Why Do Social Enterprises Fail? New Research Reveals Three Reasons (And Some Surprises)
I will begin with a confession: I ran a social enterprise that failed and it took me more than a decade to realize with clarity the reasons for that failure.
The first seven years after the failure I was in denial. Then, four friends and I founded the F*ckUp Nights movement and I realized how important it is to accept and share that experience.
A couple of years later, the Failure Institute – the research arm of the movement (see the video below) – was born, offering the chance to confront my assumptions about failure with real data and understand that what killed my business is very common in the entrepreneurship arena. The best takeaway: Most of those factors can be prevented.
F*ckUp Nights is a global movement that aims to break the stigma around business failure. It was born as a hobby in Mexico City in September 2012, when I was having some drinks with the four friends mentioned above. As conversation progressed, propelled by a few rounds of mezcal, each of us divulged that we’d tried and failed to start a business – a fact that none of us had ever told the others. Over the course of the evening, we each shared the stories of our failures, and after three hours we concluded that it had been one of the most meaningful business conversations we’d ever had.
We decided to replicate that experience with more friends, and two weeks later the first F*ckUp Night took place. Each of us invited five friends and three of them publicly shared their worst business failure. The events quickly grew in popularity and soon hundreds of people were attending each event to hear entrepreneurs share their failures. We settled on a standard format, choosing three or four entrepreneurs each meeting, each of whom was given seven minutes and could use up to 10 images to explain to the group what went wrong. After each talk there was a question/answer session and some time for networking. As enthusiasm grew, we decided to publicize and disseminate the movement. Since then, the response has been overwhelming – the movement has now reached 231 cities in 77 countries.
In 2014 we realized we were gathering an impressive amount of case studies and data from all over the world, and the Failure Institute was born.
Our most recent study, focused on the main causes of failure among social enterprises in Mexico, puts on the table a taboo topic that is extremely relevant; the findings and learnings can apply to any country and any context.
As I mentioned in a previous NextBillion post, the failure of a social enterprise is much more sensitive than that of a traditional company. When a social enterprise goes broke, it not only fails its employees and investors, it fails the population it intended to benefit.
For this study we worked with a population of 115 Mexican for-profit social entrepreneurs who had experienced failure in their initiatives.
Some interesting facts about the sample: 49.6 percent of the social entrepreneurs were older than 30; 71.3 percent of the social enterprises had one to three founding partners; and most of the businesses were small – 65.2 percent had from one to five employees, 19.1 percent had five to 10 employees, 10.4 percent had 10 to 30 employees and only 5.2 percent had more than 20 employees.
Also, 38.3 percent of the social enterprises survived less than one year, 45.2 percent lasted one to three years, 8.7 percent lasted four to six years, 2.6 percent lasted seven to nine years, and 5.2 percent lasted more than 10 years as a company. This means that in Mexico, the life expectancy of social enterprises is one more year than that of traditional businesses.
It was interesting to realize that most of these enterprises (78.3 percent) were never supported by a business incubator or accelerator.
So, we have all this data, but you might still be wondering, why do these businesses fail?
In the perception of the social entrepreneurs surveyed, the three factors that stand out as causes for failure are:
- Lack of resources and infrastructure. This is defined by the lack of support funds for social entrepreneurs, as well as ignorance as to how to get funded and the lack of skills to integrate projects to obtain social funds. A piece of advice for social entrepreneurs: In order to create an impact, it is relevant to possess the hard financial skills that will help you obtain investment and grow your business.
- Context. The environment in which they operate is often not ideal because public policies have not advanced at the same speed as social enterprises. For instance, in Mexico there is no special legal designation for social enterprises.
- The board of directors. In most social enterprises, the board is constituted of founding partners. It was surprising to learn that this tends to be perceived as a source of conflict, from a lack of clarity in the definition of responsibilities and lack of commitment of the founding partners, to the presence of interpersonal conflicts between members.
A short video about this research:
Unlike other initiatives, social entrepreneurship is directly related to the personal qualities of the entrepreneur. This includes their social skills to attract members, volunteers and investors on the one hand, and their ability to create support networks and mediate interpersonal conflicts among members of the organization on the other. Such skills are significantly correlated with effective project management and the achievement of a relevant product.
When we concluded this research, however, we realized we still had more questions than answers:
Why do social entrepreneurs fail less than traditional entrepreneurs?
What is the failure rate of social enterprises in other countries?
How can we reduce the impact of failure of a social enterprise?
Are rural enterprises failing for different reasons?
And so begins a new adventure seeking answers to these questions, in the knowledge that among social entrepreneurs, failure is part of the journey and those who experience it are not alone.
Leticia Gasca is executive director at the Failure Institute and co-founder of F*ckUp Nights.