Social enterprise: The key to financial sustainability of NGOs?

By Catherine Wijnberg The donor landscape in South Africa is changing, and the new buzz word, social entrepreneurship, is heralding great expectations. However, while many corporate social investors are excited about the concept of social enterprise, with its promise of financial sustainability and simpler exits from project support, the NGO community is not quite so convinced! Many NGOs, already under pressure to perform in an increasingly competitive funding environment, are concerned about needing to change direction from simply doing good, to doing good and making money in order to get any support. This article explores some of the opportunities that social enterprise offers in the development space, and ask if there is a danger of overemphasising or glamorising this business model, thereby raising unrealistic expectations and creating a one size fits all scenario. What is a social enterprise? The meaning of social enterprise differs from country to country. In the United Kingdom social enterprises are defined as businesses which exist to address a social or environmental need, while in the United States entrepreneurial culture, social entrepreneurship refers to for-profit businesses that combine out-of-the-box thinking with the determination to create or bring about something new and positive in the world. Unlike the UK and USA, in South Africa there is currently no formal or commonly understood definition of a social enterprise one is either non-profit or for-profit, and there is no legislated place for a blended organisation. The US has a vehicle known as a Benefit Corporation (B Corp) for socially aligned for-profit enterprises, while the UK recognises these entities as Community Interest companies. In South Africa we are left with only the laymans definition of social enterprise, of which there are two an NGO that generates part of its own income through commercial activity and a business that exists to profit and do good in the community with an emphasis on the former, the NGO turned entrepreneur model. Why is definition important? There are several reasons why defining the structure of your organisation is important not least of which is because the definition impacts the ability of donors to donate! Many social enterprises have discovered that donors (international, CSI and government) only recognise a registered NGO and will not support a for-profit registered organisation, no matter how socially beneficial it is. This indicates a need to institutionalise suitable business formats that formally recognise social entrepreneurship, to enable donors to support organisations outside the NGO format if the Social Enterprise model is to become fully effective. Secondly, for the organisation itself, understanding and agreement about what a social enterprise is is essential to organisational cohesion and successful growth. Confusion about purpose affects strategy and can undermine operations and morale. What is best in a South African context social enterprise or NGO? *Sources: CIPRO, NPO, National Centre for Charity Statistics, IRS, Companies House, Charity Commission England/Wales and Scotland

If both the NGO and the social enterprise are dedicated to building a better future for society, which model is best for South Africa? Developmentally, there is no simple answer. NGOs support positive changes in sectors and communities where little other opportunity exists, but the danger in the NGO model is the tendency to create a culture of dependency among beneficiaries, and the NGOs own dependence on the support and goodwill of donors is itself limiting. The challenge many NGOs face is that their message I am supporting an unsolvable problem that no-one else will address, tells a message of seemingly unending need for support this often makes them unattractive to donors. In contrast, the entrepreneurial model stimulates independence and self-reliance and promotes selfgenerating growth, employment and income. This model is about solving ones own problems and creating solutions for lasting benefit. The message of a Social Enterprise is I am solving it, just help me get started. It goes without saying that this approach can be challenging, if not impossible, to facilitate where beneficiaries are the elderly, infirm and vulnerable. Whilst there is a place for both models, the reality of the current donor environment means that all NGOs are being pushed to up their game. CSI practitioners are keen to cultivate a more professional culture within the NGOs they support, in order to improve efficiency and competitiveness. For those NGOs wanting to increase their self-generated income, training or assistance from specialists can help identify potential income-generating opportunities, and provide guidance during transition to a more social enterprise approach. Lack of entrepreneurial culture a stumbling block The difference between a pure non-profit and a social enterprise resides in the word entrepreneurship. An entrepreneur is defined as someone who organises a business venture and assumes the risk for it. It is this last part assumes the risk which is important, because it is this element of personal financial risk that sets a social enterprise apart from the NGO model. In the NGO it is in effect the donor or CSI funder that assumes the financial risk, with the NGO managing the funds, but not exposed to personal financial loss. Entrepreneurship is an important driver to economic growth in any country, and governments worldwide work hard to encourage the growth of small businesses to boost employment and opportunity. Frustratingly, despite many millions invested in boosting small, micro and medium enterprises (SMMEs) growth, South Africa seems to persistently lag behind in this area a recent Global Economic Monitor (GEM) report shows the country ranking a dismal 30th out of 42 developing countries surveyed in terms of Total Early Stage Entrepreneurial Activity (TEA). However, South Africa has a huge propensity for starting and running non-profit organisations in the 2011 intake for our Old Mutual Legends small business development programme, almost half of the applicants were not-for-profit. The most recent data from the Department of Social Development shows that 12 000 new NPOs are registered annually, a ratio of one NGO for every ten businesses. This is higher than both the USA (37:2) and the UK (27:2).* Some would say that this shows we are a nation dedicated to helping others. Others point to the huge gap in government service delivery that has to be met by the NGO sector or society will fail especially in areas such as HIV/Aids support, early childhood learning, and care of the aged, orphans and vulnerable children. *Sources: CIPRO, NPO, National Centre for Charity Statistics, IRS, Companies House, Charity Commission England/Wales and Scotland

There is merit in both of these theories, but in our experience as SMME development specialists there is another reason that compels people to form not-for-profit businesses; many South Africans are nervous of taking financial risk, making the option of a non-profit environment far more appealing. The reasons for this are varied, but no doubt have something to do with our apartheid legacy, in which a huge proportion of our population were mired in poverty and denied access to education, finance and the enabling environment needed for an entrepreneurial culture to thrive. This is changing, but the effects will in all likelihood be apparent for many years to come. From NGO to social enterprise In light of shrinking donor funds, many NGOs are recognising the appeal of the social enterprise model to donors, and for their own sustainability are asking should we, and can we, make the transition from NGO to social enterprise? There are already many NGOs that have stepped towards self-sustainability, creating incomegeneration units that make products for sale. Sadly, these are frequently poorly conceived or out of touch with market need, resulting in rooms filled with unsellable product for which producers have already been paid. Most NGOs require support in finding the best fit between their mission and their market, and developing the mindset and the skills to connect the two. There are four elements to developing an NGO into a social enterprise. Firstly, nurturing a willingness to view the NGO on business-like terms, moving away from the giver-receiver model of charity to a more equal relationship, where the NGO sees itself as satisfying a need of the donor for example job creation, social support services, community goodwill etc. (This NGO as business model requires an understanding of the value one is exchanging with the donor the transaction that takes place between buyer (donor) and seller (NGO). Secondly, in business dependence on only one client is suicide so building a range of multiple donors/clients is required. Thirdly, the need to remain competitive and develop a clear unique selling point (USP) keeps the organisation focused and continually improving to meet changing market demands. Fourthly, the NGO must develop a willingness to pursue alternative channels of income in a way that leverages their skills and resources for example, selling training to a willing commercial market, selling advertising opportunities on vehicles, or developing competitive, marketable products for sale in the commercial world. A successful organisational mindset understands the value of the goods and services on offer, and looks and thinks like a business on the inside, no matter what services it offers. The creation of a business-minded culture boosts an organisation from a dependency mindset to the confidence of a successful value-adding social enterprise. The effect on the CSI manager While a social enterprise brings the benefit of a more evenly balanced risk profile, a more engaged organisational leadership and exit strategies, the Social Enterprise funding models also require a different approach from the CSI manager. Firstly, while a social entrepreneur may be more willing to take financial responsibility for the organisation, they will expect to benefit personally from the venture. For this reason donor organisations might prefer to look at seed funding rather than long-term support helping promising social enterprises expand or new ones become established. The Jobs Fund, managed by the Development Bank of South Africa, is one example of a social enterprise funding model in *Sources: CIPRO, NPO, National Centre for Charity Statistics, IRS, Companies House, Charity Commission England/Wales and Scotland

operation the intention is to invest initial seed capital (a grant) into an organisation in order to create a long-term, sustainable community benefit outcome. Secondly, the reporting in a blended organisation may be more complicated and methods will need to be developed for example, donors and social enterprises will need to define and agree on distribution of profits, and agree on where in the mixed model organisation the funds are deployed. Thirdly, if donors are truly interested in the social enterprise model they will need to overcome their reluctance to support business models other than the NGO / non-profit model. Donors who are constrained by legal and tax barriers may find this difficult. Not a one-size-fits-all solution Social entrepreneurship offers an exciting new opportunity to stimulate growth in the economy and encourage independence and entrepreneurship whilst solving social issues. However, it is not without its challenges, and business formats that formally recognise social entrepreneurship are needed to enable donors to support organisations outside the NGO format. There is also a danger that the Holy Grail of social enterprise places too great an expectation on NGOs not suited or ill-equipped for this competitive environment. Whist donors might consider providing business training and support to help NGOs make this transition, they will need to think carefully about withdrawing support from NGOs that cannot be financially sustainable, as there are often good reasons why an organisation cannot incorporate a commercial function. [1862]

*Sources: CIPRO, NPO, National Centre for Charity Statistics, IRS, Companies House, Charity Commission England/Wales and Scotland