Why Social Enterprise Matters
My last article aimed to articulate what a social enterprise is. As a reminder, a social enterprise is defined as an organization that has some type of social good built into its business model with intentionality. This means that social enterprise occupies the gray area between traditional non-profits and for-profit organizations, as shown in the graphic below:
The term ‘social enterprise’ describes a variety of business activities that are distinct from the traditionally understood nonprofit and for-profit models. This article (i) explains the advantages of social enterprise over those models for organizations seeking to drive impact, and (ii) makes the case for why an organization would choose social enterprise over a traditional model.
Advantages Over Traditional Nonprofits
Social enterprise is distinct from the traditional nonprofit model in a variety of ways, but most importantly because it offers (i) recurring cash flows and (ii) unrestricted funding.
Recurring cash flow is a beautiful thing. It provides predictability and stability for businesses, which allows for better managerial decision-making and turns companies into investable opportunities for capital managers. Recurring cash flow can inform your budgeting for next year, the investment decisions you make this year and allow you to compare your performance to prior and future years. This type of income is also historically absent from the traditional nonprofit model. Traditionally, nonprofits hire fundraisers and grant writers to solicit outside sources of funding that are either a one-time transaction or, in the best cases, limited to a commitment lasting only a few years. This robs traditional nonprofit organizations of the opportunity to plan strategically and measure a large component of their performance.
While most for-profit businesses operate in a world of unrestricted funding, their non-profit counterparts are often burdened with restricted funding. Restricted funding is a term used to describe donations and grants from external sources that come with a set of rules on how it can be spent. A donor or grantor may give a gift expecting a certain program be funded with the cash, OR they can request that their money not be spent on certain things like overhead (i.e. staff salaries). This presents a number of issues for nonprofit leaders because they have cash they may or may not even be able to access, and when they do access it they have to account for all related cash flows and provide a report to the provider of the funds, thus introducing multiple layers of inefficiency.
Building a successful social enterprise can provide a predictable source of cash flow for nonprofit leaders that doesn’t come with a set of rules on how they can spend it. The benefits of recurring, unrestricted cash flows are many, but some of the major ones are as follows:
- Freedom to compensate staff members competitively
- Free up organizational resources committed to grant management
- Freedom to invest in the organization’s priority areas
- Freedom to allocate funds to their most effective uses
- Access to a greater number of capital sources
Advantages Over Traditional For-Profits
Social enterprise is also advantageous over the traditional for-profit model, and not simply because it feels good to do good. Building social impact into your revenue model also makes good business sense because it appeals to two critical stakeholder groups: (i) your customers, and (ii) your employees.
According to consumer research published by BCG, 37% of Millennials and 30% of older generations are more likely to buy items that are associated with particular causes. This increased willingness to purchase can translate directly to higher sales volumes or even commanding a price premium over your competitors in the marketplace if your organization is attached to a social cause. Successful execution of a social cause marketing strategy that is backed up by a true social enterprise operating model can drive top line growth for your business.
Social enterprise can also set your business apart from your competition in the recruiting arena. According to a 2016 study conducted by Cone Communications, 75% of Millennials would take a pay cut to work for a responsible company and, perhaps more significantly, 64% wouldn’t even take a job from a company that doesn’t have strong corporate social responsibility (CSR) practices. This may seem avoidable in the present day, when Millennials only make up 30% of the U.S. workforce, but this group is expected to represent 75% of our workforce by 2025. This should be a significant driver for business decisions as employers determine how they want to compete in the labor markets of the future.
Social Enterprise Makes Sense
There is value to be captured by innovating in the gray area between traditional non-profit and for-profit models. Non-profits can reap great reward by deploying solid business practices to achieve financial freedom and the growth potential that comes with that. Similarly, for-profits can realize value by adopting mission-oriented concepts from the non-profit world in order to drive results at the top line and differentiate themselves in the labor market.
Finally, a word to the naysayers. A very common misconception is that in order for a company to achieve social good, it must concede some of its financial returns. While I understand how one could assume that based on our society’s historical understanding of non-profit mission work, it simply is not true. Research by Michael Porter, George Serafeim and Mark Kramer shows that companies that create shared value can outperform their peers by delivering superior returns to both society and their shareholders. Companies that incorporate shared value into their business models stand to reap great reward and can ultimately outperform their competitors.
