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Longtancun, Guangzhou / Trevor Patt via Flickr

Trending challenges to running a social business

Social businesses that operate in high-, low- and medium-income countries face five overarching challenges.

A decade ago, the social business agenda was concerned mainly with answering and advocating the question; what is a social business?1 Fast-forward to today, where a pinnacle stage has been reached in which, rather than asking what a social business is, practitioners, policy-makers and academic researchers have begun to ask how social businesses function optimally. When operating in high-, low- and medium-income countries, social businesses face the following five overarching challenges:

Challenge 1: Mission drift: retaining a social purpose whilst driving a profit

The challenge of continually reiterating a social vision and steering a business towards it is difficult. Especially when strategic choices must simultaneously ensure that the business model remains feasible and sustainable.

The challenge of mission drift refers to this need to continuously reassess the value orientation of a social business and make sure the venture does not ‘drift’ away from its core purpose: to create positive social change. Social businesses that straddle both social value creation and revenue-generating strategies can benefit from strong leadership at management level with a focus on strategies which aim to integrate social and financial objectives.

Challenge 2: Improving social impact through community participation

The core function of a social business is to instil positive social change. To optimally understand the needs and desires of people, social entrepreneurs can benefit from a model which strives to actively include communities in the decision-making and functioning of their business.

The challenge lies in finding the most appropriate level of community participation, which will improve, rather than hinder, an entrepreneurial approach (which may often be somewhat top-down, capital-intensive and task- rather than process-oriented) and support both the social and commercial success of the social business.

Challenge 3: Social or financial performance measurement, or both?

As social businesses are tasked with creating social value, it is important that they remain accountable to themselves and their stakeholders. Transparency in accountability and solid measurement of both social and financial performance are aspects to running a social business which cannot and should not be ignored.

However, the process of measuring the impact of a social business remains complex and extremely case-specific. The question is not only how to measure impact, but also when to start measuring. Measurement is often conducted late in the organizational life cycle or on a demand-driven basis. Social entrepreneurs are therefore faced with the challenge of not only finding the right tools for the job, but also deciding when they should (and are able to) implement impact measurement tools.

Challenge 4: Access to social capital pre-start-up

A quick search for financing opportunities brings up a plethora of impact investors, funds and grants available to social businesses around the globe. Although many funding options exist, very few impact investors cater to social entrepreneurs pre-start-up. This may be partly due to the fact that unlike non-profit organizations, social businesses are not only assessed on their ability to create social change, but also on their potential financial return on investment. To invest in a social venture pre-start-up is often high-risk.

In recent years, the social business agenda has placed a strong focus on understanding the scalability and sustainability of social businesses. Such focus areas have tended to devote more attention to enterprises that have proven successful rather than to those that yet have to lift off. However, risk-taking and innovativeness define the sector. It is thus vital that efforts are made to readdress the case for social businesses and social entrepreneurs that need support to take their businesses from a raw idea to start-up.

Challenge 5: Organizational form

It is often said that form follows function. For social businesses, this is complicated by the fact that more often than not there are no legally recognized forms within which they can operate that cater to their specific needs. Even though some countries have developed legal forms within which social businesses have more leeway, more often than not, the environment, institutional architecture and existing legalities are not as conducive to social businesses as they could be.

In the early stages of start-up, a social business may, for example, still be partially grant-funded. At this stage, it may be beneficial to register the organization as a charity rather than a company. As the enterprise transitions into a wholly self-sustainable model, it may be time to change legal form and become a company limited by shares, so as to function more like a business. In such instances, it would be wise to ensure that the social mission is written into the memorandum and articles of association of the company to make it clear that profits should be reinvested into the social business.

This contribution has emerged from a collaborative action research process about the potential role of non-governmental development organisations vis-à-vis social businesses, supported by ICS (Investing in Children and their Societies).

Footnotes

1 Within the scope of this research a social business is defined as an organization that uses business principles to create ‘blended value’ for society in a financial sustainable manner.  For an overview of ten characteristics of a social business, reference is made to: Fons van der Velden, Social business, a novel approach to socio-political change, in: F. van der Velden (Ed.) New approaches to international development cooperation, Utrecht (Context, international cooperation), pp. 69-87.

Photo credit main picture: Longtancun, Guangzhou / Trevor Patt via Flickr

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Fons van der Velden

Fons van der Velden is director of Context, international cooperation, a social business that pro...

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Titus van der Spek

Titus van der Spek is Associate Consultant at Context, international cooperation, a social busine...

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