Social Enterprises

There are some who claim that social enterprises constitute a new form of organization,
generically different from conventional nonprofit organizations or prototypical for-profit
businesses, and are deserving of special treatment in public policy. In this paper, we will
consider this contention by reviewing the trends leading to social enterprise initiatives,
exploring the various organizational options for pursuing social enterprise, and considering
the financial and governance implications of pursuing social enterprise within alternative
organizational formats. In this analysis we will utilize the concept of “organizational
identity” to connect the intent of those who engage in social enterprise with the
organizational forms chosen to accommodate these intentions. We conclude that most
types of social enterprise are accommodated by conventional nonprofit and for-profit
forms, although adjustments in their financial and governance parameters could make
these different forms of social enterprise more effective. We also find some justification for
promoting new organizational forms of enterprise, combining aspects of nonprofit and for-
profit, for accommodating other variants of social enterprise.

Different forms of Social Enterprises

Corporate Philanthropies.
Social enterprises can be willingly for-profit businesses that decide to use some of their
resources to advance social causes or promote the public good in a particular way. Basically,
however, Corporate Philanthropist organizations are businesses whose bottom lines are to
maximize profit or increase market share. Engaging in socially beneficial activities such as
corporate grant-making, volunteering of company personnel, or corporate sponsorships
and joint ventures with nonprofit organizations, can be appreciated in this context as
elements of “strategic philanthropy” wherein philanthropic activity contributes to the
productivity of corporate employees, the marketing of corporate products or the polishing
of the corporation’s public image, all in the cause of (long term) economic success.

Social Purpose Organizations.

Alternatively, a social enterprise can consider itself to be a (private) organization devoted to
achieving social good. Such an organization is driven by a mission other than profit-making;
however, commercial revenue and business activity are seen either as a strategic means to
generate income to support the mission, or as a strategy to carry out mission-related
functions expeditiously, or both. For example, selling cookies is conceived as a revenue
generator for the Girl Scouts and also an educational (mission-related) experience for the
girls that participate in it. Organizations that run sheltered workshop programs, which
manufacture certain goods or repair and sell donated merchandise, such as Goodwill
Industries, do so for the express purpose of employing and training challenged workers as
well as to generate revenues.

Hybrids.
A fairly recent development is the emergence of businesses that claim to have dual
objectives - to make a profit for their owners and to contribute to the broader social good.
Such enterprises, in theory, constrain their levels of profit making in order to accommodate
social criteria such as environmental conservation (e.g., using only recyclable materials or
producing environmentally friendly or healthful products) or social justice (e.g., utilizing
hiring and promotion practices favorable to minorities or handicapped workers); or they
give away a substantial portion of their profits to support social causes rather than
distribute them to owners.

Identity/Legal Form Nonprofit For-Profit

Corporate Philanthropy major nonprofits business corporations
competing for market whose philanthropy is part
share who find it useful to of a business strategy to
help other charities as part enhance profits
of corporate strategy
Social Purpose nonprofits that undertake businesses whose owners
Organization commercial activities to are focused on social goals
generate funds and support and where the for-profit
social goals form is more comfortable
or practical
Hybrid nonprofits whose leaders businesses whose owners
seek both income and sacrifice some profits to
social benefits achieve social goals

All around the world, businesses with a mission to improve the lives of the poor and
generate a profit are capturing increasing attention. With respect to India, where 37% of
the population live below the national poverty line, these “social enterprises” have become
a phenomenon over the last decade. Still, little is known about them: their business
structures, engagement with the base of the pyramid (BoP), financial viability, and social
impact. A recent report by Intellecap shares findings from an online survey of social
enterprises in India in attempt to shed light on the industry as it moves from its infancy to
its youth. Given the findings, the report also concludes with recommendations to refine and
strengthen the industry.
The Beginning
The growth of social enterprise in India took off in 2005 and is fueled by a rich and diverse
ecosystem of supporting players. The support for funding initially came from overseas, but
the number of domestic investors is multiplying. A range of grant-makers, impact
investors, and now even commercial funds are channeling capital to the industry. From the
business development side, a number of incubators and consultants have helped accelerate
social enterprises. They continue to develop platforms for engagement, facilitate
knowledge sharing, and connect young enterprises with skilled human capital through
fellowship programs.
Perhaps the greatest motivator for the industry’s growth came from the microfinance
model. Global investors and development practitioners alike gained confidence in using
market-based strategies to scale solutions for addressing the poor’s needs. Despite
all scrutiny behind microfinance practices in India, the concept of using market forces to
address development challenges has persevered.
Key Findings

The study defines a social enterprise as for-profit, committed to social impact, having a BoP
focus, and working in the critical-needs sector. From the results of the online survey and
interviews of almost 100 social enterprises, the report spells out key insights:

1) India’s social enterprises are a young but ambitious industry.

Nearly half of the enterprises have been operating for less than two years, yet their
aspirations for growth are apparent in: 1) their overwhelming choice for the private limited
company (PLC) structure; 2) their aggressive pursuit of capital; and 3) their investments in
building leadership teams early on in the enterprise life cycle.

In terms of legal structure, 80% of social enterprises surveyed are PLCs, whereas similar-
sized enterprises in India are typically structured as proprietorships. This may come as no
surprise given the advantages of PLCs. Particularly, PLCs can more easily raise capital from
multiple sources and transfer ownership, which allows faster growth and ensures
continuity beyond the founder’s involvement.

The hybrid for-profit/nonprofit model is also growing in popularity, where the for-profit
entity is responsible for the core operations while the nonprofit entity provides support
services including employee training and impact measurement. This hybrid model is
appealing to social enterprises because it can enhance their ability to fundraise. Investors
and donors are often skeptical about grants and equity flowing to the same entity.

2) The industry took off in 2005-2006 and has grown dramatically since then.

Energy (representing 25% of surveyed enterprises) and agriculture (28%) have

experienced the greatest growth in the number of new enterprises over this timeframe.

The growth in the renewable energy sector is likely due to the increase in public and
private funding, media attention, and supportive regulatory changes. In the agriculture
sector, social enterprises help small-scale farmers with pre-harvest operations (accessing
quality inputs, equipment, and organic certifications) as well as post-harvest operations
(storage, transport, and retailing).

Health, livelihood development, and water/sanitation sectors have also witnessed growth.
Education is poised to take-off.

3) Most social enterprises target the BoP as consumers rather than as producers.

Nearly three-quarters of enterprises target individuals in the BoP as consumers of critical

goods and services. The remaining social enterprises incorporate small-scale producers
into their supply chain and work to improve their productivity, quality of outputs, and
market linkages.
4) The majority of social enterprises are small, reflecting the industry’s youth, but
not its potential.

Half of surveyed social enterprises generate less than USD 100,000 in annual revenue, yet
there is a strong relationship between turnover and enterprise age with average turnover
increasing overtime.

More than half of the surveyed social enterprises are financially sustainable, either profiting
or breaking even. Profitability is also positively linked to enterprise age. The trend
highlights an important advantage of for-profit social enterprises over nonprofit: if the
enterprise cannot develop a viable business model with sufficient demand and sustainable
pricing, the market will eventually force them to exit, while the same organization – if
structured as a nonprofit – could continue operating on grant funding for decades.

5) Approximately two-thirds of enterprises treat social motives as equally if not more

important than profit motives.

This finding suggests that most social entrepreneurs are using business as a tool for
achieving social impact rather than viewing social impact as a positive outcome that will
result naturally from their business. However, the motives of younger enterprises indicate
a growing preference toward prioritizing profit over impact with a belief that this will lead
to greater social impact over time.

6) India’s social enterprises are capital hungry businesses.

Only 7% report that they do not need any form of external capital currently. Equity is in
highest demand across all growth stages, wanted by 78% of survey respondents, but there
is also significant demand for grants and debt.

7) Grants from foundations, incubators, fellowships and competitions are a crucial

source of capital for early-stage enterprises.

Grant sizes tend to be small and social enterprises would pursue a large number of them to
meet their funding needs.

8) Finding and retaining good talent, raising capital, and building the value chain
create the greatest barriers to sustainability and scale for social enterprises.

While challenges for social enterprises are plenty, these remain significant obstacles for
many socialenterprises.

9) The greatest financing challenge is not a limited supply of capital but social
enterprises’ limited access to it.

Social enterprises report that they cannot secure available funding either because they do
not meet investor requirements or because their business model needs further refinement
before they are “investor ready”. The prevalence of funding that is inaccessible to most
social enterprises indicates a gap between enterprise needs and investor expectations.

10) Despite the challenges, social enterprises are making a major impact in India.

Nearly one-third of them are operating in more than 100 localities, and almost one-third
are serving more than 50,000 BoP beneficiaries annually. While still operating on a
relatively small scale compared to successful growth-stage businesses in India, this
coverage is significant given the industry’s youth and holds the potential for even greater
impact in the future as it matures.

The Future

As a young industry, the obstacles that social enterprises need to leap over are plenty. The
work in underdeveloped markets requires innovation on many fronts. They have to
overcome the skepticism that consumers place on their motives and have to address the
challenges of producers as their own. There is still work to be done in securing financial
capital. All this must be accomplished within a vast talent gap. Though India may hold one
of the most robust social enterprise industries in the world, there are three parties that can
facilitate further social enterprise growth:

Sector Enablers can:

1) Leverage human capital from Indian corporations.

There is an opportunity for incubators to capitalize on the current CSR wave in India by
establishing partnerships with corporations to connect social enterprises with skilled
labour. Corporate partners could offer employees to serve as consultants for a social
enterprise for a period of time.

2) Encourage business schools to incentivize students to join the social enterprise

workforce.

Business school graduates are prime candidates for middle and upper-management
positions at social enterprises, but very few pursue this route. The financial costs of school
propel them to higher-paying opportunities. Schools could offer scholarships and
reimburse fees to students who commit to working in a social enterprise for a fixed period
of time. As an example, the Indian Institute of Management Bangalore offers a partial
refund of program fees for students who work at a nonprofit for three years.

3) Streamline the application process for business plan competitions.

Early-stage entrepreneurs aim for prize money through business competitions. To allow
them to focus on their business and avoid sacrificing time to fill out applications, a
standardized application would eliminate wasted time and at the same time allow
competitions to attract more applicants.
4) Facilitate partnership development for social enterprises.

Bringing potential partners together via online forums and physical meetings would greatly
benefit social enterprises that rely heavily on partnerships for activities across the value
chain.

5) Support peer-learning for early-stage social enterprises.

Pilot and start-up enterprises overwhelmingly report that their most valuable source of
moral and practical support is other entrepreneurs. Peer-to-peer exchanges can be
encouraged through opportunities to interact at conferences, online communities, and
work spaces.

Investors and Donors can:

1) Mobilize a network of impact angel investors.

More than 80% of enterprises in the pilot-stage desire equity, but few are able to secure it.
At this stage, the financial return does not justify the risk for commercial investors. On the
other hand, a community of social enterprise angels investing their own money can tolerate
more risk for the potential of a high social impact payoff. An intermediary can bring
together a group of high net-worth individuals with a passion for combining their social
values with their business acumen.

2) Encourage the accountable use of grant funding.

Investors often have mixed feelings about enterprises pursuing grants, believing it indicates
a weakness in the business model. Yet the challenges in operating in the BoP market and
innovating around fragmented value chains typically require such funding. Perhaps
investors could consider extending grants alongside a financial investment or collaborating
with a foundation to do so. It would require high levels of donor engagement and non-
financial support for high-risk, high impact potential social enterprises.

3) Establish lending facilities that cater to producer enterprises.

Particular to those working with small-scale farmers and artisans, securing capital is one of
the greatest barriers. They often take out expensive bank loans and become financial
providers for the producers themselves. The method is barely viable given the already
complicated challenges of operating a social enterprise. Impact investors could establish
debt facilities that make below market-rate loans to producer enterprises for working
capital needs and use purchase orders as collateral to lower the risk.

Government and Policymakers can:

1) Target early-stage enterprises with the India Inclusive Innovation Fund.

The National Innovation Council (NIC) announced plans for a INR 5,000 crore (USD 1
billion) fund that will support innovations in critical goods and services for India’s BoP.
Scheduled to launch summer 2012, it will operate as a private fund with a government
stake of no more than 20%. According to the NIC, the Fund will seed early-stage ideas and
expand successful ones. Yet there are gaps in the funding landscape that could be alleviated
by prioritizing investments in pilot-stage and start-up enterprises.

2) Reform sector-specific policies that restrict private sector participation.

There are many sector-specific policies and regulatory restrictions that limit the private
sector’s engagement and inhibit social enterprise growth as a result. For example, India’s
education sector requires all formal education institutions to operate as not-for-profit
institutions. These regulations restrict equity investment and create significant barriers to
entry for private players. Addressing policy changes would benefit social enterprises and
the private sector more broadly.

3) Invest in infrastructure development through public-private partnerships.

Weak and inefficient physical infrastructure, particularly in rural areas, leads to high
transport costs, power and water shortages, and poor internet connectivity for all
businesses including social enterprises. The costs of developing infrastructure are not
something the public sector can fill alone. Therefore, public-private partnerships for
infrastructure development are key to building a business environment that can help social
enterprises prosper.