Crash Course in Social Enterprise

Starting at the Bottom:
Written for students exploring the idea of social enterprise with Teplitza in Velikiy Novgorod.

When asked how to define ‘social enterprise’ I recalled a famous Supreme Court case in which a judge, concluding that listing all the reasons for a particular decision might get him in trouble, stated,

“I shall not today attempt further to define the kinds of material I understand to be embraced within [a] shorthand description; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it…”

Similarly, the range of organizations and business processes self-defining as ‘Social Enterprise’ has become so wide that I wouldn’t presume to offer you a shorthand description. I will instead suggest some markers that define the spectrum and perhaps you by the end you will be better able to know one when you see one.

So what’s a social enterprise?
On one end of the spectrum are organizations most often called ‘social businesses’ such as http://www.gebruederstitch.at, a social startup that produces eco-friendly jeans. I first met the founders of Gebrueder Stitch while sitting on a panel of ‘experts’ convened to review and critique promising social enterprise ideas. Throughout their presentation one question kept popping into my mind – what exactly is ‘social’ about 400 euro jeans?

Several things, actually. First, though Gebrueder Stitch could make more money by sourcing their materials like every other jeans company, they insist on maintaining a responsible supply chain. They only use organic cotton and cloth from fair trade providers. This means each pair of jeans pays a fair wage to the farmers who grow the cotton, the factory workers who make the threads and spin the cloth. Each pair of jeans is an investment in a sustainable, equitable part of the global economy.

Second, Gebrueder Stich hires socially marginalized workers at a fair wage – each pair is made by women who would otherwise find it hard to get a job that pays them enough money to lead a decent life and provide for their family. Third, they go out of their way to educate their customers that their purchase is more ‘responsible’ than buying regular jeans which are often made of cotton farmed in unsustainable ways by farmers who don’t get paid enough then made by children, at essentially slave labor wages, in sweatshops…

Each reason might morally justify Gebrueder Stitch as a social enterprise but it could also simply be a business with a strong commitment to the environment and society (like Body Shop). What differentiates the two in legal terms is that Gebrueder Stitch doesn’t have shareholders who get a share of ‘profits.’ Nor do the founders. Gebrueder Stich profits are reinvested in new social enterprises that today include a restaurant and bakery, which follow a similar social business model.

Another more common model:
Ioannis, a 40-something Greek doctor, operates a more traditional, though highly innovative, social enterprise model. His tool, Alterniity, is a virtual reality game to diagnose early onset Alzheimer’s. Over a test group of 5,000 individuals he has had an 85% diagnostic success rate (better than other diagnostics on the market) and is building early stage investment and partnerships to scale his capacity to the point where he can offer his solution to governments.

Alterniity, like many businesses, saw an opportunity to capitalize upon an improvement to an existing business practice (in his case, Alzheimer’s diagnosis). Unlike most businesses, he is building his enterprise on long-term savings gained from more efficient service delivery to a relatively small market of individuals who are generally un-able to pay – a proposition that is clearly not appealing in ‘normal’ business terms.

Ioannis’ main ‘client’ will be government health departments who pay for his work because early diagnosis means added years of productivity for those afflicted with Alzheimer’s. These added years, a godsend to the individuals and their families, are years during which the individual may remain a productive member of society and the government can expect to spend less on care.

While Ioannis’ model of delivering a quality-of-life enhancing solution to a difficult population is more common in social enterprise space than fancy jeans, it is still a service provided ‘to’ or ‘for’ a population. The most ‘social’ of the social enterprise business models are, arguably, those providing a service ‘with’ their end beneficiary – often by directly employing their target population in the enterprise itself.

Protected workshops, for example, employ at risk individuals (the disabled or disenfranchised) as part of a social integration process. In social enterprises like these, the individual’s progress is as much the ‘product’ of the enterprise as anything they happen to produce in the workshop.

And then there is…
The Alliance Industrial Union employs dozens of disabled Hungarians – offering job training, work and assisted living facilities. Unlike most disabled individuals in Hungary, Alliance employees go to work in the morning, earn a regular salary and go home at night. They earn a living wage and spend it how they want. They are treated like normal people and are supported to gain as high a level of independence as is responsible. Programs like these offer immense social benefit, increasing quality of life, respect for disabled individuals and their rights as humans – particularly in countries where the traditional response has been less kind.

Programs like Alliance also leverage positive economic impact as disabled individuals become productive members of society – earning and spending money and paying taxes. Interestingly, these models often attract government subsidies as governments and social service agencies realize the potential for improved quality of life for the disabled, combined with potential social and economic benefits.

From guys with jeans to diagnostic games to protected workshops… there are several common threads. First off, each has a mission which focuses on social benefit. The business may be a clear part of a social enterprise’s mission but is not the reason for the organization’s existence; rather the business serves to enable the organization’s proposed social impact while providing some measure of sustainability.

Second, true social enterprises (usually NGOs, vs Social Businesses which may act otherwise) are legally bound to reflect this ‘mission-first’ reality by reinvesting financial gains into leveraging more social impact vs returning value to shareholders. There are no shareholders. There will never be an IPO. The Board is unpaid. Which is not to say social enterprise employees are underpaid! Quite the contrary, many social enterprises pride themselves on building their businesses so they can offer competitive wages and consider this an important part of their strategy – understanding it is hard to get and retain talent if you don’t pay them.

Designing for the Bottom of Pyramid
Finally, and perhaps most importantly, most social enterprises are, either wholly or in part, an expression of Bottom of Pyramid (BoP) design. BoP design is a term used to describe business solutions or services developed for the roughly 4 billion people who live at or below the poverty level in their country. This market is chronically underserved because who in their right mind thinks about building a business for poor people?

This is a huge market. The Eastern European BoP market (including Russia) is currently valued at $458 billion per year. This figure represents more than 254 million people. That is 64% of the population in the region and 36% of the total income.

Who are they? Youth, elderly, disabled… living in cities and villages. They are those people forgotten or ignored, living out their days on a pension or those who have yet to see any benefit from the region’s shift to more free-market capitalism. They spend their money on food. They spend on mobile phone connection ($84 per person per year in Russia apparently). Mobile companies build empires designing low-cost solutions to serve them. Banks offer them small loans. They are a market very few consider, leaving it wide open for new business development – businesses that, if they make the lives of these people better, will naturally provide social benefit.

So the question is, what makes their lives hard and what are the solutions that would make it easier? Social enterprises like Grameen Bank and huge corporations like General Electric alike work to answer that question and, arguably, deliver enormous social impact across large populations. Like each example in this article, successful social enterprises seem to grow out of seeing something ‘good’ where others see nothing and built a business model that focused on making people’s lives a bit easier, a cheaper, more successful or faster.

If you are thinking about starting a social enterprise, think about starting at the Bottom of the Pyramid. Talk to your grandmas and cousins. Talk to sociologists and NGOs and figure out what makes life hard. Then do what you do well and start modeling business solutions which can make life easier. As mentioned, it is a huge market with little to no competition and social enterprises can often get grants (which don’t have to be paid back vs a loan to a small business), minimizing risk. Not to mention that if you build your business there, the world becomes a better place. Big market, reasonable risk, makes the world better? Seems like a good place to get started…

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