B-School, Impact Investing, Social Entrepreneurship, Startups

Toward a practical, impact-focused classification of social enterprises

Below is the second half of an essay that I put together for Alex Nicholls’ Social Entrepreneurship course at Oxford’s Saïd Business School. It is verbose, thanks to an academic word count target. The nut graf, as my friend Ben has taught me to call it, is that I believe that social enterprises (businesses that hope to have a positive social impact with their work) are best sorted and supported according to the impact they would like to have. 

In the decades since Bill Drayton first coined the term social entrepreneurship in the 1980s, much ink has been spilled attempted to define—or argue against the definition of—a field that has attracted the attention of governments, philanthropists, and businesspeople. Most of these definitional attempts focus on the edges, using the contrast between social and “mainstream” businesses as a way to clarify what should be considered a social enterprise. This paper moves from such contrast-based efforts to define social entrepreneurship and more academically-focused frameworks, and toward a practical categorization of social enterprises starting from their relationship to their primary beneficiaries, which I call an enterprise’s impact focus. Such a categorization, rooted in the practical needs of social enterprises themselves, can help practitioners and academics of social enterprise move past questions of definition to considerations of how best to support enterprises themselves.

The rationale for a practical categorization of social enterprises

As interest in social enterprise and its sister field of impact investing has risen over the last ten years, the imperative has grown for practitioners to be able to effectively channel resources to enterprises. Building an ecosystem of support around social enterprises depends on that effectiveness, in a number of categories. Below we lay out six of those categories, referring to existing social enterprises whose needs differ widely enough to illustrate the necessity of practical categorization.[14]

Funding. Social enterprises demand an array of overlapping funding types. A bank making small loans to rickshaw drivers in India may require equity capital to become operational, and then a significant amount of debt to continue lending to its participants; a technology for more effective cold-chain distribution in the same country might seek grant capital for its initial research followed by equity capital to hire initial staff and working capital to finance vehicle purchases. Such companies face a shifting landscape of funders, many of whom continue to determine their own areas of focus, investment theses, geographic focus, and balance between profit and impact. Wealthy individuals and their asset managers, on the other hand, have little clarity into the types of social businesses that exist and (critically) their risk-return profiles.

Regulation. A company in California building partially pre-fabricated homes for urban in-fill may need to work with zoning officials; a carbon-trading platform designed to fund community-level economic development projects depends on the regulatory advancement of carbon credit legislation at an international level. In large part, social enterprises fall under the same local regulatory structures as other companies. As efforts to create country-level regulation of social enterprises pick up pace, however, lack of appropriate categorization may prevent beneficially specific regulation or inspire legislation broad enough to be open to abuse.

Talent. A medical device company developing more effective birth control insertion tools may want to hire experts in FDA clinical trials; an African-based small business software-as-a-service company might build local software development and sales teams. Today, practitioners advising those interested broadly in a career in social enterprise can offer little guidance on the skills and resources necessary to build such a career—given appropriate categorization, such practitioners could quickly point potential hires to the right categories of business to begin their search.

Media exposure. A company importing fair trade Central American coffee to the US might spend its marketing dollars getting coverage in high-end American coffee blogs; a company packaging health insurance and ambulance services to rural farmers in India might seek coverage on local-language radio stations or attend community meetings. Reporters covering social enterprise lack a common language with which to report their stories to readers unfamiliar with social enterprise, and cover an impossibly wide array of companies in terms of industry, geography, and focus. And entrepreneurs looking for media exposure need access not only to audiences of social enterprise enthusiasts, but to potential customers , investors, and industry partners.

Strategic guidance and technical assistance. A farm-to-table grocer in the United States might seek out Board members who have built for-profit, commercially-focused grocery chains in the US; an East African agricultural extension company might seek out former government ministers of agriculture. Developing a proper categorization of companies would enable third-party advisers of technical assistance and consulting to develop an area of expertise and market it effectively to groups of companies who might need it, and help identify potential Board members more quickly.

Impact Measurement. A small business software company in Kenya might measure its impact by the number of jobs created at the companies where its software is implemented. A company providing classroom software to teachers in low-income schools in America, by contrast, might track teachers’ self-reported levels of satisfaction with their product or educational outcomes attributable to its implementation. Today, some social enterprise funders use the IRIS/GIIRS impact rating system, though confidence in the system is currently such that few funds use it as a determinant in their investment decision process and even fewer social entrepreneurs see it as a useful guide to their decision-making.[15] Proper categorization can mean appropriate comparison within classes of enterprises, and appropriate focus on the metrics most important to individual companies’ impact.[16]

Such diversity in the types of organizations adopting the label social enterprise speaks to the need for appropriate categorization, without speaking explicitly to the type of categorization that would most clarify the issues raised here. Based on the academic research listed above and the author’s own experience with early-stage social enterprises, a number of possible classifications emerge:

  • Mission centrality, as argued by Alter
  • Ambition to scale: Dees’ Schumpeterian, paradigm-shifting social entrepreneur versus locally-focused small businesses
  • Entrepreneurial motive: Are entrepreneurs “impact first” or “financial first”?[17]
  • Geographic location
  • Industry, as defined by the mainstream commercial classification
  • Type of funding required: grants, debt, equity, or a combination
  • Company growth stage: idea, pilot, growth, maturity
  • Legal status:Non-profit, for-profit, or some form of hybrid (e.g. B-Corp, L3C, community interest company, flexible purpose company)
  • Relationship to beneficiaries: Is the enterprise trying to impact the producers, consumers, or recipients of its product or service?[18]

Impact Focus as a primary category

Of the categories listed above, I believe that the least-discussed and most instructive categorization of social enterprises is the enterprise’s relationship to the individuals whose lives it seeks to impact. If the enterprise is focused on social impact, are its beneficiaries its producers, consumers, or recipients? Once delineated, such a categorization can be put into conversation with other key characteristics—such as geography, ambition to scale, and industry—to determine the key resources necessary to support that enterprise’s growth. In the absence of a perfectly satisfying term, I call this an enterprise’s impact focus.

Producer-Focused Enterprises

For some enterprises, the primary beneficiary is a producer. Such beneficiaries may be smallholding farmers, people with disabilities, marginalized ethnic groups, survivors of domestic abuse, former inmates, or refugees. V-Shesh trains Indians with disabilities and places them in permanent employment. Under the Mango Tree trains smallholder Indian farmers in the maintenance of beehives as an agricultural productivity tool, selling the resulting honey in high-end shops in major metros. MobileWorks hires Indians for small, simple computer tasks sourced from American companies. Mirakle Couriers employs deaf youth in Mumbai as package deliverers.

Such enterprises approach producers in one of three ways: First, the enterprise may train and place them with other employers. Second, they may source products or services from them on a contract basis; this may be the most common form of producer-focused enterprise. Third, they may employ them directly.

Consumer-Focused Enterprises

For other enterprises, either the ultimate beneficiary is a paying consumer of their product or the advertising revenue stream of the company is dependent upon the beneficiary’s use of the product. Such payment distinguishes them from the next category of companies, which view beneficiaries primarily as recipients. Sevamob offers rural Indians affordable health insurance and emergency medical care. Spring Health India sells subscriptions to rural water purification-services. SMV Wheels offers loans to Indian rickshaw drivers so that they own, rather than rent, their vehicles. PharmaSecure attaches scratch-off codes to pharmaceuticals so that consumers in developing countries can verify the origin of their drugs.

Consumer-focused enterprises approach their consumers in one of two ways. First, the consumer may pay for the product or service herself. Second, the consumer’s use of the product may determine the advertising revenue that the enterprise can command. In both cases, the financial success of the enterprise is dependent upon the consumer’s on-going, optional use of the product.

Recipient-Focused Enterprises

A third category of enterprises approaches beneficiaries in much the same way as traditional non-profits and government agencies: as recipients of donated products or services. Better World Books donates to literacy programs around the world. Who Gives a Crap sells toilet paper to raise funds for hygiene programs. Toms Shoes sells shoes in the developed world that subsidize their donations of shoes in developing countries. Teach for America trains young graduates as teachers, placing them in underserved schools. Shelterbox USA sells supply kits to those working in disaster areas.

Recipient-focused enterprises may take a buy-one-give-one model, donating a certain amount of product per product purchased by wealthy consumers. They may also operate on a percentage model, donating a percentage of revenue or profits to a particular cause. They may also sell products to non-profits that in turn donate the product. Or their customers may be government agencies who use their service with their citizens.

Impact Focus in Practice

In the table below, we examine the effect of categorization by impact focus on our ability to identify appropriate resources and guidelines for social enterprises.

 

Resource Area Impact Focus
  Producers Consumers Recipients
Funding Small amounts of equity or grants for initial setup, followed by significant working capital Grants for research, followed by significant equity capital and some working capital (more for financial service providers) Grants from foundations, corporate social responsibility offices, or marketing departments; sometimes equity
Regulation Employment, import/export Consumer protection, financial services, Traditional regulation of charities and corporations
Talent Human Resources, partnership-building, logistics Low-income marketing, rural distribution, income-appropriate design For-profit marketers, salespeople; non-profit management
Media Exposure High-end product placement in metro areas or developed countries Local language media, both traditional and increasingly mobile-based Marketing to wealthy purchasers of primary product or service
Strategic Guidance and Technical Assistance Rural supply chains, import/export, business process outsourcing, Rural distribution, relationships to in-country industry partners, community organizers Marketing of social cause, determining appropriate non-profit partners
Impact Measurement Producers employed, wage improvements, worker health and safety, bargaining power Products sold or used, combined with some research into the impact of products[19] Product or service distributed, with rigorous ethnographic research into the impact of products delivered

Limits of Impact Focus as a primary category of social enterprises

Multi-categorization. Many social enterprises have more than one Impact Focus. Jack and Jake’s of New Orleans, for example, seeks both to provide healthy food to schools and hospitals, and at the same time build a stable market for south Louisiana farmers’ produce. When pushed, however, most entrepreneurs will acknowledge a primary impact focus—in Jack and Jake’s case, farmers. The categories above can be used as a guide to ordering priorities, rather than choosing an exclusive focus.

Cross-subsidization models. Outside of Bangalore, Indian hospital Narayana Hrudayalaya uses its high-end surgical offerings to subsidize the surgeries that it provides low-income Indians from across the country. Such a model sits awkwardly between the consumer-focused and recipient-focused models, depending on the nature of the enterprise’s relationship with its low-income users and its donors, if it receives grants on an on-going basis.

Models with derivative impact. Medical device companies and educational technology companies may not have an explicit impact focus, but some funders of social enterprises invest in them on the thesis that the eventual widespread adoption of the technology will have significant social impact. Examples include maternal health products or language translation software.

Other social innovations. Two of the most interesting social innovations of the last half-century are cash transfers and social impact bonds. Cash transfers are unrestricted welfare payments given to poor families, occasionally with conditions attached. They are innovative and may have a Recipient Impact Focus, but they do not employ “markets” as social enterprises often do. Social impact bonds are more complicated structures, the most common model of which involves an investor lending money to a municipality which donates the money to a non-profit for a particular intervention, paying back the investor out of future revenues.

Conclusion

When put in conversation with other characteristics such as geography, industry, and growth stage, I believe impact focus is the most useful categorization of social enterprises. Such a categorization can help potential funders and supporters of social enterprises direct resources more effectively by clarifying the types of resources needed. Hopefully, its practicality can also encourage conversations between academics and practitioners of social enterprise, laying the groundwork for increasingly productive conversation between the two.

[14] By way of disclaimer: each of the examples used in this section and throughout the rest of the paper are enterprises funded by First Light Ventures, the author’s former employer; enterprises analyzed by First Light Ventures for potential investment; or other enterprises the author has come into contact with over the course of the MBA program at Saïd Business School.

[15] Investors Circle is the single example of which this author is aware; they require a cumulative GIIRS rating of 80 before considering an investment.

[16] For an example of ineffective categorization, see IRIS’s list of social impact objectives on the IRIS website: http://iris.thegiin.org/indicator/social-impact-objectives-od6247

[17] This dichotomy, perhaps first used by KL Felicitas Foundation in 2007 (see link), has become part of the common parlance among angel investors in impact investment networks such as Toniic and Investors Circle. http://www.klfelicitasfoundation.org/test_EE/images/files/KLF_Pico_Bonito_Evaluator_.pdf

[18] The universe of environmentally enterprises has significant similarity to and overlap with that of social enterprises, such that Neck, Brush, and Allen consider environmental enterprises a subset of social enterprises. In this author’s experience, however, the entrepreneurs, funders, regulatory changes, and supporting agencies necessary to fuel the growth of environmental enterprises is so different as to merit separate categorization. Such an exercise is outside the scope of this paper.

[19] The difference in rigor expected here of consumer-focused and recipient-focused enterprises reflects this author’s own bias that when products are not sold directly to beneficiaries, their lack of participation in that decision places an extra burden of proof on the provider of such products to demonstrate their impact.

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