Will ‘for-profit’ firms change social enterprise for better or worse?
The Mile-High-City of Denver, Colorado has a rarified atmosphere and a reputation for doing things differently. Originally a mining outpost during the Colorado Gold Rush, it has always attracted pioneers, including social entrepreneurs.
Denver’s SAME (So That All May Eat) Cafe with its ‘pay-what-you-can’ policy is just one reminder of the city’s innovative social enterprise sector. In September Denver highlighted a new phenomenon at the Social Enterprise Alliance (SEA) Summit, the largest gathering of social enterprises in the United States.
In many ways it mirrored UK events where values-driven and mission-focused social enterprises come together to exchange ideas and best practice. The buzz about social enterprise in the US was palpable with inspiring examples of success. However, the Summit also sharply focused attention on one of the most potentially challenging developments facing the sector – a major influx of ‘for-profit’ firms.
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‘For-profit’ firms are changing the face of social enterprise
Representatives from both ‘for-profit’ and ‘non-profit’ social enterprises mingled at the SEA Summit with delegates from across the social enterprise eco-system. The union of these groups stemmed from the SEA’s decision to broaden its definition of social enterprise and to embrace for-profits as members alongside non-profits, creating a new dynamic.
The principal reason for a proliferation in ‘for-profit’ social enterprises in the United States is the creation of two legal entities that allow profit distribution – namely ‘benefit corporations’ and ‘b-corps’” and these are rapidly changing the face of social enterprise in the States as well as prompting change internationally.
It is not only new legal entities that explain a rise in for-profit social enterprises, it also reflects changing society and shifting views on how business can and should be done. The social enterprise movement has had an impact in changing perceptions and helping entrepreneurs see that it is possible to ‘do business and do good.’
For-profit social enterprises are being established by people that would otherwise have formed commercial businesses. This may be a positive impact of the social enterprise movement but it is unclear whether it will ultimately prove to be a cause for celebration or concern.
Is the stage set for ‘rock star social entrepreneurs’?
‘For-profit’ social enterprises are often headed by a different breed of CEO than their non-profit counterparts despite having some important shared goals. Denver attracted a number of media-savvy ‘rock star’ entrepreneurs armed with Ivy League MBAs and on a mission to change the world. It is undeniably a new dynamic and at odds with more community-based values of many social enterprises where the emphasis is on the team and collaborative decisions and leadership cults are a rarity.
What are the longer term implications of the new dynamic?
In the USA, non-profit social enterprises are struggling to adapt to their new extended family. They are grappling with tough issues such as whether the rise of for-profit social enterprises might limit the availability of critical foundation revenue. They are concerned that the speed at which graduates appear to have embraced for-profit social enterprises might hamper their own ability to recruit new talent. The presence of new for-profit entrants could also make it even more difficult to clearly define and communicate what the sector stands for.
Different nations take different stands on the ‘for-profit’ issue
There is no single cohesive sector view on the issue of for-profit versus non-profit social enterprises and there are significant global variations in attitudes, legal structures, business practices and funding models.
In Scotland the vast majority of social enterprises are asset-locked and non-profit distributing, benefiting from a range of legal forms that make it possible to trade and have a focus on social mission. In some countries however social enterprises struggle to form a structure that combines tax efficiency with the ability to receive grants and trade on the open market. In parts of Africa, non-profit status attracts an NGO (non governmental organisation) label that can make it very hard to be viewed as a serious business. Also, In India only 40% of social enterprises are structured as ‘non-profits’ – partly because the impact investment model is geared to support social enterprises that can take equity type investment. The ability to attract significant capital to address social problems at scale is viewed as a distinct advantage of the for-profit social enterprise, in India and increasingly elsewhere.
Can for-profit firms help grow scale and reach of social enterprise?
Does profit-distribution matter? If a for-profit social enterprise company is going to generate significant social value, and often at a scale that non-profit social enterprise would struggle to attain, should the focus be on the social impact rather than the profit distribution? Some argue that without new models and new leadership, achieving scale will remain difficult for the social enterprise sector. Some funders also contend that generating ‘appropriate profit’ is not just acceptable but necessary for reinvestment and sustainability.
Will social enterprise investment split into two camps?
It is possible that the investment market might eventually settle into two camps with foundations supporting non-profit asset-locked enterprises while for-profits attract investment from impact investors more comfortable with a business model that will generate a return on investment. Social investment funds that have struggled to engage with social enterprises unable to distribute dividends may find a new home for their money.
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The Social Enterprise Alliance tent is likely to get bigger and more diverse year-on-year. However the arrival of B Corps in the UK may have a less dramatic and more gradual impact on social enterprise here, party because non-profit social enterprises are far more prevalent. Also there are procurement provisions, education programmes, funding initiatives and a high and increasing level of public awareness.
It remains to be seen whether non-profit and for-profit social enterprises will prove to be comfortable bedfellows. While the new entrants bed down, we can expect some elbowing between those concerned about the impact on the sector and those who regard an increase in businesses focused on positive social impact and creating a more equitable society as unequivocally a good thing.
Download the Social Enterprise in Scotland: Census 2015 from our resources section to view the current Social Enterprise sector landscape in Scotland
Read an interview with Gerry Higgins, CEO on ‘What the census results mean for Scotland’.