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Social enterprises: Don’t focus on the unicorns!

We all love social enterprises, don’t we? Bridge International Academies, Mobisol, Aravind – these innovative businesses are providing quality education, energy and health care services to thousands of people living in poverty. Yet, the focus on finding and supporting these “Unicorns” may preclude a broader understanding and more systematic support for the social enterprises on the ground.

Social enterprises blur the established sector boundaries of for-profit and non-profit. They are defined as privately owned organizations that use business methods to advance their social objectives. They maximize social, environmental and economic outcomes for target beneficiaries rather than maximizing profits. A mapping of social enterprises in seven countries in Africa (Kenya, Malawi, Rwanda, South Africa, Tanzania, Uganda, and Zambia ) on behalf of the World Bank revealed these 3 surprising facts:

1) Social enterprises are not always financially self-sustainable

To be more specific, social enterprises often don’t just rely on revenues from their clients for income. Instead, they leverage public sector subsidies or grants as well as donations from institutional or private donors to offer prices that their low-income target group can pay. Their hybrid nature thus allows them to combine the efficiency and market-logic of businesses with a deep reach into poorer segments of society. As a result, social enterprises are often registered as non-profits, or use a non-profit arm to take care of the non-commercial parts of the model.

This mixed model can make social enterprises especially interesting as partners of the public sector, because they can go further that purely publicly funded organizations without compromising on their social mission. However, the mantra that social enterprises should aim to become financially self-sustainable keeps us from systematically developing such smart hybrid cross-sector models.

2) Social enterprises are not always innovative startups
Many of the organizations we encountered in our screening based on the definition above did not match with our typical idea of the innovative startup. Indeed, traditional actors outnumber the new kids on the block, especially in countries and sectors where the social enterprise concept is less established, such as Malawi or the sanitation sector. The following typology shows the diversity of organizational backgrounds we encountered:

  • “Born social enterprises” have been set up with the social enterprise concept as a reference point. They are usually rather young and the only ones that regularly self-identify as social enterprise. Often led by expats or returning diaspora, they receive most attention from international donors, investors and media. Ecotact, for example, provides sanitation services in Kenya since 2006, and has received support from government and impact investors.
  • Faith-based organizations serve the community based on religious motivations and combine user fees with charitable donations to enable affordable services. They are important and well-established players especially in the health and education sectors, and often work closely with the public sector. Founded in 1966, the Christian Health Association of Malawi (CHAM) operates 180 health facilities and 12 training colleges located throughout the country that provide about 37% of healthcare and train up to 80% of health workers in Malawi.
  • Traditional NGOs build social enterprises out of their non-profit core to innovate and increase sustainability. PACE is a Ugandan health NGO that also distributes condoms at subsidized rates as part of their social marketing efforts for family planning and HIV/AIDS prevention.
  • Local companies serve the BoP everywhere with basic services and per default adapt to the needs of the BoP. Often small and sometimes informal, they rarely self-identify as social enterprises, even though many have a strong social focus and go to great lengths to enable poor customers to access services. Makata Builders Sanitation Services provides sanitation services in the peri-urban surroundings of Blantyre, Malawi.

3) Social enterprises often clash with other players

While social enterprises are frequently hailed for developing “disruptive innovation”, the disruptions they cause rarely enter the picture. To the contrary, we seem to assume that everybody likes these darlings. But, indeed, social enterprises often clash with established actors and structures.

  • Informal service providers complain about unfair competition, especially, where social enterprises provide low prices based on private or public subsidies.
  • NGOs, government and donor programs provide services for free, but resources often do not suffice to reach the whole population or to ensure quality of service over time. Social enterprises perceive this competition as unfair, because it ruins the willingness to pay among the target population.
  • Regulators are perceived as a threat. Social enterprises often operate in a legal grey zone, where no explicit regulation exists or regulation is not enforced. The more successful they are, the more they must fear that regulation will take away their license to operate, especially where public service providers perceive them as competition.
  • Unions and other representatives of professional groups see social enterprises undermine their achievements. Where social enterprises work with untrained staff to achieve low costs, trained teachers, nurses, or doctors see their profession and the associated status and salaries under threat.

These clashes may be healthy and necessary to achieve transformative change, but they can easily overburden especially smaller social enterprises.

Acknowledging complexity for more effective interventions
Searching for unicorns may not be the most effective approach to leverage the power of social enterprises to reach broadly into low-income populations. Only if we recognize the diversity and complexity of the social enterprise landscape can we devise interventions that lead to impact at scale.

  1. Close collaboration or at least coordination among social enterprises and public providers is often necessary to scale up. We can learn from the example of faith-based organizations and the legal and partnership structures that have evolved to make them an essential part of public sector service provision.
  2. Many programs that provide financial and technical assistance focus on entrepreneurs, startups and innovative ideas. Existing organizations, be it faith-based, NGOs or local companies, could benefit from the same services, possibly with a greater chance of success as the already have a local footprint and tested model. By opening up to these less glamorous players, the long-term outcomes of these programs could be improved.
  3. Especially when designing grant support or subsidies, social enterprises should not be seen in isolation but as part of broader actor ecosystem. Donors and governments can avoid market distortions by improving market structures and devising open subsidy and grant schemes rather than supporting individual enterprises.

This blogpost was authored by Endeva’s director Christina Tewes-Gradl and is also featured in this month’s theme on the Practitioner Hub: The changing social enterprise landscape.