1
The ten paradoxes of social enterprise
Just like our colleagues, we love the enterprises we’re running. Hardly a day goes by that we don’t see a few glimmers of hope roll off the metaphorical production lines of our enterprises. At the end of the year, we proudly tabulate these incremental glimmers into a set of metrics and a report that documents the social change we’ve created.
But there’s a brutal truth we’re not as fond of discussing. It is simply this: we’re not doing enough.
By any measure, the problems we’re trying to address are getting bigger, not smaller. All the while, the aggregation of power continues within a market system that does not recognize the common good as its ultimate master.
We’ve approached this book as a practitioner’s guide because we want to improve the practice of social enterprise. We want to improve the business performance of social enterprises so that they grow, succeed, and most critically, go to scale. For only by attaining scale, by becoming large enough to change the current dynamics, can these enterprises serve their social purposes with the proper degree of impact.
Intellectual honesty can be hard to come by in this line of work. It’s easy to make yourself believe that your enterprise is changing the world because you are personally witnessing inspiring events, daily on the front lines. It’s easy to resonate with the story of the man on the beach who is throwing starfish back into the sea, knowing full well he can’t save all of them, most of them, or even a small fraction of them, but declaring, as he flings yet another, “I made a difference to that one.”
And we are making a difference. But for the most part, when compared to the need, we are doing so in a series of relatively small, usually local, completely fragmented, and mostly inefficient enterprises scattered across the land. Anyone who could ever find a means of doing a financial analysis of the sector as a whole would undoubtedly uncover a massive amount of duplication of the costs of simply being social enterprises— start-up expenses, fixed overhead, and social costs.
Our purpose is to change the world. Every economy of scale that is lost to lack of scale is a lost opportunity for social change. Every ounce of energy and resource that we spend on being a social enterprise is an ounce that we’re not spending on doing social enterprise. We can hardly be considered good stewards of our consumers’ trust, our employees’ sweat, or our backers’ funds if we fail to understand this.
Rubicon Programs, Inc., is among the largest and most successful social enterprises in the employment field. Its leader, Rick Aubry, offers a sobering perspective (with acknowledgment to his colleague Jim Schorr):
You need to be very cognizant of the cost and benefits of starting your business… Until there is a really big success in social enterprise, it’s going to remain a marginal force in having an effect on poverty in the United States… All of us have started out saying, “How are we going to make some jobs for the guys and gals walking in our doors?” and the businesses that evolved from that are small businesses that are not scalable… That really is going to require thinking about what is the value created by a social enterprise and what are the markets that could be turned to create a very large business.1
While Aubry is speaking from the perspective of a nonprofit social enterprise in the employment field, his point holds equally true for any social enterprise seeking to make a dent in the problems that threaten the common good.
■ PRACTITIONER’S TIP
You must get better to get bigger to do more.
We’ve all read the statistics about business failure rates. A fact of life for anyone starting any business, social enterprise or not, is that more businesses close their doors than survive, and even more stay small than make it big. If you just go by the odds, you’re not going to make it at all, much less on a scale that will make a difference.
More recently, as the field of social enterprise has grown, a spate of articles has been written about the failure rate of social enterprises, some concluding that social enterprises have not lived up to their promise. These articles have been met, in turn, by angry rebuttals from social enterprise practitioners, consultants, and associations.
To all of which we say, “Of course social enterprises fail— because businesses fail.” In most cases, the reasons are fairly obvious, among them:
The more interesting discussion, in our view, is whether social enterprises fail with the same discipline or even with the dignity of traditional failed businesses. Indeed another whole set of unique factors can detract from social enterprises’ success:
More reasons social enterprises fail
Unwarranted optimism
Failure to cut losses
Belief that mission will prevail over reality
These factors operate so powerfully that they often become almost a part of the DNA of social enterprises. The passion of purpose can blind one to the hard calculated decisions that must be made to grow a business. But these factors, all representing some degree of hubris, can be overcome. They require nothing more than leaders who, at their core, understand that social enterprises demand the same levels of business discipline as any other successful enterprise.
Social enterprises can stumble in all the same ways traditional businesses can and a few more to boot. You can take comfort in knowing that every one of these traps is avoidable. You can take even more comfort in realizing that an equally powerful set of factors, not generally available to traditional businesses, can propel your success exponentially. For example, your mission can create a compelling marketing proposition. You have a greater-than-average chance of attracting great talent and harnessing their passion. You have a natural point of organizational focus that can streamline your processes and your decision making. And in general, lots of different potential stakeholders will start with the default position of liking you and wanting to see you do well.
The formula for building a sustainable social enterprise is actually quite simple to articulate, if not necessarily easy to execute:
■ THE PRACTITIONER’S FORMULA
Do all the right things a traditional business does,
avoid the social enterprise traps, and grab the
points of leverage that are available only to you.
After interviewing social enterprise leaders of every stripe, and through our own experience, we realized that every moving part of a social enterprise is a virtual double-edged sword of challenge and opportunity. In the chapters that follow, we apply this simple formula to these challenge-opportunity sets, one by one. If we can help you navigate around the challenges and capitalize on the opportunities, then perhaps you can improve the odds that your social enterprise will be among the businesses that succeed.
Better yet, then perhaps you can go to scale and really change the world.
What’s on Your Mind?
When we sat down to write this practitioner’s guide, we could have started just about anywhere. As practitioners ourselves, we get up every morning and face challenges and opportunities in every aspect of our enterprises. But how to translate this myriad of daily, interrelated experiences into a coherent practitioner’s guide?
We determined that we would write several chapters, each addressing a related set of challenges and opportunities. One problem, though: we had dozens of challenges and opportunities to choose from—and a lot more to say on any subject than we could reasonably fit into a chapter. Perhaps because we are practitioners ourselves, our bias is always to listen to the voices and collective wisdom of others who are doing the same wonderfully gratifying, wonderfully difficult work. We do believe that this collective wisdom can help us all do better and grow in our impact. So we decided to let practitioners help us define the chapter content. We conducted focus groups at the 2007 Social Enterprise Alliance and Social Venture Network conferences and asked practitioners just like you what was vexing them most at the time.
What we discovered was an amazing consensus about the inherent tensions faced by practitioners. We call these the Ten Paradoxes of Social Enterprise:
- The First Paradox: Doing Good Versus Doing Well—An overriding issue that lies at the core of everything a social enterprise attempts to do is the dynamic tension between the demands of the business and the imperative to serve the common good. The most successful ones become adept at balancing impact and profit.
- The Second Paradox: Form Versus Function—A profound tension is played out in the social enterprise’s choice of a corporate structure. A confusing array of strategic options is available, making it all the more important to choose the right structure.
- The Third Paradox: Planning Versus Practice—Striking a balance between figuring out what to do and just doing it is a reality for social enterprisers at every stage. Working with discipline is key.
- The Fourth Paradox: Debits Versus Credits—Sooner or later, the presence or lack of money will determine the impact that any social enterprise can make on the common good. A thorough, multiperspective understanding of money and financing is necessary in order to create financial health.
- The Fifth Paradox: Do-Gooders Versus Good Doers— Nowhere is the idea that the right people are your most important asset more true than in a social enterprise seeking to harness people’s passion in a way traditional businesses can’t. It is imperative to hire the best people.
- The Sixth Paradox: Perception Versus Reality—Social enterprises are uniquely bestowed with the opportunity to gain strong competitive advantage by taking their marketing efforts to a new level that we refer to as marketing on higher ground.
- The Seventh Paradox: Value Versus Waste—A common malady of social enterprises is to become so caught up with the “sizzle” of their social missions that the daily operational blocking and tackling of their businesses suffers. Successful practitioners achieve operational success by eliminating waste and leaning the enterprise.
- The Eighth Paradox: Metrics Versus Instinct—Unlike traditional businesses, social enterprises measure their success in terms of social impact. The intricacies of metrics and measurement are important to learn.
- The Ninth Paradox: Growth Versus Focus—Many people are already in tune with the imperative to grow to scale to efficiently fulfill a social enterprise’s core purpose. They are equally aware of the challenges of doing so. Expanding sensibly is key.
- The Tenth Paradox: Sweat Equity Versus Blood Equity— Running a social enterprise is far from easy for the leader and can exact a personal toll. Long-term sustainability re quires a continual commitment to personal growth and caring for self.
Take Every Word of This with a Grain of Salt
Warning: Never give or take “expert advice” too seriously. You are running a social enterprise.“Enterprise” implies “entrepreneur,” and entrepreneurs know that doing the next right thing often defies anything you could plan for, be taught, or logically conclude you should do.
Kevin McDonald (recipient of a 2004 Social Enterprise Alliance award) tells a delightful tale of the sheer entrepreneurial opportunism that put his TROSA—now a sizable and relatively sophisticated enterprise—on the map in its early days.
Practical tips? Survival. You know what I mean? If somebody had front money, say $5 million, they’d waste a lot of it, I’m sure, because they wouldn’t think about survival. A hurricane came through and devastated our place, and we went over to help the neighbors because nobody had any electricity. Then I saw a guy who knew how to use a chain saw, from the mountains of North Carolina. So, I got a geographical phone book—it goes by streets—and I mapped where the hurricane went through. We started helping him and went into business, cutting up the trees and stuff like that. It was just on a spur of the moment. That was fourteen years ago, and now I have MBAs working for me.2
■ PRACTITIONER’S TIP
Survive long enough to get lucky.
Your job is to make sure that your enterprise lives to fight another day. Do this enough days in a row, with the power of your social purpose and your commitment to changing the world behind you, and your break will come.
If you take seriously the survive-to-get-lucky mantra, then you shouldn’t presume for a moment that the social enterprise you are starting or running today will resemble in any way the one that is going to be creating social change five or ten years from now. Remember, you’re dealing with two variables: the needs of the world you are seeking to change and the dynamics of the industry in which your enterprise is competing.
Rubicon is today a $16 million enterprise employing 250 people and serving over 4,000 others through its programs. This is what Rubicon became, but it’s not what Rubicon set out to become. It was initially a drop-in center for people in Richmond, California, a gathering point for very-low-income people with severe disabilities. It had no programs and its first social enterprises were very small programs that were seen more as extensions of training than anything else. For example, a plant nursery that was started in a local supermarket in the late ‘70s and a couple of very small cafes started in the early and mid ‘80s were primarily training programs that also generated some revenue.
Rubicon has evolved into an organization that today serves low-income, homeless, and mentally disabled people in the businesses, housing, and services it provides. Approximately one-third of the people currently served have a mental health disability, so its original focus is still a part, but not the largest part, of what Rubicon does. According to Rick Aubry, “The greater steps forward were when we, in the late ‘80s, had a transformative way of thinking about our enterprise as not being training programs that were also secondarily businesses, but that they were fundamentally businesses that, if they were successful enough, could provide training.”3
We’re all for having a great plan. As we discuss in chapter 4, you’ll get nowhere fast without one—including nowhere on attracting capital to your enterprise. An entire industry of social enterprise consultants can help you with that. But remember, even the very best plans become outdated the moment you hit Save.
■ PRACTITIONER’S TIP
Be prepared to operate at the rate of rapidly
accelerating change that every business is
faced with—squared!
Putting Yourself out of Business
Of all the folks we interviewed, we admire no one more than Jeffrey Hollender, founder and CEO of Seventh Generation. Get this: despite a principled decision not to sell to Wal-Mart, Hollender acts as an unpaid adviser to that corporation on environmental and climate-change issues. He does so knowing that his efforts make the competitive landscape for his own social enterprise more treacherous, but seeing that larger companies have much more influence on the environment than Seventh Generation. Increasingly, his goal is as much about influenc-ing how larger companies are run as making an impact with his own business.
Interestingly enough, he notes, Wal-Mart is probably the greatest reason that his business is more competitive than it has ever been. In large part, Wal-Mart’s pressure on the supply chain to be more environmentally responsible has affected the research-and-development spending of virtually every large package-goods company in America, resulting in a tremendous flow of green products into the market. While this creates stiff competition for Seventh Generation, Hollender sees it as a good thing. It has improved the landscape of products but also eliminated one of his points of difference:
In terms of risks, the single greatest risk we face [as a company] is the awakening of our society to global warming. It has created more change in the past year then we have seen in the past nineteen years. Our challenge is to be innovative and to change the way we operate to coexist with the competition. This means we have to move quicker and be more innovative. When there is little competition it is easier to be differentiated. When there is a lot of competition, the whole landscape changes.4
Why does he do it? Because he embodies the core principle of social enterprise. His actions live up to his own words: “We are not in business to be in business. We are in business only because of our mission.”5
In fact, Hollender inspires us to reconsider our earlier-stated credo. Perhaps the credo shouldn’t be “Survive long enough to get lucky” after all. Perhaps, instead, it should be “Get lucky long enough to become unnecessary.”
We have to get better all right. We have to get so good that we’re no longer needed.