Social Entrepreneurs: Scaling by Negotiating Impact for Resources
Faced with increasingly global social and environmental challenges, many social entrepreneurs are committed to scaling their impact (or even going international), but they must safeguard the delicate balance between their economic and social goals
Markets are an effective social mechanism. They have helped many countries achieve high standards of living. Recently, numerous social entrepreneurs have started to use markets to meet their social or environmental goals, inventing scalable business models that work in according with these market mechanisms.
On observing these social enterprises, we realize that their growth is usually progressive, from micro to small, and then medium, but almost always maintaining their impact at the local level. However, since our planet’s social and environmental challenges are becoming increasingly globalized and know no borders (for example, climate change, pandemics, and chronic poverty), more and more opportunities will logically arise to scale internationally.
When social entrepreneurs consider scaling their business, they need to be aware that they will not always be successful, since the expansion potential of their venture depends on multiple factors, including context. Therefore, before making that decision, entrepreneurs should explore factors such as stakeholder relationships, their setting, available resources, operating processes, and their leadership structure in order to fully understand their options for increasing their impact.
Entrepreneurs who choose to scale must be able to develop a strategy based on a deep understanding of the components that need to be adjusted in order to achieve their goals, and develop new capabilities to access new resources and skills. The book Scaling Strategies for Social Entrepreneurs: A Market Approach (Palgrave MacMillan, 2020), which I wrote together with my colleagues Urs Jäger and Guillermo Cardoza, from INCAE Business School (Costa Rica), with the support of VIVA Idea (an action-research center focused on sustainable development from a Latin American perspective), delves into a market approach to create effective scaling strategies based on social enterprise cases in low-income Latin American markets.
Collaboration between social entrepreneurs and impact investors
Unlike traditional entrepreneurs, social entrepreneurs must be able to put a market value on their social and environmental impact. As a result, they connect impact buyers (such as impact investors, i.e., investors who focus on the financial and impact return on their investments) with impact sellers (such as social enterprises run by entrepreneurs) to negotiate positive social and environmental impacts in exchange for resources. This is known as the practice of exchanging impact for resources to create new markets and scale impact.
Although entrepreneurs can negotiate with different actors (public organizations, international NGOs, private companies, clients, etc.), our book focuses on the highly relevant impact investors, who can help entrepreneurs reach their goals. This type of investor collaborates with the venture when scaling takes place and a large part of the relationship with them consists of negotiating the impact that will be delivered by the resources that investors are willing to invest and defining the standards that structure these relationships. Investors not only contribute financial resources, but can also offer advice on business issues, business strategy, financial management, human resources, legal analysis, or relationship opportunities for new partnerships.
Many investors will only invest if a social enterprise has growth strategies. As in other types of operations, an economic return on investment is expected, but, in this case, a return is also expected in social or environmental impact. This impact must be measurable. They also expect the strategy to include financial returns, the required resources, business and operating models, HR organization, and an internal culture. If this information is not provided, investors will most likely withdraw their offer.
Investors stepping in often puts a strain on the delicate balance between the social and economic goals of social enterprises, especially if the investor expects higher financial than impact returns. In this sense, entrepreneurs should not abandon their own mission by adhering too strongly to investors’ economic or social expectations, generating the risk of becoming an entirely for-profit or non-profit company. Entrepreneurs must protect their hybrid character: an organization that uses market mechanisms to generate social and environmental impact.
Many entrepreneurs struggle to create a business model that will allow them to obtain the financial and non-financial resources needed to scale their impact, without losing their impact potential. This is why negotiating with impact investors is so important. For example, the Guatemalan social enterprise Kingo, which sells solar energy to remote rural communities, managed to convince investors of the stature of Leonardo Di Caprio due to its data-based operation that allowed a high degree of efficiency in the service delivered and in the positive impact on the communities. One of the points that allowed them to reach an agreement was the balance between a scalable model both in economic (it is charged as a service in a similar way to the telecommunications market), social impact (access to electricity in remote, impoverished rural communities), and environmental terms (electricity based on solar energy).
Another important factor is defining the standards on which negotiations between investors and entrepreneurs will be based – some are available from organizations such as GIIRS or B Corporation. For example, the Peruvian social enterprise Ciudad Saludable reached an agreement with investors on their common goals, not only in terms of the indicators that would be used to measure their impact, but also in the incorporation of international standards, such as ISO, and in the lobbying to influence public policy regarding prioritizing grassroot recyclers to access tenders from municipalities in the recycling industry. Their argument was that people who live in poverty are usually the ones who experience environmental problems close up (for example, garbage dumps tend to be in the poorest areas of cities) and, therefore, are the actors best prepared to solve this problem.
Three-phased market approach to scaling social impact
Based on the analysis of more than a hundred successful cases in the Latin American region, our book serves as a guide to prevent an imbalance in these entrepreneurs’ double social and economic goal as they expand their business. To this end, we have proposed three phases:
- Negotiating impact for resources
Entrepreneurs begin to compile their strategy by exploring actors with whom they can negotiate the impact they offer in exchange for the resources needed to scale. These actors can be public organizations, international NGOs, private companies, institutional or individual impact investors, clients, etc. According to our market approach, the impact value that a social enterprise offers depends on how others assess the impact. In other words, this impact must be measurable according to certain standards and indicators. If these standards do not exist, social entrepreneurs can propose their creation. This phase includes an analysis of impact, resources, standards, and negotiation.
- Designing operations
Once the negotiation strategy is defined, the entrepreneurs design an operations plan to generate income and create impact. Social enterprises link revenue generation through the creation of products and services with efficient operations to achieve the impact sought by clients or beneficiaries. One way of doing this is to create standardized products or services focused on a need of the client/beneficiary, thereby increasing their impact in quantitative terms while reducing operating costs in the value chain. This phase involves the analysis of supplies and assets, products and services, and distribution and revenue
- Integrating financing and impact logics
When discussing a scaling strategy there will, of course, be conflicting views within the organization on how to achieve such growth. The final phase addresses balancing the economic logic of the venture with the social or environmental impact logic. This integration is carried out based on three elements that need to be analyzed: mission, leadership, and communication.
Three scaling strategies for Latin America
The book includes three examples of market-based scaling strategies that can be implemented on the basis of the three-phased approach presented:
- Co-creation in a low-income context: This consists of identifying, selecting, and capitalizing on resources to scale the impact of social enterprises in low-income contexts. These resources can be economic, knowledge, leadership, networks or innovation. The co-creation strategy seeks to change the lens through which we understand poverty and see it as a context filled with resources and opportunities.
- Collective impact: This strategy assumes that impact growth can only be achieved if the venture collaborates with other actors, such as non-profit organizations, private companies or government entities. Coordination between organizations is complex and requires the alignment of agendas, interests, capacities, and perspectives around a common goal.
- Replication of business models: To use this strategy, the business model has to be replicable in new contexts. This requires certain circumstances, such as a predisposition to the success of the undertaking, the receptivity of the target population, the available resources, the inherent risk, and the potential economic return.
The decision whether or not to scale a business depends on multiple factors and the context in which a venture operates. Social entrepreneurs need specific tools that go beyond those employed in traditional entrepreneurship (for example, the famous CANVAS model) and that will help them manage the complexity of integrating economic, social, and environmental objectives. Therefore, the aim of the three-phased market approach model is to help entrepreneurs decide whether they have the potential to increase their impact and design a plan to implement it.
The author is research professor at EGADE Business School and Leader of Academic Extension at VIVA Idea.
