Recommendations to investors in identifying mature social enterprises

Social enterprises may call on proven ways of freeing themselves from a constant flow of governmental or philanthropic support in becoming financially sustainable as mature social enterprises. These ways may include the following:

• the inclusion of the customers as stakeholders,
• the productive place of the government in the system,
• the choice of an appropriate legal structure, and lastly,
• joining incubators, accelerators and/or government for supporting promising social enterprises.

Illustrating the importance of the productive place of the government in the system is given by El Sistema, a youth orchestra founded by José Antonio Abreu in 1975. El Sistema has transformed the lives of thousands of initially Venezuelan children, but now also children from 35 other countries in the world. It has been consistent through seven different governments, changing the face of social justice forever. The Venezuelan government has been supporting El Sistema financially over many years and has recently been made aware of the fact that the El Sistema has found its own voice: “Beyond fueling political action with creativity, the musical and social skills that these young people have acquired embody the human values that are fundamental to the creation of a new political community. The collective practice of making music is forging bonds of solidarity – trust, the ability to listen – in a fractured society”.

The challenge for early-stage social enterprises often lies in choosing the appropriate legal structure and finding seed money. With no track record or assets, the ideal would be to turn to incubators, accelerators, and government to support promising social enterprises. The Bertha Centre for Social Innovation and Entrepreneurship that is connected to the University of Cape Town Graduate School of Business is an example of a resource for promising social enterprises. The Bertha Centre launched the world’s first Social Franchising Accelerator in partnership the International Centre for Social Franchising and Franchising Plus in January 2014. This accelerator supported four social enterprises to replicate their ideas through social franchising with financial support from the Rockefeller Foundation. Silulo Ulutho Technologies, founded in 2004, based in Khayelitsha, South Africa, was chosen as one of the four social enterprises to show how the digital divide could be bridged in low-income communities in South Africa. Silulo Ulutho Technologies offers IT related products and services ranging from computer training, internet cafés to IT support services and was invited to present its case at the London School of Economics in April 2018.

Being regarded as a mature social enterprise, customers and governments are included as active stakeholders, the appropriate legal structures are used, and incubators, accelerators and/or government are considered for support.

Recommendations to investors regarding the identification of mature social enterprises

Assuming that a social enterprise shows potential in staying true to its social mission, it would have reached a certain level of maturity to address potential investors. But what does maturity entail for the investor? The first recommendation to the investor would be to see in what ways the social enterprise’s DNA is complementary to that of the investor’s.

The second recommendation would be to see if the scaling strategies that the social enterprise follows would be a good fit for receiving access to capital or not. The Organization for Economic Co-operation and Development, OECD, refers to four strategies for scaling social impact: scaling through expansion, replication, partnerships and knowledge sharing. In the case where an organization would scale through replication, thereby taking its venture to new locations such as Gawad Kalinga building new villages where the needs are most urgent, scale could be achieved through five stages. The first stage will prove that it is ready to scale, then that its design is such that it could enter new markets, that its systems are in place, that the pilot has been tested and evaluated and lastly that it can operate at an increased rate of economies of scale. Depending on the chosen strategy, investors would be able to determine if their investment criteria would fit the organizations’ approach.

The third recommendation would be to invest in social enterprises to whom the five C’s – the critical criteria of success – are important. These are the following:

• Capacity: does the social enterprise have the leadership and managerial capacity to deliver to what it has committed to in its business plan
• Capital: what is the social enterprise’s debt-to-equity ratio? In the case of a high level of debt, is the financial risk of investing too high?
• Collateral: does the social enterprise have assets to increase the investor’s confidence?
• Conditions: what are the micro- and macro-economic and industry level conditions?
• Character: what is the reputation, business ethics, financial history, board and employee-references of the social enterprise like?

The fourth recommendation would be to invest in social enterprises that live up to the demands of truly sustainable business. Reputable investors rely to a great extent on sustainability as criterium for investment. Adobe Capital, an impact investment fund, confirms the importance of looking at the triple bottom line, social and environmental impact, innovation, profitability, scalability, a strong, entrepreneurial management team, the capacity to generate quality employment opportunities and normally established operations as investment criteria.

Mature social enterprises could therefore expect that:

• investors would want to make sure that the social enterprise’s DNA is
  complementary to that of the investor’s,
• that the investor would make sure that the scaling strategies that the social
  enterprise follows would be a good fit to receive access to capital or not,
• that the critical criteria of success namely capacity, capital, collateral, conditions, and
  character are important to the social enterprise, and lastly
• that the social enterprise lives up to the demands of truly sustainable business.