Social Enterprises: Beyond the Buzz

Pragmatic idealism and high finance are making the world a better place

Altruism has never been this trendy at private companies where profit maximization is the overarching aim. Following decades of frivolous do-good cheque writing under the Corporate Social Responsibility tag, some private companies are now trying to impact some of the world’s biggest challenges like poverty, environmental degradation and violent crime.

Applying market mechanisms to solve social problems, now called social entrepreneurship, isn’t a new idea. The social enterprise label can include many things, from old-fashioned village co-operative societies to big businesses with a conscience. As businesses become sensitive to social issues, charities that have relied on philanthropic contributions are becoming savvier at generating their own income.

As businesses and charities converge, a third type of organisation has emerged: social enterprises.

These are innovative entrepreneurial organisations aiming to solve social and environmental problems. But, unlike non-governmental organisations (NGOs), they don’t rely on aid, grants or donations, but generate income by selling goods and services. They differ from private firms due to their pursuit of social impacts in addition to profits.

In many parts of the world, social enterprises are flourishing in the most unlikely places.

“The basic premise of impact investment is that it should generate dual returns, both social and commercial”

In Sri Lanka’s former war-ravaged Eastern town of Passikudah in the Batticaloa district, a group of women – many widowed by the conflict – are manufacturing fashion accessories and handcrafts using sea shells and coconut & Palmyra leaves. Called the ‘Koralaipattu Producers Group’, their company markets these products in the area and is negotiating with fashions retailers in Colombo as well. “There has to be some kind of incubation,” says Chandula Abeywickrema, an ex-banker and now founder and chairman of Lanka Impact Investing Network, which has provided a loan to Koralaipattu Producers Group to expand output and for marketing.

Abeywickrema points out that access to capital is just one of the conditions that need to be fulfilled to nurture successful entrepreneurs in disadvantaged regions. “Entrepreneur development programmes and value chain linkages are as critical.

But that’s a long growth journey,” he says. Finance companies spawned lending in the Batticaloa district following the end of the war. Many fisherman and small business owners who borrowed struggled to repay these loans. “They are just moneylenders adopting hard collection tactics. They don’t care about graduating people out of poverty, connecting businesses with buyers or livelihood development,” Abeywickrema says about most finance companies that lend to rural entrepreneurs.

Abeywickrema’s decades of microfinance experience heading the country’s earliest and largest such unit for 15 years as head of HNB’s microfinance division makes him one the most experienced executives in the country.

He laments that microfinance lending at most finance companies is entirely profit-driven, in contrast to HNB’s (a commercial bank) ‘Gami Pubuduwa’ programme strategy.

HNB’s field officers lead capacity building and entrepreneurship development programmes, and build value chain linkages. “For the first 10 years, it was losing money,” Abeywickrema recalls. However, then chief executive Rienzie Wijetilleke was unwavering in his backing of the programme, believing that such social responsibility was critical for the private sector’s long-term sustainability in a country where income divisions were deep.

Abeywickrema, now retired from HNB, is collaborating with Eranda Ginige, founder of Social Enterprise Lanka, an advocacy on social entrepreneurship in the country, to spark nationwide interest in social entrepreneurship.

“We are different from countries in South Asia because some of our social challenges have more in common with those faced in rich countries as well,” opines Ginige. “We are mostly above poverty, but it still exists in pockets.”

Social enterprises are thriving in rich and poor countries. “Our  vision is to develop social enterprises as a thriving sector here,” says Ginige, whose foray into the area when he spearheaded the British Council’s entrepreneurship awareness and advocacy campaigns eventually led him to leave the organisation in a quest to spark the social enterprise sector here.

It’s possible to trace back the three stages in society before it arrived at the social enterprise stage. At first, caring for people was left to families. Poverty alleviation became a government’s responsibility in the second stage, as relatively rich countries successfully taxed people.

Traditionally, governments are run far less efficiently than the private sector, and in the third stage, a government’s efficiency was improved by their deeper cooperation with the private sector to deliver these services to people. In the fourth stage, some argue that the innovative might of social enterprises and the private sector will primarily deliver services to the poor and the disadvantaged.

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n eco system requires at least three components, they surmise. They are, getting youth interested in social entrepreneurship, establishing a network of potential investors for businesses combining a social improvement strategy with commercial goals, and encouraging big businesses to adopt more sustainable practices.

‘Impact investing’ is a term that describes the new type of capital of more socially responsible, purpose-driven finance that’s funding these enterprises.

Lanka Impact Investing Network is planning to put itself at the center of an evolving social enterprise scene by funding these enterprises and collaborating with organisations like Social Enterprise Lanka and CSR Lanka, which Abeywickrema heads, to encourage private companies to adopt more sustainability-related goals.

Some social enterprises generate sufficient revenue to sustain and scale their businesses, but most organisations are not profitable enough to access traditional financial markets. This is called the financial-social return gap.

Impact investment – the type Lanka Impact Investing Network aims to foster – was an idea to circumvent this equilibrium. The rise of impact investment has transformed the ethical sphere of investment from a passive approach to a more proactive one. The basic premise of impact investment is that it should generate dual returns, both social and commercial. Just as donors expect their grantees to report back on the outcomes they achieve, impact investors measure the social and environmental outcomes associated with their investments and use the data to evaluate success. The big difference between a philanthropic grant and an impact investment is the expectation of financial return.

Impact investing has transformed over the last decade from something only wealthy individuals undertook to being championed by a growing number of leading institutions.

Today, the world’s biggest investment banks and private equity funds are on the impact investment bandwagon. In 2015, global asset management giant BlackRock Inc., which manages a mammoth $5 trillion, announced the launch of BlackRock Impact, its dedicated impact investment arm; Glodman Sachs also launched its own ‘Imprint Capital’.

Lanka Impact Investing Network targets creating 4,000-5,000 social enterprises by 2025, expected to generate up to 250,000 jobs. Ginige points out that Hong Kong started with five companies 10 years ago and now have over 10,000 social enterprises.

Abeywickrema and Ginige’s collaboration took off when they stuck up a conversation following an evening talk where the audience was enthusiastic about social enterprises. Their alliance is offering a new opportunity for budding social entrepreneurs by bringing together two groups of people who might not otherwise have met: those with capital and people with ideas.

They are also planning a reality TV show modeled on the hit US series ‘Shark Tank’, featuring budding social entrepreneurs. The show expects to create a surge in public discourse on the subject. The reality show has multiple aims: to spark widespread interest in social entrepreneurship, to fund winners, and to create a buzz among the philanthropically slanted about this new class of capital oriented towards long-term and responsible growth.

Investors will fund the winning 15 social enterprises up to Rs10 million, Ginige estimates. It’s not just the winners, but the most credible participants who will have a good chance of coming away with a new financial backer. The grander aim is to incubate up to 100 entrepreneurs perusing a social agenda in the following months, where Social Enterprise Lanka, the advocacy group Ginige heads, will play an active role.

Unlike a business, scaling a social enterprise is challenging for a number of reasons. Investors are willing to back a business to build its organisational capability, but in the social sector, the tendency is to invest in the programme, not the organisation. Social enterprises and NGOs are under pressure to keep overheads low, which stymies their ability to hire scale, and efficiency building talent.

Because there is no mergers and acquisitions market for social enterprises, many ventures never flourish beyond a limited geographical area despite acquiring scale.

“It’s a mistake to say social enterprises are not about making money. They have to be profitable”

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ntrepreneurs are strongly motivated by an opportunity, pursuing a vision and the reward of realising their ideas.

What distinguishes a social entrepreneur is the primacy of social benefit. The entrepreneurial value proposition is set on a market that could pay back an innovation and provide above-market rate gains for investors. In contrast, social entrepreneurs’ value proposition targets an undeserved, neglected or highly disadvantaged population that lacks the financial means or political influence to achieve the transformation on its own.

Ginige believes social enterprises need to be run like real businesses to maximise the impact. “It’s a mistake to say social enterprises are not about making money. They have to be profitable.”

Many private firms have deep convictions about their responsibility towards sustainability and dealing with the ills around them where they can make the greatest impact. However, they would shun the term ‘social enterprise’ due to its implied disapproval of profit.

Ginige and Abeywickrema are less queasy about labels. They believe its impossible to draw lines around what is and what isn’t a social enterprise. The best ones sometimes transform into a greater profit focus as they gain scale. Sometimes, private sector businesses discover their social conscience, and acquire aims and characteristics of social ventures.

“We aren’t naïve to suggest that it should be defined along rigid guidelines. We will see some kind of evolution,” Ginige says about the challenges in defining and creating a legal status for social enterprises.

Social enterprises have a competitive advantage over their commercial counterparts, as especially large buyers are interested in sourcing from social enterprises. In the age of conscious buyers, consumers look for more than the mere utility of a product; they strive for meaning and an opportunity to make a positive change. The story of the impact drives
the business.

To attract the new generation of millennial workers, firms also realise they must deliver on this dimension.

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icrofinance has been a leading branch of impact investment. Muhammad Yunus’ Grameen movement eclipsed the idea of microfinance around the world. It was seen as the angelic financial instrument that provides banking and institutional credit to marginalised and disadvantaged communities.

Financial institutions, governments and the public alike were enamoured with the idea that, with credit, the poor would boost their living standards independently. However, in some cases, microfinance institutions have exploited the poor instead. High interest rates, greater-than-affordable loans and low financial literacy of benefiters have pushed the microfinance industry to the brink of a crisis in some areas.

Recently, the local government agent in the Batticaloa district took the extraordinary measure of imposing limits on microfinance lending due to the high indebtedness of some families.

Those sparking interest in Sri Lanka’s social enterprises believe that irresponsible microfinance firms are threatening this renaissance in more than one way. Impact investors can provide both debt and equity finance. Predatory microfinance firms lending practices may hurt budding entrepreneurs.

Critically, large global impact investment funds challenged with identifying social enterprises in Sri Lanka work with microfinance firms to reach deserving entrepreneurs. Instead of supporting innovative social entrepreneurs, Abeywickrema says these funds are often lent to buy three-wheelers.

In recent years, Sri Lanka’s private sector has made tremendous gains in terms of business performance, while social spillovers have been lackluster. Lanka Impact Investing Network believes an urgent turnaround and reflection is essential to ensure an equitable and prosperous society, and rethinking capital allocation for social enterprises can be the first step.