As with any entrepreneurial venture, a social enterprise is bound to encounter some challenges in the process of starting up and becoming established.  Below are some examples of mistakes social entrepreneurs have made and how they have learned from these mistakes.

Product: Zack Rosenberg, founder of DoGoodBuyUs, a website that sells products made by charitable organizations, encountered some challenges in the early stages of his venture.  One of the first companies he attracted to sell their goods on his site had put together a package that was not of the quality or price point that customers were interested in, and the package sales were a flop.  Rosenberg learned that no matter what the cause is, if people do not want the product they will not buy it.  He was able to use the experience to demonstrate the potential of his site to other sellers, and has since partnered with over 70 organizations.  Read the whole article.

Asking for Help & Feedback:  A social entrepreneur, perhaps even more than a traditional entrepreneur, believes they have found a solution to a problem that no one has yet come up with.  This leads to a strong belief in the “correctness” of the solution which, as the social enterprise is being assembled, may lead to blindness on the entrepreneur’s part of the areas in which they are actually not correct.  You are not expected to have all the answers and there is no failure in admitting you were wrong about something.  Be open to criticism and seek help before you begin to hit major setbacks.  You may end up needing to alter your original plan significantly, so be flexible with the details and remember that your journey is ultimately about creating lasting social impact.

Marketing:  Your product will not sell itself.  You must be selling something that people want to buy, or else figure out how to convince them that they want to buy it.  Few social enterprises will have a product that reaches the marketing success of TOMS shoes.  TOMS has a great mission, but it’s worth mentioning that TOMS also managed to become a fashion statement once they were spotted on the feet of celebrities.  But for social enterprises without celebrity ambassadors, know your audience: what kind of action must you take to reach the audience that buys your product, and how is that audience the same (or different) from the audience that benefits from your social mission?  The further apart the two audiences are, the more likely you will need to engage in marketing tactics that compete with traditional commercial enterprises.

Hiring on Availability Rather than Talent:  When you are putting together your staff for the social enterprise, do not rush into hiring the first passionate individual who sits down to speak with you.  In the beginning stages of your business you will be fueled by the energy you have towards your mission, and it is crucial that you do not allow it to sidetrack you from the importance of hiring someone who is right for the job and not someone who is under experienced.  A non-profit is a better business entity for hiring volunteers and entry-level employees, but a social enterprise must bear in mind that there is a need to earn a profit.  A suggestion for avoiding the mistake of hiring the wrong person is to thoroughly articulate the job requirements and experience necessary, on paper, before you begin speaking with potential employees.  This way you already know what your ideal candidate looks like.

Believing that a Social Enterprise is the Only Way:  The popularity of the social enterprise model is fairly recent, and as more universities are offering courses in social entrepreneurship and the business media is beginning to cover more social enterprises, entrepreneurs may cling to the idea as though it is the only way to change the world.  It is not.  Your altruism is not wasted if you end up working in another field, don’t discount the benefit you offer to the world by having your head and heart dedicated to change.  Read Lara Galinsky’s thoughts on why not everyone should be a social entrepreneur.

 

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There are two ways to scale your social enterprise: through organizational growth or through other forms of increasing social impact beyond the organizational boundaries.

Organizational growth is the internal changes made aimed at maximizing social impact, such as diversifying into other services or activities, serving more people by increasing employment number and hours, starting a new site, and winning new contracts.  Scaling a social enterprise with organizational growth requires financial and management expertise, as well as incorporation of growth models such as M&A drawn from the private sector.  Two examples of mass-scale social enterprise are Mexico-based Gente Nueva and Bangladesh-based BRAC.  Watch an interview with Gente Nueva’s social entrepreneur, Jose Hernandez.  Watch an in-depth panel interview on scaling the BRAC social enterprise (beginning at 17:00).

Increasing social impact beyond organizational boundaries includes creating alliances to get resources and political support, creating “spin out” organizations, social franchising, establishing or supporting quality standards for best practices, and providing material or training to others.*  This includes the idea of networked social entrepreneurship, which aims to achieve greater impact by creating a network of collaborators and partners.  This method of scaling a social enterprise increases the possibility of innovation and experimentation as the members of the network complement the efforts of the other members.  The Impact Alliance is a Washington D.C.-based network that aims to improve the scale of impact of member organizations and is a great place to start looking for resources to expand a social enterprise.

 

*Lyon, Fergus and Heather Fernandez.  “Strategies for scaling up social enterprise: lessons from early years providers.”  Social Enterprise Journal 18.1 (2012): 63-77.  Print.

 

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Part of the process of differentiating from a non-profit organization and a for profit business requires a social enterprise to understand how it competes with the business entities on each end of the business spectrum.

For Profit: When it comes to competing with other entities, the most significant competitor for a social enterprise is a for profit business.  A for profit business does not have the same need to balance a social mission and can therefore fully pursue the profit motive.  A for profit can often offer better salaries and benefits and can provide nicer facilities.  A for profit’s products can compete on price with a social enterprise that sells a product at a premium to support the mission.  When a social enterprise’s product is priced below market value, then it is important to maintain sales within the target market meant to be the beneficiary of the discounted product.  Whether it is on price point for the product or target market range, the social enterprise has less flexibility to alter its business plan to adapt to the market trends.

Non-Profit:  A non-profit organization also serves as a competitor to a social enterprise, but the metrics it competes on are, naturally, different from the for profit competition metrics.  All non-profits are engaged in some form of fundraising, as it is a necessity to fund their organization.  While fundraising is difficult on the front end in terms of finding donors, once the non-profit has the funding they are free to use it as they need within their legal bounds.  A social enterprise, on the other hand, is engaged in equity and debt financing and therefore must provide equity investors with a return on their investment or pay back the principle and interest on their debt.  So a social enterprise needs to be more careful with their use of funding because their sources of funding are expecting the money to be returned.

Social Enterprise:  Lastly, a social enterprise that is successful is going to face competition from other social enterprises that enter their market.  As mentioned in the earlier blog post on Social Enterprise Marketing Strategy, a social enterprise benefits when another social enterprise competes with it for market share, as far as accomplishing its mission.  In order to compete on margin when there is another social enterprise in the same market, the social enterprise must push itself to operate on lean principles and continue to seek out waste in the business.  Learn more about lean principles from the Lean Enterprise Institute.

 

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A social enterprise faces a challenge when it comes to marketing.  As a social entrepreneur is seeking to meet a demand or need in the market that is currently unmet, the availability of data is scarce.  Unlike a for profit organization, a social enterprise is often entering a hybrid market that is un-established and cannot be researched and quantified quite the way a traditional for profit market can.  Thus, there is less of a need to invest the resources necessary to conduct extensive market research that a traditional commercial entrepreneur faces.

Additionally, a social enterprise actually benefits from having competitors in their market space, as the ultimate goal of a social enterprise is to serve a need in the target market.  Unfortunately, that target market is often very specific and it can be difficult to broaden the target market without straying from the mission.  As mentioned in a previous blog post, the target markets can range from those who are willing to pay a premium for a socially responsible product (such as TOMS Shoes) or those who are receiving a product at a reduced cost (such as Grameen Bank).  Wherever the target market may lay, it is important for the social entrepreneur to consider how the size of their market affects their overall business strategy.

If a social enterprise emphasizes sustainability in their supply chain, such as Guayakí, they face a greater degree of uncertainty and lack some of the legitimacy enjoyed by a standard commercial enterprise.  Often a company must pay a premium to incentivize their supply chain towards sustainability and then turn the price premium on the product into a compelling story for the end consumer.  Often a company will seek certification, such as the Fair Trade Certified label in the food and beverage industry, to add value to their product and communicate that value to the end consumer.

A social enterprise should anticipate utilizing social media to the full extent possible in order to spread the message of the organization’s mission.  Facebook, Twitter, YouTube and LinkedIn are all wonderful ways to communicate with your entire audience of stakeholders.

The following Marketing Plan is borrowed from Social Enterprise London:

• Strategy:  The vision and purpose of the organization will provide the long-term strategic direction of the marketing plan. As a social enterprise, one of your core values will be to reinvest profits into your stated cause or community..
• Communications Objectives:  SMART (Specific, Measurable, Achievable, Realistic, Time-bound) objectives for marketing should lead the action planning. Communications objectives work to manage the buying cycle, abbreviated as AIDA (Attention, Interest, Desire, Action), and different media are used throughout the buying cycle to stimulate demand. In addition, objectives should consider company image and branding.
• Communications Tactics:  Depending on the stage of the product in the product life cycle, the campaign objectives, the customer profile and the market positioning determines which media are used. A campaign integrating multiple media avenues is strongest, and ensures that the marketing messages are reinforced.
• Action Planning and Implementation:  Resources, budgets and time frames are confirmed, and test marketing may be undertaken.
• Evaluation and Control:  Controls are essential in measuring the results of the campaign compared to expectations. This will also help with planning further marketing campaigns.

Check out Social Enterprise London’s entire handbook on marketing your social enterprise.

 

Measuring the performance of a social enterprise is likely to be one of the biggest challenges an entrepreneur will face.  Unlike a non-profit who can measure their performance based on their fulfillment of their mission, or a for profit who can measure their performance based on their profits, a social enterprise must seek to measure both metrics and find a balance between the two.

Accounting measures and accountability are a very important part of a social enterprises’ duty to report their performance.  While financial accounting to disclose profits is easy, it is much more difficult to identify and quantify proper metrics to measure a social enterprises’ social impact.  In Connolly and Kelly’s 2011 article “Understanding accountability in social enterprise organisations: a framework” in the Social Enterprise Journal, they identify three types of accountability for social enterprises: legal, constructive and voluntary.

• Legal: Also known as process accountability, legal accountability includes the implementation of the proper authority structure in the company, annual filing of requires reports and financial statements, obtaining the necessary accreditation, meeting all legal and regulatory standards and fulfilling all contractual obligations entered into with service provides and investors.
• Constructive:  Also known as performance accountability, constructive accountability measures a company’s use of resources for efficiency.  A company can used a balanced scorecard, benchmarking and best practices in the industry, and Social Return on Investment.  A company can also engage in continuous improvement through training and other forms of organizational learning.
• Voluntary: Also known as program accountability, voluntary accountability measures whether or not an organization has met its objectives.  This form of accountability is often driven by social accountability where organizations engage in self-evaluation and audits of other social enterprises.  This form of accountability is the least well-defined and is most dependent on a company’s own reflection on its goals and mission and how it has managed to meet those expectations.

 

Survival or Establishment Stage:  Once initial seed capital is drying up and no profit has yet been earned, the challenge for a social enterprise will be to expand the customer base and increase the market penetration while preserving capital.  In order to increase access to more equity capital, social enterprises in an establishment stage can consider applying for a Program Related or Mission Related Investment from Mission Investors.

Growth or Expansion Stage: Once they have hit or surpassed financial break-even, the social enterprise may be able to access debt capital and to establish a credit history.  Socially motivated lenders may be able to provide flexible or subordinate debt to a social enterprise.  It is crucial to wait until the social enterprise is beginning to turn a profit before they are ready to support debt payments.  The “five Cs of credit” lenders assess are character, cash flow, capacity, context and collateral.  Collateral is often the most difficult for the social enterprise, as it requires a commitment of an asset, which could include revenue or grant receivables.

Mature Stage: Once a social enterprise is a successful business, the challenge is to remain competitive as new players enter the market.  Success is a sign to other entrepreneurs that there is fertile ground for business opportunities and social good to do.  Social enterprises must stay ahead by continually improving the efficiency of their operations and making sure thier product is ahead of the pack.  At this point in financing, debt capital is likely to be preferred.  However, working capital (such as cash into operating assets, inventory or accounts receivable) needs to be managed to avoid a cash crunch.

 

*Social Enterprise Alliance.  Succeeding at Social Enterprise.  Jossey-Bass, 2010.  Print.

 

Seeking initial investment for your social enterprise places you in the “seed stage” of financing your company.  At this point, you must seek equity capital from sources that can afford to lose it all.  The best sources for funding are friends, family, and your own pocket.  It is a waste of your time to look for a VC who “gets it” or pursue a loan from a bank.  Depending on the legal structure you selected for your entity, offering a true “equity” share in your company may not be possible.

A good idea at this point in your financial strategy is to consider in-kind services.  This means that you exchange goods and services instead of cash.

Another idea is crowdfunding.  This is a strategy where you can use a funding platform like Kickstarter.com to name a funding goal, explain to the community what your plan is, and receive small investments from anyone interested in your project.  Often the investors are rewarded in some way.  Crowdfunding has become very popular recently. The crowdfunding strategy, however, has also caught the attention of the SEC and has been regulated by the 2012 JOBS Act.  The JOBS Act aimed to assist small business in securing financing by relaxing some of the federal securities laws.  The SEC is currently working to draft rules allowing equity-based crowdfunding.

Once your social enterprise has advanced beyond the “seed stage” and can offer a return to investors, you can seek investments from social impact investors who select investment opportunities based on a social goal.  Some examples of social impact investors are: Good Capital, and the Global Impact Investing Network.