THE BLOG
11/11/2014 06:28 pm ET Updated Dec 06, 2017

Start a Business - Not a Social Enterprise

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Socially-minded entrepreneurship is the latest humanitarian trend. Altruistic mavericks are pioneering products and services to fulfill previously unmet needs -- especially in developing nations -- changing the rules of agriculture, lighting, medicine, education and more.

For example, Reel Gardening improves agricultural access. The group manufactures fertilized paper strips that encase seeds at the correct depth and distance apart for optimal growth. The biodegradable strip is merely planted in the ground up to a dotted line - making it simple enough for even children to grow their own food.

Another is Wecyclers, which addresses the urban waste challenge in Lagos. The company employs a fleet of low-cost cargo bicycles to collect recycling in low-income areas, incentivizing families to recycle with redeemable cell-phone credits.

Millbug, which produces a low cost, solar-powered tablet, is another example. The founders' aim is to improve connectivity and information access in areas off the grid.

The trend is timely.

In a world of plenty, billions of people fail to meet their basic needs. For example, current levels of food production could feed the entire world one and a half times. But, according to the World Food Program, poor nutrition causes 45 percent of deaths in children under five. Poverty and inequality, not scarcity, are responsible for the inadequate distribution of basic goods and services.

Thankfully, socially minded entrepreneurs are making the global economy work for more people. These forgers take on challenges like providing quality medical treatment to residents of New Delhi slums or ensuring children in rural Malawi access high-quality education. The world needs these innovative pioneers to include those at the bottom of the economic pyramid.

However, unmet needs will not necessarily be fulfilled by "social enterprises". While there is not a firm consensus, most definitions of social enterprise require all of the following elements: a social mission or purpose; a sustainable business model; at least 50 percent of profits invested into the social purpose; and a democratic decision-making model that incorporates all community stakeholders.

The social enterprise model aims to free nonprofits from never-ending fundraising cycles, ensuring work continues independently of donors' whims. The model has some benefits. In theory, it allows entrepreneurs to raise capital at below market rates and provides longer time frames to earn returns. It also provides easy publicity and lower labor costs, as employees will work for a salutary mission below market rates.

However, if do-gooder entrepreneurs and innovators aim to have a lasting impact, they should consider skipping over the strict "social" in social enterprise.

Social enterprises' extremely complicated business models make survival difficult. Over half of new businesses simply trying to turn a profit fail. But in addition to earning profit, social enterprises must also reinvest in their identified social cause and democratically incorporate the demands of the communities in which they work. The additional requirements often strain social enterprises, hampering their chances of success.

Social enterprises also have a relatively more difficult time accessing finance than mainstream enterprises. The Global Entrepreneurship Monitor (GEM)'s latest report on social entrepreneurship explains that social entrepreneurs are more likely to fail to gain access to finance because of the nature of their businesses. According to the report, the subsequently high costs of financing often sink social enterprises.

In addition, social enterprises have difficulty securing the important business of large companies. A seemingly trivial deal with a large company can go a long way for a small social enterprise. For example, if a social entrepreneur employs local women to make nut butter and he or she can get a multinational to purchase stock for their canteens, it might fully fund the enterprise.

But, unfortunately, private sector companies are reluctant to work with social enterprises because they do not fit neatly into any ideological or, more importantly, legal framework. Concerns about security and potential unreliability also impede large companies from doing business with social enterprises -- although, these concerns might also be relevant to small, relatively unestablished businesses.

Obviously, social innovation should not be discouraged. However, rather than spreading these important innovations through social enterprises, the new products and services should be implemented with more traditional business models to ensure their impacts have the best chance of being felt for the long-term and at scale.

"Business" might not be as sexy as "social entrepreneurship", but fervently social innovators and entrepreneurs will best achieve their goals by building a company that achieves good without tying its hands with the onerous requirements of a social enterprise.