Five Complexities of Starting a Social Enterprise

Photo by Adolfo Félix

Starting a social enterprise is a wonderful endeavor that allows an entrepreneur to blend their passion for business and their desire to create a positive impact into one. The for-profit nature of their charitable enterprise allows them to tap into strategies used by both charities and corporations to achieve growth in their endeavors.

When I started Society Socks a few years back, I was drawn by my admiration of companies like Toms and tentree’s ability to make this business model successful from a societal and financial standpoint. As Society Socks has grown over time, there are several complexities that I have observed unique to the social enterprise model. I would like to share this list with Causeartist readers who are interested in following along a similar path as me.

While I believe the idea of a Social Enterprise is extremely powerful and should be embraced by more entrepreneurs, it is important that entrepreneurs embarking on this journey are aware of some of the complexities that come along with it. If you aren’t planning on starting a new business, I hope this post further inspires you to support social enterprises with your dollars!

1. Another Business Expense Impacting the Bottom Line

Ever wondered why the products at Whole Foods are so expensive? Whether the enterprise’s social cause provides education to students in third world countries, goes out of its way to plant trees into the earth, or provides socks to the homeless in your local community, it will always create additional expenses that competitors in the same niche do not have to manage. The negative impact of social good on a company’s profit margin forces one of two outcomes: experience reduced profits per sale or increase prices and sell less product. Ultimately, a social enterprise will likely be less profitable in its early phases of growth.

2. Growing a Social Cause in Parallel to a Business Brings Twice the Challenges

I like to look at a social enterprise as two operations rather than one; a charity and a for-profit company. Much like a traditional business may require you to consider operations like marketing, sales, logistics, and accounting, a charity would as well. While many of these operations would overlap in a social enterprise, a charity brings with it many additional operational demands. Some of these include managing charitable capital, measuring social impact, and executing the logistics behind the social cause.

As an example, tentree (a company that plants ten trees for every shirt it sells) must not only manage their product line of apparel, but also ensure they source high-quality trees at a good price, mobilize volunteers to plant the seeds, and track that the correct number of trees are being planted. While it may seem overwhelming, social enterprises often find charitable partners to assist them with some aspect of the operation behind their social cause.

3. Ensuring Partners Operate Ethically

While I could have easily bundled this point with the previous one, I believe that special attention should be brought to the idea of finding ethical partners. While it goes without saying that in business you should work with people you trust, this idea is arguably much more important to a social enterprise. In an honest business, getting burned by an untrustworthy partner will impact the investors and possibly the customers (if something goes wrong with the product). In a social enterprise, the impact extends to society. If a partner who shares responsibility for the social cause is not completely honest, the social enterprise will not deliver its promise to its customers and fail to make society better off.

Observing tentree again, they likely have multiple partners in charge of providing high-quality trees, distributing the trees and managing the volunteers to ensure they plant the trees. Regardless of whether a partner is providing lower quality trees, distributing less than the promised number of trees, or lying about the number of trees planted, any hiccup in the process would result in tentree failing to keep up its promise to society.

4. Raising Money Can Be Difficult

Raising money is generally seen as a means of accelerating growth, or helping a business overcome some financial barrier or rough patch in their business cycle. A social enterprise shares these same characteristics, while also looking to scale its social impact. Governments, charities and impact investors are examples of organizations that may be interested in investing in social enterprises to help them achieve a greater social impact.

Investors looking to invest will generally ask social enterprises to provide strong financial and social returns. Social return goals can vary from specific to vague asks. A few examples as follows:

• An increase in a population’s literacy rates
• A decrease in littering in a local community
• x Number of Books Donated

With each of these examples comes a varying amount of work required to both achieve and measure the goal. While these goals are generally created to help the enterprise grow its impact, the additional effort often brings new complexities.

5. Paying Yourself a Salary

You’ve created a successful, profitable business – it’s time to pay yourself, right? Not necessarily.

Entrepreneurs running social enterprises become very connected to the social cause they support through their endeavor. At early phases of their company, they chase better profit margins to access larger pools of capital to reinvest in their business and scale their cause. As the business progresses to a mature phase where it operates sustainably, reinvesting profits into the business becomes less important. With the excess capital at their disposal, entrepreneurs are faced with the following options:

• Increase the company’s social promise
• Try to grow the company through a new initiative
• Invest in an entirely new initiative
• Pocket the Money

While there are several options at hand, most entrepreneurs will see this as only two options; keep donating or keep the money to myself. I believe that at the end of the day there is no right answer to this question. Rather than focus on the outcome of the question, it is more important we acknowledge the impact the social enterprise has had and will have in the future.

Listen to social enterprise podcasts here.

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