Social enterprises are increasing in number and diversity all around the world. They offer new opportunities to participate in the economy, by addressing problems that bring third-party benefits. Other economic actors usually neglect the issues that social entrepreneurship concerns with.
One driving force behind this uprising of social enterprises is the newfound possibility of obtaining sustainable sources of funding and carrying out social missions through commercial activities. Social entrepreneurship removes the dependency on grants and donations specific to nonprofit organizations.
Nonetheless, starting a social business requires substantial and sometimes unique resources. Since they resemble a hybrid between nonprofit and for profit organizations, thereby also carrying multiple missions, social enterprises operate by a distinct business model. Therefore, the resource inputs are also specific.
As an aspiring social entrepreneur, you’ll need to understand and manage the following main resources: a social mission, motivation, people, and financial resources. Let’s explore each resource in detail.
Resources required in social entrepreneurship
A social mission
It is the focus on social value creation, instead of economic value capture, that differentiates social entrepreneurship from commercial business. Social enterprises use resources to bring benefits to society first, instead of making profits for its members. This is not to say that profits are not needed. Profit-making is still a part of the business model – it’s what makes social enterprises viable commercial businesses. The distinction is in the prioritization of the two missions: usually, social impact comes prior to financial gains.
When you choose a social mission for your business, you want to target a certain social group with low power, visibility, and collective capacity to support itself. The issues faced by vulnerable communities have deep root causes, such as poverty, gender inequality, health imparities, political conflict, or ecological distress. Identifying the root cause to be tackled is the first step in building a social mission.
Next, it’s useful to think in terms of what activities the social enterprise can deploy to not only assist, but also empower individuals to help themselves. For instance, in the Netherlands, Social Enterprise NL was founded to empower and connect social entrepreneurs, creating an ecosystem that contributes to ending poverty, and building an inclusive and circular economy.
The focus on a social mission is also visible through business results and reporting. The outputs and impact of activities need to be measured and demonstrated to financiers and legal monitors. A large proportion of surplus gains needs to be reinvested into socially driven activities, although the amount is different across legal systems. Profit distribution is thus restricted, and remuneration limited to protect social impact. Normally, potential revenues following dissolution or buyout are also secured through a policy requirement.
Despite the emphasis on social impact, profit remains an essential additional component. There is a fine line between the social mission and the business purpose, leading some social enterprises to struggle in balancing the two elements. Social entrepreneurs need to learn a completely new skill: steering the enterprise in two key different directions. Profit, in the end, is essential for social enterprises to achieve the desired social impact.
Venturing to use your time, brainpower, and other resources to run a social enterprise requires a strong motivation to help others. Part of this motivation likely comes from feeling compassion and empathy for the communities that will benefit from the enterprise’s activities. Because social entrepreneurship replaces self-interested motivations with interest for your neighbor, being able to understand, empathize with, and feel compassion for that particular audience is an important factor.
Creating an emotional connection with the vulnerable community leads to processes that increase the likelihood of your social enterprise’s success. These include finding integrative solutions to social problems, committing to surpassing challenges, and adjusting cost-benefit analyses in favor of others. This is why it’s usually a good practice to select a target social group that you can resonate with or are somehow connected to.
Of course, other types of motivations are possible. Personal fulfillment comes to mind. This could be driven by the desire to achieve a personal target, such as honing business skills, learning about a particular area of the economy, or building an extensive professional network. Finally, the desire to create a significant impact in the world is another common motivation theme among social entrepreneurs.
In practice, businesses may find that besides motivating factors such as compassion and impact, the need to maintain some financial stability will also intervene. To be able to keep their staff motivated, entrepreneurs will need to ensure that they provide a fair distribution of profits. After all, social enterprises also work by filling in an employment gap in the market, thereby offering the promise of increased financial security to vulnerable groups. Moreover, social enterprises often need to provide returns to their financiers. Money, while secondary, is still an important motivating factor for the various stakeholders of a social enterprise.
People: mentors and employees
Another critical resource to have as a social entrepreneur is a mentor. It is very common for the business world to encourage and nurture mentor relationships. With social enterprises, this ethos is amplified by the additional motivation of entrepreneurs to enter the business arena.
A mentor can help you along many dimensions, including morale, knowledge, skills, and connections. They are often people with expertise in the field, and can listen to your ideas and plan, lend you some of their insights, and propose new paths of actions. You can use them to train on certain skills, such as giving business pitches to an investor audience. Additionally, they can introduce you to their connections, helping you build a much-needed professional network.
Getting another social entrepreneur as a mentor can be difficult because, as you’ll see for yourself, this is more than a full-time job. Growing a business requires a lot of commitment. Time is perceived as a scarce resource. You may want to start by asking for 15 minutes of someone’s time over coffee.
There is nothing more important in an organization than people. If you can get a partner to join you as a founding party or from a management position early on, that can increase your chances of growing a successful company. It can be very advantageous to partner with someone with whom you share a common vision, resources, and efforts. You could also complement each other in terms of expertise and cover different areas of work, as well as consult each other on important matters.
Your staff also has a key role in the day-to-day business operations, in the scaling processes, as well as in opportunity identification and decision-making. You’ll want to design a series of hiring principles to stick by when choosing the right people for your organization. It’s important to cover the practical skills and knowledge that you need to drive the separate operations of your business.
On the other hand, social enterprises revolve around a social mission, which may require more commitment than your typical business environment. For instance, the job may ask for more flexibility and offer less competitive salaries. Moreover, you need people who can resonate with the culture of your business, which, in the case of social enterprises, likely focuses on values such as compassion, empathy, and care for others. Ideally, you’ll want to hire employees who share your affinity for solving social issues and helping communities.
A big resource constraint that social entrepreneurs perceive is money. Finding financial resources to start a new venture is not always straightforward. However, there are many different options to raise capital. If one fails, you can always try later on or “try your luck” elsewhere.
Some entrepreneurs manage to build the company from the ground up with no investment other than their contributions. This is called bootstrapping. Make no mistake: this is not an easy avenue, mainly because it involves a high financial risk for the entrepreneur. The lack of financial resources can undermine growth, prevent promotion, and slow down the development of the products and services. On the bright side, the entrepreneur maintains all control over decision-making. He or she can also invest all resources into the company’s core activities.
External funding, on the other hand, requires some reprioritization and additional challenges in the way the business operates. For one, the funding source may require a return on investment. Otherwise, the financiers may exercise additional control and monitoring over investment decisions and outcomes.
If you do require financing for your business, the best place to start is to understand what types of financing are available. Here is a breakdown of the most popular sources of funding for social enterprises:
1. Family loans
If you are lucky enough, your family or friends may be in the position to lend you the money you need to venture into social entrepreneurship. Usually, this means less concern over security and financial returns, leaving you more room for risk, as well as reinvesting into the business.
As the number of social enterprises grew, support from other economic sectors also increased. Government, companies, and cross-sector partnerships around the world sometimes offer support in the form of non-refundable grants to help enterprises that contribute to the economy, society, and the environment. Usually, terms of application apply, and contests are held in order to secure the funds for the most promising businesses.
3. Social investment
Another source of funding for social enterprises is the financial market, through commercial loans, bonds, and equity purchases funded by private and public investors. This option is increasingly available as green and ethical investors show a higher interest in social businesses. Apart from returns, social investors often require strong and detailed evidence of the investment’s social impact. As a result, social enterprises experience an extra burden to monitor and report results.
The society’s perception over and relationship with corporations has been shifting. No longer are we buying the theory that the invisible hand of the economy will work to the benefit of society at large. 77 percent of respondents in a 2018 Deloitte survey rated citizenship and social impact as critical factors by which they judge organizations. In this context, social impact businesses fill in an economic gap with opportunity insight and compassion. No wonder that social entrepreneurship is gaining popularity.
Starting a social enterprise requires a strong resource commitment. This potential barrier, however, can be surpassed with enough motivation, strong guidelines, and perseverance. To start, you’ll need to design your social impact mission. It is a fact that social businesses place social impact first. Being invested head and heart is the first commitment you’ll make. Your motivation will likely include a strong connection or understanding of the vulnerable social group you set to help. Furthermore, the right people will only be attracted by the right culture with which they can resonate. Hiring employees who share your passion for the enterprise’s social mission can be a recipe for success.
Lastly, the financial side of your social enterprise should not be neglected. To deliver the intended social impact, the business will need to stay commercially viable over time. Its activities are primarily market-based, so profits will matter. Fortunately, obtaining green and ethical finances has become easier nowadays, as people seek to participate in their community’s development and investments prove more attractive.