THE BLOG
09/23/2014 09:00 am ET

For Social Enterprises, The Bottom Line is Impact: Four Lessons About Investing in Social Businesses

Digital Divide Data

Despite Cambodia's rapid economic growth driven by strong exports, private investment and a growing agricultural industry, nearly one in five Cambodians live below the international poverty line. While there are jobs available, they are difficult to get, often don't pay enough to support basic living costs, and are not secure enough to offer a pathway out of poverty. In 2012, the International Labor Organization (ILO) noted that more than 80 percent of jobs in Cambodia are vulnerable, meaning they are not able to weather fluctuations in demand and capital flows. A part of the solution to create jobs and economic development in Cambodia and other poor countries may be investments by social enterprises.

A social enterprise is an organization that applies commercial strategies to maximize improvements in human and environmental well-being, rather than maximizing profits for external shareholders. Social enterprises can be structured as a for-profit or non-profit, and may take a variety of forms. A new report commissioned by the G8 called, "Impact Investment: The Invisible Heart of Markets" calls for increased investment in this type of impact-driven driven organizations.

Since 2001, one social enterprise in Cambodia, DDD, has created jobs for more than 1000 youth from low-income families with a sustainable business model -- and helped them find professional careers with higher incomes. DDD delivers backoffice services to businesses around the world, while offering young people work experience in the digital economy -- as well as a chance to complete higher education.

How does a social enterprise like DDD make investment decisions? For DDD's team in Cambodia, the bottom line is impact. Revenue and profitably are important considerations, but we put our money on our mission. That's true even when it means rethinking a grant for such investments from a key donor. Our recent work in Cambodia has yielded some key lessons for social enterprises.

Over the past year, DDD's team in Cambodia considered expanding into a seemingly attractive local business: providing value-added services for mobile phones. At first it seemed like a no-brainer. Mobile phones have been a boon to increased communications in Cambodia and are in widespread use. However, Cambodians are unable to use text-based information services because most handsets do not support the Khmer character set. We believed that making information more readily available for delivery in Khmer-language audio would meet a critical need in Cambodia, be a profitable business, and generate secure, sustainable and longer-term jobs for Cambodian youth.

Start-up costs for a new social business can be tough to recoup quickly through sales, since new businesses take time to reap profits. DDD sought philanthropic investment to offset these costs. We were thrilled to receive a grant from the Vodafone Americas Foundation to support this investment. We saw this as an opportunity to invest in mobile technologies in a way that would serve an important social mission. And, as we moved ahead with this initiative, we learned several important lessons:

The right leadership is critical to starting a new business

New businesses require the right entrepreneurial and committed leadership to get off the ground and succeed. We were reminded of this basic principle when shortly after research on this new business launched, DDD Cambodia experienced a change in our management. As a result, some initiatives, including this one, stalled during the transition. While leadership change is not always predictable, we might have engaged other talented managers on this project. That may have enabled faster forward momentum on our new business development timeline. Fortunately, we brought on new leadership and our team was able to re-engage.

For a social enterprise, SROI is at least as important as business ROI

Surveying and evaluating the market is a key step to creating any new business. All businesses need to consider the return on investment (ROI). As a social enterprise we also needed to evaluate the market for social return on investment (SROI). We conducted a market study on mobile services in Cambodia -- particularly content services like news, advertising, classified ads, weather, etc. The findings indicated that while there is healthy demand, the market was saturated with content providers. We saw that if we were going to carve out a place in this market, we would need to compete primarily on price, which would make it difficult to enter the market, hurt profitability and slow our growth.

For our social enterprise, the ability to realize scale in terms of employment for a new service was a key concern for us. Limited revenue would mean a minimal need for staff to provide the services and thus less opportunity to recruit additional youth into DDD's work-study program. Without a high-level of demand, we could not see a path to strong impact, as the new service would only employ a few youth. Based on our research, the SROI was not at the level we wanted -- the number of jobs that could be created would be too small for us to justify this particular new business.

An important note is that we were not able to assess the incremental SROI of providing additional audio information in the local Khmer language via mobiles. While we know that this information would have value to many people in Cambodia, it was impossible to accurately capture the social value of such a diffuse benefit.

Consider investment to expand existing businesses

Based on our research, we needed to pivot, drop the mobile services concept and explore other businesses that could meet both our business and social impact objectives. A common choice by social social enterprises, like many businesses, is between investing in current or adjacent businesses and starting new ones. We looked hard at our current services to see if further investment might help them meet our blended return goals. One contender for investment was our image processing service, which we had successfully piloted for an existing client. These services including cropping, retouching and deskewing graphic images. Based on the current demand, saw the opportunity to add at least an additional 20 jobs in the short term, enabling us to recruit and train 20 more youth. In the coming year, we could see the potential for this service leading to create at least a hundred more jobs, unlike the mobile services business. We decided to invest more in this business line with proven demand. Already, we have secured two additional clients for this service and are looking for more.

The best investment partners for social enterprises are prepared to weather changes

Social enterprises, especially in developing countries, need long-term partners who support them to make key business decisions, understand the flexibility needed to achieve both for-profit objectives and social missions -- and stick with them over time. Because social businesses frequently work in challenging contexts, investment often needs to be philanthropic, without an expectation of return -- and investors need to consider a long time horizon. In fact, this was among the conclusions of a report by the Monitor Group, supported by the Bill & Melinda Gates Foundation, "From Blueprint to Scale".

When working with partners, social enterprises benefit from discussing and aligning their goals -- and being transparent -- with their partners. Fortunately, we had been upfront with our partner about our goals and the challenges. As we saw the need to change direction, we were clear and direct about the issues--and we felt their understanding and support. We feel privileged to work with committed partners like Vodafone that support our goals to achieve both impact and business success, even amidst changing circumstances.

The best laid plans for new business investments sometimes go awry but especially in the field of social impact businesses, we believe it's important to share the lessons learned. We hope these may inform other investors and social enterprises.

At DDD, we learned that a well-intentioned investment initiative didn't make sense in terms of our business -- or our impact. Fortunately, we were able to correct our course.

To find out more about DDD and our services please visit our website: http://www.digitaldividedata.org.

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