3 Models of Social Enterprise: Creating Social Impact Through Trading

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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What is SROI? - A couple of useful papers for download

I've turned my previous post into a very short paper you can download for reference.

And in case you want something more in-depth here's the REDF paper on exploring value creation in non-profit sector

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Social Return on Investment (SROI)

For many of us who are looking to start up a social enterprise, the framework of Social Return on Investment (SROI) could prove to be crucial in both understanding and presenting our social impacts in economic terms. Anything that helps us raise funding and support has to be worth taking seriously, so here's a short overview of SROI.
According to the SROI-UK Network , SROI is an approach to understanding and managing the impacts of a project, organisation or policy. It is based on important impacts that stakeholders identify and puts financial value on outcomes that do not have market values. SROI therefore is a framework. It’s a story, not just a number.
The story should show how you:

1. Understand the value created
2. Manage it
3. Can prove it

It was developed in the early 1990s, by a non-profit social enterprise called The Roberts Enterprise Development Fund [REDF] who began to analyse its SROI to help illustrate in monetary terms the value generated through an investment in its social programmes.
For social entrepreneurs there are 3 avenues of value creation:

1. Economic: creating services or products that have greater market value than their inputs e.g. any commercial business
2. Social: creating services or products that have a provably beneficial impact on society e.g. anti-racism initiatives
3. Socio-Economic: creating services or products that increase the market value of inputs but also generate cost savings for the public system or environment e.g. employment programs

Why should you care?
The key point to note is that the SROI analysis is essentially a robust argument for your non-profit or social enterprise to be at least partially compensated or credited for the value it creates in the marketplace. This could be either through public funding or CSR investment.
To create your SROI analysis you need to do the following:

1. Examine your social service activity over a given time frame (usually five to 10 years);
2. Calculate the amount of "investment" required to support that social activity and analyze the capital structure in place to support it
3. Identify the various cost savings, reductions in spending and related benefits that accrue to your public system as a result of what you're doing
4. Calculate the economic value of those cost savings and related benefits
5. Discount those savings back to the beginning of the investment time frame using a net present value (NPV) and/or discounted cash flow analysis
6. Finally present the Socio-Economic Value created during the investment time frame, by expressing that value in terms of NPV and SROI rates and ratios.

And yes, it clearly points towards needing a decent accountant!
Still, the benefits of having an SROI framework are clear. It will help you

• Understand the real value of what your enterprise/organisation does
• Raise finance more easily
• Get public sector support more easily
• Improve reporting on positive changes caused by your organisation
• Develop a better organisational structure, with improved strategies, systems and accountability
• Improve your ability to manage risks and identify opportunities required to achieve your mission

References

• Harvard Business School SROI Overview
• London Business School SROI Primer
• SROI-UK Network

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Download this post on SROI as a pdf

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