More on Social Enterprise

An article in the NYT got me thinking about Social Enterprise again. It’s a good article, but further reinforces the confusion about what the term means, and misses one of the single most important factors we all need to know about social enterprises, a factor I wish I knew about before I learned it the hard way.

The Times ducks the opportunity to define what social enterprise means and even takes the lack of definition further by saying "there are those who would limit the social entrepreneur label only to those without any profit motive" This just confirms my fear that the term is being co-opted to be just another word for non-profit. You can find my definition and discussion on that here.

The article picks a few enterprises to feature, one of which is D.light, a remarkable enterprise that is a fine example of using business methods, and in their case, profit motives to fuel social change.

The key thing this and most other articles miss, is that the choice of model (for-profit vs non-profit) should be driven with one key consideration. This vital consideration is - "where will your startup, operating and expansion capital come from". Put simply, if you are more likely to get non-profit donations or foundation funding to grow your project, start a non profit. If you can get equity or debt capital, then consider a for-profit.

I do not know what savings and personal capital the founders of D.light had before they got started. I do know they have been funded by Acumen Fund, one of the few existing sources of funding for social enterprises. Acumen fund has a selection rule that any company they fund should have an "objective of reaching approximately one million end users within a five year period with the benefits of the product or service". That is completely reasonable, but leaves out most social enterprises as only a very small percentage will scale that aggressively.

Beyond Acumen there are not many other sources of equity or debt capital to startup social enterprises that use a for-profit model. In my opinion, and this is using my almost 20 years of investment banking experience as a guide, it is significantly harder for social enterprises to get for profit capital than it is for traditional companies without a social purpose. Therefore, if you are starting a social enterprise, I highly encourage you to have a strong bias towards using a non-profit or hybrid model, simply because that is where your capital is most likely to come from.

I wish this were not true and that there were more sources of capital so that social entrepreneurs could pick the corporate structure that provided the best fit for their business. I fear it may be true for a long time both due to the inflexible legal structure we use for non-profits, and basic human psychology that makes investors think separately about their investments and charity. For now though, there are limited capital sources and these will most likely be the determining factor in the legal structure you choose.

There is a hybrid option that we used, and that does provide some flexibility, and Ill blog about that in a later post.