SA’s social enterprises falling through the cracks

Cape Town - The donor landscape has changed considerably over the past few years. Increasingly, the concept of "social entrepreneurship" is replacing traditional non-profit funding models, with the promise of greater self-sustainability and easier exits for donors, two key reasons why corporate and other donor agencies are increasingly turning their focus towards these hybrid organisations.  

On the face of it, social enterprises make perfect sense for a country like ours, with widespread poverty and ongoing service delivery challenges placing ever-increasing burdens on the already constrained non-profit sector.

A business that can do good work in society and also be self-sustaining seems like the perfect solution to our challenges.

Unfortunately, there are a number of issues that need to be resolved before the social enterprise can truly make a lasting impact in our society. Many NGOs, already under pressure to perform in an increasingly competitive funding environment, are concerned about this apparent need to change direction from simply doing good, to doing good AND making money, whilst those businesses that classify themselves as social enterprises find it almost impossible to access much-needed funding to ease their path towards sustainability, due to their for-profit status. Clearly something needs to change.

So what is a ‘Social Enterprise’?

The meaning of 'Social Enterprise' differs from country to country. In the UK social enterprises are defined as "businesses which exist to address social or environmental needs", while in the USA, the focus on social entrepreneurship appears to arise more from the root of entrepreneurial culture, and speaks to for-profit businesses that look to create or bring about something new and positive in the world.

Unlike the UK and US, in South Africa there is currently no formal government definition of a social enterprise – one is either a Not-for-Profit or a For-Profit, there is no properly legislated place for a blended organisation.

This means that we are left with the layman’s definition of social enterprise, of which there appear to be two – "an NGO that generates part of its own income through commercial activity" or "a business that exists to profit and do good in the community".

What is the current approach?

The main challenge faced by many social enterprises, relates to generating enough investment capital or donor funding to pave the way towards sustainability. Most social enterprises have discovered that donors (international, CSI and government) only recognise a registered NGO and will in most instances not support a for-profit registered organisation, no matter how socially beneficial it is.

On the other side of that coin, from an enterprise development or venture capital perspective, the road to sustainability for a social enterprise is invariably long and fraught with risks, making it an unattractive investment vehicle in many cases.

In practice this can be circumvented by the creation of both for-profit and not-for-profit arms of the same organisation, as was our approach in Streetwires, the social enterprise of which I was a co-founder back in 2000. However, this can be cumbersome and may raise tax challenges, and requires strict accounting systems to ensure responsible reporting.

In any event, it feels morally wrong to me that one can open a non-profit with no intention of becoming self-sustainable and have access to grants and donor funds, but if the same person were to open a business with the identical focus and a for-profit motive, chances are that they would be left out in the cold.

Fighting the good fight

This is precisely the situation that social innovators Lakheni find themselves in. This Cape-based social enterprise organises fragmented entities like stokvels, churches and creches into buying groups so that they can achieve economies of scale and have access to far more affordable goods and services.

Their motto ‘Buying Together is Power’ has struck a chord with the community of Khayelitsha where they are currently piloting their concept, and to date over 70 organisations have signed up to access the significant savings and other benefits Lakheni offers these marginalised and underserved entities.

One would think that corporate companies and donors alike would be falling over themselves to try and support an organisation with this much potential to make a real impact in terms of poverty alleviation. Their model works, they have garnered significant community support and buy-in and all that is needed now is the financial backing that will allow them to scale to sustainable levels. Unfortunately, that is where the challenge comes in.

"What we are finding is that while potential donors and investors alike love our concept and are impressed by the traction we have achieved with the limited resources we’ve had, our desire to make a sustainable profit is anathema to CSI donors, while our gradual profitability curve and modest IRR (Internal Rate of Return), which are typical of social enterprises, make corporate and commercial investors nervous.

To date our start-up phase has been partly funded by Bank of America Merrill Lynch, and from our winnings as Finalists in the 2015/2016 SAB Foundation Social Innovation Awards, but other than that the doors have mostly remained firmly closed," says co-founder Nokwethu Khojane with a wry smile.

"We are currently working with a consultancy to refine our registration status and create a vehicle that may allow us to attract enterprise development funding, but that is not a guarantee and if truth be told we need a cash injection soon to sustain the momentum.

Alternatively, we could open an NPO and look for CSI funding, but that feels a bit disingenuous to us – we want to make a profit, and we want to give marginalised communities access to goods and services at fair prices, so it puzzles as to why the two are still largely seen as mutually exclusive, at least when it comes to meaningful partnerships or investment," she adds.

“We believe that being a for-profit enterprise, provides us with the best chance of achieving impact, sustainability and scale.”

Why is the Social Enterprise not more attractive to donors?

It is easy to see why the social enterprise model might be attractive to donors – the appeal of an organisation that is doing the same good work as an NGO but acting in an entrepreneurial, personally engaged, financially responsible manner. Such an organisation is not looking to be eternally dependent on donor funding, but to use initial financial support to move quickly towards future self-sustainability.

Conversely, it is true that there are some NGOs who have made strides towards self-sustainability, creating income-generation units that make products or offer services for sale. Sadly, these products and services are often poorly conceived or out of touch with market need, purely because they are a means to an end rather than a core focus, and thus are seldom viewed through the necessary commercial lens required to make them genuinely competitive and impactful.

Social enterprises, on the other hand, start from a position of striving towards sustainability – the profit motive is a firm component of the overall model and thus they have a higher chance of self-sustainability than the majority of NPOs or NGOs.

So why are such entities not more attractive to funders? On the face of it, corporates looking to support high-impact CSI initiatives and donor agencies looking to back sustainable and viable projects should be lining up to fund compelling social enterprises like Lakheni.

Unfortunately, current BEE legislation, and the long-held mandates of the broader donor landscape are both counting against social enterprises, and this urgently needs to be addressed if we are to unleash the potential of creative and forward-thinking entrepreneurs to build good businesses while creating positive social impact.

The way forward

So what needs to change if we are to reap the undoubted benefits that social enterprises can offer a society with as much need as ours? How do donors and investors alike need to adjust their radar to accommodate these potential gems?

Firstly, while a social entrepreneur may be willing to take on the long-term financial responsibility for the organisation, they will expect to benefit personally from a venture that has social rather than personal rewards. Here donor organisations might prefer to look at seed funding rather than long-term support – helping promising social enterprises expand or new ones become established.

Secondly, the reporting in a blended organisation may be more complicated and methods will need to be developed – for example, donors and social enterprises will need to define and agree on distribution of profits, and to agree on where in the mixed model organisation the funds are deployed.

Thirdly, if donors are truly interested in the social enterprise model, they will need to overcome their reluctance to support business formats other than the NGO / non-profit model. Donors who are constrained by legal and tax barriers may find this difficult, as with CSI funds here in SA.

Finally, government needs to find a way to make the support of such social enterprises attractive to corporate funders looking to utilsze their CSI, Supplier Development or Enterprise Development contributions to satisfy their scorecard requirements.

If a corporate invests on an ED basis in a social enterprise, they should get even more points than if they were to invest in a standard commercial entity.

Currently, there is little incentive beyond moral compulsion for those with the money to support businesses with a social mandate. This really needs to change.

*With thanks to Catherine Wijnberg of Fetola for input and insight.

*Anton Ressel is a business strategist, social commentator and writer. He is a director of the Fetola Foundation and founder and director of ARC Consulting, a small business specialist agency that offers mentorship, support and other services to entrepreneurs and emerging businesses nationally.