Most companies, at some stage of their lives, face a tension between reaching break-even faster versus scaling with a negative unit margin. In recent decades, Silicon Valley wisdom has encouraged companies to prioritize scale (think Google, Facebook, and Amazon), yet investors worldwide still feel reticent to back a business that does not already have a working business model.
Despite emphasis on scale, investors still feel reticent to back a business that does not already have a working business model. Tweet This Quote
Social enterprises have yet a third factor to take into account: impact. It is insufficient—especially for those that receive money from grants or ‘impact-first’ investors—to reach one or both of those milestones (break-even and scale) without simultaneously demonstrating their capacity for impact.
These parameters impose almost insurmountable barriers to success and are likely responsible for the mysterious dearth of successful and scaled-up social enterprises around us.
Take a safe drinking water enterprise, for example. By structuring itself as a social enterprise and accepting money from the likes of USAID, such an enterprise would not get by on showing its investor the gazillion gallons of water distributed as a result of its business. Additionally, it would have to demonstrate that the water was ‘equitably’ going to the poor and the women in the community, was reducing communicable disease burden, and perhaps even improving children’s academic performance due to alleviating water-borne illnesses.
Randomized, controlled trials are a nightmare in terms of wasted resources, time, and overall focus detracted from running the business itself. Tweet This Quote
It would not be enough for this enterprise to make a logical case for those impacts using anecdotal evidence. Instead, the company would need to demonstrate results with a randomized, controlled trial—a nightmare in terms of wasted resources, time, and overall focus detracted from running the business itself. Imagine if Google was asked in its first couple of years to prove with a RCT that it was indeed organizing the world’s information.
So, what is the alternative?
Imagine if that same safe drinking water enterprise could prioritize scale for the first three to four years of its life, geared towards a better-prepared market and reaching as many people as possible. If that meant designing flashier branding, selling a relatively expensive product to a slightly more affluent section of households, or conserving resources wasted on behavior-change communications, so be it.
If entrepreneurs could de-prioritize impact and focus on scale in the short-run, we might end up with way more socially aligned businesses. Tweet This Quote
Let them follow in the steps of Tesla and make the case that the rich can lead the way for the poor to take up more affordable iterations of an aspirational product. Let them have sales and distribution in hundreds of communities and build a nationwide presence and brand before starting to tackle deep-rooted practices, such as taking a quick gulp from the pond. Let them monetize other aspects of the ecosystem at scale, such as bundling related products and selling advertising, thereby reducing user fees and reaching poorer consumers.
By allowing entrepreneurs who are already making hard choices to de-prioritize impact in favor of scale in the short-run, we could ultimately end up with many more socially aligned businesses with large footprints. Using the investors’ leverage to calibrate attention toward impact, social enterprises may then see far more success within their target communities than they are currently able to.