How to start a social enterprise

How to start a social enterprise

If you are planning to start a social enterprise then you probably have a rough idea of what you want to do. This post will help you think through eight steps needed to turn your rough idea into reality. 


1. What is social entrepreneurship?

Before you start you should check that social enterprise is the best approach. 

Charities tend to be about raising money which is then put to good causes. When people talk about social enterprises they are often talking about organisations that aim to make a social change (like charities) but achieve this through self-sufficient trading rather than activities funded by donations.

There is a need for both models. The social enterprise model creates different incentives because you are primarily responsible to those who buy your services rather than those who give you money. In some cases, this can align your incentives with the beneficiaries of your social activity in a very healthy way.

Read more about the differences between charities and social enterprises.


2. Articulate your idea clearly

You are probably excited about your idea and keen to get things moving but it’s worth taking some time to refine your idea a little. This will increase your chances of success and save you time in the long run. 

Answering the next four questions will provide a solid foundation on which to create a basic business plan. 

Target audience

Compared to other more established organisations, you have fewer resources but what you lack in resources you can make up in focus. One key aspect of focus is pinpointing exactly who you are looking to serve. Who makes up your audience?

A good test to check that you have been specific about your audience is to force yourself to list real people in your target audience group. Can you actually think of someone who would be a target?

Value creation

The next question to answer when checking your idea is ‘what value will I create for my target audience?’

Social entrepreneurship is about building sustainable trading organisations. To do this you have to deliver value in exchange for people’s money. This might be products or services but understanding clearly what people are paying for is crucial. 

Differentiator

Once you know who you are serving (target audience) and what you are selling (value creation) you need to figure out why people would buy from you rather than anyone else (your differentiator). What makes you different? 

The most obvious approach is to be ‘cheaper’ but competing on price is a dangerous road that rarely leads to a viable social enterprise. Almost any other differentiator is fine: your services may be quicker or higher quality; your products may contain unique flavours or solve difficult problems. 

Social outcome

Lastly, you need to decide what makes you a social enterprise rather than a normal business. This requires your work to be attached to a clear social outcome. Ideally, this is intrinsic to the work you do. If delivery of your work is separate from the social outcome then your idea may just be for a company that donates some of its profits to charity. That is fine, but it does not capture the heart of the social enterprise movement, which is about reclaiming business for good. 


3. Write a simple business plan

This section will help you write a simple business plan for your new social enterprise. 

Pricing

Getting pricing right can be hard. Here are a few tips:

  • Don’t price low just because you are a social enterprise. If anything this may justify a higher price. 
  • Work out your direct costs (costs you will incur each time you make a sale), which may be materials for products or the cost of contractors if you are selling services. This provides a baseline below which you should never drop. 
  • Find some comparators and benchmark their prices. Try to find examples across a broad range and understand how the more expensive options justify their costs to customers. 

Overheads

It is easy to fall into the trap of measuring a social enterprises status by its overheads. Having lots of staff can make you look established. However, the savvy social entrepreneur will keep overheads as low as possible, including salaries, because this will make you much more flexible. Here are some specific things to consider:

  • Hot desk in a co-working space rather than renting an office. This avoids the distractions of office management. 
  • Work with people as contractors before you offer employment. This lets you get to know how good they are and scale your costs in relation to demand. Someone may gradually move from a few hours per week to a full-time contract as you grow. 
  • Decentralise expenses. Rather than buying computers for your staff, give them an allowance to cover the use of, and upgrades to, their own laptops.

Demand

This is where most business plans go wrong. It is easy to do careful and objective research about things like direct costs, overheads and how much your competitors charge. But when talking about demand for goods or services many people suddenly start plucking figures from the air. 

Ideally, you should have robust evidence for any ideas you have about demand. But in any case, it’s best to think about any projections as guesses. They are used to demonstrate a growth trajectory that can help you test your guesses quickly. For example, if you are opening a local cafe and plan to sell 100 cups of coffee you will know you are in trouble if after a few weeks you are selling less than half that. Maybe you should have started with a coffee cart before taking on a lease and you could have tested your guesses earlier?

Supply (scaling up)

When you are starting up a social enterprise it is over demand (discussed above) that you should obsess. If there is no demand there is no viable enterprise. But at the planning stage it is still worth a little time thinking about the supply side of the enterprise. What would happen if demand exceeded your expectations? 

If nothing else, this question can help you think through how dependent your idea is on people. The more crucial people are, the harder you will find it to grow. 

For resources on this topic read our guide to cashflow forecasting and basic management accounts.


4. Funding

In terms of funding, there are a few routes you can take. But the first thing to think about is whether you even need capital at all. For some types of social enterprise this will be crucial but for others, it will be less so. Some enterprises get started without any outside funding. This is sometimes called ‘bootstrapping’. 

External funding always comes with strings attached, like funding requirements, giving away control, or the time taken to research and apply for funding. All these factors mean that for some social enterprises your energy would be better directed to bootstrapping the enterprise off the ground. 

If you do decide to seek external funding there are a few distinct routes you can explore.

  • Family loans
Sometimes friends or family may take a risk and lend you money without security. Make sure that the terms are written down clearly!
  • Grants
Grants are most often associated with the funding of activities that are not commercially viable such as artistic endeavours or charitable activity. But there are some bodies that will provide grants to kick-start commercial social enterprises. 
  • Social investment
This can come in the form of loans or purchases of equity but comes with the understanding that what is desired by the investor is a ‘social return’. This is often a blend of some financial return and some evidence of social impact. 

More resources on social enterprise funding can be found here:
Funds run by the Social Investment Group
Social and Sustainable Capital, a provider of finance to charities and social enterprises


5. Build a team

It is very hard to build anything that will deliver long-term value by yourself. You will need some form of support network. The early days can be particularly challenging as you try to discover whether or not your idea has a sustainable future. 

Mentoring

If you’ve never run a social enterprise before, then finding a mentor is recommended. This should be someone who backs you and your vision and has the time to meet with you occasionally to hear how things are going. 

Co-founders

There are many benefits to finding a co-founder. You will have many areas of strength but also many areas of weakness. The right co-founder can encourage your strengths and cover your weaknesses. 

Staff

In the early stages, your staff are not just people to get things done. Your first hires will shape the ethos and trajectory of your social enterprise. So you should see these people as part of your support team and hire slowly and carefully. 

Organisational support

There are various organisations that can offer mentoring and other support services to social enterprise founders, including:


6. Build your brand 

An organisation's ‘brand’ encompasses many facets including visuals, words, behaviours, emotions and values. Your brand will evolve over time and can easily become a distraction early on. 

Your brand is important when starting a social enterprise because when you have a new idea you have no brand reputation and you need to communicate your pitch quickly to a range of people including potential customers and team members. But agonising over logos and colour schemes is often a distraction when you should be focusing on understanding the needs of your audience. 

If you are embarking on the branding process read our comprehensive branding guide or explore our start-up logo service


7. Get certified. 

The ‘social enterprise’ term is relatively new and its definition is not legally defined. However there are several bodies that support the social enterprise sector in the UK who offer their own definitions and membership of these bodies can give your social ethos additional credibility.

Social Enterprise UK

SEUK is the leading body representing social enterprises in the UK. They offer self-certified accreditation for organisations that meet the following criteria:

  • Our business has a clear social or environmental mission that is set out in its governing documents.
  • We are an independent business and we earn more than half of our income through trading (or we are working towards this)
  • We are controlled or owned in the interests of our social mission
  • We reinvest or give away at least half our profits or surpluses towards our social purpose
  • We are transparent about how we operate and the impact that we have

B-Corp

The B-Corp concept started in America but is now becoming more established in the UK following backing from the likes of Richard Branson. The B-Corp approach is more prescriptive as it provides clear guidelines on acceptable legal structures and a framework for the annual evaluation of impact. Because of the additional complexity that these requirements bring, the B-Corp model is better suited to established social enterprises. If you are starting out, we’d recommend becoming a member of SEUK first. That's what we did!


8. Start trading 

Ideally, you are already doing this. It is impossible to start trading too soon. Why? Because only when you are trading will you be forced to come face to face with the people or companies who are buying your services. 

In business, nothing goes according to plan first time. Your early experiences of trading will almost certainly reshape the assumptions you had when you dreamed up the idea for your social enterprise.

The best book to read on this subject, which totally reshaped the software industry and subsequently affected many other industries, is Lean Startup by Eric Ries. The central concept is the creation of short feedback loops that provide a framework for iterative innovation. This concept can be applied to many areas with dramatic effect. 

For more inspiration see our post on the best 5 social entrepreneurship books of the decade.

 

Date: 
24 July 2018
Andy Pearson