Sustainable Businesses: a thorough guide to social Enterprise Startups


Dr Armando Castro's Talk in UCL Green Economy Society Green Business Forum 2021


A booming trend of social enterprises startups is emerging, according to a survey made by Deloitte in 2018, 86% of millennials think that business success should not only be about profit but rather include an extent of social objective. To help students adapt to such trend and start their social enterprises to address social issues in the society, the UCL Green Economy Society have invited Dr Armando Castro to speak in their annual flagship event, Green Business Forum, to discuss different aspects of challenges and opportunities facing social enterprises startups, as well as giving students a step-by-step guidance on how to bring their idea to reality.



Startups may appear as a buzz word - so how should we define social enterprises startups?

Dr Armando Castro suggested that Social entrepreneurship is the process of creating and growing a venture, either for profit or non-profit where the motivation of the entrepreneur is to address specific social challenges. For instance, focusing on addressing any of the United Nations sustainable goals. Comparing social enterprises startups to traditional commercial businesses, there are the following differences:


1. Social enterprises focus on “value creation” rather than “value capture.”

2. Social enterprises try to find sustainable solutions, whereas commercial enterprises try to find “sustainable advantages” that helps them survive in the competitive market.

3. Social enterprises have a social or environmental objective as the center of focus in contrast to a firm centric focused objective.

4. Social enterprises always try to empower different stakeholders such as customers, employees, rather than establishing control and dependability.


After defining and differentiating social and commercial business startups, the next question is how would you want to establish the business model? Where do the opportunities lie and what does the society need that you could deliver?

Some possible types of business model you might want to consider include:

  1. Entrepreneur support model: starting from defining your targeted population, in which the population then sells the product or services to the open market. An example would be microcredit and microfinance.

  2. Being the intermediary, whereas the social enterprise stands as a middleman for transactions between its targeted population and the market. For example, buying organic honey produced from rural areas, add value to it by repackaging and making it up to standard to be sold at the European market with a higher markup.

  3. Employment model: where the social enterprise provides employment opportunities and job training to its target population or clients.


Apart from these traditional business models, a few innovative examples are also worth looking at. The Janicki Omni Processor that Bill Gates invested in could purify human faeces to produce potable water; The LifeStraw water filtering device, which only costs $2 USD per straw and allows people in rural areas who don’t have access to clean water, to drink directly from river water without risking health and hygiene. We can see how these two are both water filtering devices, but they target different pain points, the former introduces a solution to a newly identified problem, whereas the latter addresses a long-lasting challenge. These innovative products brought new opportunities to the world of social entrepreneurship, and we’re definitely going to see more of them in the market, not merely as an attention grabber but actually something delivering social benefits as its main objective.


But how to discover what is the specific social issue that needs a solution?

Most of the time you would find the opportunity by using your prior knowledge of the market and your reflection on the current status quo.


To help with identifying the problem, here are some guiding questions you could think of:


1. What is the key issue you are trying to address?

2. Who is it a problem for?

3. What social/cultural factors shape this problem

4. How is the problem connected to other social issues?


To further understand the social issue, think about what has been done by competitors. If you identified a pain point, you might think that it is revolutionary, but the reality is that it is very likely that someone has thought of it before you do. Lots of startup ideas have already been done before, they either failed or there are already companies doing similar things. Thus, it is very important for us to learn from them about why some have worked while some have not, and why does this social problem still exist. Having similar competitors in the market shouldn’t stop you from going ahead with the startup because identifying similar problem means the pain point is still yet to be addressed, you now have the advantage of learning from previous failures and success, which even puts you in a better spot comparing to competitors.


In addition, understanding the social issue itself may not be sufficient, it is crucial to dig deeper into understanding the root of the issue. For instance, asking why had the problem persisted and why it has arisen, or even collecting firsthand data to support your arguments, using data to determine the degree of impact or severity of the issue. Try to understand various dimensions of the issue: the depth of impact, its trends over time, which group of population is affected and whether they are affected equally or differently.


All in all, it all comes down to asking specific problems about “where, how and why”.


Challenges beyond problem identification

Establishing a successful startup is very challenging, as social enterprises startups, even if you have identified a significant problem in the society, you would still face different challenges that are distinct from commercial enterprises, these could include:

  1. Legal recognition - how would you register this company?

  2. Access to capital - how to acquire sufficient funding to start the company?


The challenges for social enterprises in terms of funding is very different from such faced by commercial enterprises. Firstly, we have to determine whether we want to seek funding from the non-profit sector, for example, government grants or donation from the public, or private funding from venture capitalist or incubators. If we were to go with private funding, we have to acknowledge the fact that private investors have shorter horizons, whereas the impact of social enterprises usually only occurs after a long period of time. Furthermore, social enterprises cannot rely solely on market signals and pricing to indicate their impact on potential investors. there is a lack of commonly defined performance metrics to measure the degree of impact that could be brought by the social enterprise, and that would be the main challenge for social enterprises to source funding from the private sector.


Thus, we have to understand the investors we’re looking for, target the investors that have a social objective that aligns with your business, try to understand their motivations from a personal perspective as well as understanding their evaluation metrics, their risk tolerance level and what is their time horizon.


It is very common for social enterprises start-ups to seek funding from a hybrid of for-profit and nonprofit entities so that the social enterprise could get access to multiple sources of stable funds as well as getting business guidance and advice from experts from the for-profit arm of funding.


  1. Markets - how to adapt to changes in behaviour of customers or beneficiaries?

  2. Organizational culture and talent development - which direction should the company go and how to further develop the talents acquired?


Growth and Development

The final subtopic of our handbook concerns business growth and development in startups. Once we have the idea, the business model, the funding, now we must consider how should we scale up the business, or to which extent should we scale up the business?


There are different ways of scaling up including expanding existing services or goods provided to a larger group of customers – widening; or exploring new goods or services to produce – increasing the depth of the business. We also have to weigh the potential advantages and disadvantages in scaling from a business-specific perspective, although scaling up gives you access to economies of scale and improve the efficiency of various business processes, we have to be aware of the potential drawbacks of scaling up, such as the risk of decreased focus on social missions, negative impact of reputation, and potential cash-flow problems. These weightings should be different for different business depending on the product or service they provide, and the social objective they are targeting at.



Concluding remarks

Starting a social enterprise is not an easy route to go with. In addition to challenges faced by commercial business startups, social enterprises need to face far more difficulties in funding, legal requirements, business direction establishment. Nevertheless, none of them should be stopping you from going ahead with an ambitious idea and an inspiring goal to bring positive impact to the society.



References:

https://www2.deloitte.com/content/dam/insights/us/articles/HCTrends2018/2018-HCtrends_Rise-of-the-social-enterprise.pdf

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