Is Social Enterprise Right For Your NFP?

Social enterprise is a huge source of potential income for NFPs but requires a clear business strategy, Social Traders' Head of Enterprise Development, Lisa Boothby, told Pro Bono Australia News journalist Ellie Cooper in a Q & A ahead of the “Innovative Business Models for Non-Profits Conference”, in Sydney.

What are the challenges to starting and running a social enterprise?

The first challenge is a strategic one that relates to the purpose of the social enterprise. Many Not for Profits are keen to start social enterprises, but sometimes they’re not clear about why they’re doing it.

Get clarity around the purpose of the social enterprise. There are three quite different purposes; employing marginalised people, providing access to products or services for marginalised communities or generating surpluses to feed back into a social program. A common trap is to create a social enterprise that’s trying to focus on all three things at once, and that can be very difficult to manage.

The next set of challenges lies in understanding if there is a market for your product or service. In the Not for Profit sector, understanding customers and what they are willing to buy and at what price point is not necessarily something that the sector has historically focused on. Evidence for market demand is very challenging and something we focus on heavily at Social Traders when we’re helping social enterprises.

Starting a social enterprise often requires start-up capital, and then when you’re running a social enterprise you may require growth capital. Forecasting a cash flow and being able to understand the capital requirements can be really challenging. And then you need to source that finance or that capital. There’s grant funding available, there’s also impact investment – which is very different kind of capital – available, but finding what’s right for your organisation is challenging.

For organisations that run as Not for Profits at the moment, the skills and processes required to manage a social enterprise are very different to those normally used for running a social program. Governance processes can be different, your governance body may possibly need to make decisions differently, may need a different degree of commercial acumen, and also the people managing the social enterprise on a day-by-day basis need to have a mixture of business and social program skills.

With this in mind, what’s the first step for a Not for Profit looking to incorporate social enterprise?

The first thing that’s really important is to get clarity at a board level about why the organisation is looking at a social enterprise, what it’s trying to achieve and thinking through what the business model is going to look like. That involves validating with market information, understanding if customers actually want to buy that product or service and then building a financial model. There is support available in the marketplace, and Social Traders provides a start-up program.

Which business models are working well?

With employment-based social enterprises, what we are seeing working well are enterprises that have a strong underlying business. Enterprises that are employing people who are otherwise marginalised in the workforce have a productivity gap, their costs are higher than regular businesses, and so they really have to be competitive. What’s working well in these social enterprises is playing to the strengths of their labour force. We’re seeing successful social enterprises in areas such as cleaning, maintenance and recycling, where the tasks that are being performed work well with the labour force that the social enterprise is using.

For social enterprises providing a product or service to a marginalised community, what is working well is a cross-subsidisation model that enables the pricing to be more accessible for those marginalised groups. If you’re offering fruit and vegetables to a low socio-economic group at a lower price, then cross-subsidise by selling a higher-margin product, maybe a product that’s got more value add in it like preserves, to a more affluent customer group.

Social enterprises specifically designed to generate surpluses and underpin a social program, like Thankyou Water, need to generate decent surpluses to work well, otherwise it’s not worth it. They have to be generally high margin or very high volume. Often where we see success is when Not for Profits leverage their existing capabilities. If they’re good at property management because they work in the area, providing property for low-income families, then going into a commercial real estate agency tends to work better than if they went into something completely different.

Can all Not for Profits look into incorporating social enterprise?

A very large proportion of income in the Not for Profit sector is already coming from trade, so there’s already a lot of social enterprise activity taking place in the sector. I don’t think there’s anything to stop anyone from doing it – it’s really getting clear about why you’re doing it and then making sure you’ve got the commercial skills to be able to execute it properly.

About the author: Lisa Boothby is the Head of Enterprise Development at Social Traders, where her focus is on building capacity of start-up social enterprises with the objective that they become investment ready and ultimately begin trading. She provides consulting and coaching support to enterprises participating in The Crunch and a range of other start-up enterprises.

She is also a keynote speaker at the Innovative Business Models for Non-Profits Conference