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Growing Pains for Social Entrepreneurs

Social enterprises are here to stay. Here's how they can grow to the next level, while still doing good.
December 10, 2010
URL: http://www.entrepreneur.com/article/217702

The appeal of "doing well by doing good" is enormous. Perhaps that's why there are an estimated 30,000 social entrepreneurs applying business practices to solving problems of pollution, poor nutrition and poverty. But despite all the good feelings that come from solving our society's problems, the ability to take a social enterprise to the next level while growing and protecting the bottom line is quite a challenge.

"It is not easy to do a social enterprise," says Gautam Kaul, managing director of the Social Venture Fund at the University of Michigan. "In private enterprise, the sole aim is my shareholders. With a social enterprise, there is something more -- social impact -- [while] growth is misplaced," he says.

Still, there are a few guidelines that are important to keep in mind if you have an eye toward growth for your social enterprise.

Stay focused
Perhaps the biggest pitfall social entrepreneurs experience as they try to grow their enterprise is broadening their focus and product lines too quickly. A lot of startups make that same mistake.

"We have to stay very narrow, keep it very simple and just focus on bottled water," says Jeff Church, co-founder and executive director of NIKA Water. His enterprise is a for-profit company that donates 100 percent of its profits to support clean-water projects in Uganda, Kenya, Sri Lanka and Nicaragua. For his part, Church focuses on selling the water and donating the profits.

Other social entrepreneurs give the same advice. "The last thing you want to do is get a reputation for not focusing on your mission," says Andy Gold, an IT consultant who has a nonprofit enterprise that donates IT and other services to charitable organizations.

That said, some believe it's important not to rely too much on the mission as the enterprise grows. As with any business, the entrepreneur needs to ask, "What is the value [I'm] providing the consumer?" says David Murphy, CEO of Better World Books, a business that collects and sells books online to fund literacy initiatives worldwide.

Remain competitive
Don't confuse helping society with ignoring the need to be business-savvy. While consumers may be willing to shift their buying behavior, they will only do so as long as the quality and cost are comparable to other similar products, says Church.

Indeed, many social entrepreneurs rely on the mission to sell their product or service. That may work initially, but it won't work in the long run as they try to scale up the business. For Murphy, "It's the selection, the online experience -- all the brand promises must be met. They come here because they want a great book at a great price," he says.

It's also imperative to think about capital structure -- creative use of debt, early-stage equity, and how to secure capital to finance growth. "It seems in the social-enterprise sector, people don't think about outside capital, which is essential to scaling up," says Murphy. To that end, there definitely is capital available. Foundations donate an estimated $200 million annually to social enterprises. There are also several venture funds that invest in social enterprises.

Hire great talent
A company -- whether for-profit, not-for-profit or a social enterprise -- is only as good as the talent it can attract and retain. In some cases, because of the appeal of the mission, a social entrepreneur can attract employees who wouldn't otherwise take a lower-paying job. "Working at a startup and being at the start of something socially engaging and important [allowed me to be] able to hire two really great candidates at a lower wage," says Church.

Still, social entrepreneurs should do what they can to remain competitive when it comes to attracting potential employees. Murphy of Better World Books created an incentive stock pool. "Top talent will be drawn to something exciting like a mission, but you also have to pay attention to incentives to draw in great people," he says.

To be sure, the best way to build up a social enterprise is to run it like you would any business. "In the beginning, you have to be three parts businessman and one part social [entrepreneur]," says Church. "… As you get the business successful, then you can begin to make it three parts social and one part profit.