Fighting against chronic child malnutrition in Madagascar, promoting access to clean and economical energy for all in Cambodia, reconciling the circular economy and waste treatment in Argentina… while being profitable: these are the challenges of social businesses. There are an increasing number of these initiatives and they are attracting the interest of a growing number of actors in the political field, as well as among donors. This enthusiasm must not mask the reality: social businesses face a number of challenges. How to come up with an economic model that allows financial equilibrium to be achieved when you sell a good or service aimed at the poorest? How to support the development of these enterprises? These questions were discussed at the Agence Française de Développement.

Organizers

Fighting against chronic child malnutrition in Madagascar, promoting access to clean and economical energy for all in Cambodia, reconciling the circular economy and waste treatment in Argentina… while being profitable: these are the challenges of social businesses. There are an increasing number of these initiatives and they are attracting the interest of a growing number of actors in the political field, as well as among donors. Why? Because these initiatives convince through their capacity to provide a response to societal issues (social and environmental) and pave the way for a really inclusive economy.

This enthusiasm must not mask the reality: social businesses face a number of challenges. For the moment, few of them have reached a critical size. Why? How to come up with an economic model that allows financial equilibrium to be achieved when you sell a good or service aimed at the poorest? How to support the development of these enterprises? How to measure the effectiveness of their social commitment and guard against “social washing”?

The conference will be coordinated by Emmanuelle Bastide, journalist at RFI.

Social business: How to scale up?

Date

Tuesday 22 March 2016

Hour

17:30-19:30

Place

Agence Française de Développement
Bâtiment « Mistral »
3 Place Louis Armand
75012 Paris

The debate was coordinated by Emmanuelle BASTIDE, journalist at RFI. The speakers were David AUERBACH, Co-Founder of Sanergy ; Emmanuel BEAU, Investment Manager – CoFounder at Energy Access Ventures ; Jean Gabriel DAYRE, Senior Investment Officer – Microfinance at PROPARCO; Jean Michel LECUYERCEO of Le Comptoir de l’Innovation and Stéphanie SCHMIDT, Managing Partner at Ashoka Europe. Please find below the Conference synthesis and watch the video (in French) here.

 

How to define them?

There are a number of definitions of social entrepreneurship. They have two fundamental criteria in common. Firstly, the rationale of a social enterprise is to provide a response to a social or environmental issue. This mission must be clearly highlighted in its articles of association. Secondly, its activities must be guided by the objective of finding a business model. This model must allow it to be sustainable in the medium term, without grants.

A third criteria is also important: coherence. This especially depends on the social enterprise’s impact on society. “It is necessary to have a financial statement, but also a statement on social results. The approach of these entrepreneurs cannot be credible without this” (J.-G. Dayre).

These criteria are what makes social entrepreneurship stand out from traditional entrepreneurship. “Running a social enterprise requires thinking differently compared to a ‘traditional’ entrepreneur: it involves seeking to achieve the maximum social impact, while having a profitable activity. It is more difficult to juggle between these two cultures” (D. Auerbach).

 

Impact difficult to estimate

It can be difficult to estimate the impact of a social enterprise. This difficulty may arise from a question of costs, prompting some actors to talk about “performance” rather than “impact. “Impact measurement requires tools and resources which the enterprises we invest in do not necessarily have […]. We prefer to measure the enterprise’s environmental performance and help it implement tools which work and can be deployed over time and at a low cost” (E. Beau).

Estimating a project’s impact also takes time. Developing a viable model requires a lot of testing” (D. Auerbach). “It generally takes between eight and ten years to test, manage and refine models which will allow a scaling up” (S. Schmidt).

 

Think profitability differently?

Investors must be flexible in the evaluation of the social impact at every stage of the life of a project. “We have opted for a dynamic approach. We incubate a social enterprise when […] we are convinced that it is really guided by a commitment to have an impact. They generally come to see us with a project for a small business and the rest needs to be built with them over time” (J.-M. Lecuyer).

This flexibility is based on redefining profitability criteria. The societal objectives of social enterprises move them towards a risk-profitability-impact triptych. “We work with highly innovative small businesses, with a strong potential for impact and low level of profitability. Why are we willing to accept the risk? Because in the overall return, we take the societal return into account” (J.-G. Dayre).

 

Recommendations for the coming years

There are possible areas of action to promote the development and scaling up of social enterprises.

The first area would be to develop a conducive ecosystem based, in particular, on the successes achieved in the microfinance sector. It would be worthwhile creating “a platform like MIX Market, which would disseminate information on social enterprises which have reached a certain size” (J.‑G. Dayre), or setting up a replication fund for social entrepreneurship in one or several countries. “In fact, replication is the real issue: How to replicate a success that has already taken place? […] There are no replication funds yet like we find in the standard economy” (J.-G. Dayre). These initial recommendations will produce results in the long term: “My recommendation is to take our time. Building an ecosystem is a lengthy task” (J.-M. Lecuyer).

A second area would be to encourage development agencies to co-invest in social enterprises with a capacity to scale up. “What matters is to help enterprises replicate in different geographical areas by adjusting their model to different sociocultural realities. We will need co-investments in the enterprises we invest in, once they have demonstrated their capacity to scale up” (E. Beau).

The third area would be to support co-creation between sectors and between different types of actor –  whether between social entrepreneurs or with traditional enterprises – and with public authorities. “The barriers to scaling up encountered by a traditional enterprise and social enterprise are very different. They are consequently complementary and can work together” (S. Schmidt).

 

The opinions expressed on this blog are those of the authors and do not necessarily reflect the official position of their institutions or of AFD.

 

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