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Mar 10, 2014

Social Enterprise: Which is the Cart? Which is the Horse?

The most discussed issue in social enterprise that I have encountered is the question can nonprofits really get a start-up going?  The debate is about whether the operating duties of a nonprofit (governing board, fiduciary reviews, constituency relations, etc.) can free enough focused attention to foster a profit-making social enterprise?  Or is success more likely with a social enterprise start-up that is unburdened by a relationship with a nonprofit (except perhaps through a commitment to “donate all profits”)?

We also need to focus on what the providers of start-up capital want to see.  Many social enterprises still focus exclusively on philanthropy, seeking grants rather than debt or equity capital.  Sometimes this is through ignorance of the additional financing channels that a social enterprise can tap compared with a nonprofit.  But, in my experience, the magnitude of capital necessary to get a start-up to cashflow breakeven is  much larger than the magnitude usually provided by most grant programs.

Attracting investors to social enteprise is a major issue that needs attention.  This summary of the issue comes from the Dutiee blog:

Investors aren’t interested if you are in the business of doing good and social impact investors are hard to find: Early on we were told that there were thousands of people who wanted to invest in social enterprises, but these “social impact investors” were difficult to find. As soon as we told investors we were a social enterprise, they lost interest and referred to us as “do gooders,” a term synonymous with not making money. What we also realized is that social impact investors are not really interested in you if you do not have a few years of traction, but to get to a few years of doing business, you often need someone to invest. It’s a strange paradox. For companies between $100K -1 million revenue there is not much growth capital available in the ‘impact investing space’.

Their blog introduced me to a very revealing “story” of the lessons a Pakistani social entrepreneur, Saba Gul, learned in getting her enterprise established.  To paraphrase the theme of the story:  is the cart the “social” and the horse the “enterprise” or is the horse the “social”.  Her social enterprise produces fashion handbags made by rural women and girls.  She initially focused on “identifying the right girls and women to join our program, visiting the villages, facilitating the training and quality control, forming NGO partnerships.”

But the business was not thriving despite the enthusiasm of its customers.  Here are excerpts of her observations:

“At the end of the day, the socially-conscious breed of consumers is a minority….shoppers buy for design and style first, and ethical credentials are a secondary consideration.”

“We needed to be a fashion label focused on sales, not a non-profit focused solely on social impact.”

“Sales were going to drive impact, but what was going to drive sales?”

“We changed the company’s name so it would resonate with our customers and represent a fashion label, instead of a word that sounded like the name of a non-profit.”

She concludes that a social entrepreneur needs to be a realist.  An idealist sees social enterprise as a means to an end, with its only mission to achieve its social impact.  In contrast, a realist sees social enterprise as creating a business that can be profitable and sustain itself, yet provide a social impact through whom it hires or where it operates or what it does with its profits.

So her lesson:  the horse that moves the social enterprise is the enterprise itself; without that horsepower, the cart of social impact will not advance.

I agree that a social enterprise must be a competitive, successful business first.  I am not yet convinced that a nonprofit cannot be the home of a competitive, successful social enterprise.

Our program for 2014 for the Community Investment Network of Central Ohio (CINCO) will yield more information and experience to resolve that question.  If you would like to learn more about CINCO and support its work, send an email to me at