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Friday, 12 September 2008

The Charities Aid Foundations' social investment arm Venturesome has published a couple of papers this year on categorising social enterprises, so that both investors and investees understand how different business models create social impact and the consequences they have for generating financial returns. It is worth a look to see if or where you fit within their model as it might help you present your social enterprise better, and understand not only the management skills needed but the financial risks and potential social return perceived by your investors.

Anyway CAF divide social enterprises into 3 distinct business models, based on their research defining enterprises according to the social impact they are achieving rather than their legal form.

  1. Model 1 - Profit Generator:
    Trading activity itself is primarily seeking a financial return only. As such, it is deemed to have no direct social impact but gives some or all of its profits to charity. Financial risk of the investment is disconnected from the likelihood of achieving social impact.
    Examples include Corporates with CSR programmes or those which give a percentage of their profits to developing charitable projects, Charities investing endowments in financial markets, and Trading subsidiaries of charities.

  2. Model 2 - Trade Off:
    Social impact is integral to the nature of the trading activity, but a balance has to be struck between generating financial returns and creating social impact. The firm could increase its social impact by decreasing financial returns, or vice versa. In other words, there is a trade-off. Model 2 firms may be able to attract commercial investors with an acceptable rate of financial return, while at the same time achieving a level of social return which is acceptable to its other stakeholders.
    Examples include Fair Trade Businesses, Microfinance Institutions, and Firms that employ the disabled or other disadvantaged people.

  3. Model 3 - Lock Step:
    Trading activity has direct social impact, but that social impact increases or decreases in step with financial returns. Apparently these types of enterprise are scarce as they operate in clearly competitive markets. The level of financial returns that Model 3 businesses are able to achieve may be acceptable to a fully commercial (financial return only) investor.
    Examples include Co-operatives, Wind Farms, and JustGiving.com.

Download Three Models of Social Enterprise (.pdf)

Download Three Models of Social Enterprise, Part Two (.pdf)
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