: Success of the proposed business depends on there being a defined market and a minimizing of risk. Too many NFP’s believe that "if we build it, they will come", and that is not a credible foundation for launching a business of any kind.
Strategy: Test it! A feasibility study to test the concept and the marketplace appetite is a necessary investment. While a Board or Executive Director may think a business concept is a sure thing, any enterprise needs a validation from some research and testing. Gut feel is helpful and can be emotionally supportive, but it is not a business strategy.
Compatibility with Core Beliefs and Mission:
Issue: The biggest trap for unwary NFP’s is that of choosing a potential enterprise based solely on what might make the most money without regard to its fit and compatibility with the NFP and the NFP’s constituency. To take an extreme example, an activist environmental organization would be foolish to get in to a car dealership.
Strategy: Identify possible enterprises, not only for their commercial potential, but for compatibility with the organization and its stakeholders.
Separate Board and Management:
Issue: It requires specialized expertise to create a master plan for a business of any kind, and especially for one that has the added sensitivity and uniqueness of a social enterprise. Because a Board or NFP management can successfully operate its NFP does not mean those skills are transferable to a social enterprise. Also, the fact that a Board may include successful business people from the corporate sector is no guarantee they can successfully transfer those skills to a social enterprise model.
Strategy: Create a separate management and governance structure that may share some resources with the core NFP, but which brings the required expertise to the enterprise. This may mean leasing the operation to a third party with a track record and expertise, but also with a commitment to the particular NFP. For example, restaurants and events catering can be and have been profitable enterprises for NFP’s, but this is a precarious industry that needs experienced and knowledgeable day-to-day managing and supervision.
Start-Up – Expense Versus Investment:
Issue: A not-for-profit might have identified a really good social enterprise opportunity that seems to align with the organization’s values and philosophies, but it hasn’t allowed for sufficient business planning and marketing costs, and is not sure it has enough funding to launch.
Strategy: Identifying and funding all true costs of a start-up are the greatest cause of business failure, whether in the private sector or in social enterprise. The first thing organizations cut if funds are short are marketing and business planning costs. The correct strategy to have is to see these as investments, not costs. Without marketing, financial planning and other expertise, any enterprise will be starting with an operating liability.
The issues above are some of the key areas to be addressed in looking at a social enterprise operation, and there are others. The essential ingredients to success are:
- Strategic, financial and marketing planning.
- Alignment with the organization’s core values and philosophy.
- Separate governance and management.
- Realistic expectations.
So, by all means pursue a business as a social enterprise and it could be an excellent source of revenue for your not-for-profit. However, if you build it, they will not necessarily come. You have to get them to want to come, and that means having a viable business plan, good marketing and a reason for people to support your enterprise other than supporting a worthy cause.
Blane Hogue (click to see Blane's profile)
Principal
