Business is an effective way of getting things done. We all, pretty much, believe that it is a good way to keep the world turning. Businesses identify a need, and solve it with a product or service that customers are happy to purchase. They scale through markets, enabled by a supportive interplay of regulation, law, capability support, and capital. Competition to win customers drives innovation and improvement.
However, there is also an assumption that business owners should receive all of the financial benefits of success. While we do not wish to suggest that shareholders shouldn’t benefit from their hard work and risk taking, social enterprise is a challenge to the assumption that businesses can only work in this way. Efficacy of delivery is not inherently coupled with maximising private returns—they are different things and it is the decoupling of these traditional bedfellows that creates a new opportunity. If business is so effective at solving problems, why not point it at the most difficult and intractable social ones? And if solving social problems becomes the business purpose, why not use the financial benefits to maximise impact?
Social enterprises seek to employ the innovation, scale, and financial sustainability of an effective business model but do so to maximise social change—prioritising returns for stakeholders over shareholders. Social enterprise isn’t about replacing mainstream business; it’s about expanding our practice and developing new models to tackle social and environmental challenges in different ways.
These are challenges that traditional approaches to social change can’t make go away, and that we simply cannot afford to continue to gift, grant, or throw money at.
This article aims to build mainstream support for social enterprise as a new, valuable, and complementary sector within New Zealand’s economy. It does this in two parts: firstly, by giving the reader a sense of how social enterprise models work in practice; secondly, by making the case that if we want social enterprise to work at scale, then we need a coherent approach and a supporting infrastructure—just like the mainstream business sector.
Business models that deliver social good
Just like mainstream businesses, social enterprises demonstrate huge diversity in their size, structure, and shape. However, at the heart of how they actually work, regardless of the change they seek, there are number of core models that deliver social good:
1. The Robin Hood
The Robin Hood is essentially a mainstream business that exists to resource less marketable activities. Examples include Y-Gap in Australia, which runs boutique cafés and restaurants, and reinvest their profits into capability building programmes for social entrepreneurs in developing countries. Another example is Barnardos’ Kidstart, where profits from their childcare service cross-subsidise other social services they deliver but are less easy to resource.
Like the Robin Hood, the One-for-One runs a successful business to resource other activities but with a stronger link between the activities—often delivering the same product or service with different pricing models. Examples include TOMS, which sells shoes and sunglasses on a commercial basis and then provides a similar product or service (eye-treatment in the case of the sunglasses) at no cost to people in need. Another example is the Aravind Eye Hospital, which performs thousands of eye operations a year, half to customers who can afford to pay at the market price, and half to customers who can’t—subsidised by margins that would otherwise be returned as dividends to investors. An example closer to home is Angel Place, a Sydney-based startup setting up a hotel that will provide a free room to people at risk of homelessness for every pre-paid room booked.
3. Waste to Value
These enterprises reuse, recycle, and repurpose to create new value in materials that have come to be considered waste. Examples include many of the community-owned recycling centres around New Zealand that not only divert and re-sell materials otherwise headed for landfill but also reinvest revenues into proactive waste management initiatives. Another example is TerraCycle, which provides free waste collection in a number of countries, and turn hard-to-recycle materials into practical and affordable green products.
4. The Regenerator
In these enterprises, the process of delivering the product or service results in the regeneration of communities and the environment. Examples include Te Whāngai Trust, where native plants are grown then sold, alongside environmental services, to private companies and the Government. Their social impact comes by providing employment and training opportunities to people who are facing complex personal challenges such as drug, alcohol or mental health issues. Another example is Jamie Oliver’s Fifteen restaurant that leverages his brand to create a thriving business staffed by young people who have been living on the street. A further example is Guayaki who operate a “market-driven restoration business model.” They grow and produce Yerba Mate (a herbal beverage popular in South America), reforesting the Amazon as they go. They aim to reforest 200,000 acres of South American rainforest and create over 1000 living wage jobs by 2020.
5. The Good Asset
Based on the development of community-owned assets—often premises or infrastructure—these enterprises provide a public good and also generate revenue streams that can be reinvested into projects and local development. In many countries, community-owned energy generation has seen a proliferation of these models, including Hepburn Wind in Australia. Another example will be the Auckland Harbour Bridge Skypath, where the Skypath Trust, which led the project’s development, stands to receive a return from user tolls to then fund new community transport initiatives. Elsewhere, leisure centres and community facilities provide important local amenities that are embedded and owned by the communities they serve.
6. The Disruptive Provider
These models tend to be seen as the so-called rock stars of social enterprise, often with good reason. They tend to be ambitious, entrepreneurial, and target systemic failures. When successful, they create opportunities for significant scale and replication. Examples of this model include Grameen Bank, which pioneered micro-finance by extending credit to people living in poverty and securitising affordable loans through peer lending groups—the antithesis of loan sharks! Grameen has lent more than US$11 billion at a default rate of less than 1 percent, and has developed similar models for housing, education, telecommunications, and even a “not-for-loss” joint venture to tackle malnutrition with food giant Danone. An early-stage Disruptive Provider is Uncharted Play, which is providing a lighting solution for children without access to energy, who are unable to study after sunset. They have developed a football that kinetically generates power—children play football for 30 minutes, which then provides them with three hours of light for study. Another early stage “Disruptor” is Chalkle, which is reinventing community education in New Zealand. Built to serve the needs of a changing educational landscape, Chalkle provide software and resources to connect teachers and learners, and enable a distributed marketplace for education—think TradeMe for knowledge and learning.
7. Cash for Impact
Enterprises using this model deliver products or services whose impact can demonstrate a measurable avoided cost or economic benefit. This enables a scalable and performance-based revenue model to be built around outcomes. These models are still finding their feet and require market mechanisms to trade into. One example of the Cash for Impact model are the communities and landowners that use the Plan Vivo scheme to trade the carbon benefits of ecosystem restoration and preservation projects. Other examples include organisations utilising “Impact Bonds” to resource and deliver interventions that reduce recidivism rates. Given the undisputed health benefits resulting from improvements in housing, it is easy to see how existing health budgets could invest in social housing ventures to avoid both significant economic costs and personal suffering.
8. Fair Share
These are businesses where the benefits are shared internally across the organisation and/or a supply chain—equally distributing profits and power. Examples include Café Direct, which has taken fair trade to a whole new level while retaining the position of a premium coffee and tea brand. Café Direct distributes its profits across their value chain resulting in resilient producer communities and a supply of high-quality product. Cooperative structures provide a backbone for these social enterprise models, prioritising self-organisation, empowerment, democratic voice, and the needs of member-owners over the needs of capital investors. While not all cooperatives are driven by a social purpose, it cannot be underestimated how empowering the experience of ownership can be in marginalised communities where self-esteem, confidence, and tenancy are social goods in themselves.
9. Service Providers
These models focus on providing professional services to the social enterprise sector. They can either be specialised services such as impact reporting, business model design, and social finance, or more generic professional services, such as design, legal, and technology, delivered with the interests and values of social enterprise in mind. To maximise their impact, Service Providers often offer flexible contract arrangements and ways of working. New Zealand examples include the suite of professional services offered by Enspiral, the resource reuse expertise offered by Envision, and the design agency, Curative.
Of course, many social enterprises combine a number of these models to deliver a more systemic impact. The Community Business and Environmental Centre (CBEC) in Northland combines the Waste to Value, Robin Hood, and Regenerator models to provide a range of waste management services, employment, and training for around 80 people, as well as offering seed funding for new community initiatives with profits generated from a turnover of more than $10m a year.
Providing a sense of how social enterprises work in practice also gives a sense of why growing a thriving social enterprise sector is of interest and value to policy makers, local government, philanthropists, business, and the wider community. Social enterprise is about expanding the total pool of economic and social value, rather than redistributing or “salami slicing” what already exists.
So, if we want more social enterprises working at scale in New Zealand, what can be done to facilitate this? While the potential of social enterprise is attractive, the reality of establishing, operating, and growing one is far from straightforward—running any business is a hard slog, and running one with additional complexities and bottom lines can be harder. This is especially true for teams and organisations coming from a low capability base—people used to leading project and community work but who are not familiar with business practice. Or, for that matter, business people who are not used to leading social change. Just as we have developed a support structure for mainstream business that includes training, mentoring, networks, lobby groups, seed-funds, investment funds, legislation, incubators, and, indeed, entire government departments, so too, do we need a similar, if more modestly sized, support infrastructure for social enterprises to succeed.
Pathway to Scale—how social enterprises grow and what they need to be successful
In many respects, the development pathway of a social enterprise is similar to a commercial venture. However, the different interests, motivations, conditions, and objectives that drive social enterprises make the supports they require distinct. The purpose of the Ākina Foundation is to deliver a sustainable, inclusive, and prosperous New Zealand by growing social enterprise. To go about our work, we breakdown the growth pathway of a social enterprise into four stages: design, validation, viability, and expansion. At each stage, ventures require a combination of capability building, capital, and connectivity supports to fulfill their potential to succeed.
The start point of any social venture is marked by an intention to solve a social or environmental problem. This usually comes as a vision, either individual or shared, with only a loose understanding of how an enterprise will work in practice. For a good intention to move closer to business reality, ideas need to be quickly tested for basic feasibility, and matched with an assessment of the capability required (business, technical, social) to develop further. Capability supports that facilitate this stage include: business design workshops, basic skills development, access to proven models, innovation processes, and, not least, frank advice on what it will take to be successful. Capital requirements at this stage are minimal, although small awards can play a role in supporting capability building and enabling would-be ventures to move forward. Connectivity is critical at this stage—not least because social enterprises often arise from a desire for collective action. Innovation hubs—providing space and place, peer learning, community building, and networking with stakeholders, are all critical components of good enterprise design.
Given the low conversion rate of ideas to successful enterprises, there is an imperative to enable a continuous, interconnected, and high-volume flow of innovation at this stage with mass mobilisation of talent, mass creation of ideas, and rapid testing and iteration. From a sector development perspective, this means that support needs to cover a large surface area if it is to be effective—preferably via replicable programmes and local level service provision. At Ākina, we are mobilising talent through our Workshops and Clinics programme. Increasingly, we will seek to support locally-led innovation hubs and programmes delivered with regional partners.
When a team, community or organisation has developed a blueprint for their enterprise, and made the commitment to take it further, they move into a stage of validation. This requires intensive testing of their business model for market fit, customer fit, commercial viability, scalability, and impact. It involves running real trials and evolving all elements of their proposition based on evidence from the real world. Rapid iteration is possible at this point because the enterprise is still fairly weightless—it is unlikely to be bogged down by the grind of day-to-day-operations or funder/investor obligations. The main obstacle is likely to be the entrepreneurs themselves, and the attachment they have to their initial ideas and beliefs. A key component of their success is being able to respond to the evidence that validation provides. Development at this stage also demands a step-up in a range of commercial and technical capabilities: financial modelling, marketing, product/service development, impact reporting, operations, legal form (a question that businesses take for granted), and, increasingly, technology.
The capability supports required include skilled coaching through the progressive process of validating the business model, and access to a range of professional expertise to provide advice and undertake specific work. Enterprises that don’t have access to these supports can easily get stuck, fall-over, or worse, persist with a model that is set up to fail. Connectivity between social enterprises remains critical at this stage, not least for the ability to copy models that are already proven and operational. Intellectual property plays differently with social enterprise, as successful entrepreneurs are happy to give away their recipes for success if it means solving a problem more quickly. At Ākina, we support the validation stage through our accelerator programme—Launchpad. Launchpad starts with an open call for the best new social enterprise ideas across the country, and takes around 10 teams through an intensive six-month process which concludes with the ventures putting business cases to funders and investors. Launched in May 2014, the programme received a surprising 134 applications—evidence of significant unmet demand.
While bootstrapping is expected in the early days, access to capital now becomes necessary for ramping up capacity. For mainstream businesses, seed funding often comes from angel investment and development grants. Both of these options are currently unrealistic for social enterprise in New Zealand due to the limited potential for financial returns within a timeframe that is acceptable to investors (in order to compensate for the early-stage risk and small deal sizes). Add to that the focus of conventional (business) policy settings and the complications of social purpose and open IP. In countries where social enterprise sectors are thriving, public and philanthropic seed funds (which are motivated by future social returns on investment rather than financial) are managed by specialised intermediaries—like the role the Regional Development Agencies, Callaghan Innovation and business incubators play, in various ways, for private investors and mainstream business in New Zealand.
After validation, a social enterprise, if it is able to get startup capital, commits to operations and a stage of proving their viability. This is a stage of growing pains—of building an organisation, improving products and services, increasing turnover, expanding operations, and measuring impact. Development at this stage is non-linear, and can involve any number of false starts, stalls, pivots, inexplicable failures, and unexpected breakthroughs. Capability requirements include access to a range of technical supports and services—particularly legal, financial, HR, and marketing. Ongoing mentoring is also required to get the benefit of experience and informed objectivity. Guidance on management and governance is also essential, as these elements provide the foundations for all other aspects of strategy and operations. Connectivity on learning is still important, especially where peers can compare and contrast their common experiences, but now commercial networking is also key to enterprise development—finding new partners (the right partners) that can help access markets and prepare the venture for growth. Ākina supports social enterprises navigating this stage through our Incubator programme—boosted by significant support from our corporate and professional partners who provide support to our ventures on a pro-bono basis.
Capital requirements at this stage become significant, and the resources currently available in New Zealand are scarce. While many social enterprises get access to grants through existing public and philanthropic funds, these rarely recognise or prioritise the internal capability development, which is the primary need of ventures at this stage. Usually, they are grants issued to fund service delivery with internal development only enabled by default. To date, there are only a few philanthropic organisations who intentionally fund the development of social enterprises and only one—Canterbury Community Trust’s Social Enterprise Fund—that is explicitly named as such. In mature sectors internationally, funds have been established to specifically support development of ventures at this stage. Again, these funds are usually capitalised by public and philanthropic sources motivated by future social returns, and the prospect of getting social enterprises to the point where they are investment ready, or otherwise primed for self-sustainability. This last stage is defined as moving from development to expansion.
If a social enterprise can navigate the previous stages, they reach a position from where they can scale and sustain their impact. This usually goes hand-in-hand with securing the investment they need to ramp up operations. For organisations coming from a traditional charity or community background, resolve is often required at this stage to push for a truly investable proposition, and get beyond a grant-funded model disguised by some trading. Traditional private investment can be sought, but is problematic for the reasons previously outlined. In order to tolerate and respond to the needs of social enterprise, new impact investment markets are required, purposefully designed to generate both social and financial returns. Internationally, engagement in impact investment is growing rapidly—the number of specialist funds has doubled over the last five years, and Social Impact Investment is currently on the G8 agenda.
In New Zealand we don’t have an impact investment market yet, so social enterprises need brokered connections to investors who will consider a deal on a case-by-case basis. They also need the capability and professional support required to structure and execute the investment. When the investment is secured, social enterprises—like any business—need continued support to stabilise and manage an expanded operation. Ākina is in the process of building the networks, capability, and capital required to provide an appropriate and accessible offer in this space. This is what social enterprises need to grow. It’s not that they can’t navigate these stages on their own, it is simply that the majority of them don’t, and because of the lack of support, many more are discouraged from even trying. So the rationale for investing in support for social enterprise is exactly the same as why we do it for mainstream businesses—more ventures, with better business models, developing more quickly, and operating with stability, results in outsized returns on investment. With social enterprise, the return on investment is diverse innovation, social change, and public benefit.