Category Archives: Social Enterprise

Social Enterprise: Competing With Non-Profits and For Profits

Competing Social Enterprise from The Startup Garage

Social Enterprise: Competing With Non-Profits and For Profits

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.

 

Whether you have a question about Social Entrepreneurship or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Social Enterprise Marketing Strategy

Social Enterprise Marketing Strategy from The Startup Garage

Social Enterprise Marketing Strategy

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.

 

Social Enterprise Performance Measures

Social Enterprise Performance Measures from The Startup Garage

Social Enterprise Performance Measures

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.

 

Stages of Social Enterprise Capital

Growth Stages of Social Enterprise from The Startup Garage

Stages of Social Enterprise Capital

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.

 

Social Enterprise: Sourcing Initial Investments

Sourcing Initial Investment from The Startup Garage

Social Enterprise: Sourcing Initial Investments

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.

 

Writing a Social Enterprise Business Plan

Writing a Social Enterprise Business Plan from The Startup Garage

Writing a Social Enterprise Business Plan

Writing a business plan serves two main purposes: providing the guide for your business internally and communicating the value of your business externally.  The more detail and thought that is put into the business plan, the more it will help your business navigate the start up and expansion stages.  Consequently, the more your business plan thoroughly addresses all the issues that will come up internally as you grow your company, the more power it will have in convincing an external audience that your business plan will succeed.

Depending on the type of entity you are writing a business plan for, there will be different external audiences that will be interested in your business plan.  A non-profit  business plan is aimed at donors, as fundraising is a key method of financing a non-profit organization.  A for profit business plan is aimed at investors, as both equity and debt capital are key to financing for profit organizations.  A social enterprise business plan however, is aimed at a blended audience.  As a business, a social enterprise leans in the direction of appealing to investors, but it would not do justice to the social enterprise to remove the importance of the mission for the sake of convincing investors about the prospect of the profit margin.

Your business plan is the argument you use to your external audience to finance your organization, and there are three types of persuasive strategies to accomplish this goal.  The first strategy is the logical appeal, or the logos.  This tactic is best applied in the context of a for profit business plan, as investors will want to see numbers and figures reflecting financial potential to convince them to invest.  The second strategy is the emotional appeal, or the pathos.  This tactic is best applied in the context of a non-profit business plan, as donors want to feel like they are providing funding for a solution to a problem that tugs at their heartstrings.  The final strategy is the ethical appeal, or the ethos.  This tactic emphasizes the character, credibility and dependability of the messenger.  It is the tactic most dependent on who is advancing the argument rather than the content of the argument.  This tactic is most appropriate for a social enterprise’s business plan.  By establishing the credibility of the social enterprise itself as a competent, well-connected and confident team of leaders, an investor is likely to buy in to both the mission and the financial potential of the organization.

The Startup Garage specializes in writing business plans for social enterprises, get in touch with us for a free consultation!

 

Registering Your Social Enterprise

Registering a Social Enterprise from The Startup Garage

Registering Your Social Enterprise

Once you have decided on the proper entity type for your social enterprise, the next thing you need to do is file the proper paperwork with the proper authorities to begin the process. The best place to start is your state’s Secretary of State office.  You can find their contact information here.

Register Your Name (State): Find the form your state requires to register the name of your social enterprise.  Your state likely has a database you can search through to ensure that you are not registering a duplicate company name.  You can generally do this step first.

Articles of Incorporation (State):  Find the form your state requires for submitting your articles of incorporation.  This is generally a short form and requires the name of the corporation, the address of the principle place of business, the purpose of the corporation, and the contact information for the agent for service of process, and a signature.  The California forms are available here.

Employer Identification Number (Federal): An Employer Identification Number (EIN) is a nine-digit number assigned by the IRS used to identify operating businesses – it may also be referred to as a Federal Tax Identification Number. Your  EIN will allow you to apply for federal tax exemption status as a 501(c)(3) charitable organization. EINs do not expire. You can obtain an EIN for free through the IRS by mail, fax, toll-free phone, or online submission. Click here to read more on how to apply, or download FormSS-4 right now.

Bylaws (State): The Bylaws is the document that governs how the corporation is to be run.  This includes expectations of members, how the board of directors will be assembled and what their duties are, how meetings will be organized, and how stock is issued.  The Startup Garage has sample corporate bylaws.

Annual/Biennial Statements (State, Federal):  You will need to file tax documents with both the IRS and the state, and possibly with your county.  Your tax specifics will depend on what type of business entity you have selected for your social enterprise.

 

Social Enterprise: Choice of Legal Entity

Entity Choice for Social Enterprise from The Startup Garage

Social Enterprise: Choice of Legal Entity

As of yet, a social enterprise is not its own legal structure, and a social enterprise company must consider its legal structure options and select the one most congruent with the company’s plan.  Below we explain the options available:

Non-Profit:  A non-profit is the most common legal entity chosen by social enterprises.  However, a non-profit that has attained 501(c)(3) or 501(c)(4) status with the IRS faces a lot of limitations as to how profits can be re-invested into the company and how they can raise investment capital by offering outside investors ROI.  Therefore, a non-profit is not the ideal structure for a social enterprise that seeks to re-invest profits and pay competitive salaries to its employees.

L3C (Low Profit Limited Liability Company): Although legislation has not yet been adopted in California for an L3C, this entity, which is considered a for profit with a socially beneficial mission, is available in nine states and pending in ten more.  The purpose of the L3C is to simplify use of program related investments (PRIs) from private foundations.  Foundations must direct 5% of their assets to a charitable purpose, and an L3C can be a recipient of an investment that satisfies the criteria of this requirement by the IRS.  Read more about L3Cs here.

Benefit Corporation:  A benefit corporation is an entity type in California (and seven other states) that is required to have a public benefit purpose for its Articles of Incorporation and that requirement is audited by a third-party standard.  The most well-known third-party standard developer is B-Lab, which certifies complying companies as “Certified B Corporations”.  Different states have different requirements for incorporation as a benefit corporation, and B-Lab has provided a guide to navigating those requirements.

Flexible Purpose Corporation:  Unique to California, a flexible purpose corporation is another entity type that is allowed to pursue certain special purposes and relies on shareholders to oversee the fulfillment of the special purposes through minimum voting requirements and required disclosures.  The California Corporations Code sections that sets forth the requirements for this entity are available here.

It is also possible to choose an LLC or a corporation as an entity form for a social enterprise, and companies in some states may be required to for a lack of options otherwise.  Both an LLC and a corporation offer personal liability protection for the owners but differ in their tax benefits and corporate formalities.  To determine the best entity choice for your company, you would be well advised to consult an attorney.

There’s no perfect business structure for success in a social enterprise: the model that will ultimately serve you best  depends on the good or service being delivered, the market being served, the ability to obtain funds for growth, and the political, social, and cultural context of the regions in which the social entrepreneur operates.

 

Developing Your Social Enterprise Team

Social Enterprise Team from The Startup Garage

Developing Your Social Enterprise Team

As a social enterprise prioritizes its mission to its people, a crucial step in forming a social enterprise is defining and developing your team of players.  Rather than emphasize shareholders, as with a for profit, a social enterprise considers all stakeholders who share a “stake” in the outcome of the enterprise.  The group of stakeholders includes employees, investors, customers, and anyone involved in the product supply chain.  A social enterprise also considers the environment to be a stakeholder.

Employees

Some of the most important stakeholders in a social enterprise are the employees.  As an employer, a social enterprise wants to hire talented employees who resonate with the social enterprise’s mission and who expect to give something more than their time and in return will gain something more than a paycheck.  A social enterprise wants to hire employees with passion and drive for the enterprises’ cause.  However, these passionate employees must also possess the talent required for the job.  It is paramount that social enterprises pay their employees on a pay scale that competes with traditional businesses.  This means that the right employee for the job receives enough that the combination of their pay plus the value of doing meaningful work for the social enterprise outweighs the pay from a top-of-the-market competitor.  You cannot settle for a second or third choice candidate because you lack the capital to compensate your first choice adequately.  Inability to provide competitive pay is a sustainability issue and indicates a need to re-think the underlying financial model of your social enterprise.  Darell Hammond, awarded the 2011 U.S. Social Entrepreneur of the Year Award by the Schwab Foundation for Social Entrepreneurship, states that “[You] can’t pay pauper salaries for program staff or executive staff… We have to allow them to invest in the future as far as long-term compensation and retirement savings plans, and that’s the only way that we are going to get ahead.”*  A suggestion is to craft a company policy on compensation so that future discussions on pay are objective.

Customers

Your next stakeholders are your customers.  Your customers may be indirect to your mission- like those willing to pay a premium for a product from a socially responsible enterprise, such as TOMS Shoes, or may be those who are directly impacted by your mission, such as Grameen Bank.  It is important to understand the role that your customer base plays in driving your business.  Are they the same group that you wish to make an impact on?  The answer will help you understand how to price your product or service.

Investors

Another group of stakeholders are your investors.  You will likely first encounter these stakeholders early on in your company’s life, as they serve a key function in getting your social enterprise off the ground.  Social enterprise investors are a hybrid between a for profit investor looking primarily for a promising return on investment and a non-profit investor who wishes to foster the mission of the non-profit.  Social enterprise investors do want to see ROI on their investments but are also invested in the company’s mission.  It is crucial to keep your investors involved in the conversations about your company’s mission, because it is your mission that most likely attracted their attention.

Supply Chain

Yet another part of your stakeholder team is your product supply chain.  If you are producing a product, where you source the materials from is an important decision a social entrepreneur must make.  Companies like Ben & Jerry’s actively seek out opportunities to source their ice cream materials from other social enterprises, such as sourcing their brownies from Greystone Bakery.  Check out Ben & Jerry’s commitment to social enterprise.

*Lynch, Kevin.   Mission, Inc.: The Practitioner’s Guide to Social Enterprise.  Berrett-Koehler Publishers, 2009.  Print.

 

Defining Your Business Model: Social Enterprise

Social Enterprise Business Model from The Startup Garage

Defining Your Business Model: Social Enterprise

Now that you have a clearly defined mission and a set of guiding principles, it is time to start asking the business questions. How will your business work? How will it manage the tension between mission and margin?
Let’s start with the margin:

  • What is your product or service?
  • Who is your target market?
  • How will you bring the product to market?
  • Who are your suppliers?
  • How will you determine the price of your products?

Now to consider the mission:

  • How will you motivate your team with the dream of doing the impossible?
  • How will you reward your staff and provide them with the opportunity to be heard?
  • How will your staff be the spokespeople for your enterprise?
  • How will you celebrate your social impact?