Four Things I Learned About Surviving The Long Game of Social Enterprise
I was in Mexico City for a World Economic Forum Global Leadership Fellow learning journey, and was thrilled that a meeting with a luminary in the social enterprise/impact funding space was listed on the itinerary. I asked him what advice he would give to other impact investors (and social entrepreneurs) now that impact investing had entered the mainstream lexicon.
He indicated that for a social entrepreneur to achieve the desired impact and reach a point of sustainability, it takes time – around 14 years. I don’t know if he noticed my palpable sigh of relief, considering that my social enterprise is five years in and still has room to reach our goals.
When I started the consortium of Waste Ventures Charities, a non-profit and Waste Capital Partners, a for-profit that work in tandem to with the audacious goal of solving the solid waste crisis that plagues India, I set a 15-year vision. Through all the planning and several pivots, I’ve learned four things related to different aspects of running an impact enterprise. I’ve learned, as have most entrepreneurs, mostly by first doing the wrong thing and then making course adjustments.
1. Tackle the problem you are trying to solve at the margin fast and then parlay the work into a paradigm-shifting solution over time. This is something I learned the hard way. Working at the World Economic Forum where the business and social entrepreneur participants run mature and massive enterprises, it’s very easy to think scaling is no problem. Even getting one’s foot in the door in solid waste management is pretty tough, as the utility sector easily runs in the tens of millions of dollars, and it can be a rough-and-tumble mafia-heavy business at its worst. Fortunately, we were able to learn the ropes by working with and improving the systems of other players. It was only several years in that we identified the heart of the issue AND developed a solution that will address the problem in a systemic manner. Of course implementation will still take quite a while.
2. Keep administrative structures as simple as possible as long as possible. Here’s another lesson learned the hard way. Because we had to build the ecosystem while simultaneously building a business, I started Waste Ventures Charities and Waste Capital Partners in quick succession. While in the long run, starting both a for-profit and non-profit pays dividends, it is extremely distracting, and legally and administratively time consuming. This go-to-market strategy also confuses stakeholders at a time when an entrepreneur has to be focused on building momentum. If you can, attain a fiscal sponsorship from another entity, which I did when starting my first social enterprise or through a skunk works project inside of a company. Many for-profit social entrepreneurs I speak to worry about monetization, equity and intellectual property. Until one has clear unit economics and a path to profitability, these are secondary (and easily addressed when the time is right, as I’ll cover in an upcoming blog post).
3. Find the right investors for the right stage in your business. It’s a clichéd, but never exaggerated statement. Having raised funds for our non-profit and two rounds of financing for our for-profit (about $1.6 million in total), I found our funders broke down into three categories:
a. Approximately 40 percent of our funding to date has been in grants focused on experimenting and innovating a solution (mostly at the beginning of our existence).
b. The second group, 60 percent of our funders, provides patient capital. They conducted due diligence on our impact and financials to ensure we met both sides of their investment criteria. Generally, they are comfortable with a five- to seven-year period to receive returns, and are a bit more understanding in the pursuit of greater impact – even if it means a small delay in financial return (in some cases because they are investing from their Program Related Investment portfolio). Given this timeframe, most of our impact finance came in when we were already five years old and had a clear opportunity going forward.
c. We have not pursued pure commercial investors yet. These may include institutional investors and intermediaries that perhaps use impact as a threshold at most, but are more concerned with a market-rate return and timeline for their investment. Until we are gross margin profitable, we have no intention of raising funds from this group, as it would be premature.
On a related note, in a couple of instances we determined investment was not a good fit for us in terms of timing and expectations, so we walked away, a move that I believe saved investors and us a significant headache.
4. When recruiting for start-ups, analytical ability trumps experience and technical capability. Having created seven entities in my career, I’ve learned that paradoxically, although they may be low on resources, startups should hire generalists comfortable with pivots and amorphous challenges. My ideal candidate is usually an expat from a top-tier consulting firm with emerging market experience. To my surprise, employees with rich operational experience in scaled social enterprises only lasted one to two years, primarily due to constant setbacks and the ambiguous nature of achievement. Those conditions quickly wear on morale for those used to binary standards of operational success and clear unit economics. However, later in an organization’s career, this type of personnel is invaluable in “cookie-cutting” a tested program and being able to command tens if not hundreds of subordinates across vast geographies while codifying procedures.
Although I was happy that, based on the mentor’s comments that I referenced at the start of this post, we were far from alone in our journey, my immediate follow-up thought was: How many other impact investors understood this reality? What’s more, how many understood the implications for social enterprise financing in general, especially if necessity dictates that failure is a part of the process?