Future of Social Enterprise – What’s on the Funder’s Mind

That was the topic for a panel I participated at the 2006 Net Impact Conference in Chicago. It was an honor to sit alongside Emily Bolton of REDF and Julia Novy-Hildesley of the Lemelson Foundation. This was the last panel of the day and what was really on my mind was a good cup of coffee. However, the room was full to capacity and the energy in the room more than made up for my need for an afternoon caffeine fix. I was asked to participate because of the new type of funding we will be providing to social enterprises. The earlier panels of the conference definitely had a non-profit focus to the definition of social enterprise, whereas at Good Capital we think of it as any organization in business to solve social problems, tax structure is not important. I realized our distinction from the other panelists as one of investor versus mission supporter. What I mean by this is we want to help investors use their money for good and the social enterprise expansion fund is one way to do it versus REDF or Lemelson who are very much mission based be it to alleviate poverty or to help solve world problems through invention.

One takeaway of our conversation that day is that often the capital needs of a social enterprise will be met by a combination of different types of funding: grants, loans, equity (equity-like). And the stage of the organization also will dictate what type of capital will take the lead. For example in early stages it is often the grant maker that can take the funding lead bringing others to the table and then in the expansion stage institutional money like Good Capital’s can lead and help mitigate the risk for the other more risk adverse sources.

I enjoyed very much the opportunity to speak with the attendees of the panel and like I said the energy was phenomenal. There was definitely hope and good old fashion entrepreneurial spirit alive in that room and I want to thank those that attended for your questions and wish you luck. Net Impact has been an instrumental part of my professional career and an impetus for me to return to business school (Kenan Flagler, UNC-Chapel Hill) a couple years ago. If you are not familiar with it, I encourage you to check it out.

I have attached my notes that I drafted prior to the panel, unfortunately I didn’t get to use them since my laptop died the day of my flight.

Please comment on how you (the reader of this post) might answer these questions:

1. What is your vision of the social enterprise sector in 5 years? How will the sector evolve? (e.g., range of funding mechanisms available, critical focus areas — healthcare, education, etc.) I think the sector is in its toddler years, learning to walk and beginning to run. In five years the sector will be mature in both its legal, financial and human capital structures. The sector will have many more entrants, we have seen even in the past four years more and more interest and activity to use business as a solution to social problems. You can look to the popularity of the Fast Company Social Capitalist Awards as one signpost and more dramatically the actions by Warren Buffet, Google.org and even the Nobel Peace Prize going to a social entrepreuner provides more and more encouragement to this sector.

The critical focus areas that will have the most amount of interest are those that need multi-sector support to crack: government, public sector, private sector all need to work together. Top on this list are education and healthcare. Systemic change has to happen in all sectors and scrappy entrepreneurs are going to be a key factor to creating that change. One can look at the current leaders in the social enterprise sector who are affecting change: Aspire Schools, KIPP, Teach for America, New Schools Venture Fund, First Book, RealBenefits and feel like the tide is changing.

Both sectors in their complexity offer a lot of opportunity for an emerging social entrepreneur.

1. What do you believe are the primary hurdles currently preventing further development of the sector? (What is missing? What is needed? Can talk about hurdles in the U.S. or internationally.) Primary hurdles in this sector: breaking free of the traditional conventions of business. Social enterprises are a hybrid model (no matter what their tax structure), they are a square peg in a round hole world. There needs to be real changes in that structure of business. I am talking legal, financial and human capital again. Financially: this is where we are working specifically. By “investing” in nonprofits we are creating something new. The challenges of doing something never done before is the recipients don’t have a model to envision it. How do you do pro-forma financials with a new financial instrument? It takes a leap of faith. Good Capital has experience creating new instruments that are now used more frequently. This brings me to human capital - a social enterprise is a business and it benefits the same as a traditional business from the verve of the entrepreneurial spirit. Management who can see opportunities and make it happen regardless of current obstacles. It requires managers that can make this new type of capital work and understand what it means to their organization. Of course there is another level of complexity specifically for the nonprofits and that is board buy-in. We have come across organizations where the management team is ready to execute on a promising expansion plan and are working to find the right financing. The Board, comprised of private industry business professionals, create pushback – as in,” I don’t do this Board work to behave the same way I do during my day job. This is different, it is a nonprofit. Why do you need to act like a business?” And of course for nonprofits, an earned income strategy isn’t always the best way for them to serve their social mission but for those that it does make sense they need to have a Board that supports the business strategy.

2. What are the key characteristics and skills of a successful social entrepreneur? (can talk here about hybrid background) How does this differ (if at all) from a traditional entrepreneur? There are not too many differences in my opinion. You make bets on people. And you have to believe they can do the job. The job of a social enterprise manager is more complex because not only do they have to be a rockstar business manager but they must have the passion and the integrity to stay true to their social mission. You also must understand who your customer is and it isn’t the foundations or your investors, it’s the community that you are serving. Which isn’t really that different from the customer focused mindset of a traditional business. Additional skills include the ability to navigate in both the nonprofit and for profit world and have the flexibility to create new forms of delivering a mission. This is no different in any emerging sector. You place your bets and hope for the best. The difficulty here though is if you fail you are failing your constituents.

3. What are the critical points at which many social enterprises fail? (e.g., transitioning to the growth stage) How might a social entrepreneur best mitigate risks at these key points? I can’t really speak to this… and what is failure? Business model failure, mission impact failure. For any entrepreneur it is important to realize what expertise you are missing, for example when you do get funded and you need to fill out your management team, don’t look to replicate yourself. Really assess the weaknesses in the management team, and more than likely a good financial partner or strategic advisor will kindly point those out.

4. What are some of the typical mistakes social entrepreneurs make when presenting to funders (can talk here about different audiences — SVCs, philanthropists, foundations) Not being able to articulate their story and impact, theory of change. I want to believe that you can do it, but if you can’t sell me on that big vision than no matter what your business plan says or your financials I can’t really have trust that you can execute.