5 Challenges to Starting a Social Enterprise
(full paper here: http://bit.ly/challengesofsocialentrepreneurship)
My generation is very concerned with “making a positive difference”, and for a good reason. We’ve been taught that money doesn’t equal happiness, and that finding a career which benefits society is more important than wealth, fame, or power. It’s not surprising then, that when I first heard the words social entrepreneurship in my “Introduction to Entrepreneurship” class at Loyola Marymount University, my ears perked up and my heart began to beat a little faster. Starting a business to make a positive difference? While making a profit at the same time? Where do I sign up???
It was a Tuesday. My professor, Dr. Jason D’Mello, started off the class by saying he had met today’s guest speaker at a bar in Louisville (somehow he meets all of his guest speakers in bars). After introducing her, the class applauded, and she walked up to the front of the room.
Our speaker’s name was Radha Agrawal. Radha was not like other class speakers we usually listen to in business school. She didn’t talk about why “cash is king.” She didn’t have “5 Ways to Succeed in Real Estate”. She was loud. She was energetic. She was full of energy and had a vivacious personality. It was invigorating just to hear her speak. She started out her story with an anecdote: “When I was 22 years old, 9/11 happened, and I was there.”
That may not be an exact quote, but the gist of it is true. When Radha was 22, right after she had graduated college, she was working as an investment banker in New York. When 9/11 happened, she experienced it first hand, and it affected her dramatically. On top of that, her entire team was laid off and she was out of a job. In her opinion, it was a blessing. When she was interviewed by BBC about her new business, Daybreaker, she said, “I hated investment banking. It was the most harrowing experience of my entire life.” She had realized that making money for the sake of making money was no longer satisfying, no longer even a challenge, and she hungered for something more. Something with deeper meaning. Something that made a positive difference.
From that moment forward, Radha decided to pursue her goals and passions now, rather than later. In her words, “Who the fuck knows when your life is going to end?” Why wait?
Fast forward to the summer before my senior year. I had been tasked with completing a senior thesis project for the Honors program on any topic of my choosing. At this point I had been passively thinking about social entrepreneurship for a few years, so it was easy to decide that my paper would have something to do with the subject. I recalled Radha’s speech. Her energy, her call to action, her drive to make a difference. All of these things made me want to tackle a research topic just as bold as Radha was. But when it came time to define my specific research question, I was stuck.
I knew one thing for sure: No matter what, my project had to allow me to actually speak with social entrepreneurs who were “in the trenches” building their businesses. I wanted to learn about what building a social enterprise was actually like, how the process is different from building a traditional startup, and what the barriers to entry really were. This thought process led me to forming my final research question: “What are the most common challenges social entrepreneurs face when creating differentiated, for-profit social enterprises, and how can they overcome these challenges?”.
(In my question, the word “differentiated” refers to the fact that the ventures I studied did not sell their product or service directly to their social beneficiaries, but rather, sold a particular product to a paying customer and then passed on a social benefit to a separate beneficiary. Think Warby Parker, who sells glasses to paying customers and then donates pairs to those in need.)
Once I had my research questions settled, it was off to the races. I sent emails out to various social entrepreneurs, set interview dates with the ones that were willing to have a conversation with me, and began having in-depth phone call conversations that acted as the data for my research. I ended up interviewing ten founders from companies such as Good Spread, Thinx, Jaipur Living, Roozt, Conscious Step, Change Heroes, BogoBrush, MADI Apparel, and Panda Sunglasses.
Performing these interviews was everything I could have hoped for. Having conversations with the individuals who were building social ventures was fascinating, and I learned so much about the real challenges and obstacles that each founder had experienced and conquered at various stages in their business’s life cycle. As I began to sift through my interview transcriptions, I started to notice patterns in the types of challenges that many of these founders faced, and I began to form my research paper.
If you’d like to read my full paper (please do!), I encourage you to click the link at the top or bottom of this article. For those of you who are allergic to research papers, however, here is an über-condensed version of my findings:
The 5 Challenges to Starting a Social Venture
Challenge #1. Raising Capital - Raising funds for social enterprises is incredibly difficult, mostly because social ventures do not typically yield the explosive growth and rate of return that traditional investors look for. Social entrepreneurs who offer a software-based product have it the hardest; they typically can’t produce high enough returns for traditional VCs, but they don’t seem to attract the attention of impact investors either. This forces them to rely on an obscene number of individual investors — sometimes up to 40 — to achieve the amount of funding they desire. Dealing with that many investors is a huge time drain for entrepreneurs who should be focusing on building their business.
Social startups producing physical goods have been able to capitalize on the advent of crowdfunding websites such as Kickstarter, Indiegogo, and WeFunder to support their initial operations. This is a fantastic way to prove product-market fit and generate sales upfront, but unfortunately, crowdfunding usually does not yield the desired amount of capital. This means entrepreneurs must tap into alternative resources, such as strategic investors, grants, prize-money competitions, and personal funds to finance their ventures.
It is worth noting that 3 of the entrepreneurs interviewed specifically mentioned that capital funding is not always the answer, and that organic growth is much more preferable over fundraising. Many entrepreneurs seem to understand that raising money can lead to larger hassles than abstaining from raising money would. Raising money from investors comes with binding terms that may hinder the firm’s social value creation process, and it can also drain away time that entrepreneurs would be able to spend on selling or marketing their product.
Challenge #2. Finding and Attracting Manufacturers - Due to revenue constraints, social entrepreneurs building physical products sometimes have a difficult time attracting manufacturers and paying for the manufacturer’s required minimum order quantity, or “MOQ”. There is a familiar “catch-22” feeling that entrepreneurs experience when they cannot pay for the MOQ. Since the entrepreneur does not have the income to pay for the MOQ, they cannot obtain product from the manufacturer. However, in order to obtain income, they need to sell product which can only be obtained through the manufacturer. Some manufacturers are hesitant to partner with social startups due to their volatile nature and their propensity to yield lower margins than other types of ventures. One entrepreneur I interviewed discovered that finding manufacturers who also believe in the social mission of the business is one way to build rapport, establish trust, and dispel any worries the manufacturer has about low profit margins.
Challenge #3. Switching Manufacturers, Errors or Issues - Don’t be afraid to switch manufacturers if you need to. One entrepreneur in my study experienced a manufacturer horror story in which over 50% of her product shipment — which contained over 10,000 units — was defective when it was shipped from her manufacturer in China. After switching to a manufacturer in the U.S., she was able to implement an injection molding process with a new bio-composite material, which more reliably and consistently created an equally environmentally friendly product.
Another entrepreneur in my study switched manufacturers three times, not because he was receiving defective products, but because he wanted to find a manufacturer that offered Fair Trade, Organic, and Vegan certified goods. This is important for entrepreneurs with a triple bottom line who want to ensure their entire supply chain is benefitting society and the environment.
Challenge #4. Inventory Management - Once the product is received from manufacturers, inventory management becomes a huge challenge for social entrepreneurs building physical products. Lack of experience with inventory management can cause founders to overpay for inventory storage and not utilize proper inventory scheduling practices. Founders were usually able to overcome this challenge by proactively learning more about inventory management, and having the courage to test different strategies to see which one works best.
Challenge #5. Social Mission Issues - As expected, many social ventures experience a myriad of challenges relating to the very nature of their social business model. The most common of these challenges is low profit margins. “Buy-one-give-one” models naturally have lower margins than their direct competitors due to the fact that they are giving away product “for free”. Rather than donating the same product that is sold to paying customers, some founders discovered that donating a slightly lower cost version of their product increased margins and still fulfilled their social mission.
“Mission drift” is another challenge that relates to the social nature of the business. “Mission drift” is exactly what it sounds like; it’s when social ventures have a particular mission that begins to shift or change as the venture grows or experiences challenges. Mission drift can cause ventures to focus strictly on generating profit, rather than balancing priorities between profit and social mission. Mission drift can be avoided by having a clear, definable mission that is communicated to all stakeholders on a regular basis.
The process of completing my thesis taught me more than I could have hoped for. More than anything, I learned that although most social enterprises are separated from traditional businesses due to their social justice orientation and/or their environmentally friendly appeal, the challenges that social enterprises experience are only marginally different than those of traditional businesses. While there are certainly unique challenges to starting a social venture such as overcoming social taboos, avoiding mission drift, and managing relationships with customers and beneficiaries, it’s impossible to ignore the fact that capital fundraising, finding manufacturers, paying for MOQs, managing inventory, and maintaining profitability are some of the most crucial challenges that will make or break most social ventures.
While there are many structures being put into place that help social enterprises overcome these challenges (such as crowdfunding), there is still a great amount of work to do. I hope that this study will inspire future research and action to ensure that founders of social enterprises have the resources they need to continue creating a more economically just, environmentally friendly, and socially responsible world.