The Social Enterprise Landscape: good news first or bad?

Would you like the good news first or bad?   The good is that social enterprise is thriving. Our mini-series this month, produced with the World Bank and Endeva, provides plenty of evidence.  The bad is that behind the hype, not only are the practical hurdles high, but contention reigns over what it's all about, and how profit balances with purpose. This may not stop entrepreneurs in their daily business, but contention and confusion hinder a smoothly functioning system that deploys the right models and appropriate capital to different markets and development solutions.

First I need to frame 'social enterprise' (or 'socent') as that part of inclusive business that is on the socially-driven and generally smaller end of the spectrum. It's not about multinationals diversifying their model.  But just how small and social it is, it part of the debate that I return to below.

Thriving has come in five steps. First, we saw huge focus on getting business models at the BoP to work.  Not all do, but much has been learnt about affordability, payments, demand, distribution, and consumer value propositions.  It's well on the way.  This month we have excellent overviews of the leading business models in health, education, energy and WASH that are cracking the success factors for scale.

Second, over the few years, attention has shifted to the ecosystem.  Half the point about an innovative BoP business model is that it finds its way round market failures - lack of infrastructure, consumer information, or financial systems.  But the other half is that a more supportive ecosystem has to be built.  This has certainly become a focus of attention of reports, toolkits and donors.

Thirdly, the support system of investors and intermediaries is growing.  As we explored on the Hub last month, business development services are chaotic, incomplete and hindered by the unresolved question of 'who pays' for support to pre-profit businesses.  But it is evolving.   If we measured finance availability by the amount of coverage of impact investment, or number of times large investment numbers with lots of zeroes are discussed, or frequency with which new donor or foundation initiatives are announced, we would also assume that financing is becoming more bountiful.

Fourthly, and what I find most exciting in this month's Hub theme, is that government and policymakers are beginning to take social enterprise seriously. They are looking at the potential to solve some of their objectives through these non-traditional models. This month we have the World Bank - yes the World Bank, that domain of top notch economists, top down policy frameworks and sovereign loans - explaining why socents are increasingly important to delivering objectives of their partner governments. From Costa Rica to South Korea to the UK, governments are embracing social enterprise models.

Finally, we are beginning to see pathways to replication and scale.  Certainly not enough. The relatively few examples of scale are still over familiar from multiple. But plenty of our blogs this month and next month (in a theme on scale and replication) are able to highlight scale factors for business models across the sectors.   

So what is there to worry about?

First, on the practical level, the challenges remain huge. Business models that are not viable,  ecosystems incomplete, policy constraints.  And almost every entrepreneur complains about lack of finance. Mozambikes is a good example: the model is getting traction but investors just are not prioritising Mozambique. We have discussed these constraints before on the Hub and we will discuss them again.

The other concerns are higher level. There is still unresolved debate about what on earth we are talking about, and about the fundamental proposition of profit with impact.  There is certainly no agreement on a single approach that could be labelled social enterprise.  And I don't think there should be.  But nor is there agreement on how to segment this space.  Only with segmentation can the right model or tool be deployed for the right problem. 

There are three distinct issues here:  how to segment the market; what labels to use; and whether one segment is more effective, more deserving of capital, or somehow 'better' than another. 

Whatever terms you use - social business, impact business, social enterprise or inclusive business - the fact there is a spectrum is not contested.  It's small community-based organisation with a revenue model at one end, a multinational investing in quality beneficial goods in BoP markets at the other. Most commentators see social enterprise starting at the community business end and spreading some way across the spectrum.  Christina Grad highlights the vast number of faith-based and small organisations that are operating socents, and may not even have the intention to scale.  They can be critical for the communities within which they work and should be valued but not confused with the investable model.   ADB's new report comes from the other perspective - what is investable - while recognising a similar spectrum.   ADB already invests in corporate inclusive business, but their new report says that the growing social enterprises in the middle of the spectrum may be the inclusive business investees of tomorrow.

The fact that these categorisations all use different terms is unhelpful but not disastrous.  For example, ADB, like IFC, labels the business bankable end of the spectrum as 'inclusive business' while I have always used that as the catch-all phrase that embraces social enterprise and corporate inclusive models. Others use impact business as the catch-all.   

But differing opinions are more interesting than differing labels. And that is where this month's Editor's Choice really livens things up. In 'Neo-Liberal takeover', Jyoti Sharma argues that hype around the profit-driven social enterprise model is damaging the more socially-focused hybrid models.  The reaction, which she comments on here, suggests a raw nerve.   I'm well aware of the views of more commercially minded investors and intermediaries, that see the 'fluffy' end of the spectrum as unscalable, and the recognition of sound business principles as key for the socent sector.

My own view is that we need to distinguish more clearly between 'low returns' and 'slow returns'.  Some socents will always provide low returns.  Decentralised rural water decontamination plants, micro-hydro for mountainous communities, or garbage collection and processing can provide quality services at low cost, but low income clients will and should never finance the full cost including capital.   Government procurement or grants for a hybrid model may be the most efficient way to deliver services in a decentralised way.   These are quite different to 'slow return' models, where grant money is needed to help entrepreneurs across the 'pioneer gap’ - cover the costs of innovation, iteration, building market demand or distribution models. Then patient capital can step in.  Whether full commercial capital becomes feasible without any trade-off with mission is a question not yet answered.

Differences and tensions are here to stay.  We don't need to strive for agreement, but if capital is going to be deployed into any of the businesses on our spectrum, clarity is needed.  If donors are going to fund hybrid models, or venture capitalists to invest in scalable bankable models, the inputs, outputs and expectations need to be clearer.   This is an echo of a conversation in the impact investing world about asset classes, and in the donor world about where and why to subsidise impact enterprise.  Conversations that look set to continue for a while. 

More Information

The October 2016 theme on the social enterprise landscape includes a vox pop with social entrepreneurs and intermediaries and over a dozen blogs by key players. The theme newsletter introduces them all.