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In southern Potosí, one of the poorest regions in Bolivia, goat milk producers often cannot find a market for their product and end up consuming it themselves. But this milk could be used for making cheese, which can be sold at good prices in major cities in Bolivia. Pro-Milk was a business based on a simple idea from a social entrepreneur. And at Fundación IES, a development institution that supports social enterprises through funding and technical assistance, we hoped that Pro-Milk could become a company offering a market for goat milk, while at the same time transforming it into a high value-added product.

Thus, in early 2006 – after a one-year incubation – Pro-Milk began operations. In order to stay close to its producers, the company built its plant in rural Guadalupe which, despite being only about 45 miles from Potosí, was difficult to access due to poor road infrastructure.

As investors, we at Fundación IES (which at that time was part of Fundación PRODEM) followed Pro-Milk for two years in the production of milk and dairy products. Those were difficult years, distinguished by long learning curves, financial issues and lack of liquidity. After those two years, the entrepreneur decided to radically change the business. Pro-Milk abandoned cheese production, transferred the plant to Potosí, and decided to produce and sell soft drinks in that city. As a result, we broke relations with the company. Currently, Pro-Milk is dedicated to the production and marketing of juices in the city of Potosí and is no longer a social enterprise.

After some introspection, we managed to identify three main issues that led to this outcome.

Lack of liquidity: Pro-Milk was paying its providers daily (due to the fact that, for many of them, milk was their only source of income), while processing and selling cheeses took between two and three months. This caused serious cash flow issues. As a solution, they began experimenting with other products to provide cash flow for the company. This complicated the production process and extended the learning curve even further.

Human resources: Due to the lack of qualified labor at the location of the plant, Pro-Milk ended up becoming a human resource trainer and assumed the related costs. Also, the company had a high staff turnover, which made the training process even more expensive. All this slowed the production process and increased its price, which deteriorated the already precarious financial situation of the company even more.

Productive process: The process for producing ripened and semi-ripened cheese turned out to be more complex than we expected. One of the main issues was the location of the plant. Despite being close to milk suppliers, it was not the right place for ripening cheese, considering the high variations in temperature throughout the day. To overcome this, we decided to transfer part of the production process to the city of Potosí, which made the process more complicated and costly. Furthermore, the time needed to start the machinery and provide production inputs ended up being much longer than planned, due to the above-mentioned difficult access to the plant.

The main lesson we can draw from this story is that, when the main product of a company does not generate sufficient and timely cash flow, the company will turn to other alternatives that do. This may cause the company to drift away from its original mission. In regards to social enterprises, this is particularly important, considering the fact that, like in this case, the new model does not satisfy the social objectives initially contemplated.

The second lesson we learned is that, despite margins that may seem attractive at first, working at the base of the pyramid implies hidden costs that are not easily detectable (like HR training costs or higher logistics costs due to poor road conditions), all of which will make operations more expensive. Lastly, working on small-scale businesses at the base of the pyramid makes the operation even more expensive, since scale economies cannot be leveraged.

This experience, along with others we have acquired in our journey as a foundation, lead us to believe that one of the common mistakes made with social enterprises is to make decisions based only on the social end, without considering fundamental business factors. Avoiding this error is essential to the success of every social business – and the organizations that support them.

Julián Vargas Talavera is in charge of the innovation and development area at Fundación IES.

*Note: NextBillion generally does not publish language we deem profane or offensive. In this case, the formal name of the organization involved is a curse word. For that reason we decided to publish the name of the organization in the article and in future articles without any alteration. But we chose to alter the name in the headline and in future headlines because headlines do not have the benefit of an explanation.