Debunking the top seven social venture myths

Despite their promise as a sustainable version of the traditional business model, social ventures continue to be shrouded in myth and misinformation. Here are the top seven misconceptions about social ventures, and why they don’t hold true.

Written by Philippa Christoforou and Sandra Ainsua Martinez, Oxford University Innovation

In 2018, OUI launched its new social enterprise (now called social ventures) programme. We witnessed a growing number of researchers who wanted a spinout company that fits with their values, and the “normal” company model wasn’t the best solution, either ethically or economically, to deliver the impact they desired.

To date, the social enterprise offering has been a huge success — we’ve just completed our 10th social enterprise spinout and have more in the pipeline.

Along this journey, we’ve run into several misconceptions around social enterprises, which haven’t proven true in practice. Here, we take a closer look at these myths, and analyse whether they hold weight or not.

Social enterprises are not businesses but are charities or not-for-profits

To understand the different financial models between social ventures and charities/not-for-profits, let’s first look at what is required for the latter.

Charities must prove they exist for the public benefit and are regulated by the Charity Commission in the UK. A charity cannot have owners or shareholders who benefit from it. In a charity, all the funds raised are spent achieving their charitable objectives. “Not-for-profit” is a broad term that describes organisations whose purpose is something other than to make a private profit; a not-for-profit isn’t a legal structure in and of itself.

This is where social enterprise differs. Fundamentally, a social enterprise is just like any other business — it aims to make a profit. What sets them apart from traditional businesses is what they do with their profits. They are driven by a mission to make the world a better place and so re-invest profits or donate them to create social or environmental change. Find out more how this works in practice here:

Where there is overlap between social ventures and charity is on mission and purpose, but even then, there are clear differences. A charity might provide temporary measures for a disadvantaged part of society, while a social enterprise would think beyond that and try to solve the root cause of a problem.

For example, a charity such as Shelter gives information, support, and advice to millions of people facing homelessness or experiencing poor housing. They conduct research into housing and campaign for the government to tackle the housing crisis. Our social enterprise, Greater Change, is taking a different approach. They work with charities and support workers who have identified a person who is homeless or at risk of homelessness. Together they identify what they need to leave homelessness behind for good and then Greater Change campaigns for the public to donate to help the person achieve their goal. This helps them with housing deposits, training and key identification which to date has resulted in 87.5% of people moving into sustainable housing, 93.8% saw an improvement in their employability with 37.5% maintaining or gaining employment which allowed them to grow more financially independent and build financial resilience.

It isn’t a social enterprise if it isn’t a Community Interest Company

A social enterprise does not have to be a Community Interest Company (CIC).

A CIC is a structure specifically designed for companies which provide a benefit to a predefined community. They are subject to an asset lock, a provision written into the CIC’s articles of association, which acts as a means of making sure that any assets and profits (aside from those distributed under the rules on dividend capping) must be retained within the CIC and used solely for community benefit. The company must report to the CIC Regulator in addition to Companies House, and they must submit a Community Interest Statement and an annual Community Interest Report. Whilst this can be a useful structure for a company, it also involves restrictions. OUI prefers not to create CICs when spinning out companies as their business models may change significantly in the first couple of years so the CIC requirements may limit such change. A limited company can register as a CIC at any time but must meet the criteria.

Social Ventures don’t need to make any money

Social Enterprise UK reported in 2018 that 47% of social enterprises grew their turnover in the previous 12 months, compared to 34% of UK businesses. In addition, 58% of social enterprises anticipated an increase in turnover in the following 12 months, 26% expected their turnover to stay the same, and only 8% predicted a decrease. This was noticeably higher than their SME equivalents: 40% of whom anticipated an increase, 47% to stay the same, and 10% a decrease.

It is clear that social ventures do and should make money. In fact, the larger the profit a social enterprise makes, the more money it can re-invest or donate to its social mission.

For example, WildHearts Office is a company that started by selling paperclips and office supplies to corporates. The company has now grown to deliver document services and run entrepreneurial training programmes to corporates. The company group donates all its profits into its WildHearts Foundation, which run a series of programmes to address major issues worldwide. Their StartHer Strategy provides access to finance, education and menstrual healthcare products to girls and women in LMICs to empower them and tackle gender inequality. In 2019, they provided micro-loans to 85,630 clients, transforming 428,487 lives and entire communities. In total, WildHearts have invested £20m and transformed one million lives. This is an excellent example of how a social business can use its profits and create real change globally.

Social enterprises are more likely to fail

In 2014, a study at the University of Northampton looked at the survival rates of the 100 top social enterprises and trading charities in comparison with the top 100 PLCs. It found that social ventures were not more likely than the PLCs to cease operating or fail to repay investments. In fact, overall, 41% of these ‘competitive third sector organisations’ have endured, compared with 33% of the PLCs.

Focussing on the 60 social enterprises alone, there was a small but not significant difference between their survivability compared with PLCS — 31.6% and 33% respectively.

The takeaway is that social enterprises should not be considered as a failure-prone business model. It is simply a different way of doing business.

Social Enterprises only rely on grants

Grants and donations are popular financial support for social enterprises in the early-stage. However, financial sustainability and growth can only be successfully achieved with the implementation of income generation activities, aligned where possible with their social mission. Social Enterprise UK found 87% of small and medium-sized social enterprises acquire at least half of their income from trading activities; and the average small and medium-sized social enterprises generated 84% of their total income from trading (Trading for Good: A report on small and medium-sized social enterprises).

Trading comes with challenges as the social entrepreneur needs to navigate through both social mission and commercial activities. In some cases, investment capital might be needed to help kick-off and grow the social venture. Fortunately, impact investing is becoming more prevalent with the availability of “patient capital” that allows a longer investment time horizon for social entrepreneurs.

Social Enterprises are only suitable for social sciences

While the connection between social change and the social sciences seem obvious and necessary, STEM skills are also of great importance in tackling some of the major societal and environmental issues.

An inspirational story and example of the importance of STEM in social entrepreneurship are showcased with the Aravind eye hospitals. Aravind was created with the mission of providing quality eye care affordable to all in India, as avoidable blindness consisted of a major issue that the Indian government could not tackle alone. Their business model is such that it allows the provision of free eye care to 50% of their patients. Their business is nevertheless sustainable partly due to Aravind’s manufacture arm Aurolab, which provides high quality low-cost ophthalmic consumables and pharmaceuticals that today are being exported to more than 160 countries. In addition to providing important healthcare services, the organisation is also a teaching institution aiming at empowering women and girls in rural India, thus improving the quality of education and reducing inequalities.

Social Enterprises aren’t scalable or they have a view of highly localised business

While growing businesses is important for every entrepreneur, for social ventures what really matters is scaling the impact to reach the many communities in need. Simply replicating a business model in different parts of the world implies many challenges for social ventures as the same internal culture might not work in different community environments. Nevertheless, it is possible and not all the pathways involve growing an organisation to large scale, as explained by Dees in Creating large-scale change: Not ‘can’ but ‘how’ (2010, McKinsey & Company). There are many methods for scaling impact and possibilities range from providing more and better services to more and larger communities, using media to raise awareness and create public debate, but also lobbying governments to change the legislation and regulations, social norms and behaviours to ultimately find the manner to prevent the problems and/or reducing the needs that are being tackled. Ultimately scaling impact requires many players and an ecosystem of change to solve a social problem.

An example of scaling impact can be found with Grameen Bank, a social venture founded in 1976 in Bangladesh that has revolutionised the banking industry with its microfinance funding to the poor. Grameen Bank started making loans of $26 to women to start their businesses. What started with 42 women in rural Bangladesh has now converted into 9.6 million members with more than 2,500 branches and serving more than 93% of the total villages in Bangladesh. Their methods for such expansion involved providing services, management and support specifically tailored for the poor; but also through increasing awareness across the population on the importance of adopting an active role in getting out of poverty with dignity. Grameen Bank’s success has been described as “an innovative local initiative, a small bubble of hope, that has grown to the point where it has made an impact in poverty alleviation at the national level”.

Every country, regardless of its relative wealth, has challenges that need to be solved on a social or environmental level. There are global social ventures that tackle some of the world biggest challenges, however, most of them started with a local community in mind.

Therefore, it is not surprising to see a growing number of social ventures. In the UK, Big Society Capital reported that the social investment market was worth over £3.5 billion in 2019, 30% more than the previous year. Among the main targeted social and environmental missions in the UK, we can find supporting vulnerable communities in deprived areas, creating employment opportunities and promoting education and equality, improving mental and physical health and wellbeing, but also addressing social and financial exclusion together with protecting the environment [“Trading for Good” report, by Social Enterprises UK].

At Oxford University, some of our social ventures focus primarily on the UK while others go beyond. Homelessness in the UK has been at the core of Greater Change’s mission, while SOPHIA aims at understanding and targeting multidimensional poverty across the globe. Under the current climate, it is not surprising to see social ventures thinking beyond the UK, with Oxvent currently developing an easily deployable low-cost ventilator and Oxsed with their low-cost rapid tests for Covid-19.

At their core, social ventures here at Oxford and around the world are proving themselves to be a sustainable and impactful vehicle for societal change. This mission is best summarised by Bill Drayton, founder of Ashoka: “Social entrepreneurs are not content just to give a fish or teach how to fish. They will not rest until they have revolutionised the fishing industry.”

The research commercialisation office of Oxford University. #Spinouts #Startups #Universities #Venturing #Entrepreneurship #Innovation

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