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Sep 25, 2013

Social Enterprise Requires Developing the Right Mindset

Social enterprise is supposed to be entrepreneurship occurring in the social sector.  Some recent reports remind us that many lessons that have been pounded into social sector organizations need to be unlearned.  A recent survey out of the United Kingdom and a report from the Health Foundation of Greater Cincinnati reinforce to me the need to provide an alternative to what I call the “grant mindset”.  The surprises in their reports are surprising only when one mistakenly thinks that a social enterprise as a business can operate under different rules than other enterprises.  I don’t think social enterprises are different in design or operation, only in goals and objectives: the so-called double or triple bottom line.

I call the “grant mindset” the following sequence:  come up with a great idea and write it up in a few pages, not delving into details until one learns if the grant application has been funded.  Then, if successful, assign a staff member to develop a plan budgeted on the amount the grantor awarded.  And make sure you show positive results for the annual report due after the first year.

Contrast this with the “entrepreneur mindset”: come up with a great idea and put senior management to work intensively to evaluate commercial feasibility and develop a business plan.  Then seek investment funding commensurate with the scale the business plan indicates.  Start small and ramp up over several years.  Don’t promise results for the first few years.

So what do these reports tell us?  They tell us what we should have known already and what social entrepreneurs need to know before they even get started.  Here are their findings.

1. The most common type of funding sought by 90% of social enterprises in a UK survey was grants, not investment capital.  Grant mindset.

2. The Health Foundation reported that grant funding “removed much of the financial uncertainty around planning and starting a new business.”  Is free money necessary before a social enterprise is willing to put in the time and effort to develop a business plan?  Does there need to be guaranteed money before the business development effort is worthwhile?  Grant mindset.

3. Quarterly “grantee” group meetings served as a support system.  In the for-profit enterprise world, this is why incubators are viewed as valuable:  put the new businesses together so that they can share experiences and resources as they confront the uncertainties of business development.

4. Grants were often too small to support a social enterprise.  Under-capitalization is a common source of start-up failure, but we have taught social organizations to work with whatever grant they are awarded.  For-profit start-ups, when they are raising capital, usually specify a “minimum raise” before they will close a financing.  Social enterprises also need to keep raising funds until they have enough and not promise to “start” until they reach that threshold.

5. “Most of our grantees would have benefited from starting at a smaller scale and testing their business models.”  Promising earth-shaking change is a well-tested way to attract donors.  But for-profit entrepreneurs almost always ramp up; their business plans show promising scale in years 4 or 5 or later, but their “pre-revenue” stage starts small and makes few promises of  results in the early stages.

6. “Social enterprises would have been more successful if they seek expertise that matches their specific needs….and conduct an in-depth market analysis and feasibility assessment.”  The grant mindset reassigns existing staff to a project rather that recruit the specific skills needed to develop the business.  And the notion of making a funding proposal before completing intense pre-work is a grant habit.  Entrepreneurs do the opposite.  Social entrepreneurs need to do the opposite as well.

7. “Grantees’ gaps in marketing and customer service skills made it hard for them to recognize when and how to make quick adjustments.”  Once again, a main key to business success is to know the customer and adapt the product to their needs.  Social organizations operating with grants have long been discouraged from “wasting” their grant money on marketing and advertising.  This is counterproductive for social enterprise:  marketing and customer service skills are central to selling and a start-up business knows that generating customers takes focused effort by experienced personnel.

It sounds obvious the way I tell it, doesn’t it?  But it somehow is not so obvious when the word “social” is put in front of “enterprise.”

We are trying to put together a system in Central  Ohio that can help social entrepreneurs to avoid the “grant mindset” and use the “entrepreneur mindset.”  We call our idea the Community Investment Network of Central Ohio.  Want to learn more or become  involved?  Email me at NPInnovation@linkingmissiontomoney.com.