Social Enterprise on the Rise: Business models, funding evolving to better serve market standards

11/20/2012  |  News | Trends

Despite—or perhaps because of—the ongoing economic situation around the world, more people are founding or joining social enterprises. Unlike typical startups, which are profit-oriented, or corporate philanthropy, which donate to third-party causes, social enterprises seek to integrate social or environmental needs into their business models. But just because they’re doing good doesn’t mean they’re not doing well financially; they’ve been estimated to add £24 billion to the UK economy alone. Nor are they limited to one region or industry:

  • Azadi plans to build a small factory in India to produce affordable, biodegradable feminine hygiene products, which will create jobs as well as enable women and girls to go to work or school.
  • Africa’s Talking lets people access email, banking and more via SMS on feature phones, helping to improve commerce.
  • 18 Chefs in Singapore specifically hires ex-convicts and helps them develop marketable skills in the restaurant industry, easing their transition back into regular society.

While these new startups have the potential to dramatically change local markets, they face unique challenges. According to Paul Carttar, director of the Social Innovation Fund, one of the biggest hurdles is the ability to scale. Commonly accepted financial metrics like revenue can only capture part of the startup’s impact; the success (or failure) of its social goals is harder to measure and standardize across companies. Without these key metrics, it’s difficult to allocate resources effectively, and harder to attract the investors needed for growth.

Fortunately, a variety of funding alternatives are already being developed. More social enterprise-focused incubators have launched, from Hub Ventures in San Francisco to Make a Wave in the UK, giving these startups access to capital and, crucially, an experienced knowledge network. Even more conservative investors like banks are looking for ways to contribute: Mexico’s Banorte-Ixe sponsored an event called The Green Pitch, in which environmentally or socially oriented companies were invited to meet with investors.

A more innovation approach is the “social impact bond,” also known as “impact investing.” In this system, a company provides a low-interest loan to a nonprofit organization. If the nonprofit achieves it goals, it pays back the loan out of the “savings” the program has delivered: for instance, lower recidivism rates or reduced medical costs. If the nonprofit does not reach its goal, though, the company loses its original investment.

The first social impact bond was implemented in the UK in 2010 at Her Majesty’s Prison Peterborough in with the goal of providing training and support to prisoners in order to reduce recidivism. Although the final results won’t be available for several years, other organizations are already copying the model: Goldman Sachs invested in a similar program at Rikers Island, New York City’s main jail. While this strategy is still controversial, what’s important to note is that organizations and nonprofits are both open to experimenting to find out what works.

With more people seeking to earn a living while positively impacting society, social enterprise can only be expected to grow over the coming years. To get inspired, start by checking out the 2011 Forbes Impact 30, which highlighted some of the most influential entrepreneurs in the field.