As a corporate strategy person, I totally get why traditional for-profit companies seek to grow: to make ever more money for their shareholders. Fine. But what I don’t get are social enterprises – however you define the term – when they talk about the “do-good equivalent” of the word “growth”, which is often referred to as “scale”. If the end goal of a for-profit corporation is to make as much money as possible (infinity + beyond $$$), what is the end goal of a nonprofit or for-profit social enterprise?
As a famous person once said: It’s the impact, stupid! And so the discussion becomes, in every single conference since the term “social enterprise” entered the mainstream a decade ago, about how we in fact can scale the impact of such organizations over time. A recent session during the 2012 Skoll World Forum, for example, was focused exclusively on the idea of how to envisage scaling beyond initial seed funding and “exit strategies” for social enterprises.
Although the panelists in this session touch on the subject, I feel not enough space in today’s literature is dedicated to a question that has somewhat plagued me for a long time – in fact, it has plagued me ever since I got interested in social enterprises.
The question is this: why the heck does everyone seem (so obsessively) to equate the scaling of impact with the scaling of the actual organization? In this post, allow me to make an argument for the importance of finding an “impact offtaker” as a critical scaling mechanism that supersedes that of organizational growth when it comes to social enterprises.
I suppose there are many reasons why we are so focused on organizations. For one, those of us so excited about social enterprises have usually partially or fully taken our enthusiasm in seeing their traditional corporate counterparts’ success stories unfold, which at best goes like this: start-up, growth, IPO exit, ever increasing growth, world domination. Money and legacy for all. Happiness.
The equivalent dream for social enterprise enthusiasts must have been: start-up, growth, mysterious infusion of more money, mysterious “triple bottom line” business model moving from breakeven to profits, ever increasing growth, global scaling of the mission (feed the poor, provide healthcare, etc.). Honor and Nobel Prize for the founders. Widespread admiration. Happiness.
Now what’s wrong with this picture? For starters, it doesn’t seem to work!
To this very day I do not understand why it is the dream of so many social enterprises to not only create the greatest impact but in fact to seek to BE CREDITED for the impact all over the world in whatever field they are targeting. While it is understandable to me why a corporation has a mission to put X brand television in every family’s home in the world, it appears somewhat ludicrous to me why social enterprises, who can barely make money, have the same ambition to be THE de-facto known provider of X social/environmental service to the world.
That brings me back to the idea that we in our culture seem too obsessed with the cult of the individual company reaching its heroic arc and spreading its message/product/service to the world. When we speak about “scaling impact”, we still tend to mean “scaling the company”. When we talk about scaling a company, we talk about how to make it bigger, set up more offices, hire more employees, receive more funding and spread its logo as far and wide as possible. Why are we then so surprised when we realize there’s not enough money (revenues + grants + equity) anywhere to make that dream actually happen (as fast as we’d like at least)?
Worse: why does nobody even stop for a moment to ask why we even need to build the next Walmart-sized social enterprise to create the maximum impact? The reasonable answer, of course, is that we don’t need large social enterprises to achieve large scale. Think about it. The role of the social enterprise is to introduce a disruptive, innovative way of achieving social impact in a the most sustainable way possible. The role of the social enterprise has never been to become huge while doing so. In a way, think of social enterprises like inventors of new ways of providing energy. They find ways of extracting energy from the most unusual places, maybe even patent the approach, and hope to help many people in doing so. But the same people do not have the means – nor were they ever meant to have them – to transmit and distribute this energy to all those who need it. That is why we call utilities sometimes an “electricity offtaker” of energy produced by any number of providers (coal plants, solar farms, wind mills, etc.).
In the world of social enterprises, let me suggest then that what we need in the end is what I’ll call an “impact offtaker”. To do that, we already have several alternatives.
First, we have foundations. They have a ton of money, they have missions that are aligned with what some social enterprises do, and they would like to help their favorites out as long as possible. Problem is, they usually don’t like spending more than a limited percentage of money every year because they’d rather invest the rest into the stock market or other places to keep the endowment fat, healthy and tax-sheltered for the long-term.
Second, we have corporations. Assume we can find some abstruse CSR rationale why a company should care about the public welfare, it too has a ton of money to help social enterprises take their idea further – but that is unfortunately limited given the outcry of shareholders who would rather not have their hard-working invested money be spent on random social causes they did not sign up for to begin with.
Finally, we have government. You know, that motley crew of elected and appointed individuals meant to represent the public welfare and all that? Yes, these people are supposed to take what inventors and entrepreneurs come up with and take it to the next level using the substantial budgets they have at their disposal. The good news is that government is SUPPOSED to care about what social enterprises care about and so they theoretically have no reason to NOT support social enterprises by adopting their ideas into programs that can be financed through tax-payers money. This way, even the most innovative social programs can be scaled nationally or internationally in a way no social enterprise could hope to do in decades by themselves.
Given the availability of government, why then do we keep talking about pumping up our social enterprises to become big gorilla organizations instead of talking about how we can replicate the tools of social enterprise across permanent institutions whose missions are completely aligned with that of the enterprises? Isn’t this what “scaling impact” is all about, in the end?
The immediate counterpoint to this suggestion, in my understanding, is a matter of control and inefficiency.
First, many social enterprise owners started their organizations because they did not see anyone else doing something important (or they didn’t bother researching this). They also started their companies because they have a conviction about being able to do what they do BETTER than anyone else – including the government. As a result, it could be fairly argued by the “organization” camp that we should help good organizations scale because we expect them to be in the long term best suited to carry out their mission. Can we blame the hard-working, hot-blooded social entrepreneur for dreading their carefully constructed, innovative social change models poorly implemented by some incapable government clerks and for that reason, not entrusting them with this in the first place? Can we blame them for fearing the vagaries of political decision makers and their ability to kill their predecessors programs without any particular rationale other than partisanship and competitiveness towards adversaries?
Second, it could be argued that government budgets, capabilities, and/or attention spans sometimes are too limited to administer certain programs – and so instead of not having these programs at all, social enterprises struggle and fight and scream to raise as many dollars privately as possible to do what they want to do and not have to wait until the various factions of government find a way to allocate funds to the program in the end. This becomes all the more obvious in developing countries where social enterprises exist precisely due to the weakness of government institutions.
Frankly, I tend to sympathize with the second point more than with the first. I am all for carefully controlling and honing your boundaries – such as within the confines of a company you created – so you can help people and feel good about doing it as effectively and deliberately as possible. I am also for starting things ourselves when government is not ready or capable of handling them. But what I do not sympathize with is this idea that the ultimate goal for social enterprises, in and of themselves, is to be around and grow forever – just like all those desperate corporations fighting daily for survival. In most instances, the ultimate goal for most social enterprises should be to catalyze large institutions like government to take up worthwhile innovations and scale them through its budget as widely as possible.
For instance, the role of the social enterprise that successfully collaborated with government then shifts over time from 100% focus on innovation and execution to perhaps 20% execution, 30% innovation and 50% control/monitor how the larger agent (e.g., government) is doing on the execution. In a perfect world, a social enterprise could phase out over time as its work is placed into capable hands. Since those capable hands are not guaranteed to always be around (or even consistently capable), there is prudent reason for the social enterprise to live on to manage its legacy and keep innovating. For that basic maintenance there should be enough money lying around through foundations and impact investors.
As a last disclaimer, I do not speak as a pro-government wonk here, but try to convey the idea that “passing the baton to capable institution/organization(s) X” could be perhaps a more useful goal to set ourselves with our most powerful social enterprise concepts. I just utilized the example of government as a potential fit due to 1) resources, 2) permanency and 3) mission alignment, but any institution or organization fitting the above criteria is arguably suitable. And that is why we should strive to identify an “impact offtaker” to be most effective, instead of striving to make our companies the biggest they can be.
I am sure my thinking is nothing new. In the spirit of ending on questions, help me answer some of these, please: why do we still have a majority of companies dreaming about becoming big and mighty instead of talking about how to replicate their model to as many (reasonably functioning) governments or other partner organizations in the world as possible? Why do we hardly have any “Chief Replication Officers” among social enterprises’ senior leadership teams? Why do foundations and other social entrepreneurship fanboys keep calling attention to the genius of the individuals and companies they support, rather than how those accomplishments fit into the larger scheme of being scalable through cooperation with larger, sustainable institutions like government? Does the hesitation to collaborate and achieve wider impact stem from fundamental distrust between the SE/NGO and the public sector? Does it mostly stem from bad experience with corrupt and incapable regimes? Or does some of this trace back to our old favorite of individual ego?
I’ll take a shot at the funding question. In our 1996 paper we describe how an initial for-purpose business may be set up and by agreement of its directors determine that a social purpose is the entire point. It will invest at least 50% of profit into a trust fund to provide see capital. Here’s an extract :
“How can such a thing work? Where would the initial venture capital come from? This capital in each case can come from each community if available, or from sponsoring communities or funding organizations. In Chapel Hill, North Carolina, for example — where P-CED was born in 1997 — multi-millions of dollars are donated each year to charities, after which the money is typically given away, spent, and gone. Two churches adjacent to the university campus recently raised in excess of four million dollars to improve their buildings. (As a counterbalance, a third church chose to forego its own plans for a building and donated its entire building fund to a badly-needed support program for the elderly.) If twenty percent were set aside to fund a “P-CED enterprise”, that money would never go away, but would instead grow as it should in business. Once the seed capital is available and the business plan implemented, everything after that goes the normal way of business. Employees are paid according to the local pay scales, receive benefits, and so on. They would also enjoy profit-sharing directly for themselves from a total pool of ten percent of profits. Forty percent of profits would be rolled back over into the company for growth. The remaining fifty percent would go to the trust fund. Thus, aside from the final direction of profits, everything is exactly the same as with any other business enterprise.”
Now the matter of creating impact rather than organisational growth and brand imprint.
The paper I described above advocates an alternative to capitalism which is “measured and calibrated in human terms”
Proof of concept begins in 1999 with investment to fund research in Russia which delivers recommendations for a development initiative and this is forwarded to President Clinton’s office. $6 million is leveraged to set up a collateral free microfinance bank and by 2004, around 10,000 microenterprises are established in the Tomsk region. The modelis then replicated by USAID in 3 other cities.
The investment is repaid by means of a consultancy fee while P-CED remains a one-man operation until 2004, when I join the founder to scale up to a national initiative described as a ‘Marshall Plan’ for Ukraine.
Here’s how it evolved
http://www.ecademy.com/node.php?id=132188
Thanks Jeff! Great example especially for the creation of impact through “replicaneurship” – we need more of this!
Very insightful post!
When we think of social enterprises we need to think of impact maximizing strategy, as opposed to a profit maximizing strategy. This will then guide decisions on how and whether the company should scale and in what aspects. Many often mistakenly assume that if you are not following a profit maximizing strategy you are ignoring the need for profit. But if the goal is to maximize impact, profitability is of course necessary, but the impact maximizing strategy may be different than if purely pursuing maximum profit. The decision about appropriate level of scale and other strategic aspects of social enterprises is too often made in the same way as for traditional profit maximizing business, without accounting for the fact that the ultimate goal is different.
Jana, I agree with you that we should do more effective “adjustment” of traditional for-profit business models when we talk about scale in social enterprises.
But I’d point out that, based on your statement above, I’m not sure profitability is “obviously necessary to maximize impact.” If you mean by that profitability is necessary to keep the social enterprise alive so it can reinvest into impact – yes – but as this post argues, the idea is to take the burden of “owning” the impact away from social enterprises (hence less pressure for profit, growth, etc.) and find an impact offtaker who can make things happen significantly faster and on a wider scale. That way, entrepreneurs can focus on what they arguably “should” do best – perfect a certain business/change model, document the best practices, and teach others who want to learn how to apply it in their specific community’s context.
Yes, I do mean that profitability is necessary to keep the social enterprise alive so that it can reinvest into impact. I find I have to be careful when I talk about less pressure for profit, as it is often misunderstood as I am saying it’s ok for a social enterprise to be losing money.
This is a wonderful post!
Have a look at this link relating to Social Enterprises:
http://dowser.org/newberg-how-real-is-the-impact-economy/
Thanks for another insightful post. I am a social entrepreneur who has been trying to raise funding for several years now for a medical device development company. Our founding team is entirely supportive of the “off-taker” approach that you outline – but when we talk to potential investors about things like low-cost technology licensing to government or NGO partners in low-income markets, in order to improve access to our technology, it gets a decidedly chilly reception. Conversations about intellectual property are even more difficult – if you really care about impact, you don’t prioritize protecting IP in the same way that you do if you are fully profit oriented, and you are more open to collaborations and IP sharing, and this is really scary for investors.
Anais, thanks a lot for your examples (speaking of “case in point”)!
The chilly reception you are receiving supports my suspicion again that the profit-mind set or that of “protecting our company to dominate all others” is an attitude that is pervasive among financial and social investors alike. No matter how socially oriented people are, too many are still under the belief that they have to “get in” on a deal, “do better” than others, and see “their baby” take off – which is precisely the traditional for-profit business mindset that can get in the way of spreading innovative change models.
The issue of IP is of course even dicier as we are starting to talk money, lawyers and “creating barriers to entry to competition”.
See my post on competition vs. collaboration and see if you sympathize with the view that we may be better off to reduce our worship of competition in return for better social outcomes.
http://goodgeneration.org/2012/03/21/competition-vs-collaboration-in-social-entrepreneurship-cant-we-all-be-friends/
Hi Thien, thanks – I did read it and I do sympathize with your view – I too think competition can be a healthy motivator, but shouldn’t be assumed to be the only/best/most “natural” motivator. Actually what I was most reminded of by your piece was my training in the field of international health, where a frequent theme, once people got out of school and most hit the workforce in some form of “development” or aid work, was how do you work best to ultimately put yourself out of a job? it’s quite possible to cultivate that mindset and excel with it – and be happy wit hit, because it keeps your focus not on your success but the success of those you want to serve.
By the way, I’m not implying that the competitive mindset is unique to people with strong business backgrounds – one thing I’ve found is just how widespread the problems of egoism are even in the supposedly more collaborative professions. And I’m not free of it myself – I too want to be more clever and innovative and well known for what I do. But I try not to let that have the upper hand!
Thien,
I think you’re “on the money” here! Why do we keep equating “scale impact” with “scale the company”? When I read about entrepreneurship and small business growth and survival rates, it seems obvious that MOST people are NOT cut out to be entrepreneurs in the big, bold, IPO-down-the-road sense of the word. Innovation isn’t just figuring out what business models can scale directly, I think it’s also figuring out how to make unscaled/unscaleable businesses as efficient and sustainable as possible.
Some of the emphasis on disruptive innovation undoubtedly comes from the windfall profit upside that a handful of tech companies and one commercial microfinance bank have enjoyed. It seems a bit contradictory that we get behind models that promise one or two scaleable ventures, alongside singles, doubles and a handful of failed ventures. Is this really a model for economic development? Or is it a way to pursue financial gain that potentially also has a development outcome?
For me the question you’ve left open (understandably) is what kind of impact offtaker or offtake mechanism should we try? I think we need to design different financial instruments as well as create “market-making mechanisms” – and I’ll be trying to get some of these thoughts onto my blog this summer
Keep up this line of questioning and reasoning! If we all just accept “standard wisdom” we’re not far from Ionesco’s ‘theater of the absurd’ world…