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What Is Social Entrepreneurship, Social Enterprise and Social Business?

30 Oct 2013/0 Comments/in

What is an Entrepreneur?

Contrary to common usage of the word, entrepreneur is not a synonym for businessman, nor is anyone starting a business an entrepreneur. The way entrepreneurship is used in contemporary academics and in the social and business society deals with the creation of change and progress, the recognition and exploitation of opportunities, and the creation of innovations that lead to economic progress.

History of the word ‘entrepreneur’

The word ‘entrepreneur’ has a long history, dating back to French economics in the 17th and 18th century, meaning someone who “undertakes” projects or activities (Dees, 1998, revised 30 May 2001). Dees explains further that French economist Jean Baptiste Say is commonly accredited for given the word its meaning as identifying “venturesome individuals who stimulated economic progress by finding new and better ways of doing things. (…) Writing around the turn of the 19th century, Say put it this way, “The entrepreneur shifts economic resources out of an area of lower and into an area of higher productivity and greater yield.” Entrepreneurs create value.” (1998, revised 30 May 2001, p.1)

In the 20th century Joseph Schumpeter added a new perspective to the concept, focusing his definition on the innovative capacity of entrepreneurs, who drive the “creative-destructive” process of capitalism. Entrepreneurs were thus attributed the capacity of bringing about economic progress by creating new markets and new ways to do things (Dees, 1998, revised 30 May 2001). Entrepreneurship in this view is seen as new combinations including the doing of new things or the doing of things that are already being done in a new way. New combinations include (1) introduction of new goods, (2) new method of production, (3) opening of a new market, (4) new source of supply, and (5) new organizations. (Schumpeter, 1934)

Although many entrepreneurs can be identified using these definitions as individuals starting new, profit-seeking business ventures, starting a business is not the essence of entrepreneurship. Say and Schumpeter created the basis of the current perceptions and understandings of entrepreneurship with their definitions of entrepreneurs as the drivers and innovators of economic progress. (Dees, 1998, revised 30 May 2001)

Current Theories

A study by Meyer, Neck, and Meeks (2002, p.22) gives a number of definitions for entrepreneurship, that show the versatility of the concept as it is used today and the distinction between an entrepreneur and entrepreneurship and the common use of these words as referring to any businessman or other person that is starting up or running a business. One definition for example explains entrepreneurship as “the creation of new business, new business meaning that they do not exactly duplicate existing businesses but have some element of novelty” (Rumelt, 1987). This excludes any business activities that lack an innovative element and thus goes beyond the popular use of entrepreneurship as referring to anyone starting a business.

We find that entrepreneurship is a broad spectrum of activities ranging from the actions of creating new enterprises (Low and MacMillan, 1988) and new organizations (Gartner, 1988), to a way of thinking, reasoning, and acting (Timmons, 1997), and encompasses acts of creation, renewal and innovation taking place both inside as well as outside of existing organizations (Sharma and Chrisman, 1999).

Opportunity and change

Another important aspect in the current use of entrepreneurship is the notion of opportunity and specifically “the ability to perceive new opportunities” (Kirzner, 1979), which according to Peter Drucker does not require the entrepreneur to cause change, but focuses on the opportunities that change creates and on the recognition and exploitation of such opportunities, making it clear that starting a business is nether necessary nor sufficient for entrepreneurship (Dees, 1998, revised 30 May 2001).

Entrepreneurship in this view is “an act of innovation that involves endowing existing resources with new wealth-producing capacity”, and what defines an entrepreneur and entrepreneurship is the fact that “the entrepreneur always searches for change, responds to it, and exploits it as an opportunity.” (Dees, 1998, revised 30 May 2001; Drucker, 1985).  The entrepreneur is someone who sees problems as opportunities and transforms his environment by finding resources to act on the opportunities he perceives. In this way entrepreneurs are an important driver of innovation and growth and this is the way in which scholars now perceive Say’s idea of shifting resources to areas of higher yield (Dees, 1998, revised 30 May 2001; Reynolds et al., 2001).

Howard Stevenson added resourcefulness as a last influential element added to the opportunity-oriented definition of entrepreneurship, defining it as “The pursuit of an opportunity without concern for current resources or capabilities.” (Dees, 1998, revised 30 May 2001; Stevenson et al., 1985). As Dees (Dees, 1998, revised 30 May 2001, p.2)describes it:

He found that entrepreneurs not only see and pursue opportunities that elude administrative managers; entrepreneurs do not allow their own initial resource endowments to limit their options. To borrow a metaphor from Elizabeth Barrett Browning, their reach exceeds their grasp. Entrepreneurs mobilize the resources of others to achieve their entrepreneurial objectives. Administrators allow their existing resources and their job descriptions to constrain their visions and actions. Once again, we have a definition of entrepreneurship that is not limited to business start-ups.

What is Social Entrepreneurship and a Social Entrepreneur?

The dictionary describes social entrepreneurship as
so•cial en•tre•pre•neur•ship

n. 1. Recognizing and resourcefully pursuing opportunities to create social value
2. Crafting innovative approaches to addressing critical social needs

Social entrepreneurship is the process of recognizing and resourcefully pursuing opportunities to create social value. Social entrepreneurs are innovative, resourceful, and results oriented. They draw upon the best thinking in both the business and nonprofit worlds to develop strategies that maximize their social impact. These entrepreneurial leaders operate in all kinds of organizations: large and small; new and old; religious and secular; nonprofit, for-profit, and hybrid. These organizations comprise the “social sector.” (Center for the Advancement of Social Entrepreneurship (CASE), 2010)

The definitions of entrepreneurs and entrepreneurship of Say, Schumpeter, Stevenson and the other current theorists described above can also be applied to social entrepreneurship, because they describe a way of thinking, a way of behaving and a mind-set that applies to the social sector as much as it applies to more traditional business environments. Social entrepreneurs are thus seen as a sub-set of the general population of entrepreneurs. Social entrepreneurs are entrepreneurs with a social mission. (Dees, 1998, revised 30 May 2001)

A social entrepreneur is someone who embodies the characteristics of an entrepreneur, who thrives on finding solutions for problems that he sees around himself. A traditional entrepreneur will look for a problem that allows for a profitable solution, the measure of success in his endeavors is profit maximization. A social entrepreneur on the other hand starts by identifying a social problem he would like to solve and then proceeds by using business methods to build a solution for this problem. Where profit-maximization and the creation of wealth is the prime indicator for success for business entrepreneurs, profit is unsuitable as a success indicator for social entrepreneurship, because it does not show the extent to which a social entrepreneurial undertaking is creating social value.

The measurement of success for a social entrepreneur is the extent to which the venture or activity succeeds in creating social value and/or works efficiently on solving or diminishing a clear social problem as its core objective. The focus is not on profit, but on finding a sustainable solution to the social problem or problems identified by the social entrepreneur. However, in the process of creating social benefits his company may become a profitable business that creates surplus profits beyond those needed to solve the social issues attended to, but profits should never be a goal in itself (Dees, 1998, revised 30 May 2001; Yunus, 2010).

Dees gives a definition of social entrepreneurship as follows:

”Social entrepreneurs play the role of change agents in the social sector, by:

  • Adopting a mission to create and sustain social value (not just private value),
  • Recognizing and relentlessly pursuing new opportunities to serve that mission,
  • Engaging in a process of continuous innovation, adaptation, and learning,
  • Acting boldly without being limited by resources currently in hand, and
  • Exhibiting heightened accountability to the constituencies served and for the outcomes created.”

The article “The Meaning of Social Entrepreneurship” by J. Dees is available at the website of the Center for the Advancement of Social Entrepreneurship (CASE)

Why is there a Growing Need for Social Entrepreneurs?

Social entrepreneurs have the capacity to create social value by finding creative solutions and new and innovative ways to tackle social problems. They find solutions others would not find and they use the methods of business entrepreneurship to create value in ways that are impossible for social actors and organizations that operate within a non-entrepreneurial paradigm. We must understand the value that social entrepreneurs bring to our society and we must support and motivate those individuals who have the characteristics, drive and capabilities needed to become successful social entrepreneurs through legislation, a fitting institutional environment and projects that support these types of leaders. Only then will we be able to benefit from the social improvements that social entrepreneurship can give to our society.

According to Dees (Dees, 2009), social entrepreneurship is necessary to mitigate the financial repercussions on the most vulnerable people in society:

Fewer people will receive adequate health care…  Tensions and violence may increase as the poor compete for jobs and income opportunities… Progress will be lost, as families that have been successful in moving out of poverty fall back into it… As government, business, and household budgets tighten, costly environmental protection and clean-up efforts are in jeopardy… Because many social and environmental issues are time sensitive, failure to recognize the importance of social entrepreneurship and provide adequate support for such efforts during this downturn would be a serious mistake.

What is Social Business?

Social business is a term that was brought forward by Prof. Muhammad Yunus, the founder of the concept of social business, to create a clear distinction between socially oriented businesses that still operate within the profit-maximizing paradigm and fully social businesses, which operate outside of the profit maximizing paradigm.

What types of social business exist?

Muhamed Yunus describes two types of social business:

A type 1 Social Business
This is a non-loss, non-dividend company, which is owned by shareholders and focuses on solving a clearly defined social problem.

A number of characteristics apply:

  • Investors/owners receive no dividends
  • Investors/owners can only get back their initial investment, anything beyond that disqualifies a company from being a social business
  • Investments are subject to nominal repayment, following the rule that ‘A dollar, is a dollar, is a dollar’. This means that no adjustments are made for inflation or time-invested. For example, if an investor puts down $1000, he will never receive a repayment of more than $1000.- nominally.

A type 2 Social Business

A profit making company owned by poor people, either directly or via a trust, that is dedicated to a pre-defined social cause.

This type of profit maximizing firm is a social business because its profit benefit the poor, alleviating poverty and thus solving a social problem. This makes it a social business by definition.

In cooperation with a German partner, Grameen Creative Lab, Yunus created the 7 principles of social business, which define a type 1 social business. A business must meet all these 7 principles in order to be labeled a social business.

The 7 principles of Social Business

  1. The business objective is to overcome poverty or one or more social problems, not to maximize profits. These social problems can for example be related to education, health, technology or the environment, but may include any social problem that exists on any level of society.
  2. The company will attain financial and economic sustainability. This means that the business must be self-sustainable and not require continuous outside investments in a way that an NGO or traditional ‘social-help initiative’ does.
  3. Investors get back only their investment amount. No dividend is given beyond the return of the original investment
  4. When the investment amount is paid back, surplus profits stay with the company for expansion and improvement of the business
  5. The company will be environmentally conscious
  6. The company’s workforce gets market wage with better than standard working conditions
  7. Do it with joy! This last point is an important part of any social business initiative. The joy that comes out of helping others and creating a force for good in the world is an important driver of social business.
    (Yunus, 2010, Author’s explanations, red.)

The Distinction between Social Entrepreneurship and Social Business

The regular entrepreneur’s final objective is wealth creation. For the social entrepreneur, wealth creation is simply a means to an end. The social entrepreneur participates in profit-seeking business ventures if only to use the profits generated to create valuable social programs for the whole community. These initiatives have the creation of social benefits as their main driver, but operate within the profit maximization paradigm and are not bound to all of the specific principles that apply to social business.

A social business exists outside of the profit-maximizing world, which characterizes most businesses today. Yunus saw a rise in social entrepreneurial initiatives, some of which had a social focus while still aiming to maximize profits, and felt that a clearer definition was required to prevent confusion of social business with other socially entrepreneurial concepts.

Social entrepreneurial initiatives are not more or less right, they merely have a different aim than a purely social business. Yunus identified a risk of abuse of his concept by those who wanted to find ways to maximize personal gains, even though these represented a minority amongst the good initiatives undertaken, under the flag of social business. This would damage the concepts and principles for which he stands, which is why he set out to more narrowly define the concept of social business.

Social entrepreneurs and social-entrepreneurship are still a force for good in the world and create great benefits for society. It is therefore important not to mistake social entrepreneurship for something bad, but rather to understand that social business is a clearly and narrowly defined business concept that exists outside of the profit-maximizing paradigm, while social entrepreneurship exists on the outmost social and least profit-maximizing end of the profit-maximizing spectrum.

A suggested next step to developing the social business concept is the creation of a social business certification, which could give out a standardized seal of approval to businesses which aim to adopt a social business concept. This could create more clarity for investors and make the social business concept more solid and respected, increasing its potential as an alternative investment and business paradigm.

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The History of Social Business & Social Entrepreneurship

29 Oct 2013/0 Comments/in

The Birth of Grameen Bank and the Social Business Movement

The rise of the successful concept of social business began with Prof. Muhammad Yunus and a small amount of money, worth about $27 in the mid 1970s.

We write around the year 1976, Muhammad Yunus, a professor in economics, has been appointed head of the Economics department and professor at the University of Chittagong, Bangladesh. A terrible famine raged across the country at the time, causing Yunus to feel less and less at ease teaching sophisticated economic models, while his countrymen were dying outside the university gates. Feeling the urge to help Yunus resolved to leave the safe confinement of the Chittagong campus and visited the nearby village of Jobra with a mission to make himself useful by helping at least one person there each day.

While in the village, Yunus became aware of an appalling practice that was taking place there; loan-sharks loaned many to the poor villagers, who had no other sources of credit, at very high interest rates of 25% or even 100% at times, while adding restrictions that stated that any person who took such a loan was obligated to sell some, or all, of their produce at a fixed price to the loan-shark. The low income of the villagers, combined with the extreme interest rates, caused anyone taking such loans to fall into a perpetual circle of debt and poverty, binding them to these loan-sharks in a way that can best be described as modern slavery.

Yunus, upset by what he saw set out to document the number of people in the village who had taken such loans and took note of the size of their individual debt. When he had finished his inquiries he added up the loans and found out that the size of all the loans involving the villagers had a total sum that was equivalent to no more than $27.
Staying true to his resolution to help the villagers Yunus paid the money out of his own pocket, releasing the villagers from their financial burden.

Yunus’ actions created a wave of gratitude and happiness from the villagers, who felt that they were repaid with their freedom to make their own choices once again.  Yunus was amazed with the amount of happiness and joy that he was able to bring about with so little money, and started to think about ways to further his initiative. This resulted in the birth of microcredit, the extension of financial loans to the poorest people of Bangladesh without collateral, and the social business movement.  The initiative took shape by multiplying the micro-credit concept, applying it to more and more people and led to the creation of Grameen bank (village bank) in 1983, the world’s first bank devoted to servicing the poorest people in society. (Yunus, 2010)

Grameen bank operated using a groundbreaking business model, which provided those people in the lowest regions or even those at the bottom of the economic pyramid with micro-credits to help them set-up independent self-sustaining businesses that allowed them to provide a source of income for themselves and their families. These loans were provided under fair conditions, fitting the economic situation of these people, without a requirement for collateral to manage the risk on these loans. (Social Business Tour 2010; )

Grameen Bank and Social Business Today

Now, more than thirty years later, Grameen bank provides credit to more than 8 million customers through more than 2500 branches all throughout Bangladesh and provides credits worth around $100 million every month, with a total volume of $9.9billion in loans over it’s history ().

The bank has led the way in a paradigm shift that led to rise of the social business movement and many social business initiatives all over the world. Grameen bank has set the stage for social business today as a socially conscious, sustainable business, maximizing benefits to its beneficiaries and society, rather than profit. Surplus profits are invested back into the business and used to maximize these benefits and finance new sustainable initiatives.

The Growth of Social Business across Industries and Sectors

The enormous success of the social business concept created a platform for Yunus, usually through partnerships or joint ventures with existing traditional profit-maximizing businesses, to develop a wide variety of social businesses, aiming to solve social issues ranging from nutritional deficiencies in poor children, to lack of telecommunications amongst village inhabitants and a lack of affordable footwear for the poor. Some good examples can be found here.

His ideas have been a source of inspiration fueling social business initiatives far outside of the borders of Bangladesh, and have created attention for social business world wide. Following the wave of successes and attention for his work, Muhammad Yunus has received many awards from all over the world, including the Nobel peace price and the American ‘Presidential Medal of Freedom’ in 2009 ().

You can find more information about the social business initiatives and work of the Grameen group and of Prof. Yunus at: www.muhammadyunus.org

Bibliography

Center for the Advancement of Social Entrepreneurship (CASE) (2010) ‘What is Social Entrepreneurship?’ [Online]. Available: http://www.caseatduke.org/about/whatissocialentrepreneurship/ [accessed: 18 December 2010, 2010].

‘Grameen Bank | Bank for the poor – 2010-11 Issue 371 USD ‘ [Online]. Available: http://www.grameen-info.org/index.php?option=com_content&task=view&id=453&Itemid=527 [accessed: 12/28/2010, 2010].

‘Grameen Bank | Bank for the poor – Credit Delivery System ‘ [Online]. Available: http://www.grameen-info.org/index.php?option=com_content&task=view&id=24&Itemid=169 [accessed: 12/28/2010, 2010].

Social Business Tour 2010 ‘Social Business Tour 2010 | History’ [Online]. Available: http://www.socialbusinesstour.com/social-business/history/ [accessed: 12/28/2010, 2010].

‘Yunus Centre | Awards of Professor Yunus’ [Online]. Available: http://www.muhammadyunus.org/Awards-of-Professor-Yunus/ [accessed: 12/28/2010, 2010].

Dees, J.G. (2009) ‘Social Ventures as Learning Laboratories.’. Innovations, pp. 11-15. Available: http://www.caseatduke.org/documents/Articles-Research/INNOVATIONS-Davos-2009_Dees.pdf, (accessed: 18 December 2010).

Dees, J.G. (1998, revised 30 May 2001) ‘The meaning of social entrepreneurship’. . Available: http://www.caseatduke.org/documents/dees_sedef.pdf, (accessed: 18 December 2010).

Drucker, P. (1985) Innovation and Entrepreneurship: Practice and Principles. New York: Harper and Row.

Gartner, W.B. (1988) ‘Who is an entrepreneur? Is the wrong question.’. American Journal of Small Business, 12(4), pp. 11-32.

Kirzner, I.M. (1979) Perception, opportunity, and profit: Studies in the theory of entrepreneurship. Chicago, IL: University of Chicago Press.

Low, M.B. & MacMillan, I.C. (1988) ‘Entrepreneurship: Past research and future challenges’. Journal of Management, 14(2), pp. 139-161.

Meyer, G.D., Neck, H.M. & Meeks, M.D. (2002) ‘The entrepreneurship-strategic management interface’. In: Hitt, M., Ireland, R.D., Camp, M.S. and Sexton, D.L. eds. Strategic Entrepreneurship. Creating a New Minds. Oxford: Blackwell, pp. 19-44.

Reynolds, P.D., Camp, S.M., Bygrave, W.D., Autio, E., et al. (2001) ‘Global Entrepreneurship Monitor (GEM) 2001 Executive Report’. Kansas, MO: Kauffman Center for Entrepreneurial Leadership, Ewing Marion Kauffman Foundation.

Rumelt, R.P. (1987) ‘Theory, strategy and entrepreneurship’. In: Teece, D.J. ed. The competitive challenge. Cambridge, MA: Ballinger, pp. 137-158.

Schumpeter, J.A. (1934) The Theory of Economic Development: An inquiry into profits, capital, credit, interest and the business cycle. Cambridge: Harvard University Press.

Sharma, P. & Chrisman, J.J. (1999) ‘Toward a reconciliation of the definitional issues in the field of corporate entrepreneurship’. Entrepreneurship Theory and Practice, 23(3), pp. 11-28.

Stevenson, H.H., Roberts, M. & Grousback, H. (1985) New business ventures & the entrepreneur. Homewood, IL: Irwin.

Timmons, J.A. (1997) New venture creation: Entrepreneurship for the 21st century. 5th ed. Boston: Irwin McGraw-Hill.

Yunus, M. (2010) Building Social Business: “The New Kind of Capitalism that Serves Humanity’s Most Pressing Need”. New York: Public Affairs.

 

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Leveraging Social Media for Social Enterprise or Social Business

28 Oct 2013/0 Comments/in

The concept of Social Media is immensely popular and its importance is becoming more and more important to the success of social business. If you are not using Social Media to your best advantage you are selling yourself and your social business short. Since it’s still difficult to find your way in the jungle that is Social Media, SENStation will provide some key points for you to consider when developing your social business project. We do so because SENStation’s aim is to help you as our members to gather the tools you need to make any project into a lasting success. We will discuss an integrated collection of our own experience, current literature and some key points that were put forward by Kaplan & Haenlein (Kaplan and Haenlein, 2010) all about using social media and about being social when doing so. This way we will give you everything you need for getting the most out of Social Media for your social business.

Tips about using media

Choose carefully

There is a wide array of Social Media applications available to the social entrepreneur today. Being successful on any one of these requires constant interaction and contribution, which makes it crucial to not spread yourself too thin.
Remember to follow these three steps when you decide to maximize your social business success using Social Media. First determine how much time you really have to spend on social media. Not based on what you think you ‘ought to do’ judging from the potential upside, but the amount of time that you can invest while still taking care of the other many responsibilities you can find on your calendar each day. Remember that spreading your attention out too much means that you will be successful in none of your activities. Second, determine your goals for using social media. If you know what you want out of your activities you will make it that much easier for yourself reach your goals. Third, select the combination of channels that best fits your needs and stick to them. You will need some time of active interaction to make your efforts worthwhile, so once you start building your network or group of followers make sure you hold true to your choices for at least a good six months. Your persistence will pay off.

Ensure activity alignment

When you choose to communicate your message across a combination of platforms and applications, make sure your activities are aligned across the different channels. When you spread a consistent message you will exponentially grow the impact of your activities. Combine for instance the social networking power of SENStation, with Youtube viral clips that function as teasers to draw attention to your SENStation actitivies and allow your followers to Twitter your activities to their existent networks on Twitter and the integrated Facebook homepages of their friends to maximize the spread of your message. Your project will take of faster and grow larger using this multi-channel approach, than any single channel would have allowed you to.

Key points about being social

Be active

Be active and be a leader when it comes to interacting with your new online following. Social Media success is all about consistent, constant and active interaction. Remember that it’s not about defending yourself to the negative critics when the situation arises, but much more about building your social capital when things are going well. By building a personal relationship with your followers you allow yourself to fill that social stockpile for when future situations might call for it. Even when you only have positive interactions and never meet a downturn, your continuous activities will benefit you, even more so than in any other situation. Either way active interaction will bring you loyal followers, who believe in your philosophy and feel a real and lasting support for your ideas. These are the kind of followers that will stick by you no matter what and invest their energy, time and effort when you call for it. They are the people that will help you get what you want and achieve the goals that you have set for your social business.

Be interesting

When interacting with your followers and supporters give them a reason to keep coming back and to feel that you add something to their lives. Be interesting, be different, be new. An important way to do this is to start by focusing on what it is that your followers are interested in and what things they need and focus your message on that. All too often social and normal businesses think about their own message first and forget that there is nothing more interesting to people than genuine interest in their personal wants and needs. If you allow your followers to give you input on how they feel connected to your message, or on suggestions for improving your project and social business, you collect very valuable feedback, input that would otherwise have called for you to hire a professional market research firm and on top of that your followers will feel more engaged and connected to your activities than ever before. Listen to your people and use the gold that they leave on your online doorstep to bring your business to the next level.

Be unprofessional

Don´t choose too formal a tone when interacting on Social Media platforms. Social Media is about interaction and interaction is about building relationships. When you interact online think about your followers and your community as your friends and they will do the same. Try to be clear and maintain a focus on your strategies for using these applications, but understand that if your community likes you and trusts you, they will be much more likely to buy into your philosophy and way of thinking.
Too like you it helps if you maintain a style that can be described as ‘social business casual’. You are giving a professional appeal, but you do so in a down-to-earth and personal manner. This way people will feel that you are the kind of social business they can see themselves hanging out with in their online hours and your message will be received with a much more trusted feeling, which will help you build the loyalty you seek from your community.

Be honest

Just like in any other part of life relationship require trust and trust requires honesty. Trust comes afoot, but goes by horse as a Dutch proverb goes, and honesty is the only way to have trust ease it’s way into your relationships with your followers. Be positive about your business, but don’t exaggerate. Be clear about your benefits, but acknowledge some points of improvement that your project still has. People will appreciate your honesty and trust will be your mutual reward. Nothing breeds loyalty like trust does, so be honest, be yourself and success will come your way faster than you thought possible.

Using these tips you will be able to bring your social business or social entrepreneurial project to the next level. From all of us at SENStation: Bring SENS to Life and be successful doing it!

See you on SENStation,

Jort Duijnker

On behalf of your SENStation Core Team

Bibliography

Carnegie, D. (1937) How to win friends and influence people. New York: Simon and Schuster.

Covey, S.R. (2004) The Seven habits of highly effective people. 15th anniversary ed. New York: Free Press.

Kaplan, A.M. & Haenlein, M. (2010) ‘Users of the world, unite! The challenges and opportunities of social media’. Business horizons, 53(1), pp. 59-68.

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Finding Funding for your Social Enterprise or Social Business

27 Oct 2013/0 Comments/in

Funding is a crucial part of setting up your social business. There is a wide variety of alternatives available when it comes to funding your project, from government support, to angel investment and of course personal financing using your own savings or surplus equity on your home.

You have to streamline your financing with your overall business goals, the type of social business you are creating and your personal preferences regarding the level of debt, risk and financial responsibility of your business.

The team of Startupnation (www.startupnation.com) have written much high quality information about starting up your venture. This article will discuss and integrate their article on funding your start-up with the specific needs of starting up a social business and additional important information to take into account when finding funding for your project.

We will walk you through the following options you have to fund your start-up:

  1. Bootstrapping
  2. Government and Private Institutional Grants
  3. Personal Network
  4. Debt Financing

Bootstrapping

Bootstrapping or bootstrap finance refers to the tendency of resource-constrained entrepreneurs ‘To finance a company’s startup and growth with the assistance of or input from others’, using creative techniques to launch and operate a business with limited (financial) resources {{150 Bhidé, A. 1992; 151 Arora, P. 2002}}. Bootstrapping is at it’s core a creative process {{150 Bhidé, A. 1992}}, which can be seen as an emergent, problem-solving process, that fits the need for being able to adapt to an unpredictable reality in which entrepreneurs build their businesses {{148 Lahm Jr, R.J. 2005}}.  In this respect it has a great deal of overlap with effectuation, in the sense that both approaches begin with a constrained set of resources, and work from this stance-point to maximize their impact {{148 Lahm Jr, R.J. 2005; 155 Vanacker, T. 2009; 150 Bhidé, A. 1992}}.

Benefits

  1. Allows you to minimize the risk in terms of resource investments
  2. Flexible, easy to exit
  3. No track-record or proven sales required (no credit check)
  4. If you’re project turns out a hockey-stick results (a full-blown success) you will receive the far majority of the results as you do not share your equity, nor take any business loans

Downsides

  1. Your business will be strapped for cash
  2. Growth during the bootstrapping phase will be hindered by the resource constraints. You may not be able to reach the level of professionalism that you envisioned for yourself.
  3. Does not build a network of finance contacts or a track record of being a good financee. Later financing may still be difficult.
  4. Down side risks are for the most part carried on your personal responsibility and reputation. If things do not turn out as planned this can potentially create a significant financial burden on your future financial situation.
  5. Depending on the source of your financing you may face high opportunity costs (e.g. for constraining your savings) or high interest rates (e.g. when financing your business with creditcard debt, or money from consumer credit loans)

 

Grants

Grants are financial incentives aimed at supporting the entrepreneurial undertakings of social entrepreneurs. Most programs are specifically designed for a certain group of projects or entrepreneurs, determined for instance by geographical scope (e.g. only projects that focus on third-world countries), general aim (e.g. poverty reduction, education, water management), or founding team composition (e.g. minority entrepreneurs or people from a certain school or city). Social business enjoys a special status when it comes to receiving funding and grants, as its main focus lies outside of the profit-maximizing paradigm and a drive for making a change is a valid motivation for receiving funding. Grants can come from several sources, the two most important ones being private funds and the government. In the latter case the government itself is the best source of information on your different options and applicability to current programs.

Benefits

  1. Non-equity financing, normally a gift or at minimum a loan at sub-market interest rates. You generally can’t beat the conditions of such financing.
  2. Being part of certain prestigious and well-established programs provide the added benefits of free publicity and validation of your project’s quality and seriousness

Downsides

  1. Funds or programs sometimes provide a small mountain of paperwork and bureaucratic regulations that your business must comply with. Fulfilling these requirements can at times be a lengthy and energy-consuming task.
  2. Bureaucracy can impede your time to market by providing a serious lead time before receiving your money. As unfortunate as it is true, large (government) organizations are rarely characterized by their rapid action. It is therefore important to understand the length of the pipeline when applying for grants, and allowing yourself to count on various sources of income to maintain your liquidity by guaranteeing sufficient cashflow and operational flexibility during start-up
  3. Requirements may limit your number of strategic options in the future.
  4. As ‘Free money’ is always sought after you face a lot of competition, as the applications for grants tend to greatly outnumber the amount of capital that is up for grabs.

Personal Network

One way to get your funding is using your personal network by asking friends, family and personal contacts you have made over the years, to invest their own money into your project. This can be in the form of a loan with specified duration and interest rates, or in return for equity in your social business. As social business is generally bound to the zero-dividend approach to investor repayment, this may require some additional thinking on how to repay your investors in other meaningful ways. Be aware of the social capital that you invest alongside this hard cash, and be prepared for the consequences of dealing with potential negative scenarios. If you value your relationships it is key for you to be open and transparent about the benefits and risks of your social business project, in order for your contacts to know what they are getting into and prevent them from being negatively surprised afterwards and taking it out on you personally. An important tool in this process is open communication throughout the process. Set-up a newsletter or personal blog for your investors and keep them posted of your progress.

Benefits

  1. As you have social capital and trust with your personal network this type of financing can be governed with fewer official contractual agreements. You should however still draw up a contract to officially enlist your contacts´ financing and protect their investments;
  2. Your network knows you, so your personal reputation will be your track-record for the investment. This means that you will not be required to formally proof yourself and your applicability as you would with some other investors;

Downsides

  1. Using your personal contacts’ money requires you to think three times on how you spend it. You have a responsibility to them beyond your professional investor-investee relationship and you must act in accordance with the trust they put in you;
  2. Trust comes afoot, but goes on horse-back. It has most likely taken you years of trustworthy interaction to build such strong relationships of trust with your network, if your business does not turn the (social) profit and sustainability you set-out for this trust will very likely suffer a dent, if not disappear altogether;
  3. Your loved ones and social ties are generally a one-time source of funding, so don´t expect to go back to them for (m)any capital investment rounds other than the initial one you include them in.

Debt Financing

Debt financing requires you and your project to meet the requirements for getting a traditional bank loan. Applying for such financing is a skill in its own right, and you will need some help and/or experience to maximize your potential for success on getting such financing. It can be tricky to explain your plans to a bank, as experience shows that there is an inherent difference in what is needed. The bank’s quest for minimizing the risk of insolvency, leads your counterparts at the bank to ask for many and consistently appearing forecasts and explanations of your goals, growth potential, business model, additional revenue streams, etc. As an entrepreneur you are however more focused on getting things done according to your vision and overall aim, developing and adapting your plans and business as the volatile reality of the trial context  demands it. Successful entrepreneurs acknowledge the importance of an adaptive approach to managing your start-up. Market-research and forecasts are important and a good way to get a feel for some of the factors that play a role, but the only sure thing about forecasts is that they are always wrong, so your personal ability to create the conditions and results that drive your success should be a key-factor when discussing your plans. If you manage to get your business financed, the leverage a bank loan provides can be the leverage you need to turn good into great and reach the success you envision.

Benefits

  1. You do not loose any equity or decision-making power
  2. If you succeed your relation with your banker can develop to be a fruitful one, allowing you to have easier access to additional future funding if you would need it.

Downsides

  1. Following the risk-avoidance approach, banks typically fund businesses with an existing track record of completed sales, credit history, and other solid results to show that your business has what it takes to be profitable and sustainable;
  2. Your loan encompasses interest, and you will need to keep up with your payments or you will suffer some unpleasant consequences.
  3. Bank loans can demand collateral, such as your house, further increasing the personal risks you incur.

Conclusion

Besides the sources of funding discussed here there are a number of other ways to get your project from the drawing board to reality, such as Angel investors (high net-worth individuals investing personal money and experience) and Venture Capitalists (firms dedicated to investing in (usually established and high growth-potential) start-ups, offering financing and expertise in exchange for equity, control and an exit strategy in the foreseeable future). To learn some more about these forms and also to get more back-ground information on the funding possibilities discussed here, have a look at the website of startupnation.com[2] or the specific article on funding your start-up[3].

With this information we hope to have given you some better understanding and insights about the ways that are available to you when funding your project. Whatever route you choose, we at SENStation will be here to support you with the network, knowledge and inspiration you need to get to the next level. Let us know how your project develops by posting your progress on the site.

All the best and looking forward to seeing you soon at SENStation.org

On Behalf of the SENStation founding team,

Jort Duijnker

SENStation: ´Connect, Create, Inspire’

Join SENStation in ‘Bringing SENS to Life’

 

[1] If you are interested in some additional background information have a look at their funding article or one of the many other publications you can find on the Startupnation website.

[2] Go to Startupnation.com is a great website for providing practical advise on how to start-up your business. Have a look at their ’10 steps to Open for Business’ and get inspired on additional ways to turn your dream into reality.

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