#unsectored

Note: This blog post was originally featured on UnSectored on May 14, 2013 as part of their series “Put Your Money Where Your Mouth Is"– an exploration of  how we can effectively use our power as consumers to create a more equitable, sustainable society. 

Localism has become all the rage in recent years. Ubiquitous farmer’s markets, locally brewed beers, locally manufactured apparel, and even locally made kombucha all reflect consumer’s increasing preference for all things local. Yet despite the strong demand for (and supply of) these local goods and services, how has our newfound local consciousness impacted our investment portfolios? Not all that much, as it turns out. Michael Shuman, author of Local Dollars, Local Sense and well-known authority on local investing, notes that of the $30 trillion Americans keep in stocks, bonds, mutual funds, pension funds and insurance funds, less than one percent goes toward small local businesses—despite the fact that more than half the jobs and output in the private economy come from such businesses. What are the ramifications of this capital allocation? Shuman posits that if even 1% of this money (roughly $300 billion) were redirected to Main Street, there would not only be greater economic activity and growth of local communities, but also investors would likely see higher financial returns from more healthily diversified portfolios. Given the obvious benefits for local economies and local investors, not to mention the rise of the locally conscious consumer, what’s stopping a surge of local investment? Well, for one, there are few opportunities available for average investors to easily invest in Main Street: Of the more than 7,500 mutual funds in the U.S., not one offers a portfolio focused on small or local businesses. Moreover, securities regulations, many enacted during the depths of the Great Depression, have made investing in small businesses prohibitively costly and complex for both investors and firms trying to raise capital. The passage of the JOBS Act in April 2012 was supposed to alleviate this process by reforming laws enabling small businesses to solicit investments from the general public, but the SEC has neither provided the new regulations required for such investment nor is it clear when they are likely to do so. So where does this leave us as locally conscious citizens, consumers, and, most important, investors? Despite the seemingly bleak landscape for the local investment movement, there actually has been a great deal of progress in recent years to change the nature of investment in America. Some noteworthy parties that have pushed forward this movement include:

Cutting Edge Capital: Consulting firm dedicated to promoting local investment solutions such as direct public offerings and community investment funds.

Fundrise: Real-estate crowdfunding platform; enables unaccredited investors to invest as little as $100 in real estate projects (and become equity stakeholders).

LendSquare: Microloan crowdfunding platform; allows individuals to fund projects of businesses and be repaid loan with interest over time.

Community Sourced Capital: Microloan crowdfunding platform; allows individuals to lend up to $250 to businesses at zero-interest and be repaid principal over time.

Clovest: Business project crowdfunding platform; allows individuals to fund up to $5,000 of various business projects and be repaid contributions in 1 – 3 years.

As the founder and CEO of Clovest, I’ve had the privilege of working alongside the other platforms as we foster and grow the local investment movement. Though we all offer different means by which ordinary people can invest in their local communities, there is one overarching outcome that we all seek: bringing businesses and communities closer together through investing. At Clovest, we view our project funding services as merely a means to an end of stronger, more connected, and more engaged local communities. And this isn’t all just for feeling good—as made clear by Shuman, when communities are invested in their local businesses, there are clear gains in employment, wealth, and economic growth. So, how can you, the reader, get involved? Easily! For one, you can learn more about the local investment movement through these blogs and websites:

Cutting Edge Capital blog: features writing on various mechanisms to invest locally and raise capital while being compliant with SEC regulations.

Katovich and Kassan Law blog: topics include SEC compliance for private and public offerings as well as various experimental ways to raise capital.

Business Alliance for Local Living Economies: national advocate of building strong local economies; offers webinars on various topics including community capital.

Localist Champions: subchapters of the BALLE network in your area! Attend events and become a member to support the local business initiatives in your community.

There is a current distinction between social enterprise and social innovation. It is a slight, but important one. Social enterprises seek to generate income to support social missions, whereas social innovation is more about applying improvements to the way social problems and needs are addressed. To me, this separation is untenable. We need more of a focus on generating income to sustain the socially innovative solutions created each day around the world. This is the only way to scale up these solutions enough to tackle our most pressing problems.

But how can social enterprises thrive in the long run? I think they can do so by focusing in on a few concrete areas:

Promotion

First, it is important that social enterprises are promoted in the same way mainstream ventures and entrepreneurship promote traditional enterprises. For example, leveraging social media to promote the mission component of the enterprise should prove effective.  Also, highlighting noteworthy outcomes goes a long way in positioning the enterprise’s effectiveness. The absence of self-promotion by social enterprises is partly to blame for their lack of familiarity. A heightened awareness of social enterprises will enable more financial resources to be directed toward businesses that carries the social enterprise label. 

Data

An important tool that will aid the future success of social enterprises is its ability to take advantage of the large amount of data, from a wide variety of sources that can be mined to make the delivery of goods and services more effective.  Mining the various data sources will enable the enterprise to have a laser-like focus on the best way to target resources.  Specifically, if you know that a large percentage of your customers are college students, then you would target your marketing plan to campuses where you do not already have a presence.  The amount of data collected, and more importantly how it is dissected and analyzed is critical to the success of an enterprise, social or otherwise. 

Education

Another sign of near certain long-term future of success is the increasing number of major academic institutions that have curriculums, certificate programs, undergraduate and graduate degrees dedicated to social enterprise.  Oxford and Stanford have the Social Innovation School.  American University’s School of International Service graduated its first Masters of Social Enterprise class in May 2013 (although its first student, Kerri Murphy—also the COO of the William James Foundation—graduated in December 2012).  I am told that American University’s decided to house its social enterprise degree in the international versus the business school because they wanted to emphasize an international development versus a business focus. This debate of how business-like must social enterprises must be (and therefore, how business-like the education must be) rages on.

The Facilitators

In the long run, it will be useful for social enterprise to become more of the norm and no longer be viewed as an outlier strategy. We need facilitators and industry-builders to get there. Organizations like the Social Venture Network (SVN), the Social Enterprise Alliance (SEA) and the Omidyar Network will be critical to shaping the future and ensuring long-term viability of social enterprises. The William James Foundation is doing an admirable job by hosting global competition for impact entrepreneurs and their social enterprises, which exposes a lot of creative talent to audiences they might not otherwise have access to. Finally, the academic and practitioner worlds also need to work more closely together to improve the awareness and viability of the social enterprise sector.   

About the Author

Dr. Wayne R. Curtis worked with two money center bank investment houses and a GSE structuring billions of dollars of transactions with bonds, debt and equity. Dr. Curtis is particularly proud of the creative debt product created for the Public Housing Sector, which resulted in a commitment of over a billion dollars of leveraged financing for capital grant financing. Curtis Concepts LLC was established in 2007.

Curtis Concepts, LLC is a full service advisory firm. Curtis Concepts provides financial advice for real estate deals, including structured finance, management consulting, and professional customer relations. Curtis Concepts has a leadership team with over 45 years of experience in financial services, economic development, and relationship partnering in both the public and private sectors.

Dr. Curtis has been an advisor to the Mayors of New York and Philadelphia on matters of economic development as one of the most fulfilling opportunities of his career. In both instances, Dr. Curtis worked with new initiatives that sought to retain and recruit businesses, and expand the effectiveness of the central economic development agency.

Dr. Curtis earned his PhD of Philosophy from Antioch University, in Leadership and Change. His research focused on social entrepreneurship and wealth building strategies for working class Americans, seeking alternative was to build and accumulate wealth. He earned a Master of Science in Urban Planning, with an emphasis on economic development, from Columbia University, and a BA, with honors, from Harvard University. He currently sits on the board of a privately held financial institution. In addition, Dr. Curtis is an Adjunct Professor with the University of the District of Columbia, and Northern Virginia Community College.

Dr. Curtis is an avid gardener and cook, and lives with his wife Dina in Washington, D.C. and has three sons, Dylan, Robert, and Talon.

What are the most important parts of running a successful social enterprise?  Should you worry about making money first, then creating cross-subsidies later, or try to build in impact and profit at the same time from the start?

I suggest that you approach social enterprise as any other business.  Even if your customers are in an under-served area or if your product creates positive social or environmental impact, you still need to make money first.  If you can’t pay your employees (and yourself), you can’t make your social enterprise sustainable in the long term for yourself, your company, and your customers.  

So, how do you build a social enterprise using the best practices of the for-profit startup world?  

Here are some suggestions, based on my personal experience and accumulated discussions with people I know in social enterprise and other startups.  

  1. Lean Startup and Design Thinking methodologies will save you time and money

At the 2012 Net Impact conference, one seminar compared these two approaches. In the end, the lean startup teams iterated faster towards a specific product whereas design thinking teams created more innovative products.  Both approaches are very useful and you should know how to apply both methodologies.  If you haven’t already, go read The Lean Startup and take the free online Stanford d.school course on design thinking.  Do it. This week. You’ll thank me later.

Lean startup summary: In the 1990s, product development was the big thing.  Companies would pitch investors, get a few million dollars, go build something and hope it would work out in  the marketplace.  Then Steve Blank, Eric Ries, and others realized (circa 2010s) that customer development first makes a lot more sense because you can test your assumptions cheaply

(think $100-500K) before going big ($2-20M).  Build it, Test it, Fix it, Launch it.  Or, Build – Measure – Learn – repeat.  Just because you’re aiming at a double or triple bottom line doesn’t mean you’re exempt from testing the core assumptions of your business.   Lean Impact is a San Francisco based organization that is looking to help impact-driven organizations use lean startup methodologies, so check them out too.

Design thinking summary: Empathy is critical in designing good products, services, software, etc.  You have to understand your core users really, really well to make something useful and valuable.  It is also important to separate the ideation (brainstorming) phase from when you evaluate the idea to select what to make into a prototype.  The best way to have a good idea is to have lots of ideas, so go for quantity first and then figure out what you can build and how to test it.  Design thinking is different from lean startup in the empathy/ideation phase; later in the process, prototyping and learning from each iteration is similar.

2. Always be testing your business model

Does your pricing model optimize your profits?   How do you know what people are willing to pay?  How do you know whether they would pay more or not?  What drives your conversion from a free to premium service, if you have a freemium model?  If you don’t know, see #1.  Note that it takes great people to do great work, so don’t skimp on team quality if you want to get good results.  Be creative in how to pay people – if you can offer housing or free food but not cash or much equity, consider flexible arrangements.

3. Focus on generating revenue and becoming profitable before going for funding

The thing is, generating revenue and becoming profitable, even as a “traditional” for profit business, is really, really hard.  The two hardest things to do are build software (if you have a technology platform related business) and sell your product.  Good software developers and rockstar salespeople are expensive – precisely because they add so much value.  

While you’re still in pre-launch mode, you can show some traction by collecting signups so that

you can launch to a bunch of interested people rather than build first and hope you can market

fast enough when you launch.  See LaunchRock and ThunderClap for more.  

  4. If you have any hope of becoming a profitable business with a large market, use a forprofit rather than non-profit social enterprise model

According to one major impact investor in Silicon Valley, it’s easier to get angel investor funding for a for-profit social venture than grant funding for a non-profit.  Non-profits may think they can do fine on grants of $50K here and $100K there, but it is rare for them to be able to scale up when the funding is so small.  Angel investors are generally more comfortable with taking risks if you can show your lean startup/validated learning test plan for a sizable market and upside.  The impact investor I talked to said that his own well-known firm has more stringent requirements on making nonprofit grants than he and his angel investors would have for a for profit social enterprise.  

5. Never stop networking

You never know where your next employee, investor, donor, or partner may come from. So spend at least five percent of your time (at least 2 hours a week) meeting people who are outside

your usual work or friend circles.  If you’re already working 80+ hour weeks, this may sound like a lot, but it pays off in the long run.

If you’ve found these approaches useful – or even if you disagree, feel free to share your experience in a comment.

      About the Author

Katharine graduated Phi Beta Kappa from the University of Chicago with a degree in Psychology. Over the last few years, she’s been thinking about what makes organizations tick and how to connect people to career development opportunities, whether through compiling resources like this Google Doc or making introductions. In 2012, she was a Finalist for the Net Impact “Impact at Work” award for her “intrapreneurship” in a global employee volunteering group at work. In her free time, she enjoys yoga, reading, cooking and meditation. You can follow Katharine on Twitter @kbierce.

If you asked a social entrepreneur about sustainability, chances are they would say that it means a creative solution to a social problem that can be replicated and endures over time.  They may also say that sustainability involves generating enough income to at least break even.  Sustainability can also be thought of as a situation where people are empowered to take ownership for solving the social problems that affect them.  Finally, there’s the more common definition of sustainability, which is the conservation of natural resources.

What these ideas have in common is a perspective of sustainability as something that takes place beyond the social enterprise.  As social entrepreneurs tend to be strong visionaries who have groundbreaking ideas for making the world a better place, they tend to focus their attention on what is going on outside their doors.  While an external focus is needed to scale up their innovative solution and assess its impact, it’s just as important for social entrepreneurs to pay attention to what is going on inside of their venture.

Like traditional entrepreneurs, developing a robust business model that can support your venture in getting off the ground and grow over time is paramount.  Regardless of how innovative a solution, it is unlikely to succeed without a viable market that appreciates the value of a particular product or service enough to pay for it.  For example, a couple of African-based social enterprises I consulted with have had success marketing their services to the private sector by addressing companies’ needs for knowledge of cutting edge business practices and executive leadership development.  Beyond the ability to cover expenses (and possibly also generate a profit), there are other factors that contribute to the organizational sustainability of a social enterprise, such as having a social impact strategy in place to guide its operations.  In the case of one social entrepreneur I worked with, the process of developing a social impact strategy started out as a “check the box” for obtaining seed funding and evolved into a rewarding experience that enabled him to think through the organizational and social impact elements of his venture.

In addition to the value of a business model, you also need to focus on your team. Recently, I was brought on to manage the launch of a crowdfunding campaign for expanding a company’s operations.  Although the newly formed group I joined reflected a diversity of backgrounds and skills sets, the main commonalities among the team were a connection to the owner and a commitment to his vision of creating economic and social value.  It became evident early on that bringing a group of committed strangers into the same room was not enough.  What they need was to transition from a group to a team.  To facilitate the change from a state of independence to interdependence, I facilitated a team-building session where we agreed upon our mission, worked together to sort out roles, tasks, responsibilities and deadlines, and established conditions for working together.  By investing the time up front on forming a team instead of leaping straight into tasks, we are now better prepared to launch a successful campaign.      

Similar to this internal focus on the enterprises, the social enterprise sector can sustain itself by looking inward and developing an ecosystem.  A robust social enterprise ecosystem includes various types of support, such as professionals interested in working in the social enterprise sector, donors, impact investors, policymakers, vendors and consultants that cater to the needs of social enterprises, and consumers that make triple bottom line purchasing decisions.

As this ecosystem continues to take shape, how can these actors work together to sustain themselves and the social enterprise sector?

  About the Author

Kimberley Jutze is Chief Change Architect for Shifting Patterns Consulting, which is a socially responsible business that facilitates social change by helping social entrepreneurs access funding and strengthen their people and organizational capabilities.  Kimberley has over 15 years experience as a resource and organization development professional.  She has worked for nonprofits in the United States and overseas, in such sectors as international humanitarian aid and development, public policy, and peace and conflict resolution.  Drawing upon her strengths, which include a strong work ethic, commitment to producing quality results, and cross-cultural communications, Kimberley has consulted with organizations in Africa, Asia, Europe, and North America to help them achieve positive results.  She has a Master of Science in Organization Development and a Master of Arts in International Politics.

How Do We Sustain Social Enterprise?

The WJF team is proud to be partnering with UnSectored to explore this and other questions that relate to the field of social entrepreneurship. Each week we'll be inviting experienced members of the social entrepreneurship community to shed insight on how to cut through the hype and sustain social enterprise for the long run, both the industry as a whole and the myriad entrepreneurs trying to make a difference. The series will be posted weekly here as well as on UnSectored.

Join us for this exciting discussion series as we lead up to our 10th Annual Gathering!