What is a Social Enterprise? Not Another Word for Charity or Non-Profit . . .

Calling yourself a Social Entrepreneur is the latest, dare I say it, fad in business.  Not that there aren’t social entrepreneurs, and not that I don’t truly admire them, because I do.  In fact, I admire them so much that I hate to see the understanding of what they do watered down in any way.

Social entrepreneurs develop sustainable enterprises that deliver solutions for some of the world’s great problems, ranging from poverty and homelessness to starvation and unsafe water. They can also create small enterprises that deliver innovative and efficient products and services to small tightly targeted populations that, initially at least, is in no business’s best interests to serve.  They allow those of us who want to invest in real solutions for social challenges on the local, national and international level to achieve our objectives.

What is a social enterprise?

Normally, successful entrepreneurs construct a business based on delivering products and services to paying customers. Business operations focus on lowering delivery costs and finding more customers to serve so they can increase profit.

Successful social entrepreneurs construct enterprises that deliver products and services to “customers” who cannot pay the entire cost of development, production and promotion for the products and services they need initially. Once economically viable solutions have been created, the social enterprise should be in a position to produce and distribute those products and services without outside investment or donation. The object of a social enterprise is to create a completely self-sustaining business model.

Understanding how a Social Enterprise Operates Financially

Like any business, social enterprises can accept funding from outside sources.  Funds may come from charities or non-profits that decide to fund a social enterprise as part of their mandate to serve a given population or contribute to the solution of a given problem.  Investors may also fund social enterprises, perhaps in return for a lower return on their money than they might normally accept due to some benefit they derive from meeting one or more of their own social goals. Lenders may fund social enterprises as they would any other business, perhaps adjusting interest rates in order to meet their business requirements as well as to contribute to a social benefit.  Finally, the government may help fund social enterprises in order to create cost effective sustainable solutions to social problems they have a mandate to solve.

Profits from a social enterprise may be used to repay investors and lenders, they may also be ploughed back into the business to scale up the business or to franchise it to better meet the needs of more people.

Social entrepreneurs may be paid, and may even be well paid, for creating social enterprises that meet the objectives of their customers and their funders. In their role as owner they give up the expectation of return from their business, but as employees they can be paid what their enterprise can afford.

Creating a Successful Social Enterprise is No Mean Feat

Many business professionals never really master how to create, package, sell and deliver innovations that meet customer needs.  Creating a truly profitable business is a tough nut for many to crack. Creating a successful social enterprise achieves that objective for a population that, initially may not be able to pay anything for the solution, is a real feat.

I think it can be particularly difficult when social entrepreneurs have to fund initial development of the product or service with the help of outside funding. This subjects them to the burden of debt, investors who expect a return, government offices that need progress reports and charities/non-profits that often have their own reporting requirements that must be met.

People who build a successful social enterprise are frequently great innovators, exceptional business strategists, amazing sales professionals, effective business managers and true philanthropists.  If I have a definition of a business “Super Hero” that’s probably it.

So, Do You Want to Start a Successful Social Enterprise?

Now that I’ve reviewed what a successful social enterprise must be, and what a successful social entrepreneur must do, here’s a quick step by step overview of how to do it.

1. Get something right.  As always, every good business starts with one key, easy to define, easy to explain, absolutely useful product or service.  This is beyond critical for social entrepreneurs.  Whatever key innovation you are delivering has to be truly remarkable.  For many social enterprise, achieving this first step requires outside funding to front the cost for developing a viable, sustainable, profitable product or service that meets very tight constraints.
2. Build a successful business around that product.  Like any successful business you must be able to cost effectively sell your product or service to its market. You must be able to produce and deliver your product or service profitably for what your customers can pay in whatever currency they can pay.  Some social enterprises take much of their payment in the form of time or raw materials given to the business by its customers.
3. Meet the repayment or reporting requirements of external funding sources.

When you have met these objectives, I think you have a successful social enterprise.  Until you meet them you have an organisation which is, more or less, a philanthropic endeavour because it is not self sustaining. It may be a very efficient charitable undertaking, in that it reduces the costs associated with achieving a given social objective, but operations will stop when the folks donating the money go away.

When we are trying to solve problems like starvation, lack of clean water, or eliminate illnesses like malaria . . . I’m pro charity, but I’m even more supportive of sustainable enterprises that ensure a given need is met in virtual perpetuity.

Want to Know More About How to Start a Successful Social Enterprise? Come to Our Class January 19, 2010

School for Startups runs events for entrepreneurs and social entrepreneurs every month.  January 19, at the Royal Institution of Great Britain, we will be hosting an 8-hour event for social entrepreneurs.  For complete details, please check out www.schoolforstartups.co.uk.  You can also follow us on twitter at @s4startups or @s4stv.  I warn you that ticket prices are very low, since this event is sponsored by O2, the University of Essex and the Royal Institution. So sign up immediately if you want to attend.