Tag Archives: Social Enterprise

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?

Social Enterprise: Defining Your Mission

Social Enterprise Mission from The Startup Garage

Social Enterprise: Defining Your Mission

A key part of a company’s business plan is the mission statement.  In particular for non-profits and social enterprises, the mission statement serves as a constant reminder of the social aim the organization is dedicated to.  Writing a strong mission and corresponding guiding principles is a key planning step to keep your social enterprise on track during the various stages of business. For a social enterprise, the mission and guiding principles must provide guidance for tackling the tension between mission and margin.  Below, we provide a list* of the areas from which you can draw inspiration as you write your mission statement and guiding principles:Writing a Mission Statement that matters from the startup group

  • Employees: What is your role with your employees?  Are they a means or an end or an intricate part of who you are?  How does that manifest itself in your business and its structure?
  • Community: What is your relationship to your community?  Is it simply a place of business?  Could you move one hundred miles away without any loss of impact or connection?  Or would your community miss you because you were impacting it positively?
  • Environment: What will you do and not do to earn a profit?  What are your profit goals?  Who is rewarded when a profit is made?
  • Wages: How will wages be calculated?  What is your commitment to moving in the direction of a living wage?  What type of benefits are you committed to providing?
  • Governance: To whom is the organization accountable?  To whom are you, the leader, accountable?
  • Decision making: From whom are you going to seek input, counsel and advice?  Will decisions be made by consensus or chain of command?  Where will the buck stop?
  • Business Ethics: What will be the basic business terms by which you will conduct commerce?
  • Diversity:  Whom will you welcome into your organization and how hard will you work to get them there?
  • Personal Development: To what degree will the enterprise be a vehicle for personal growth?  To what degree will you seek to encourage spirit at work?  What about fun?
  • Advocacy and Public Policy:  Which social issues is the organization passionate about?  Will you seek to affect those issues with your work alone?  Will you be a public voice?  Will you seek to influence public policy?
  • Impact: How will you measure your impact and what will you call success?  What are you willing to spend on measurement?  How open will you be to the course corrections that measurement suggests?

An example of a company with a well-articulated Social Mission and a downloadable PDF of their guiding principles is Yonkers, NY-based Greystone Bakery, who strives to provide job opportunities to people who are considered “hard-to-employ” such as ex-prisoners.

 

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

 

Social Enterprise, Non-Profit and For Profit: The Differences

Social Enterprise Profit vs Non-Profit from The Startup Garage

Social Enterprise, Non-Profit and For Profit: The Differences

 

While the most important difference between a social enterprise and any non-profit or for profit company is an emphasis on the balancing act between the mission and the (profit) margin, there are many specific business attributes unique to a social enterprise.

 

  • Corporate Accountability:  Along with traditional financial and legal accountability, a social enterprise is responsible for constructive and voluntary accountability measures.  These measure provide stakeholders with information on resource efficiency and whether or not the organization has met its objectives.
  • Governance:  Many governance issues can be addressed in the social enterprise’s corporate bylaws.  Similar to a non-profit, there is the heightened responsibility for moral governance of your organization as to fulfilling the organization’s mission.
  • Transparency:  Social enterprises face the challenge of building trust with their stakeholders and thus have an additional incentive to provide ample amounts of transparency in their success metrics.
  • Compensation & Wages: This issue is significant for a social enterprise.  A social enterprise falls somewhere between these extremes of a non-profit, which is limited to executive compensation that is reasonable and often pays staff employees below their market value, and a for profit, which can practically pay their executives and staff whatever they think is necessary for top performance.  It is important to pay staff employees a wage that is competitive with the compensation rate for the same work in the for profit sphere.  However, when it comes to executive compensation, it would reflect poorly on the social enterprises’ pursuit of their mission if the executive compensation even remotely resembled that of the for profit sphere.
  • Employee Ownership:  Offering an Employee Stock Ownership Plan (ESOP) is a means of raising finances and saving money on payroll by offering shares of company stock to employees.  An ESOP allows business owners to offer equity in the company in exchange for, most often, a reduced salary.  Offering ESOPs to employees has the added benefit of promoting employees to take a vested interest in the company and its success and may be a good way for a social enterprise to free up additional capital.
  • Management & Worker Communication:  Social enterprises are more often characterized by participative management from the employees than a traditional for profit business.  Similarly to a non-profit, the employees are often dedicated to the organization’s mission and are likely to want to be involved in deciding the direction of the company.
  • Local Involvement:  If the social enterprise’s mission is to address a local issue, than local involvement is going to be especially important.
  • Diversity:  Improving the diversity of a company’s workforce is becoming a popular issue for all companies, for profit, non-profit and social enterprise.  But as a companies with a mission, both social enterprises and non-profits can make it their goal to bring diversity to a multitude of professional, social or other group settings.
  • Civic Engagement & Giving:  Especially for customers of a social enterprise’s business, a social enterprise business model provides a way to both give back to the community while receiving a quality product.  This may be more attractive to consumers who don’t have the resources to make an outright donation but want to feel good about what companies they give their business to.
  • Environment: One of the key tenants of a social enterprise is a commitment to the triple bottom line: profit, people and planet.  Environmental stewardship is an important part of a social enterprise’s role in the corporate world.

 

What is a Social Enterprise?

What is a Social Enterprise from The Startup Garage

What is a Social Enterprise?

You may have heard the term “social enterprise” being discussed in the business world — but what does it really mean?  A social enterprise is the joining of a social cause with a business activity.  It is easier to understand the concept of a social enterprise if you think of a business continuum with non-profit organizations on one end and for profit organizations on the other end.  Between the two profit extremes lie the social enterprises.  They can take the form of anything from a non-profit organization engaged in mission-supporting commercial activities, a dual-purpose businesses that mediates profit goals with social objectives, to a profit-oriented businesses engaged in social commitments such as corporate philanthropies.  Together, the variety of social enterprises represent a paradigm shift in business motives.  Purely economical decision making and economic Darwinism have given way to a focus on the value of creating a positive impact on society sustainably through ethical and social capital.

In a social enterprise, there is a necessary tension between the dual motives of mission and margin, and this tension drives the whole business.  A social enterprise differs from social entrepreneurship in that the enterprise is the vehicle through which profits can be reinvested for growth, and entrepreneurship is the socially innovative action that serves as the tipping point for change.

An advantage of a social enterprise is that it has a more entrepreneurial spirit than a traditional non-profit, but remains socially proactive by seeking to influence and change environments rather than respond reactively.  A social enterprise can attract and retain a staff that desires pursuit of a social mission while still having the opportunity to make a profit.  In business lingo, the social enterprise pursues the “triple bottom line” of people, profit and planet.

Socially and environmentally-focused business models seek to solve a community problem in the “people” or “planet” categories through a variety of methods.  The products or services of a social enterprise are designed to address issues such as economic inequality, improving health, promoting the arts/sciences/media, conserving the environment, rebuilding the local community, alleviating poverty through the supply chain, employing workers from a chronically under-employed population or driving capital to other purpose-driven enterprises.

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