SOCIAL enterprises are a brilliant idea. Instead of a charity or a non-governmental organisation (NGO) that has to depend on charity or grants from governments or international agencies, a social enterprise does social good via a business entity.
Investopedia states that, “social enterprises seek to maximise profits while maximising benefits to society and the environment. Their profits are principally used to fund social programmes.”
It’s interesting that the definition states that profits are used to fund social programmes. Hence a social enterprise is a business entity with two objectives in this order – firstly to make a profit and secondly to benefit society.
At the recently concluded Asean Angel Alliance Summit 2018 organised by the Malaysian Business Angel Network (MBAN) we had a panel debate about social enterprises on the topic of “Have your cake and eat it too: Is that what impact investment really is?”
It was an interesting debate about whether an investor can get both a financial return and do social good at the same time – what we call impact investing. However, a vote at the end of the debate was inconclusive as half agreed that it works while the other half thought this model doesn’t work.
I happened to share the view that social enterprises in Malaysia haven’t worked and that the confusion about whether to make a profit or do social good has caused many of the failures.
Don’t get me wrong I’m not saying that the social enterprise model doesn’t work, what I’m saying is that most social enterprises haven’t done well not because of the model but because the fundamental principle of the model – make a profit and then fund social programmes – hasn’t been fully understood by the founders.
The panellists also shared that more than 80% of social enterprises fail and the ones that survive struggle to do well. In fact one would be hard pressed to name 10 successful social enterprises in Malaysia. It’s because of this high failure rate that it’s difficult to find investors for impact investments.
So are social enterprises a viable proposition? If you ask people in the social enterprise circles to share an example of a successful social enterprise the one name that is often mentioned is Anita Roddick’s The Body Shop. This is primarily because of their philosophy of promoting fair trade with third world countries so that it benefits small-scale farmers and planters.
Another oft mentioned name is Newman’s Own, the salad dressing and food company started by the actor Paul Newman (of Butch Cassidy and the Sundance Kid fame, the movie not the real outlaws). The entire after tax profits of Newman’s Own is donated to charity and as of 2017 the company has donated US$500 million to charity. Not bad for a social enterprise.
But both of these companies didn’t start as social enterprises. They both started as business ventures but incorporated a cause into their business.
Anita Roddick started a business to earn an income to look after her family but as a social activist who had travelled widely she wanted to make sure farmers were given a fair deal.
Paul Newman was persuaded to start a company because he made great salad dressing and had his face as the brand for his product. He didn’t want to profit from having his face as the brand so he decided to donate all his profits to charity.
The key difference between these companies and many social enterprises today is that both of them built a profitable business first and then contributed back to society.
While it can be done concurrently in some cases for example selling products made by artisans, the key is the success of the business itself.
If the business succeeds and becomes profitable then it can contribute back to its chosen beneficiaries. But if the business itself fails or struggles then no one wins. And sadly this has been the case for the majority of social enterprises.
At the debate I also mentioned that founders of social enterprises are confused about whether to focus on the business or on the social cause and that is also a cause of their failure. If you search the Internet for “why social enterprises fail” you will discover that this very confusion was one cause of their failure.
Read more at Digital News Asia