Social enterprise: Building a sustainable business model

Why such angst about what being a social enterprise actually means? At the roundtable dinner hosted by Coutts and Growing Business, some of the country’s leading social entrepreneurs debated the value of definitions and how to push the third sector forward most effectively

Making a fortune is unlikely to be the main thing getting social entrepreneurs out of bed in the morning, but it appears there’s a shift towards something where everyone wins. Social enterprises strive for sustainability, but that’s not possible without profit. What you should do with this profit if you’re a social entrepreneur is where arguments – and angst – seem to arise.

Defining a social enterprise has always been something of a moot point. Earlier this year, the launch of the Social Enterprise Mark introduced an accreditation, and with it, more formal criteria for the first time. The mark was launched with the aim of identifying businesses that serve a social purpose, helping them to stand out and making it easier for consumers to find them. To qualify, as well as having social and/or environmental aims, you have to be earning at least 50% of your income from trading – and spending at least 50% of your profits on socially beneficial purposes. But should there be limits on how much profit you have to give away to be a ‘true’ social enterprise, or how much money you can take out for yourself, staff and shareholders? Or should we be defining social enterprises by their social impact, no matter how this is achieved? Here’s what our dinner guests had to say…

Drawing the line

Arguably, of course, the question of definitions is academic. The fact there is even a need to discuss it was a source of frustration to some of our guests. “The debate about what makes a social enterprise has been around for a long time,” says Phil Conway, the founder and chief executive of Cool2Care, an award-winning social business, which supports families with disabled children. “We should be discussing risk management techniques, CRM databases, pricing methodology and new forms of investment. These are the things I’m really interested in as a CEO trying to advance my social enterprise.” Jonathan Jenkins, director of Ventures at UnLtd, a support organisation for social entrepreneurs, agrees. “I find it soul destroying when the industry is talking to the industry about the industry, or whether something slides a little bit too far into the commercial side,” he adds. However, he says he is beginning to notice a shift in the sector, and a more widespread acceptance that sustainability and scalability can increase an organisation’s social impact. Sinclair Beecham, co-founder of iconic sandwich chain Pret a Manger and founder of the Hoxton Hotel in Shoreditch, thinks it’s unfair that social entrepreneurs are bound by rules about what is and isn’t acceptable trading practice, while other entrepreneurs get off “scot free”. “I think people within social enterprise feel guilty that they might make some money, and those outside throw stones at you because you’re profitable,” he says. “I’m allowed to make a profit because I’m a businessman. And yet you guys are tied by these unwritten rules about where you decide to draw the line. That doesn’t seem fair.” Beecham believes there is a stigma around profiting from a social enterprise, which needs to be addressed. He’s a strong advocate of applying more traditional approaches to social businesses, which, if scaled to their potential, could result in a much wider social impact, even if this makes some people uncomfortable. “I think the fact that you might make a profit is the greatest opportunity for charity in the future,” he argues. “You stand a much better chance of doing more for a cause if you can grow your business, because you can get revenue – not just from grants and gifts, but real revenue to support growth. The bigger the business, the bigger the impact. I believe having a charity where there’s simply a group of well-intentioned individuals that are not economically accountable is not as effective.”

Achieving sustainability

For Sam Conniff, co-founder of communications agency Livity, proving that he could operate a profitable business in the marketing industry – with a viable business model – and make a difference at the same time, formed the basis of his business plan nine years ago. “I never intended to be a social entrepreneur,” he says. “I’d never heard of a social enterprise. The first time I was called one I wasn’t too sure I liked it.” That’s all changed now. These days Conniff is a social enterprise ambassador. But it took him a while to understand why people felt the need to stick ‘social’ in front of his name. “I like to think that we compete on a fairly level playing field in an open market with the best agencies out there, and I deliver an additional value,” he explains. Livity uses the power of media and marketing to benefit the lives of young people, who go to the firm’s two London offices to experience a real-life working environment. The majority come from the NEET (not in education, or employment or training) population, and this practical work, hands-on work experience has helped 150 find full-time work in the last year, says Conniff. Meanwhile clients include Google, Coca-Cola, Playstation, Nike and Universal. “We are a commercial company first and foremost,” he stresses, adding that Livity provides a competitive advantage through social innovation and expects to win contracts on the strength of delivering the best service, and nothing else. “My ambition is never to get pushed into the CSR department,” he adds. “I like to work with marketing and media budgets where the real influence is achieved.” Conniff believes he would be undermining his intention to create a viable business model, and also make a difference, by paying himself well below the market rate, not going for the biggest clients and not entering awards. He also finds it frustrating when people say: “It’s a social enterprise, shouldn’t it be charging less?” “I think you have to compete first and then prove that you can make a social difference. If we follow that approach, I believe we’ll actually out-do the need for the term social enterprise, because this is a sustainable business model.”

Adding incentives

As social enterprise evolves, there is a growing school of thought that having financial incentives for staff – or indeed founders – isn’t such a bad thing. If this helps boost motivation, grow the business and deliver a bigger social impact, then surely this has to be good? Beecham certainly thinks so. “John Bird, (the Big Issue founder), who’s a famous social entrepreneur, puts everything back. But what would be the problem with him taking his profit and spending it on fast cars and big houses if that’s what he wanted? It doesn’t take away from what he’s done, which is fantastic,” he argues, also drawing a parallel with Conway’s business, Cool2Care. “I would rather see Phil’s business looking after 100,000 young disabled people than 1,000, and if the way to get there is for Phil to become a billionaire, it’s fine by me. I don’t think we should be afraid of that,” Beecham continues. “I think the public opinion has to change. He may decide to put all of that money back, but I want him to help more people and I don’t care how much profit he makes.” Jonathan Cutler, co-founder of Patients Know Best, a company formed to help patients communicate with their clinicians online, says that there is not the same resistance to taking money out of social organisations in the US, where “a different metric is used”. “If you look at charities in the US, there isn’t such an objection to people taking money out,” he says. “The key metric is what percentage of what is donated goes to the people that need it.” Livity gives 25% of cash profits to a charitable trust, along with the equivalent of 25% in staff time. Employees are contracted to spend time mentoring young people. Conniff made this decision long before there was ever a criteria for a mark. “Luckily for me, I now fit the mark, which is great,” he says. If he didn’t, would he have changed his percentages? “Probably not,” he replies. “The rest of my profits I share with the staff in bonuses and I can do what I want with it. I think that’s imperative to the growth of the sector. I don’t think there is a long-term future for us if you can’t make money.”

Finding scalability

However, one of the difficulties involved in scaling social enterprises is access to capital. If you subscribe to the definition that they aren’t set up to maximise profit for shareholders, or that all profits should be re-invested, this makes finding investment problematic. Moreover, as Alastair Wilson, chief executive of the School for Social Entrepreneurs, which supports social enterprise start-ups, points out, “the vast majority of social enterprises don’t have a company limited by share status, they are companies limited by guarantee”, which seems to preclude equity finance altogether. However, Wilson warns that the sector has been rightfully wary of certain types of traditional funding. There needs to be some level of differentiation, he argues, otherwise social enterprise is a “busted flush”. “No-one’s got anything against profit, there are lots of fantastic social enterprises making a profit. What’s interesting is ownership,” he says. “Social enterprise is a kind of fourth sector that encompasses trading to earn income which is then used for social gains. The problem is that’s where the story ran out, because we needed equity investment to scale these things. You need access to capital to grow.” So what’s wrong with using functions that allow people to put capital in and get a return? Wilson believes it raises a dilemma. “If social enterprise isn’t pigeonholed, if it doesn’t hold to anything, if it’s just a business with a social aim, and therefore is scalable and has access to growth finance, that’s fine,” he says. “But the thing we’re playing with here is public trust.” Wilson believes there is a case for holding to some criteria, to ensure that social enterprise does not become a social or environmental “fig leaf”, in order to merely commoditise social problems. “If we say: ‘Profit’s good, trading’s good, we want growth and development, but we want to think carefully about debt finance, bond finance and pseudo equity finance, in order to hold on to public trust,’ our primary focus is social change,” he explains. Wilson believes the CIC structure used by Cool2Care, which has a capped rate of equity return at 20% and a community interest regulator, is one way of holding on to this trust, which for social enterprise is “hard currency”. Perry Littleboy, senior client partner at Coutts, adds that there is scope for new models and structures, and the sector will benefit from more entrepreneurial thinking. “There really are so few large social enterprises, although there are a great number of little storylines,” he says, adding: “I suspect one of the reasons why is that so many people have come into social enterprise out of charities rather than business.”   All our guests agreed that a greater focus on sustainability would benefit the sector. “A better understanding of risk will help,” says Conway. “If you want money, you have to articulate where the risks lie to your investors. If you can’t, go back to the grant model and be a charity.” Sheena Pentin, head of business development at Clearly So, an online marketplace for social enterprises, agrees. “We have to forget definitions and get on with what’s important – making businesses sustainable and focusing on scalability.”       


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