The Problem with Social Enterprises, Part 1: From Fair Trade Baby Seal Clubbers to “Socially” Enterprise

“I work for a company that makes money off poor people.”

That’s how a friend of mine likes to answer the “where do you work?” question at parties.  Apparently people’s reactions are pretty entertaining.

Now let’s see if I can paraphrase it to be less intentionally provocative:

“I work for a social enterprise.”

It’s happened to the best of us.  We’re good people.  We want to make the world a better place.  We don’t want to work for baby seal clubbers or oil companies, or toil away long hours figuring out how to increase ball bearing sales by 2%.  We want our work to contribute to the greater good: solving environmental problems, fighting poverty, improving health in poor countries.  But we also know that the traditional aid approach is fraught with perils of ineffectiveness and dependency, and that the private sector tends to be much more effective at delivering results.  And we definitely don’t want to be “NGO girl,” who came to Africa on her gap year and decided to start an NGO to take care of all those cute little kids she saw, but really has no idea how to run an organization.  If only there were a type of company with the heart of an NGO but the methodologies of business…

It can also go the other way around.  We’re naturally entrepreneurial, good at starting things and making money.  But we don’t want to start just any business—after all, there are real problems in the world that need fixing.  Perhaps we even feel a little bit guilty about the idea of making a profit off the poor.  We want our business to be more… social.

And now, with the “social enterprise,” you can.  At least that’s the theory.

Only, what is a social enterprise anyway?

There have always been businesses and there have always been charities, and until recently their domains have always been pretty separate: businesses produce things that people want, and charities take care of people who can’t produce enough for themselves.  But at some point in the last few decades those domains have become more blurred, with charities acting more like businesses, and businesses doing some of the things charities normally do.

From these blurred lines has emerged the social enterprise, a term that gets bandied about in the media and development circles, but no one actually seems to know what it means.  As a result, the term more accurately describes a scene (or “circus,” as one friend put it) rather than any particular type of organization.  As a result, many organizations calling themselves “social enterprises” face a sort of identify crisis.  Is a social enterprise merely a charity that turns a profit?  Or a business that does good things?  Or something more distinctive?

Just as importantly, what is NOT a social enterprise?  A restaurant, for example, provides food, creates incomes for its workers, and trains people in useful skills like customer service: why should it not count as a social enterprise?  (For that matter, why not an oil refinery?  After all, the fuels it produces are vital to “social” things like health care provision: gasoline for ambulances, for instance, or diesel for hospitals’ backup generators.)

This lack of definition—assuming that a social enterprise really even is a distinct type of entity different from other for-profit companies— has real consequences for the “social sector”: it elevates the importance of branding over operations, diminishes how donors and investors support these businesses, and generally makes everyone in the space look less serious.

For the would-be social entrepreneur, there’s a danger of becoming too “socially,” as I’d put it: focusing more on the “social” than the “enterprise.”  When we become “socially,” we start to measure our success by how well we play the social enterprise scene—which is all about showing how cool and innovative we are—rather than how well we do the numbers-focused, methodical, and, well, sometimes boring work of operating a business.  No doubt I’m guilty of this.

Look how innovative I am in my Uganda cranes t-shirt and $2.50 Ray-Ban knockoffs, stopped over in Mubende on the way to Kasese!

Playing the social enterprise scene: look how innovative I am in my Uganda cranes t-shirt and $2.50 Ray-Ban knockoffs!

More concerning for the entrepreneur is when we start to lose sight of the goal of profit entirely.  I’ve met a number of founders who have faced this dilemma: they got into a social business because they wanted to help people and knew that an enterprise approach was the best way to do it, but when it actually came time to start charging for the good or service, they found they were deeply uncomfortable about asking poor people for money.  But if you don’t start charging money at some point, are you even really a social enterprise?

For donors, who as a generalization are often suspicious of the profit motive, the term does have some good in that I think it helps them to get more comfortable with the idea of funding a for-profit entity: much easier if I call it a “social enterprise” instead of a “company”.  But this view of the social enterprise as essentially a for-profit NGO distorts the kind of support donors are willing to provide: funds for product subsidies and marketing campaigns instead of, say, grants for setting up financial structures that would help unlock big financing.  Moreover, the focus on being cool and innovative helps a lot of bad ideas get funded: witness the effusive praise lavished on a light-up soccer ball called the “Soccket“.  Ideas with neither customers nor commercial appeal can survive longer than they should as long as they tickle donors’ and investors’ innovation bone.

Investors too can fall into this same trap of treating social enterprises with kids’ gloves, providing small pots of cheap capital that, as BBOXX investor Ceniarth puts it, “shields” these enterprises from the “rigors” of the commercial market instead of preparing them for commercial viability:

We feel strongly that when markets such as energy access begin to move in the direction of commercial viability, we, as investors, should be focused on preparing companies for the rigors of this path, not developing mechanisms that artificially reduce these pressures.

[…]

The author’s [of the idea we are responding to] state that these impact payments will allow social enterprises to receive low-cost capital without the pressure of offering market-rate returns. This is the most disheartening conclusion in the piece. The only way that companies will attract commercial capital is if they are subjected to the rigors of commercial investors.

It’s the pity sex of the investment world.  But serious social enterprises don’t need pity investments: we can handle the real thing.

So what is a social enterprise, and what is not one?  How can social entrepreneurs pursue noble goals without becoming too “socially”?

This has turned into quite a long article, so I’m dividing it into at least two parts.  Part 1 will look at “how we got here”: the initial divide between business and charity, the rise of Corporate Social Responsibility (CSR), and the emergence of the social enterprise—or at least the “socially” enterprise.  Part 2, which I’ll post in a few days, will look more at the problems with today’s social enterprise scene (and it is a SCENE)—both with the use of the term itself, as well as the way many so-called “social enterprises” currently operate, and how investors can differentiate the serious and the un-serious ones.

PART 1: From Baby Seal Clubbers to “Socially” Businesses: the Emergence of Social Enterprise

So how did we get here?  To me, the social enterprise seems to have emerged in three eras, which I’ll tell as a story about three organizations: a traditional company called Baby Seals Industries Inc., a charity it helped to found, and a would-be social business that rose to try and challenge both of them.

Era 1: Everyone is Looking for Money

Ah, those were the days—at least if you were an amoral robber baron bent on building a solid gold house.  Furs were all the rage, and Baby Seals Industries Inc. produced a lot of them.  Its baby seal clubbers toiled long hours for low pay in harsh conditions, roaming into the frozen arctic to hunt down the valuable animals and kill them as cheaply as possible, even if cruelly.  Back at the factory farther south, Baby Seals Industries churned out fur coats at previously unheard of prices, thanks to its low production costs: workers were paid a pittance, coal for electricity was cheap, and dangerous chemicals were discharged freely into the nearby river (with Mother Nature covering the cost).  Nobody really cared though: workers needed the money, an emerging middle class was eager to get its hands on newly-affordable fur coats, and the owners of Baby Seals Industries were busy building their solid gold houses.

In the farms surrounding the Baby Seals Industries factory, young people started hearing about these new factory jobs, and many began moving from their farms to the city in search of a more modern life.  But not everyone was lucky enough to get a job at Baby Seals Industries.  Unemployed and unable to fall back on farming in their new urban setting, many of these migrants found themselves hungry and homeless.  The wives of the Baby Seals Industries owners (all men of course) took pity on these indigent urchins and, with assistance from the local church and a few sympathetic souls, started a charity to provide them at least some small sustenance: Loving Hands Shelter was born.  Surviving on donations from the Church and whatever cash the Baby Seals wives could wring out of their husbands, Loving Hands Shelter became instrumental in caring for the poor and sick of the city: it couldn’t lift them permanently out of poverty, but it could at least stop them from starving.

Below is Phase 1 of the Business-Charity nexus.

social enterprise phase 1

Era 2: Corporate Social Responsibility

But the times, they were a’changing—and not just because of Bob Dylan and the Beatles.  The Western world was growing richer and more secure.  Televisions were providing everyday people with a visual window onto wider worlds.  With the masses no longer worried about their day to day survival, and televisions broadcasting images of the worst corporate practices into living rooms across the country, people started noticing for the first time what Baby Seals Industries was actually doing to produce those cheap fur coats they loved so much—and so did the government.

The Baby Seals Industries board was aware of these pressures, and knew it had to take action.  So they agreed on a plan.

First, they re-branded: Baby Seals Industries Inc. would now be known as “The BS Group.”  The acronym would hopefully sanitize the company name.

Second, they decided to embrace a new philosophy of “Corporate Social Responsibility” (CSR): the BS Group would donate a percentage of its profits to construct an alcohol clinic for the Inuit communities whose livelihoods had been ruined by the decimated seal populations.  How social!  BS’s white collar workers would also be encouraged to spend one day per year volunteering in their communities.  How responsible!  And the company spokesman made a big announcement: baby seals would now be clubbed 10% more humanely.  How… corporate!  The board knew it was all mostly BS as it didn’t change the core business, but the CSR efforts didn’t cost much, and might deflect some of the criticism they were facing.

BS made one other commitment based on its historical ties: it made a large grant to the Loving Hands Shelter to start doing work in Africa.

These were heady days for Loving Hands Shelter.  The charity had slowly grown its operations over the previous decades to include a food pantry, orphanage, and small clinic.  Donations were rising from an expanding middle class.  And the cultural environment was right: the West was awash in post-colonial guilt (and itching to show the Soviets how much of our abundance we could share across the world), and college students were restless to escape dull suburban life.  With the BS grant, Loving Hands hired dozens of these eager graduates to launch projects in Ethiopia, Kenya and Uganda.  The wealth of the West rained down on Africa and sprouted up schools, health clinics, food aid distribution centers, and refugee camps.  In this new idealistic era, aid was not to be just a lifeline to those who had fallen through the cracks: it promised to lift entire nations out of poverty.

No longer just a US-based charity, Loving Hands Shelter also decided to change its name.  Unfortunately the best acronym writers had already been hired by CARE, so Loving Hands Shelter became LHS International.

social enterprise phase 2

Era 3: The Socially Enterprise

But something was not quite right.

In the world of Big Business, people were taking a closer look at the BS Group’s CSR efforts.  The re-branding had not actually distracted its customers from the fact that its core business was the clubbing and processing of baby seals (a pretty hard fact to forget when the product you’re buying is a baby seal fur coat).  The Inuit alcohol clinics had backfired: instead of focusing the public on the company’s half-hearted efforts to help, it only reminded them of the destruction of Inuit livelihoods that had necessitated that help in the first place.  The Boomers and Gen-X’ers climbing the BS ladder found they were not fulfilled by the one day of community work per year—they too could not forget that their job was essentially to fuel the growth of baby seal clubbing.  And their kids did not want to follow that same path.

Meanwhile in Charity land, results were also underperforming.  LHS’s eager graduates had finished their initial projects and moved on to other countries or back to the home office.  Within a few short years, most of the water pumps they had installed were broken.  Local food traders and producers, undercut by free charity, had given up their businesses, leaving food production in disarray and refugees still in camps.  Teachers were regularly absent from the pristinely-built schools, and doctors regularly stole free medicine from donor-funded health centers to sell in their private clinics.

Yet more money than ever before was flowing in.  LHS employed armies of grant writers who when explaining the OVC (“orphans and vulnerable children”) project they had just won, described it first in terms of the dollar value of the grant, instead of in terms the people it was meant to help.  Development professionals arrived with graduate degrees and an entire repertoire of scientific-sounding jargon and acronyms.  Aid had become an industry.

In this environment there seemed to emerge, especially among the younger generation, a growing disillusionment with the ethics and general soullessness of Big Business on the one hand, and the disappointing results of Charity Land on the other.  Why couldn’t there be an organization that combined the best of worlds, these Millennials thought: one that had pursued social goals using business methods, and generated a profit to grow and expand without relying on donations?

Before long a new term began popping up, and along with it a new crop of organizations claiming its banner: the social enterprise.  Organizations selling solar lanterns.  Energy efficient cook stoves.  Feminine hygiene products.  Toilets in slums that collected human waste and turned it into biogas.  Organizations that wanted to do good, but knew they had to turn a profit to sustain themselves and grow.

The BS Group was not scared.  It was still the largest producer of fur coats in North America with billions each year in revenue.  A few upstart “social enterprises” making a few hundred thousand dollars a year did not threaten its standing.  After all, most of these upstarts were not profitable or on the radar of commercial investors: they were still mostly reliant on grants from charity-driven donors and impact-focused investors, none of which were big enough to achieve real growth.

Still, the headwinds driving the rise of these social enterprises were on the BS Group’s radar.  People wanted to buy products that made them feel like they were doing something good.  And they wanted to work in jobs that made them feel fulfilled.

So BS made some announcements.

First, it was going to be “sustainable”: its coat production methods would be improved to use 5% fewer baby seals.

Second, it would be engaging a cooperative of Inuit “micro-entrepreneurs” to capture baby seals, thereby supporting local income generation.  For these “Fair Trade baby seal furs,” consumers would pay a premium so BS could in turn pay above-market rates to the indigenous baby seal clubbing micro-entrepreneurs.  Of course the sale price increase to the consumer would be greater than the purchase price increase paid to the Inuit hunters, but the BS executives figured this was fair: if anyone was willing to pay a higher price for a coat to make themselves feel better about the baby seals that were clubbed to make it, it seemed fair to over-charge them.  That’s why it was called Fair Trade, the executives thought.  Right?

Third, BS announced that it was making a small investment in a Bay Area start-up called “Fyr”: a social enterprise whose mission was to “end the traffic in baby seals”, and did so by training Inuit women to make “fur-similar” coats out of locally available lichens and mosses.  For every coat bought, Fyr would donate one coat to an impoverished Inuit family.  The coats didn’t look very much like fur, they didn’t keep you as warm, and they started to smell after 3 months of use, but that didn’t matter to Fyr’s socially-minded Millennial founder: the Fyr coats cost 10% less than traditional fur, and people should just buy them because they are sustainable.  Right?

This social enterprise investment was a bit of a lark for the BS Group, but to LHS International, it was a threat.  Who were these “social enterprise” people, and why were they competing for funds from LHS’s biggest donor?  The threat to its funds combined with the growing trendiness of “trade not aid” moved LHS into action: it was time to make some changes.  LHS would pull back on food aid and launch programs to increase farm productivity.  It would provide less free medicine and more consultative services to Health Ministries on how to create better medicine distribution systems.  It would start measuring impact with quantitative methods.  It would even experiment with a sustainable project that should eventually become self-financing: setting up a microfinance institution to loan money to small entrepreneurs and reinvest the interest proceeds in more loans.

social enterprise phase 3

At this point, a lot of lines have been blurred.  LHS is starting to engage much more with the profit motive to achieve its objectives—and even doing some activities that sure look to be generating a profit.  Meanwhile, the BS Group is making actual changes to its sourcing and production methods to support local incomes and reduce its use of baby seals, if only by 5%.

And then there’s Fyr: an ostensibly for-profit company that is not just making small changes at the margins of fur-production, but claiming its entire mission as a social one: eliminating the use of baby seals in coat-making.  Only, while Fyr’s charismatic founder has made dozens of TV appearances and won a number of high-profile grants, the company still hasn’t sold many coats.

So things have become quite interesting for an organization wishing to call itself a social enterprise.

Is a Fair Trade baby seal clubbing company a social enterprise because it supports local incomes?

Should we praise a company’s 5% reduction in the baby seal intensity of its coat production process?

Is a charity that starts a microfinance organization an NGO, a social enterprise, or something else?

And how seriously should we take the efforts of a company like Fyr, which seems very cool and innovative, but not very likely to sell many coats?

Era 3 brings us almost up to today in the social enterprise’s development, and wraps up Part 1 of the article.  Part 2 will move on to what I think is the beginning of a Stage 4 in the evolution of this business-charity nexus of goals and methodologies, in which social enterprises need to decide which way they’re going: will they become for-profit charities, or growth companies for good?

social enterprise phase 4

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One response to this post.

  1. […] enterprise anyway, compared to an ‘evil’ one? Some help for reference is kindly offered here (from a dear friend) for […]

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