In 2019, I started The Social Business with a simple Instagram account. The idea was to start posting interesting information about social entrepreneurship and impact investing to reach a broad audience and raise a level of interest for these topics as well as growing a network. With the start of 2020 (and the new decade), The Social Business is now ready for the next step: The launch of this blog! This first post will deal with the essence of my work and answer the question: What is a Social Business?
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What is a Social Business?
- Company that is using innovative business solutions to intentionally address a social and/or environmental problem and generate measurable impact
- Hybrid Model or Triple Bottom Line: Profit, People & Planet
- Profitable and scalable business models
- Oftentimes competing against conventional businesses
- Profits can be reinvested into the company to further grow the business and the impact or distributed
- Impact is tied to business activities and can be created across the value chain of the Social Business
- Inside the company: E.g. Formal job creation
- Outside of the company: E.g. Clients benefit from product or service, protection of environment
A social business is a company that is created to address and solve a social problem.Mohammad Yunus
After reading the bullet points above, you may not have a concrete idea of how a social business can look like.
Imagine the following: A developing country with high poverty rates, especially amongst its rural population. An entrepreneur located in this country and that is passionate about handmade products has the idea to start a company that produces and sells handmade jewellery made in this country. (S)he noticed that many rural villages have a tradition in making handmade products. The entrepreneur registers the company and starts hiring local unemployed women that show interest in making jewellery for the company. (S)he trains the women and they start showing great results in the production. The company is starting to sell significant amounts and turns profitable after some time. The profits are reinvested into the company and the entrepreneur decides to further grow the company by adding more product lines and sales markets. The company is continuously hiring and training new employees, mainly women, but also some men. Further, the entrepreneur is starting to wonder, how the new jobs have affected the company’s employees and (s)he starts to develop questions and metrics: (S)he is counting the jobs that were created, the average increase in income per employee and family, (s)he even sees improvements in the employees’ health and overall happiness. The employees, mainly women, report that much more children are now attending school.
You wonder why? Creating jobs is great in pretty much any case when looking at poor populations (ideally formal, stable and well-paid of course), however, creating jobs for women is even better, because as studies show, women’s income is reinvested into the family to 90% vs. only 35% for men. This can lead to better education for families’ children, access to healthcare and better nutrition amongst others.
Another great example of social businesses are so called circular business models. The opposite and still common model is the linear business model in which resources are used only once or few times (end-of-life concept). In a circular economy instead, the idea is to recycle and reuse resources many times. Many times companies recycle trash and produce something new from it. You’re probably thinking of a small company that picks up the trash and produces goods with it (jewellery, toys or even building houses with it), however there’s significant, large and not that uncommon circular business models such as companies that use pyrolysis to turn plastic back into its original components (basically fuel/ base oil) or re-refineries, oil plants that collect waste oil, re-refine it and produce new motor oils from it. In both cases, if done correctly, these processes can be done multiple, if not endless times. Key here is to not interrupt the circle by contaminating the plastic/ waste oil or burning/ dumping it. Either way, small scale or large scale circular business model, the point is that with limited natural resources, massive air contamination and environmental pollution, every resource should be used as much as possible, ideally so it never ends up as waste and at the same time, reducing carbon emissions.
All in all, what makes a great social business? As always, there’s not ONE answer to this question, however, from reviewing hundreds of business models and investment proposals and working with a good portion of those, I can tell you that it all starts with a social/ environmental problem the entrepreneur(s) are experiencing and trying to solve. The solution to the problem becomes the essence of the business: It is inseparable from it and directly linked to its growth and success. The more scalable the business model, the larger the social and/or environmental impact. Not all social businesses tackle both social and environmental problems, however, many do. Others focus on one problem, however, they are very conscious about other factors such as a social business that solves a mainly environmental problem, however, it is implementing strategies to create impact for its employees and their families (formal jobs, fair salaries, growth opportunities, etc.). Some of these activities can also be seen as ESG (environmental, social risk management).
The second important factor that makes a GREAT social business is profitability. Social business are real businesses, meaning they have to make money to pay the bills (i.e. reach profitability)! There’s (as always ;-)) some exceptions of small/young businesses that receive outside (grant) support that gives them time to reach profitability at a later stage (if ever), however, this is/ should be the exception and not the rule. Why? Because these social ‘businesses’ will never reach sustainability and therefore depend on outside willingness to finance the organisation. Because of that, the team can never fully focus on the business, but is constantly fundraising and this leads to a behaviour that is much more comparable to the way NGOs work (fundraise, set a budget, use it, fundraise again…). Also, looking at the impact of such organisations, it is typically much more scalable for social businesses that reach profitability, reinvest their profits, further grow the business and therefore, the impact.
One last (REAL) example to this point: One of my favourite social companies from Guatemala Ecofiltro started as an NGO with the goal to increase access to safe drinking water by producing and distributing pot water filters into the rural communities of Guatemala. Great idea, but in multiple years, the organisation only managed to scratch the surface of the problem. Years later, the current CEO and brother of the founder of the NGO, Philip Wilson, turned Ecofiltro into a social business with both a strong business and impact model: High-margin retail/urban business and rural distribution. The company’s target is to have reached more than 1,000,000 families in 2020!
Please let me know what you think – send me a note on social media or an email!
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