Impacting investing: trends, issues and capabilities
Mixing Business and Social What is a Social Enterprise and How Can We Recognise One?
by Andrew Rogerson and Gideon Rabinowitz
A clearer, generally agreed definition of what constitutes a social enterprise (SE) in the context of developing countries is needed for several reasons. First, despite manifold efforts, mapping and tracking this supposedly booming set of institutions remains unfeasible without a consistent working definition. Second, lingering ambiguity around the definition makes it that much harder for ‘real’ SEs that could make a substantial contribution to poverty reduction to promote themselves effectively to customers, investors and regulators and to stand out from the ‘also-rans’. And third, potential funders further afield, including official aid agencies and the taxpayers behind them, could benefit from better metrics on how they might identify SEs for possible support.
Responding to this ‘public interest’ imperative, Overseas Development Institute (ODI) has carried out some experimental research which uses a definition of SEs informed by relevant literature to then identify and test a set of proposed thresholds for defining social and financial standards to be expected of SEs in a development context. This article outlines and justifies the approach taken for this research, together with its results and some elements of the substantial remaining research agenda it is hoped this work will help to stimulate efforts to address. It is based on an ODI paper presenting this research.
Social enterprise definitions
The first step of this research was to select a definition of ‘social enterprise/entrepreneurship’, a concept which is much debated in the literature. We defined SEs as:
‘Organisations primarily intended to pursue social impact, which are also financially viable.’
This focus on the primacy of SEs’ social purpose, combined with a minimum threshold of financial sustainability, aligns them closely with the alternative term of ‘social businesses’ as used by, for example, Muhammad Yunus. A broader tradition goes back to the seminal work of Greg Dees that focuses on SEs as change makers regardless of their financial viability. But given our interest in the potential of SEs to provide new resources for development, additional (in at least a modest and gradual way) to philanthropic and government grants, we have chosen this narrower interpretation.
This still leaves us with the not inconsiderable task of unpacking what we mean by the terms ‘social impact’ and ‘financial viability’, in order to present a full picture of the definition we are using.
Defining social impact for social enterprises in a development context
‘Social impact’ is a term that is always hard to define in the abstract. Given that we are addressing these questions from the perspective of global development and poverty reduction, as enshrined in, for example, the Millennium Development Goals (MDGs), we think it has two main dimensions:
• Reach – Its target group should be large – in the thousands at least, preferably much larger yet. It should also ideally contain at least the same share of poor people as the region or country as a whole, a measure of its focus on supporting such groups
• Depth – It should help generate substantial, rather than marginal, social or environmental value for all they serve, which we interpret as significantly (ideally by one-third or more) improving access to, affordability of or income generated by goods and services consumed or produced by the poor
Our definition of financial viability is that an SE must be able over the medium term (say five to ten years) to, as a minimum, break even, service reasonable debts, set adequate funding aside as a cushion for shocks and expansion and, ideally, provide acceptable returns to investors. In order to address sustainability challenges we also require SEs to not pay their managers too far above or below (an implicit subsidy) market rates and to generate their income predominantly from commercial activities. We decided not apply a profit limit to SEs given that our definition requires SEs to be ‘primarily intended to pursue social impact’.
Testing of these thresholds using a questionnaire applied to real life SEs
On the basis of these decisions we developed a simple questionnaire with questions (ten in total, five each on social impact and financial viability) covering all of these thresholds and identifying scores to be given to SEs based on their ability to meet / come near to meeting them. We then applied this questionnaire to six high profile cases (selected largely on the basis that substantive public information is available on them, allowing us to carry out this research on a modest budget) of impact-oriented enterprises being supported by foundations, impact investors and donor agencies in order to illustrate its use and test the approach in the real world.
Results from testing the ‘GRR SE questionnaire’
The results of our trial of this ‘SE assessment tool’ are illustrated in the diagram below. NB - The enterprises scoring at least 35 on both social impact and financial viability are judged to be bona fide SEs (i.e. the top right hand corner quadrant).
It is clear from these results that a number of organisations are on the borderline of meeting our proposed SE standard, which suggests that our decisions about scoring thresholds (which in some cases were relatively arbitrary) may have determined much about the outcome. It also seems possible that our results would be challenged by the backers of some of these organisations, especially those some way from meeting the standard.
Conclusions and future agendas
We therefore make no claim to have developed a silver-bullet solution that allows for an accurate and low-cost triage of SEs that clearly deserve public support as such (if only in terms of political goodwill). Nonetheless, we feel this exercise is a valuable one, for two reasons. Firstly, it brings attention attention to the importance of deepening debate about the role and nature of SEs, e.g. in relation to timeframes for achieving financial viability, transparency of reporting and potential trade-offs between social impact and financial viability. We urgently need more debate on these issues in order to bring more rigour to this area of policy and practice.
Secondly, it illustrates the types of practical tools that can be used to assess SEs and inform research, sector monitoring and investment decisions. We recognise that this ‘SE assessment tool’ may come across as too simplistic for impact investors who hold more substantial information about prospective investees and apply more nuanced criteria to their assessment decisions. We therefore hope some of them will be able to adapt and improve our tool.