How social enterprises work
Last year, Flint and Steel magazine featured a significant article from Ākina’s Chief Executive, Alex Hannant. Check out the full article – or our part one highlights below.
Social enterprises seek to employ the innovation, scale and financial sustainability of an effective business model but do so to maximise social change – prioritising returns for stakeholders over shareholders. Social enterprise isn’t about replacing mainstream business; it’s about expanding our practice and developing new models to tackle social and environmental challenges in different ways.
Business models that deliver social good
Just like mainstream businesses, social enterprises demonstrate huge diversity in their size, structure, and shape. However, at the heart of how they actually work, regardless of the change they seek, there are number of core models that deliver social good:
1. The Robin Hood: The Robin Hood is essentially a mainstream business that exists to resource less marketable activities. Examples include Y-Gap in Australia, which runs boutique cafés and restaurants, and reinvest their profits into capability building programmes for social entrepreneurs in developing countries. Another example is Barnardos’ Kidstart, where profits from their childcare service cross-subsidise other social services they deliver but are less easy to resource.
2. One-for-One: Like the Robin Hood, the One-for-One runs a successful business to resource other activities but with a stronger link between the activities – often delivering the same product or service with different pricing models. Examples include TOMS, which sells shoes and sunglasses on a commercial basis and then provides a similar product or service (eye-treatment in the case of the sunglasses) at no cost to people in need. Another example is the Aravind Eye Hospital, which performs thousands of eye operations a year, half to customers who can afford to pay at the market price, and half to customers who can’t – subsidised by margins that would otherwise be returned as dividends to investors. An example closer to home is Angel Place, a Sydney-based startup setting up a hotel that will provide a free room to people at risk of homelessness for every pre-paid room booked.
3. Waste to Value: These enterprises reuse, recycle, and repurpose to create new value in materials that have come to be considered waste. Examples include many of the community-owned recycling centres around New Zealand that not only divert and re-sell materials otherwise headed for landfill but also reinvest revenues into proactive waste management initiatives. Another example is TerraCycle, which provides free waste collection in a number of countries, and turn hard-to-recycle materials into practical and affordable green products.
4. The Regenerator: In these enterprises, the process of delivering the product or service results in the regeneration of communities and the environment. Examples include Te Whāngai Trust, where native plants are grown then sold, alongside environmental services, to private companies and the Government. Their social impact comes by providing employment and training opportunities to people who are facing complex personal challenges such as drug, alcohol or mental health issues. Another example is Jamie Oliver’s Fifteen restaurant that leverages his brand to create a thriving business staffed by young people who have been living on the street. A further example is Guayaki who operate a ‘market- driven restoration business model.’ They grow and produce Yerba Mate (a herbal beverage popular in South America), reforesting the Amazon as they go. They aim to reforest 200,000 acres of South American rainforest and create over 1000 living wage jobs by 2020.
5. The Good Asset: Based on the development of community-owned assets – often premises or infrastructure – these enterprises provide a public good and also generate revenue streams that can be reinvested into projects and local development. In many countries, community-owned energy generation has seen a proliferation of these models, including Hepburn Wind in Australia. Another example will be the Auckland Harbour Bridge Skypath, where the Skypath Trust, which led the project’s development, stands to receive a return from user tolls to then fund new community transport initiatives. Elsewhere, leisure centres and community facilities provide important local amenities that are embedded and owned by the communities they serve.
6. The Disruptive Provider: These models tend to be seen as the so-called rock stars of social enterprise, often with good reason. They tend to be ambitious, entrepreneurial, and target systemic failures. When successful, they create opportunities for significant scale and replication. Examples of this model include Grameen Bank, which pioneered micro-finance by extending credit to people living in poverty and securitising affordable loans through peer lending groups – the antithesis of loan sharks! Grameen has lent more than US$11 billion at a default rate of less than 1 percent, and has developed similar models for housing, education, telecommunications, and even a ‘not-for-loss’ joint venture to tackle malnutrition with food giant Danone. An early-stage Disruptive Provider is Uncharted Play, which is providing a lighting solution for children without access to energy, who are unable to study after sunset. They have developed a football that kinetically generates power – children play football for 30 minutes, which then provides them with three hours of light for study. Another early stage ‘disruptor’ is Chalkle, which is reinventing community education in New Zealand. Built to serve the needs of a changing educational landscape, Chalkle provide software and resources to connect teachers and learners, and enable a distributed marketplace for education – think TradeMe for knowledge and learning.
7. Cash for Impact: Enterprises using this model deliver products or services whose impact can demonstrate a measurable avoided cost or economic benefit. This enables a scalable and performance-based revenue model to be built around outcomes. These models are still finding their feet and require market mechanisms to trade into. One example of the Cash for Impact model are the communities and landowners that use the Plan Vivo scheme to trade the carbon benefits of ecosystem restoration and preservation projects. Other examples include organisations utilising ‘Impact Bonds’ to resource and deliver interventions that reduce recidivism rates. Given the undisputed health benefits resulting from improvements in housing, it is easy to see how existing health budgets could invest in social housing ventures to avoid both significant economic costs and personal suffering.
8. Fair Share: These are businesses where the benefits are shared internally across the organisation and/or a supply chain – equally distributing profits and power. Examples include Café Direct, which has taken fair trade to a whole new level while retaining the position of a premium coffee and tea brand. Café Direct distributes its profits across their value chain resulting in resilient producer communities and a supply of high-quality product. Cooperative structures provide a backbone for these social enterprise models, prioritising self-organisation, empowerment, democratic voice, and the needs of member-owners over the needs of capital investors. While not all cooperatives are driven by a social purpose, it cannot be underestimated how empowering the experience of ownership can be in marginalised communities where self-esteem, confidence, and tenancy are social goods in themselves.
9. Service Providers: These models focus on providing professional services to the social enterprise sector. They can either be specialised services such as impact reporting, business model design, and social finance, or more generic professional services, such as design, legal, and technology, delivered with the interests and values of social enterprise in mind. To maximise their impact, Service Providers often offer flexible contract arrangements and ways of working. New Zealand examples include the suite of professional services offered by Enspiral, the resource reuse expertise offered by Envision, and the design agency, Curative.
Providing a sense of how social enterprises work in practice also gives a sense of why growing a thriving social enterprise sector is of interest and value to policy makers, local government, philanthropists, business, and the wider community. Social enterprise is about expanding the total pool of economic and social value, rather than redistributing or ‘salami slicing’ what already exists.
So, if we want more social enterprises working at scale in New Zealand, what can be done to facilitate this? While the potential of social enterprise is attractive, the reality of establishing, operating, and growing one is far from straightforward – running any business is a hard slog, and running one with additional complexities and bottom lines can be harder. This is especially true for teams and organisations coming from a low capability base – people used to leading project and community work but who are not familiar with business practice. Or, for that matter, business people who are not used to leading social change. Just as we have developed a support structure for mainstream business that includes training, mentoring, networks, lobby groups, seed-funds, investment funds, legislation, incubators, and, indeed, entire government departments, so too, do we need a similar, if more modestly sized, support infrastructure for social enterprises to succeed.