What you need to know about making sound investments that are ethically sound.
In many respects, the development pathway of a social enterprise is similar to a commercial venture. However, the different interests, motivations, conditions, and objectives that drive social enterprises make the supports they require distinct. The purpose of the Ākina Foundation is to deliver a sustainable, inclusive, and prosperous New Zealand by growing social enterprise.
To go about our work, we breakdown the growth pathway of a social enterprise into four stages: design, validation, viability, and expansion. At each stage, ventures require a combination of capability building, capital, and connectivity supports to fulfil their potential to succeed.
Growth Stages of a Social Enterprise
The start point of any social venture is marked by an intention to solve a social or environmental problem. This usually comes as a vision, either individual or shared, with only a loose understanding of how an enterprise will work in practice. For a good intention to move closer to business reality, ideas need to be quickly tested for basic feasibility, and matched with an assessment of the capability required (business, technical, social) to develop further. Capability supports that facilitate this stage include: business design workshops, basic skills development, access to proven models, innovation processes, and, not least, frank advice on what it will take to be successful. Capital requirements at this stage are minimal, although small awards can play a role in supporting capability building and enabling would-be ventures to move forward. Connectivity is critical at this stage – not least because social enterprises often arise from a desire for collective action. Innovation hubs – providing space and place, peer learning, community building, and networking with stakeholders, are all critical components of good enterprise design.
Given the low conversion rate of ideas to successful enterprises, there is an imperative to enable a continuous, interconnected, and high-volume flow of innovation at this stage with mass mobilisation of talent, mass creation of ideas, and rapid testing and iteration. From a sector development perspective, this means that support needs to cover a large surface area if it is to be effective – preferably via replicable programmes and local level service provision. At Ākina, we are mobilising talent through our Workshops and Clinics programme. Increasingly, we will seek to support locally-led innovation hubs and programmes delivered with regional partners.
When a team, community or organisation has developed a blueprint for their enterprise, and made the commitment to take it further, they move into a stage of validation. This requires intensive testing of their business model for market fit, customer fit, commercial viability, scalability, and impact. It involves running real trials and evolving all elements of their proposition based on evidence from the real world. Rapid iteration is possible at this point because the enterprise is still fairly weightless – it is unlikely to be bogged down by the grind of day-to-day-operations or funder/investor obligations. The main obstacle is likely to be the entrepreneurs themselves, and the attachment they have to their initial ideas and beliefs. A key component of their success is being able to respond to the evidence that validation provides. Development at this stage also demands a step-up in a range of commercial and technical capabilities: financial modelling, marketing, product/service development, impact reporting, operations, legal form (a question that businesses take for granted) – and increasingly, technology.
The capability supports required include skilled coaching through the progressive process of validating the business model, and access to a range of professional expertise to provide advice and undertake specific work. Enterprises that don’t have access to these supports can easily get stuck, fall-over, or worse, persist with a model that is set up to fail. Connectivity between social enterprises remains critical at this stage, not least for the ability to copy models that are already proven and operational. Intellectual property plays differently with social enterprise, as successful entrepreneurs are happy to give away their recipes for success if it means solving a problem more quickly. At Ākina, we support the validation stage through our accelerator programme – Launchpad. Launchpad starts with an open call for the best new social enterprise ideas across the country, and takes around 10 teams through an intensive six-month process which concludes with the ventures putting business cases to funders and investors. Launched in May 2014, the programme received a surprising 134 applications – evidence of significant unmet demand.
While bootstrapping is expected in the early days, access to capital now becomes necessary for ramping up capacity. For mainstream businesses, seed funding often comes from angel investment and development grants. Both of these options are currently unrealistic for social enterprise in New Zealand due to the limited potential for financial returns within a timeframe that is acceptable to investors (in order to compensate for the early-stage risk and small deal sizes). Add to that the focus of conventional (business) policy settings and the complications of social purpose and open IP. In countries where social enterprise sectors are thriving, public and philanthropic seed funds (which are motivated by future social returns on investment rather than financial) are managed by specialised intermediaries – like the role the Regional Development Agencies, Callaghan Innovation and business incubators play, in various ways, for private investors and mainstream business in New Zealand.
After validation, a social enterprise, if it is able to get startup capital, commits to operations and a stage of proving their viability. This is a stage of growing pains – of building an organisation, improving products and services, increasing turnover, expanding operations, and measuring impact. Development at this stage is non-linear, and can involve any number of false starts, stalls, pivots, inexplicable failures, and unexpected breakthroughs. Capability requirements include access to a range of technical supports and services – particularly legal, financial, HR, and marketing. Ongoing mentoring is also required to get the benefit of experience and informed objectivity. Guidance on management and governance is also essential, as these elements provide the foundations for all other aspects of strategy and operations. Connectivity on learning is still important, especially where peers can compare and contrast their common experiences, but now commercial networking is also key to enterprise development – finding new partners (the right partners) that can help access markets and prepare the venture for growth. Ākina supports social enterprises navigating this stage through our Incubator programme – boosted by significant support from our corporate and professional partners who provide support to our ventures on a pro-bono basis.
Capital requirements at this stage become significant, and the resources currently available in New Zealand are scarce. While many social enterprises get access to grants through existing public and philanthropic funds, these rarely recognise or prioritise the internal capability development, which is the primary need of ventures at this stage. Usually, they are grants issued to fund service delivery with internal development only enabled by default. To date, there are only a few philanthropic organisations who intentionally fund the development of social enterprises and only one – Canterbury Community Trust’s Social Enterprise Fund – that is explicitly named as such. In mature sectors internationally, funds have been established to specifically support development of ventures at this stage. Again, these funds are usually capitalised by public and philanthropic sources motivated by future social returns, and the prospect of getting social enterprises to the point where they are investment ready, or otherwise primed for self-sustainability. This last stage is defined as moving from development to expansion.
If a social enterprise can navigate the previous stages, they reach a position from where they can scale and sustain their impact. This usually goes hand-in-hand with securing the investment they need to ramp up operations. For organisations coming from a traditional charity or community background, resolve is often required at this stage to push for a truly investable proposition, and get beyond a grant-funded model disguised by some trading. Traditional private investment can be sought, but is problematic for the reasons previously outlined. In order to tolerate and respond to the needs of social enterprise, new impact investment markets are required, purposefully designed to generate both social and financial returns. Internationally, engagement in impact investment is growing rapidly – the number of specialist funds has doubled over the last five years – and Social Impact Investment is currently on the G8 agenda.
In New Zealand we don’t have an impact investment market yet, so social enterprises need brokered connections to investors who will consider a deal on a case-by-case basis. They also need the capability and professional support required to structure and execute the investment. When the investment is secured, social enterprises – like any business – need continued support to stabilise and manage an expanded operation. Ākina is in the process of building the networks, capability, and capital required to provide an appropriate and accessible offer in this space. This is what social enterprises need to grow. It’s not that they can’t navigate these stages on their own, it is simply that the majority of them don’t, and because of the lack of support, many more are discouraged from even trying. So the rationale for investing in support for social enterprise is exactly the same as why we do it for mainstream businesses – more ventures, with better business models, developing more quickly, and operating with stability, results in outsized returns on investment. With social enterprise, the return on investment is diverse innovation, social change and public benefit.
Ākina has a number of programmes designed to help your social enterprise grow, including Elevate and Thrive. If you would like to learn more about these please contact us at firstname.lastname@example.org.