Business fundamentals drive impact for social businesses

The Argidius Foundation promotes the growth of inclusive SMEs, often known as the missing middle. Why does it do this? How is your approach unique?

Small and growing businesses are the drivers of economic growth for low income communities. They create employment and revenue, which addresses poverty. Often in developed economies, between 30 and 40% of their GDP is represented by small and medium enterprises. This can be as low as 10% in developing or emerging countries—despite the positive benefits to employment and revenue. Ideally some of that employment and revenue is captured by low-income communities.

We support a range of interventions, including incubation, acceleration, business networks, individual consulting, and management training and development. Within each of these, we measure our impact using three indicators: incremental revenue, full-time employment growth, and the ability to raise capital. This allows us to channel our resources into those interventions that are most effective at lower cost for entrepreneurs.

Is scaling critical to achieving impact? Is it right for all businesses with a social mission?

We are looking to build viable businesses. And scale is always appropriate to the marketplace in which that business is functioning. So, when it comes to going for growth, you have to ask, “why?” and, “in what market does that make sense?” For some businesses scaling makes a great deal of sense. In other businesses it makes more sense to focus on incrementally serving your niche or your sector more effectively—and more profitably—and there is a limit to what size it should be.

We have found that we can work with businesses on either of these tracks—those that are focused on scaling and those that are not—and generate impact (remember our three indicators) very effectively.

Looking at the businesses that the foundation supports, are there any common or emerging themes with regards to measuring and demonstrating impact?

First, a company’s commitment to measurement is not necessarily carried through very successfully into actuality. Those who do it well often really care about what it is they're measuring and have developed indicators that are aligned with the business’ development and growth.

Second, many businesses that are achieving significant levels of impact do not necessarily describe themselves as inclusive businesses or social businesses. For example, there is a business in Uganda, which has created a whole new market for the traditional long horns of cattle. The exterior of the horns can be turned into various products, and the interior can be turned into fertilizer. The company employs its staff permanently and has a very positive attitude towards medical costs and providing medical insurance for its employees. That said, the owner would not describe themselves as an impact business. So, I think that's an interesting dilemma.

Are good impact stories enough, or do you require your partners to provide quantitative analysis to demonstrate their impact?

We recognise that measurement is a cost to business, and so it is important to us that we have a reasonable expectation when it comes to measurement. We are cognisant of striking the right balance. When is too many indicators too many? For example, we have seen the person who was supposed to be providing coaching to an entrepreneur instead spending even more time collecting impact data. And the problem with having too many indicators is that always, one or more of them will be going in a positive direction even if the other is going a negative direction. I would say if you've got over seven indicators, you've probably gone in the wrong direction.

While we are quantitatively driven, we do indeed look at impact stories. and interest in that. We might interview some of the new staff in an enterprise, for example, to learn if their new job is a positive change in their life and circumstances.

Do you have any advice for entrepreneurs who are looking to scale their impact?

Assuming that scale is appropriate for your business, first and foremost, what is it that you are actually scaling? You are actually scaling a business. You are functioning in a market. And you are selling a product or service that is going to drive your success. And the impact you are creating is going to be magnified by successfully building the business.

In terms of measurement, what do you really want to know about the impact of this business that is helpful both from an impact point of view and also from a you running your business perspective? There will be investors and other funders who are asking you to do X, Y and Z in terms of measuring a particular impact. And the question is always, does that actually help me drive a successful, scalable business?

A company we supported before I arrived, CO2 Bamboo, failed, in part, because it spent too much time trying to convince people of its virtuousness when it came to CO2 emissions, and too little time thinking about, "Who is going to buy this bamboo?" The upshot of this story is that now, in Nicaragua where CO2 Bamboo was based, there's a thriving industry of bamboo growers and manufacturers, all of whom learned that the impact of the bamboo is important, but unless people are buying it, we will not achieve scale or have the impact we want to have.

How are you sharing the knowledge you have gained around how to successfully support social enterprises?

Learning should drive most of what we do or try to do. We have tried to boil down the key characteristics of a successful provider of business development support using a series of animations.

We have also been experimenting with interesting ways of evaluating and learning. And so, one of our partners decided to do a series of videos of entrepreneurs who had all passed through the same business development programme. When you watch the eight videos in sequence, you begin to see patterns emerge, which you might have not noticed if you just talked to one entrepreneur. Most powerfully, we learned that all of the entrepreneurs were basically rubbish at managing their staff effectively, empowering them, and dedicating resources to enable them to be more effective and also happier.

And happier, more effective staff, unsurprisingly, improve your customer relations. And your customer relations, if improved, drive your sales. So, for these entrepreneurs, there was an important learning in paying attention to how they were managing their staff, and the process of being interviewed allowed them to think differently about their own journey moving forward, which was really positive.

Additional Resources:

All major grants are subject to an external evaluation, and we also fund external research. The reports are published here on an on-going basis.

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