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Five Social Enterprise Myths, Dispelled

Social Capitalists

Five Social Enterprise Myths, Dispelled

By Kristen Ace Burns, managing director, Roberts Enterprise Development Fund

The idea of applying the ethos and strategies of traditional business entrepreneurs to the realm of social change has in recent years captured the imagination of nonprofit leaders. And as the popularity of "social entrepreneurship" grows, there are nearly as many definitions of the concept as there are people pursuing it. Founded in 1997, Roberts Enterprise Development Fund was one of the earliest social-purpose enterprise investors; to us, this means providing multifaceted assistance to nonprofits running market-driven businesses to create jobs for people with significant barriers to employment, such as homelessness, a history of criminal conviction, or substance abuse, or psychiatric disabilities.

Over the past seven years, REDF has worked with a portfolio of San Francisco Bay Area nonprofits as they create and operate sustainable businesses -- while employing individuals most of their for-profit competitors would never have hired.

As any for-profit entrepreneur will tell you, the road to success is rarely smooth, and in this respect, social ventures are no different. REDF and our portfolio of social enterprises have learned countless lessons from our experiences -- far too many to capture here. But as one of the oldest and longest-running investors in social enterprise, we are in a unique position to offer help to those joining the fray today and to share the lessons we've learned. Below I've offered some of our real-life experiences in contrast to five myths that exist about the endeavor of social entrepreneurship:

Myth #1: Social entrepreneurs have it easy. Customers will buy their products just because the company represents a great cause.

The Truth: Social mission will get a business only so far.

Research indicates that if product quality, service, and price are comparable, then -- and only then -- will customers factor in whether their purchase supports a worthy cause. If a retail store provides poor customer service, or if a construction company installs doors that don't fit properly, even the most socially minded customers are likely to jump ship.

Also, social entrepreneurs must carefully consider their audience before deciding how and when to market their mission. For example, we've found that some potential customers (and vendors) mistakenly assume the quality of our portfolio companies' services or products will be poor because they employ people with additional challenges. We've had to address those assumptions head-on, rather than taking for granted that everyone will share our appreciation for the amazing potential of these employees, or assuming that they'll let their good feelings about helping out override any misplaced concerns.

Myth #2: Social entrepreneurs don't need to worry much about bottom-line financial results. As long as the business can survive and fill some social function, that's good enough.

The Truth: The social value of an enterprise is only one of myriad criteria for success.

Determining whether a social-enterprise business is succeeding is rarely a simple analysis. Ongoing tracking is key and requires a level of complexity that can rival (and in some cases exceed) that of a regular business. Arobust accounting system is critical -- one that can separate the enterprise's activities from those of the agency as a whole and monitor such things as inventory and cost of goods sold, which are often not part of traditional nonprofit accounting.

We require our portfolio to engage in the kind of monthly, weekly, or even daily financial oversight that most businesses demand. REDF holds monthly operating meetings with the management of each portfolio group to discuss enterprise performance and to identify any areas needing extra attention. In addition, REDF staff often spend time one-on-one with business managers between monthly meetings to provide additional support and advice.

For each enterprise, we encourage our investees to define the minimum acceptable thresholds of performance against the business's social and financial goals. And we recommend that they close lines of business that don't meet those requirements. While that might result in short-term setbacks for an organization's social agenda, we think it makes more sense to pursue enterprises that will help the investee thrive in the long run and ultimately make a bigger difference.

Myth #3: Starting a social enterprise requires minimal investment.

The Truth: Social enterprise costs more than you think.

Between planning costs, startup expenses, initial losses, and capital investments needed along the way, it's a rare enterprise that only requires a limited financial investment to get started and keep going. While social entrepreneurs may be able to access donated items, beware: They often come with hidden costs. Free retail space, for example, could be tempting -- but if the location is suboptimal, it could undermine the entire business model.

The good news: A variety of foundations, government programs, and people are increasingly interested in making philanthropic investments to support social enterprise. REDF makes significant, long-term investments to help cover both capital and operating expenses incurred by our portfolio.

Myth #4: Social entrepreneurs can (and should) quit fund-raising and rely on earned income alone.

The Truth: See Myth #3, and then some.

Not only is social enterprise expensive in terms of money, time, and other resources, it is usually not a nonprofit's only activity. Each REDF Portfolio nonprofit operates at least one enterprise -- and also offers an array of social programs to provide much-needed support to the individuals it serves. While an agency's enterprise may eventually become profitable, it is doubtful that enterprise profits will cover all the costs of everything else the agency does. In all likelihood, fund-raising will remain an important part of the nonprofit's financial strategy.

Myth #5: Scaling to a national level should be the goal of every social entrepreneur.

The truth: Bigger is not necessarily better.

Many social enterprises are very successful on a local or regional basis but are not equipped to do business on a national scale. Success should be measured in terms of the quality of change in individuals' lives -- and not based on whether Uncle Bert in Omaha can be a customer. We counsel our portfolio to start small and plan carefully before expanding its geographic scope.

We've learned quite a few lessons as an investor, too. Funding social enterprise requires patience, responsiveness, and a genuine interest in creating a social return as well as a financial one. George R. Roberts, a founding partner of Kohlberg Kravis Roberts & Co. and REDF's initial investor, has set an excellent example as we identify others interested in supporting REDF's work.

We've also learned that in order to serve the needs of our portfolio of social enterprises effectively, REDF's support must take multiple forms. In response to conversations with our portfolio, we provide not only financial support for the enterprises but also strategic business assistance, access to industry experts, the Farber Internship and Fellowship program to help recruit MBA talent, significant support for tracking social outcomes, and specialized resources for strengthening the infrastructure of the organization.

The payoff has been tremendous. Since 1998, the enterprises that REDF supports have employed more than 2,000 people with significant and often multiple barriers to employment, such as psychiatric, physical, or developmental disabilities; a history of substance abuse or criminal incarceration; or homelessness. Once given a chance at self-sufficiency, two years after hire:

  • 78% remain employed.
  • Average monthly incomes triple.
  • 70% live in stable housing, in one of the nation's most expensive housing markets.
  • People demonstrate a reduced reliance upon public services, including public assistance, emergency rooms, community food banks, and housing support services.

Despite working with a more challenging target population, when compared with other job training and employment programs, the social enterprises in the REDF portfolio are at least as effective (if not more so) at helping individuals change their lives for the better.

While these numbers are inspiring to us, the individuals behind them are even more so. "Community Vocational Enterprises made me more confident about myself and helped me to keep a job," said one enterprise employee. Another from Rubicon Programs told us, "Rubicon gave me a chance when no one else would."

A worthwhile investment indeed.