Social Enterprise in Context

Social Enterprise in Context

Hybrid Spectrum

Hybrid Spectrum

Shifting stakeholder expectations of nonprofit organizations to achieve larger scale social impact while also diversifying their funding has been credited as a major factor in the appearance of the “nonprofit hybrid” part for-profit and part nonprofit.1

At this intersection of business and traditional nonprofit is where the social enterprise lies.

Spectrum of Practitioners2

  Purely Philanthropic Hybrid Purely commercial
Motives Appeal to goodwill Mixed motives Appeal to self-interest
Methods Mission-driven Balance of mission and market Market-driven
Goals Social value creation Social and economic value creation Economic value creation
Destination of Income/Profit Directed toward mission activities of nonprofit organization (required by law or organizational policy) Reinvested in mission activities or operational expenses, and/or retained for business growth and development (for-profits may redistribute a portion) Distributed to shareholders and owners

All hybrid organizations generate both social and economic value and are organized by degree of activity as it relates to: 1) motive, 2) accountability, and 3) use of income.

The Hybrid Spectrum includes four types of Hybrid Practitioners.

On the right hand side of the spectrum are for-profit entities that create social value but whose main motives are profit-making and distribution of profit to shareholders.

On the left hand side of the spectrum are nonprofits with commercial activities that generate economic value to fund social programs but whose main motive is mission accomplishment as dictated by stakeholder mandate.3

  • 1. Adapted from Tom Reis, Unleashing New Resources and Entrepreneurship for the Common Good: A Scan, Synthesis, and Scenario for Action. W.K. Kellogg Foundation, January 1999.
  • 2. Adapted from Gregory Dees, Why Social Entrepreneurship is Important to You, from Enterprising Nonprofits: A ToolKit for Social Entrepreneurs, John Wiley and Sons, 2001; and Lee Davis and Nicole Etchart, Profits for Nonprofits, NESsT, 1999.
  • 3. Adapted from Etchart, Nicole and Lee Davis, Profits for Nonprofits, NESsT, 1999.

Nonprofit with Income-Generating Activities

Nonprofit with Income-Generating Activities

Nonprofit organizations that incorporate some form of revenue generation through commercial means into their operations. Income-generating activities are not conducted as a separate business, but rather are integrated into the organization's other activities.These activities usually realize little revenue relative to the organization’s overall budget and traditional fundraising contributions.

There are two types of income-generating activities, delineated here by purpose:

  • Cost Recovery (discrete)--a means to recuperate all or a percentage of the costs to deliver a nonprofit service or fund a discrete activity related to the organization's mission. Special events, conference fees, paid training, and fee-for-service are examples. Cost recovery activities are linked to programs; once a program ends, the related cost recovery activities are terminated.
  • Earned Income (ongoing)--provides a stream of unrestricted revenue to the organization, generated through activities both related and unrelated to the mission. Membership dues, sales of publications and products, and consulting services are examples. Earned income activities are rooted in operations; they may progress into social enterprises when implementation is accompanied by a business plan.

    When is an Earned Income Activity a Social Enterprise?

    Is it the size of the income-generating activity; the amount of revenue earned; its legal structure, or type of staff involved that determines whether or not a income-generating activity can be considered a social enterprise? Though subtle, and subject to debate, the defining characteristic is that an income-generating activity becomes a social enterprise when it is operated as a business. The following characteristics apply: the activity was established strategically to create social and/or economic value for the organization. It has a long-term vision and is managed as a going concern. Growth and revenue targets are set for the activity in a business or operational plan. Qualified staff with business or industry experience manage the activity or provide oversight, as opposed to nonprofit program staff.

    More than half of all nonprofits are engaged in some form of income generation, though few have the tools, knowledge, expertise or desire to develop these activities into enterprises, thus realizing their potential social and economic benefit for the organization. The example below demonstrates how elephant waste was turned into an earned income activity in one zoo and a social enterprise in anther.

    An Example of Earned Income Activity versus Social Enterprise

    The National Zoo in Washington DC sells Elephant dung to the public as exotic fertilizer. Although the humorous product is popular among local organic gardeners, the "Zoo Doo" venture is not treated as a business and the income it earns is insignificant. Opportunities to scale Zoo Doo into a viable enterprise by selling the product in nurseries and gardening catalogues, as well as adding other "zoo products" to the line have not been realized. Instead Zoo Doo functions as an innovative public relations and marketing strategy used to attract visitors and patrons to the National Zoo. The small amount of money it generates is considered a plus.

    Using the same raw material, Zookeepers in Bangkok, Thailand turned their Elephant dung into lucrative business. The Thais transform the animal excrement into high-quality handmade paper which are sold in stationary stores, nature shops, and used in premium paper products in domestic and export markets. The enterprise employs several people who process the organic pulp to produce handmade paper. To keep up with demand, Thai zookeepers source dung from other zoos and elephant habitats. Unlike Zoo Doo, the Elephant dung products are not advertised to consumers as such; rather, socially-conscious consumers are sold on organic nature of the product and the fact that proceeds from sales are used to fund zoo activities and animal protection organizations.

  • Social Enterprise

    Social Enterprise

    A social enterprise is defined as any business venture created for a social purpose--mitigating/reducing a social problem or a market failure--and to generate social value while operating with the financial discipline, innovation and determination of a private sector business.1

    Social enterprises use entrepreneurship, innovation and market approaches to create social value and change; they usually share the following characteristics:

    1. Social Purpose - created to generate social impact and change by solving a social problem or market failure;
    2. Enterprise Approach – uses business vehicles, entrepreneurship, innovation, market approaches, strategic-orientation, discipline and determination of a for-profit business;
    3. Social Ownership – with a focus on public good and stewardship, although not necessarily reflected in the legal structure.

    Social enterprises may be structured as a department within an organization or as a separate legal entity, either a subsidiary nonprofit or for-profit.

    The purpose of the social enterprise may be:

    1. an additional funding mechanism for the organization’s social programs or operating costs;
    2. a sustainable program mechanism in support of the organization's mission; or
    3. a leadership development mechanism in support of social innovation.

    Used for either purpose, business success and social impact are interdependent.

    Social enterprises can be classified based on their mission orientation...

    ...as well as the level of integration between social programs and business activities.

    • 1. Definition from Virtue Ventures LLC

    Socially Responsible Business

    Socially Responsible Business

    For-profit companies that operate with dual objectives-making profit for their shareholders and contributing to a broader social good. Ben and Jerry's and Body Shop are examples of this type of hybrid.1

    In socially responsible businesses the degree to which profit-making motives affect decisions and the amount of profit designated for social activities ranges. Socially responsible businesses are willing to forsake profit or make substantial financial contributions rather than distribute earnings privately, and frequently place social goals in their corporate mission statements. In some cases a socially responsible business may be considered a social enterprise when it is a registered for-profit subsidiary owned by a nonprofit organization (parent organization) created for the purpose of earning income for the parent organization as well as supporting a social cause.

    For additional information, see the Business for Social Responsibility web site.


    Green Mountain Coffee Roasters, an example of Socially Responsible Business

    Green Mountain Coffee Roasters (GMCR), based in Vermont, is an example of socially responsible company. At GMCR every business decision is anchored in the company's core values concerning the environmental and the social impact of its business actions.

    In 1989, GMCR established an environmental committee comprised of employees to explore the many ways its corporate environmental vision could be executed in its business practices. One outcome was the establishment of the Company's extensive on-site recycling program.

    In 1992, GMCR launched its "Stewardship" line of coffees, which are grown and harvested using ecologically-sound sustainable farming techniques beneficial for the land and workers. GMCR employees travel to coffee farms in Hawaii, Mexico, Costa Rica, Peru, Guatemala, and Sumatra to evaluate the farm management and quality of the coffee. These visits help develop strong relationship with the growers and better profits.

    In 1997, GMCR funded construction of a "beneficio and hydro" plant for 16 coffee-farming families in Peru. Then in 1998, the Company provided funding for a Coffee Kids micro-lending project in Huautsco, Veracruz, Mexico. This project has already grown to include over 270 participants.

    In addition to these socially responsible business activities, GMCR contributes 7.5% of its pre-tax earnings, the highest amount allowable by law, to social and environmental organizations such as Conservation International.

    • 1. Young, Dennis, Social Enterprise in the United States, 2001.

    Corporation Practicing Social Responsibility

    Corporation Practicing Social Responsibility

    For-profit businesses whose motives are financially driven, but who engage in philanthropy. "Strategic philanthropy" helps companies achieve profit maximization and market share objectives while contributing to public good.

    A private company or corporation engages in socially beneficial activities such as grant-making, community involvement, volunteering company personnel, and sponsorship as a means to improve public image, employee satisfaction, sales, and customer loyalty.

    Corporate social responsibility is not classified as social enterprise, although philanthropic activities may support social enterprises, make a positive social impact, or contribute significantly to a public good.


    Amanco, an example of Corporate Social Responsibility

    Amanco, part of the Nueva Group based in Costa Rica, produces and markets piping for irrigation construction, infrastructure, and industry in 13 countries of Latin America.

    Amanco Argentina has two plants, including one at Pablo Podestá where the company started a community integration program in 2000. They are working with the Agrupación Ecológica Oasis (Oasis Group), which brings together needy youth for local activities, including reforestation and tree planting, and collecting aluminum, glass, and newspaper that they sell to recycling companies. The money is used to buy school supplies, tools, seeds, and other items. The company provides them with a space to create a library and meeting center, for which Amanco employees collected the first books. Employees will also teach classes.

    Amanco identified community leaders who will be trained to continue the work organized by the Oasis Group, and plans to bring other companies in the region into the program, which will be expanded to work with other local community groups.

    Dual Value Creation

    Dual Value Creation

    Two distinct families of organizations reside on the hybrid spectrum. The characteristic that separates the two groups is purpose.

    Profit (shareholder return) is the primary purpose of socially responsible businesses and corporations practicing social responsibly, whereas social impact is the primary purpose of social enterprises and nonprofits with income-generating activities. This difference is central to the organization’s ethos and activities. For this reason, organizations rarely evolve or transform in type along the full spectrum. Those that transform from social enterprise to socially responsible company or visa-versa must first reorient their primary purpose then realign their organization.

    Nonprofits are founded to create social value, however, financial sustainability cannot be achieved without external or self-generated funds. For-profits are established to create economic value, yet often must make social contributions to survive in the marketplace. Therefore, both types of hybrids pursue dual value creation strategies to achieve sustainability equilibrium. Nonprofits integrate commercial methods to support their social purpose and for-profits incorporate social programs to achieve their profit making objectives.

    As a hybrid, the social enterprise is driven by two strong forces. First, the nature of the desired social change often benefits from an innovative, entrepreneurial, or enterprise-based solution. Second, the sustainability of the organization and its services requires diversification of its funding stream, often including the creation of earned income.1

    Distinguished by their dual value creation2 properties--economic value and social value--social enterprises have the following characteristics:

    • Use business tools and approaches to achieve social objectives
    • Blend social and commercial capital and methods3
    • Create social and economic value
    • Generate income from commercial activities to fund social programs
    • Market-driven and mission-led
    • Measure financial performance and social impact
    • Meet financial goals in way that contributes to the public good
    • Enjoy financial freedom from unrestricted income
    • Incorporate enterprise strategically to accomplish mission

    Duality of Objectives

    Social Objectives aimed at mission accomplishment (social value creation) vary widely depending the organization’s mission and sector. Examples include economic opportunities for the poor, employment for the disabled, environmental conservation, education, human rights protection, strengthening civil society, etc.

    Financial Objectives focused on financial sustainability (economic value creation) vary according to funding needs and business model. Financial measures are drawn from both private and nonprofit practice. Examples include cost recovery of social service, diversifying grant funding with earned income, self-financing programs or making a profit to subsidize the organization's operations.

    Blended Value

    The concept of "blended value"4 arises from the notion that value has within it three component parts: economic, social, and environmental. While traditionally people have thought of nonprofits being responsible for social and environmental value and for-profits for economic value; in fact both types of organizations generate all three value sets.

    The rise of social enterprise, corporate social responsibility, social investing, and sustainable development are all examples of how various actors are pursuing a blend of financial, social, and environmental value.5 The blended value proposition is drawn from the belief that "value" is inherently whole; hence this school of thought is moving from measuring multiple bottom lines to focusing on a single value sign-blended value-or "total value" creation.

    More information about Blended Value is available on the Blended Value Map website.

    • 1. Reis, Tom. Unleashing New Resources and Entrepreneurship for the Common Good: A Scan, Synthesis, and Scenario for Action. W.K. Kellogg Foundation, January 1999.
    • 2. Formerly referred to as double bottom line concept; double bottom line was dropped in favor of a new more holistic value creation approach (see blended value). Many proponents of social enterprise, social investing, corporate social responsibility, and venture philanthropy subscribe to the triple bottom line which includes environmental impact along with economic and social impact. The intent of this typology is to simplify the concepts, rather than to discount the significance of environmental impacts. For our purposes environment impacts have been included within social impact category.
    • 3. Adapted from Gregory Dees, Enterprising Nonprofits, Harvard Business Review, January-February 1998.
    • 4. For more information see, Blended Value Proposition: Integrating Social and Financial Returns, California Management Review, Vol. 45, No. 4, Summer 2003.
    • 5. Excerpted from Mapping the Blending Value Proposition, Jed Emerson and Sheila Bonni, 2003.

    Mission Orientation and Motives

    Mission Orientation and Motives

    In hybrid organizations money and mission are intertwined like DNA; however, they are not always equal partners. In practice, financial and social objectives are often in opposition or competition with one another. The initial decision to undertake a social enterprise is frequently motivated by either financial need or mission benefit.

    Mission Orientation in Hybrid Organizations

    The following diagram shows the relationship between mission orientation and type of organization.

    Mission vs. Profit Motives in Hybrid Organizations

    The following scatter diagram shows the relationship between the type of organization and its motives.

    Mission Drift

    Mission Drift

    The inherent challenge of operating a social enterprise is managing to its dual objectives. In practice, the business of generating social and economic value means decisions and actions are in frequent opposition. This translates into calculated trade-offs: decisions to forsake social impact to gain market share or increase profit margins; or conversely, expanding the scope of social good at a financial cost. Problems occur when an organization's enthusiasm to meet its financial goals begins to overwhelm its social mandate. Nonprofits' long history of struggling to secure funding can, in the advent of earned income, threaten to swing the pendulum too far in the other direction. In the early days of microfinance, donors and practitioners toiled to set parameters on "how far is too far" on the mission-money spectrum by quantifying loan sizes, duration of client relationships, and interest rates before arriving at a model that was both viable and scaleable.

    The concern many nonprofit practitioners and donors face is that incorporating commercial approaches into a nonprofit will compromise the organization's mission or social services by causing a "drift" too far into the for-profit camp.

    The feared results of the "drift" (real or perceived) are:

    • drift may damage the reputation of the organization among stakeholders and the public;
    • the social enterprise may jeopardize funding because donors either misunderstand its dual-intention social enterprise or believe donations are now unnecessary;
    • it may threaten organizational culture by applying market-based approaches and bringing in business professionals and industry experts; and
    • finally, some fear that the organization will lose focus, and stray too far into the commercial realm, neglecting its social mission.

    Running a social enterprise is a balancing act, which requires vigilance and a clear understanding of the organization's purpose and priorities: what is the social impact that the organization is trying to achieve, and how much money does it need to make? It means strong market discipline coupled with an equally strong sense of ethics and integrity--and leadership consensus about limits on "how far is too far" in any direction. Generating economic value, or making money, is not an evil act; on the contrary, it's a tool for generating social value in a way that is more sustainable than relying on donor funds.

    The social enterprise model and design will largely inform how its dual purposes are achieved; it is up to the leadership to manage the tensions. The following exhibit shows this relationship in the product and market mix.

    Existing Product; Existing Market

    Income directly from social programs

    Income is earned directly from nonprofit program activities. Nonprofit sells existing social service and products to its target market or to a third party payer on behalf of target market. Income covers the cost of service delivery and may fund all or a portion of overhead.

    Example:

    A microfinance institution sells micro-loans to low income microentrepreneurs. Income from interest and fees is used to cover the service delivery costs as well as the operating and financial costs of the microfinance institution.

    Highest mission relevance; lowest risk

    New Product; Existing Market

    Income from extension of social program

    Income is earned by enhancing nonprofit program activities. Nonprofit sells new products and services to its existing target population or constituents. Income covers the cost of service delivery and may fund all or a portion of overhead.

    Example:

    In addition to its educational and advocacy programs, a biodiversity organization adds an exhibit hall to its offices. Visitors pay admission fees, which fund the operating costs of the exhibit as well as a portion of the organization's overhead.

    High mission relevance; medium risk

    Existing Product, New Market

    Income related to social program

    A nonprofit commercializes its existing social services or products and sells them in the open market to the general public or businesses (other than to clients/constituents). Income subsidizes social programs and parent organization overhead.

    Example:

    A senior services organization provides grant-subsidized care management services to poor seniors, and sells the same services in its eldercare business to a private pay market. Income generated from the private eldercare business is used to subsidize social program costs and a portion of the parent organization's overhead.

    Medium mission relevance; medium risk

    New Market, New Product

    Income not related to social program

    A nonprofit sells new products or services in a market other than to its target population or constituents. The decision to use this mix is financially motivated. This type of social enterprise most often takes the shape of auxiliary or unrelated businesses, and its income is used to fund social programs and the parent organization at-large.

    Example:

    A youth organization owns a real estate holding company with several commercial rental properties. Space is rented to tenants that have no relationship with the commercial activities of the youth organization. Profit from the real estate business is used to fund the youth organization's overhead and programs.

    Low mission relevance; high risk

    Financial Strategy

    Financial Strategy

    Social enterprise is a means to achieve sustainability through earned income; however, it is important to note that financial objectives differ among organizations. Unlike the microfinance field, the financial objective of a social enterprise is not by default viability (generating sufficient income to cover all costs).

    Social enterprises don't need to be profitable to be worthwhile. They can improve efficiency and effectiveness of the organization by:

    • reducing the need for donated funds;
    • providing a more reliable, diversified funding base; or
    • enhancing the quality of programs by increasing market discipline. 1

    Nonprofit organizations have varying financial motives for incorporating social enterprises into their organizations, ranging from income diversification to full financial self-sufficiency:

    • Income Diversification -- For many nonprofit organizations, social enterprise serves as a strategy to diversify their funding base, decrease reliance on donors, and recover or subsidize program costs. In these cases, the social enterprise offers a means to reduce program deficits and employ resources more efficiently. Organizations seeking means to diversify income may set modest financial objectives. For example, the costs of a program previously 100% grant-funded now covered 40% by earned income is success for many organizations.
    • Financial Self-Sufficiency -- Financial self-sufficiency is achieved by increasing nonprofit organizations' ability to generate sufficient income to cover all or a substantial portion of their costs or fund several social programs without continued reliance on donor funding. Organizations seeking to maximize profit will opt for external subsidiaries expressly for the purpose of funneling money back to the parent organization. Experienced nonprofits may use complex structures and have multiple mixed enterprises and income streams.
    • Cost Savings and Resource Maximization -- This financial objective is usually combined with financial self-sufficiency or income diversification and is concerned with optimizing resources and leveraging assets for economic, social, and community development.
      • Cost savings--is achieved by sharing back office functions, optimizing systems, and streamlining efficiencies to increase business performance and margins.
      • Resource maximization--is achieved through leveraging the nonprofit's financial assets, tangible assets (space, equipment, plant, building, etc.), and intangible assets (proprietary content, methodology, relationships, goodwill, name recognition, skills, and expertise).
    • 1. Dees, Gregory, Enterprising Nonprofits, Harvard Business Review, January-February 1998.

    Financial Spectrum of Social Enterprise

    Financial Spectrum of Social Enterprise

    The level of social enterprise self-sufficiency is based on financial objectives, the type of enterprise, and its maturity. Social enterprise methodology does not dictate breakeven or profit-making; rather, financial performance is appraised by the ability of the social enterprise to achieve the financial objectives it has set.

    For this reason, the chart below1 does not represent gradation from one stage of development to the next, unless the social enterprise's express objective is to move across the continuum and performance is a question of maturity.

    Organizational Structure Traditional Nonprofit Traditional Nonprofit / Social Enterprise Social Enterprise Social Enterprise Social Enterprise
    Financial Spectrum Full Philanthropic Support Partial Self-Sufficiency Cash Flow Self-Sufficiency Operating Self-Sufficiency Financial Self-Sufficiency
    Level of income No earned income. Relies on subsidies for financial support to sustain operations. Earned income covers a portion of operating expenses or recovers some program costs. Earned income covers operating expenses of enterprise at lower than market rates. Earned income covers all operating expenses without full market-based costs (capital & investments). Earned income covers all operating and investment expenses at market rate.
    Subsidy 100% subsidy. Enterprise and/or parent organization mostly subsidized. Bridges deficit between earned income and expenses, capital investment and growth subsidy. Cost of capital, partial subsidies for loans, and capital expenditures. No subsidies.
    Viability through earned income Not viable. Requires continued external financing (grants). Cost recovery is often seen as a side benefit rather than an expectation of the program. Not viable. Organization is dependent on grants and donations for survival; may self-fund isolated services or activities. Approaching viability. Covers direct costs; cost structure and growth subsidized; revenue covers daily operations until breakeven. Viability expected. Operational breakeven; no surplus revenue, subsidies diminish; revenues cover all operating costs. Viable to profitable. Revenues cover all operating and financial costs; retained earnings finance growth. Nonprofit may change its legal status to that of a for-profit entity.
    Type of subsidies
    • Philanthropic donations
    • Grants
    • In-kind support
    • Volunteer labor
    • Philanthropic donations
    • Grants
    • In-kind support
    • Volunteer labor
    • Parent organization support
    • Grants to fund deficit
    • Discounts and tax advantages
    • Volunteer or below market labor (interns)
    • Below market interest rates
    • Parent organization support
    • Preferential contracts
    • Discounts and tax advantages
    • Below market interest rates
    • Parent organization support
    • Bridge/gap funds; grants for specific cost costs
    • Preferential contracts
    • Tax benefits allowable by law if organization maintains nonprofit status
    • Preferential contracts
    • 1. Expansion on spectrum idea presented by Gregory Dees, Enterprising Nonprofits, Harvard Business Review, January-February 1998. Adapted from, Alter, Sutia Kim, Managing the Double Bottom Line: A Business Planning Resource Guide for Social Enterprises, Pact Publications, Washington, DC, 2000.

    Methods of Income Generation

    Methods of Income Generation

    Social enterprises use a variety of methods to generate commercial income to sustain operations. At any given time, a social enterprise may use one or a combination of methods, based on the type of enterprise and business strategy.

    Method Description Examples
    Fee-for-service Charging constituents or clients for social services in order to recover costs of service provision. Museums charge entry fees; microfinance institutions sell financial services; rural clinics collect sliding scale fees for doctor visits.
    Products Earned income through manufacturing and product sales, or through mark-up and resale of products. Horticulture cooperative sells flowers wholesale to suppliers; a fair trade company imports cocoa beans and manufactures them into chocolate products to sell in western markets; a handicraft marketing company sells artisan products through a catalogue and takes a commission on sales; a café employing disabled people sells coffee and snacks to the public.
    Services Commercialization of a skill or expertise to a market willing and able to pay. Hunger relief organization sells catering services to schools and institutions; children's education organization provides daycare service for a fee; mental health organization sell psychotherapy and counseling services; a national microfinance institution sells management consulting services to other nonprofit organizations interested in starting credit programs.
    Membership Dues Fees collected from members of a group, association, or organization in exchange for services such as a newsletter, discounts, conferences, insurance, etc. Dairy subsector trade association provides market information and linkages to its paying members; organization of social enterprise practitioners receives newsletter, listserv, industry reports, job listings, and an annual conference in exchange for an annual fee.
    Tangible Assets Generating income by renting or leasing a tangible asset such as office space, building, land, vehicles, or equipment. Human services organization leases its idle office space to another nonprofit organization; a community development organization rents its trucks to a moving company on the weekends; an environmental conservation organization leases its land to an eco-touring organization.
    Intangible Assets Generating income by leveraging an intangible asset such as proprietary content, methodology, brand, reputation, relationships, goodwill, etc. International Children's organization licenses its logo and brand name to a clothing line; a university obtains research contracts for scientific study from technology companies; a membership organization sells its mailing list; a youth news agency sells its print content to an online educational service targeting young people.
    Investment Dividends Passive income earned from investments. Interest income and dividends from bonds, stocks, savings deposits, and other investments.
    Unrelated Business Activities Revenues from a business unrelated to the organization's mission and created for the purpose of funding specific social activities or the organization at-large. Museum shop or retail store of an environmental organization; Girl Scout cookies; a catalogue trinket business supporting a public radio station; nonprofit real estate holdings.

    Access to Capital

    Access to Capital

    Social enterprises, like any other business--micro or corporation, need capital to grow. It's not only a question of financing, but also of the right kind; capital must correspond to social enterprise financial needs, business cycles, and maturity. Furthermore, like any other business, the best make good use of borrowed capital and their own risk capital.

    Access to capital, however, is a constraint social enterprises continue to face. The reasons are fourfold:

    • Nonprofit capital markets are immature and underdeveloped, and there is little availability of financial instruments appropriate for capitalizing nonprofit businesses.
    • Ownership and regulatory issues bar nonprofits from access to financing--they cannot issue equity or distribute profits.
    • Nonprofit managers are financially risk adverse and hence often steer clear of options to leverage or borrow funds in order to capitalize their enterprises.
    • For the nonprofit manager willing to borrow, the lack of collateral, credit history, or financial competence are other factors that prohibit access.

    Market Maturity

    Market maturity and limited available resources present significant problems. Agencies such as the Inter-American Development Bank and social investors such as Calvert Foundation or Partners for the Common Good have worked to fill funding gaps with low interest loans and innovative financing programs, such as SEP.

    On the other hand, few donors have come to the table to fund start-up or early stage social enterprise with grants. In cases where donors have funded social enterprises, the philanthropic funding cycle is typically slower than the social enterprises' business cycle (production and sales cycle), which can further challenge capitalization.

    To exacerbate matters, there is the worrisome misconception that once an organization has launched a social enterprise, it no longer needs grants for social programs, when in fact early capitalization of the enterprise dictates the opposite. There is also the misperception that social enterprises only need loans. Capitalizing a nonprofit social enterprise may take four or five times longer than its private sector counterpart, due to the social costs and encumbrances of supporting dual objectives. These financial limitations hinder efforts of many social enterprises to take their activities beyond the start-up stage and to stabilize, expand, and diversify. 1

    Funding Instruments

    Appropriate funding instruments and greater awareness of capitalization issues is needed to facilitate the growth of the social enterprise field as a viable sustainability strategy for nonprofits. Assisting the development of social enterprises' capital markets is a role that onors, philanthropists, and local governments can play. The following exhibit shows the range of funding across the nonprofit and for-profit spectrum. Many of the same funders support both traditional nonprofit and hybrid nonprofit enterprises; however, greater participation and diversity of funding instruments are needed in the latter if this field is to emerge as a mainstay of international development.

    Funding Spectrum2

    Type of Organization Traditional Nonprofit Social Enterprises Socially Responsible Companies For-Profit
    Capital Grants and donations Mix of grants and below market capital No interest or low- interest loans Market rate capital (including social responsible investments) Market rate capital
    Sources of Capital and Investors
    • Foundations and government grant programs
    • Multilaterals
    • Bilaterals
    • Individuals

    • Foundations
    • Local government
    • Community Development Financial Institutions
    • Program related investments (PRIs)
    • Bilateral and multilateral lenders
    • Nonprofit social investors
    • Individuals

    • Socially screened funds
    • Shareholder activism
    • Socially screened and traditional venture capitalists
    • Investment banks
    • Individual investors
    • Traditional venture capitalists
    • Investment banks
    • Other investment assets
    • Individual investors
    • Stock
    Investment Objective High social return--no expected financial return High social return with below market or no financial return Market rate of financial return and some social return Full market rate of financial return and no expected social return
    • 1. Etchart, Nicole and Lee Davis, Unique and Universal: Lessons from the Emerging Field of Social Enterprise in the Emerging Market Countries, NESsT, 2003.
    • 2. Adapted from Emerson, Jed and Sheila Bonni, The Blended Value Map: Tracking the Intersects and Opportunities of Economic, Social and Environmental Value Creation, September, 2003, www.hewlett.org

    External Financing vs. Revenues Over Time

    External Financing vs. Revenues Over Time
    External Financing vs. Revenues Over Time
    Legend: SE = Social Enterprise; Y Axis = Money; X Axis = Time;
    External Financing = all financing (grants, loans, contributions) minus revenues (internal financing)

    Total expenses can be divided into three subcategories (moving upward along the Y-axis):

    • SE Business Expenses include all costs found in similar businesses that are strictly for-profit, with no consideration for social impact and mission.
    • SE Social Expenses comprise additional expenses incurred because of the social focus of the SE, such as special workplace or benefits requirements. Together, the SE Business Expenses and the SE Social Expenses total the total SE expenses.
    • Program Expenses, in this context, represent expenses incurred to support social programs outside the SE.

    From Time 0 to Time A (moving along the X-axis), the SE goes through a start-up phase requiring a lot of external financing. Expenses increase faster than revenues. This is a critical phase during which decision-makers must carefully weigh business expenses based on their potential for generating future revenues.

    From Time A to Time B, the SE goes through a growth phase during which external financing is still required, but revenues grow at a faster pace than expenses, leading the way to traditional financial sustainability.

    The SE reaches its first breakeven point in Time B, at which point the SE becomes sustainable as a traditional business (a business that does not incur additional social expenses). The difference between all Business Expenses and Revenues between Time 0 and Time B represent the total business investment over that period of time (light gray area on the chart). Even the best management team implementing the best business model cannot succeed in bringing a business to that critical point if decision-makers fail to recognize (and budget) the level of external financing that will be required over that certain period of time, both of which can vary greatly based on a variety of factors (all of which are considered during the business planning phase).

    From Time B to Time C, the SE still requires external financing, but only to cover part of its Social Expenses (part of which is also covered by SE Revenues). Depending on the model, some social enterprises never grow beyond that point, in which case they serve in a context in which both SE Revenues and external social subsidies can be effectively leveraged to create social impact.

    In Time C, the SE might be reaching a second breakeven point, at which all SE expenses are covered by revenues. Additional SE revenues now generate a profit that can fund social programs outside of the SE.

    Program Strategy

    Program Strategy

    From a programmatic perspective, social enterprise addresses one of the most pressing issues nonprofit organizations face--how to achieve ongoing sustainable impact. In some organizations social enterprise is highly compatible with the mission and hence, is a natural program fit. For example, program activities concerned with economic development revolve around work and wealth creation. The missions and objectives of social welfare and human development organizations focused on employment training and welfare-to-work transitioning also mesh neatly with social enterprise as a program methodology. Agricultural organizations offer ample opportunities to marry program activities of sustainable crop cultivation and livestock rearing with social enterprises that process food or sell fair trade products, etc. In these cases, organizations often employ embedded and mission-centric social enterprises as a principal program strategy to accomplish their missions while simultaneously increasing their financial self-sufficiency.

    Opportunities to utilize social enterprise as a program strategy may be less evident in some organizations than in others. Here social enterprise is an auxiliary activity that compliments or expands the organization's mission and social activities, but is not the core social program. For example, an arts-and-culture organization may commercialize its products--i.e. sell art--, yet its primary activities are education and training programs aimed at preserving traditional artisan crafts methods. An environmental organization may launch an eco-tourism enterprise as a vehicle to educate people about environmental conservation and employ community members but its main social activities are concerned with reforestation and anti-erosion.

    Where social enterprise is not a seamless match with an organization’s mission, the impetus to begin a social enterprise might be financially motivated, nevertheless the social enterprise may enhance or compliment the organization’s social programs and strengthen its mission. In these cases, social enterprises are often integrated within the organization, their activities related to the mission, but are not used as a core program strategy to accomplish the mission.

    Program Areas

    Program Areas

    Program activities described in this section are not comprehensive, rather they relate only to social enterprise programs. All technical program areas have numerous activities not elaborated herein.

    Economic Opportunities

    Economic opportunities programs focus on starting social enterprises for the express purpose of creating fair-wage jobs or employment opportunities in a geographic target area. Other program activities center on developing transferable skills, job placement, or opportunities that foster self-employment. Economic opportunities programs may be single-focused on business or integrated with other social services such as insurance, literacy, health education, etc.

    Community and Rural Development

    Community and rural development programs develop community-based social enterprises aimed to provide local jobs, increase purchasing power, reduce urban flight, increase community wealth, and strengthen community cohesion. These social enterprises may be designed as community businesses intended to benefit the entire community by investing surplus revenue in wells, schools, libraries, community centers, gardens, etc., or as more traditional small and medium scale enterprises (SMEs).

    Market Development

    Market development programs start or support social enterprises that spur and facilitate growth in underdeveloped and under-served markets. These social enterprises operate in markets that are unattractive to private companies due to high market penetration costs (often related to rural distribution and educational marketing), slim margins, or both. The objective is to provide access to vital good and services to marginalized communities while strengthening markets to entice private sector players. Social enterprises working in market development consider private sector competition or cannibalization an exit strategy. Socially responsible fair trade organizations also serve to develop markets, but do not seek to exit markets based on emerging competition.

    Access in Under-served Markets

    In markets unattractive to the private sector, but where social need and demand coexist, the social enterprise fills a vital niche by providing access to products and services. Poor and rural markets are largely under-served due to high transaction costs, low purchasing, and low margins, making access difficult for many people in need of products and services, such as medical services, health inputs, financial services, etc.

    Employment Development

    Employment development creates employment and vocational training for disenfranchised, disabled or at-risk populations. These so-called "hard-to-employ" people earn a livable wage and develop marketable skills through their employment in the social enterprise. Employment development models of social enterprises were popularized in the US, and have proven successful in Latin America.

    Microenterprise Development

    Programs that foster the growth and development of microenterprises (businesses that employ 1-10 people) and self-employed people (microentrepreneurs) through the provision of affordable credit or business support services (training, technology, market information, etc.)

    Institutional and Organizational Development

    Institutional development programs are aimed at building the capacity of nonprofit organizations to self-govern and become sustainable. In addition to training and technical assistance in organizational development and nonprofit management, programs focus on income-generation and financial self-sufficiency, thus may incorporate social enterprise.

    Sectors

    Sectors

    This section describes a number of nonprofit sectors and some social enterprise applications in those sectors. This is by no means an exhaustive list; social enterprise can be applied in any nonprofit sector, particularly if is it used as a financing strategy. The sectors highlighted in this section are generally conducive to incorporating social enterprise as a program strategy.

    Economic Development

    Economic development is a sector that uses social enterprise as a sustainable program strategy to create economic opportunities and community wealth-building to enable poor people to attain economic security for themselves and their families. In many cases, business activities are "embedded" within the economic development organization; the social enterprise is the program--the means to effect social impact. Some of the possible social impact goals include increased household income, asset accumulation, investments in productive activities, job creation, increased school attendance, improved health, and quality of nutrition.

    Environmental Conservation

    "Eco enterprises" offer a wealth of creative methods to both raise money for, and awareness of, environmental issues. Eco-tourism's growing popularity provides lucrative opportunities to social entrepreneurs interested in capturing intrepid travelers. The tourist market, unlike many nonprofit "client markets," has money; therefore this business easily marries the social enterprise's financial and social objectives. Many environmental social enterprises also sell products, such as shade-grown coffee or items made from recycled materials. In other examples, environmental social enterprises operate organic markets or home delivery food businesses to finance sustainable agriculture and education programs.1

    Social Welfare and Human Development

    In some social welfare and human development organizations, there is crossover with employment development and job training programs, whereby the social service organization creates jobs and develops skills for clients--homeless, physically and mentally disabled, and at-risk populations--through a social enterprise. Human development organizations that target recovering drug addicts and alcoholics, former welfare recipients, or ex-convicts use social enterprises as rehabilitative programs. In other cases, the social welfare organization may commercialize its social services to a private pay market to fund its programs.

    Arts and Cultural Preservation

    Within the context of the cultural organization, social enterprise offers a range of possibilities to serve social and financial objectives. Selling cultural products through outlets such as an art gallery, cinema or theater; or educational services such as art, drama, music, cultural history, etc. are common social enterprise examples.

    Health

    In the health sector, nonprofit organizations have been incorporating social enterprise for many years. Hospitals and clinics are common examples. Pharmacies, medical supply companies, and group-purchasing businesses are also widely applied models. Selling health services is a growing industry in social enterprise: nutrition counseling, physical therapy, mental health counseling, care management, and alternative therapies.

    Agriculture

    Agricultural production, sustainable farming, food processing and animal rearing offer many social enterprise opportunities for rural communities in developing countries where few other economic opportunities exist. In the United States, social enterprises in the agricultural sector range from nonprofit or cooperative organic farms to economic development organizations that support entrepreneurs and small scale producers (cheese, jam, salsa, beer, etc.).

    Education

    Educational institutions have long used social enterprise as a means to diversify their income and strengthen education programs. Tuition or "fee-for-service" is the obvious method used by schools, colleges and universities. Many universities obtain research contracts with the government or private sector. Specialized skill or technology institutions provide an option to follow the service subsidization model by repackage classic education to new markets for a fee.

    Children and Youth

    Many nonprofit organizations serving adolescents and young adults, particularly from low-income families, conduct entrepreneurship and vocational skills training, or run hands-on business programs such as youth run enterprises or incubators. These types of program provide multiple opportunities for integrating social enterprise programs within the organization. Other children and youth organizations operate child-focused enterprises such as birthday parties, camp, after school programs, test preparation, tutorials, classes, extra curricular activities and sports.

    Democratization and Governance

    Democracy and governance programs are concerned with facilitating democratic and self governed organizations, advocacy, enabling legal environments, human rights and rule of law. Although democracy and governance organizations are not an intuitive fit for a social enterprise program, many provide paid legal services, training, consulting to nonprofits, government bodies and private companies. Creative examples exist in this sector; one social enterprise sells encryption services to human rights organizations.

    • 1. Etchart, Nicole and Lee Davis, Unique and Universal: Lessons from the Emerging Field of Social Enterprise in the Emerging Market Countries, NESsT, 2003.