CEO Blog 12: Language you wish to learn
20 November 2019
Social entrepreneurs get the best of both worlds: social purpose, development, and impact on one hand, with profit, payback, and dividends on the other. If only this were true in all cases! In reality, there is a much bigger learning curve to make it possible for social entrepreneurs to succeed. Many a time, it is a lone battle either managing impact or securing funding by convincing investors about how they plan to grow at a scale desirable. In this blog, I am sharing some of the terms that one should be familiar with when walking the path of social enterprise.
In India, there is as much clarity on the term ‘social entrepreneur’, ‘social enterprise’, and ‘social entrepreneurship’ as there is an understanding of ‘deregulation’, ‘broken markets’, and ‘compassionate capital’. We can force upon a transition to new forms of market and types of businesses, and then leave it to fate—but that is not what we wish to see for social entrepreneurs.
There is much need for improving the general awareness of consumers about new kinds of products traded by these social enterprises, if we wish for markets to respond favorably and allow these enterprises to grow. But even before we embark upon this, we first need these ideas to become enterprises. The key to this is a robust financial market, which fortunately, is prevalent in India. So, let’s learn the language to help us navigate this domain.
Social enterprises offer blended value to the investor, suggesting a combination of key elements. Indeed, the ultimate objective is to maximize the blended value of economic, environmental, and social factors, regardless of whether the organization is in the for-profit or nonprofit space. In order to fulfil impact and productivity goals, social enterprises often employ a blended work-force of people who are socially excluded (economically, educationally, physically, or mentally) and those who are not. A typical mix draws about 60 percent of employees from the ranks of people who are disadvantaged.
Venture capital is not so well-developed in India among social enterprises, as this form of financing requires businesses to give up partial ownership or control of the business in exchange for capital over a limited time frame (usually 3-5 years). And social entrepreneurs need to closely hold the reins of operations to ensure that their social purpose becomes embedded in their business model and not compromised for quick returns. So, venture capital is generally in the form of equity and is offered along with expertise and mentorship to help develop the business. It is offered only with an aim to multiply returns, even by selling the business.
Angel investors are usually High Net-worth Individuals (HNIs) who provide funding in exchange for a share of equity but have more flexible business terms and usually invest in difficult early stages of the business, helping the business get off the ground. They turn out to be family and friends for many entrepreneurs. Often, start-ups need high liquidity and cash flow to meet their working capital. Working capital is used for day-to-day operations, and this is available as a loan—which is the most feasible option. In my own experience of over a decade working with start-ups, ‘debt’ or ‘bank loans’ are more popular sources of funding that need to become a preferred source for social enterprises, too. India has a strong microfinance ecosystem; hence microloans should be promoted to entrepreneurs who do not qualify for conventional bank loans.
The ask for seed capital is usually to test-market a working or almost-working prototype to make sure that it can be produced and delivered at a cost that allows the enterprise to make a profit. This is the most popular form of investing in India and it has grown in popularity over the past decade.
The founders of social enterprises usually hold cross-functional responsibilities that include managing programmes, people, and finances—all specialized areas of focus, which contribute towards ‘founder burnout’ over a period of time. Preventing burnout is not a function of one thing or the other, or simply about delegation or making a priority list. It is about self-discipline. It may sound like philosophical advice, but from my own experience, I can say: it helps. When founders face physical and emotional exhaustion, they tend to lose self-confidence, and the people around them including their family, team, and investors start to feel the pressure. No matter how resilient they may be, they do get affected.
Networking and Outsourcing are two key strategies for expanding business and reducing the anxiety related to new business development. Outsourcing is about purchasing or hiring standard operational services such as accounting or IT from another business provider. A prevailing myth is that “outsourcing is cheap”, but this is not always true. However, with many start-ups such as Happay and MyCFO joining the outsourcing space, it has started becoming more affordable. Networking is about developing business relationships for the purpose of learning new things, serving your customers, and growing your business.
“Show me the impact” is a general phrase or request that entrepreneurs hear from potential investors or people generally interested in their business, who try to ascertain whether they have anything to offer or not! Impact investing is a rapidly growing industry in India and it has redefined many dimensions of the funding landscape for social entrepreneurs. Impact investors look for the double bottom line instead of just monetary gains, thus seeking both profit and social impact. Here, the communication of ESG: environmental, social and governance data and assessment matters. These factors enable enterprises to assess the extent to which they qualify to be considered ‘sustainable enterprises’, and include impact in the areas of climate change, waste management, and energy conservation, as well as global warming and carbon emissions. They also cover areas such as the employment of child labour, adherence to workplace health and safety, benefits to the local community and economy, and human rights. They align the interests of several stakeholders to support sustainable development.
Social entrepreneurs are creating a new form of business, along with a new vocabulary that the world is learning. This rapid growth is attracting attention from the entire ecosystem: including government, financial institutions, foundations, and philanthropists—and is bound to create a more compassionate society. I invite all social entrepreneurs to engage with more vigor and passion to pursue their purpose, because the world is on their side.