All around the world, businesses with a mission to improve the lives of the poor and generate a profit are capturing increasing attention. With respect to India, where 37% of the population live below the national poverty line, these “social enterprises” have become a phenomenon over the last decade. Still, little is known about them: their business structures, engagement with the base of the pyramid (BoP), financial viability, and social impact. A recent report by Intellecap shares findings from an online survey of social enterprises in India in attempt to shed light on the industry as it moves from its infancy to its youth. Given the findings, the report also concludes with recommendations to refine and strengthen the industry.
The growth of social enterprise in India took off in 2005 and is fueled by a rich and diverse ecosystem of supporting players. The support for funding initially came from overseas, but the number of domestic investors is multiplying. A range of grant-makers, impact investors, and now even commercial funds are channeling capital to the industry. From the business development side, a number of incubators and consultants have helped accelerate social enterprises. They continue to develop platforms for engagement, facilitate knowledge sharing, and connect young enterprises with skilled human capital through fellowship programs.
Perhaps the greatest motivator for the industry’s growth came from the microfinance model. Global investors and development practitioners alike gained confidence in using market-based strategies to scale solutions for addressing the poor’s needs. Despite all scrutiny behind microfinance practices in India, the concept of using market forces to address development challenges has persevered.
The study defines a social enterprise as for-profit, committed to social impact, having a BoP focus, and working in the critical-needs sector. From the results of the online survey and interviews of almost 100 social enterprises, the report spells out key insights:
1) India’s social enterprises are a young but ambitious industry.
Nearly half of the enterprises have been operating for less than two years, yet their aspirations for growth are apparent in: 1) their overwhelming choice for the private limited company (PLC) structure; 2) their aggressive pursuit of capital; and 3) their investments in building leadership teams early on in the enterprise life cycle.
In terms of legal structure, 80% of social enterprises surveyed are PLCs, whereas similar-sized enterprises in India are typically structured as proprietorships. This may come as no surprise given the advantages of PLCs. Particularly, PLCs can more easily raise capital from multiple sources and transfer ownership, which allows faster growth and ensures continuity beyond the founder’s involvement.
The hybrid for-profit/nonprofit model is also growing in popularity, where the for-profit entity is responsible for the core operations while the nonprofit entity provides support services including employee training and impact measurement. This hybrid model is appealing to social enterprises because it can enhance their ability to fundraise. Investors and donors are often skeptical about grants and equity flowing to the same entity.
2) The industry took off in 2005-2006 and has grown dramatically since then.
Energy (representing 25% of surveyed enterprises) and agriculture (28%) have experienced the greatest growth in the number of new enterprises over this timeframe.
The growth in the renewable energy sector is likely due to the increase in public and private funding, media attention, and supportive regulatory changes. In the agriculture sector, social enterprises help small-scale farmers with pre-harvest operations (accessing quality inputs, equipment, and organic certifications) as well as post-harvest operations (storage, transport, and retailing).
Health, livelihood development, and water/sanitation sectors have also witnessed growth. Education is poised to take-off.
3) Most social enterprises target the BoP as consumers rather than as producers.
Nearly three-quarters of enterprises target individuals in the BoP as consumers of critical goods and services. The remaining social enterprises incorporate small-scale producers into their supply chain and work to improve their productivity, quality of outputs, and market linkages.
4) The majority of social enterprises are small, reflecting the industry’s youth, but not its potential.
Half of surveyed social enterprises generate less than USD 100,000 in annual revenue, yet there is a strong relationship between turnover and enterprise age with average turnover increasing overtime.
More than half of the surveyed social enterprises are financially sustainable, either profiting or breaking even. Profitability is also positively linked to enterprise age. The trend highlights an important advantage of for-profit social enterprises over nonprofit: if the enterprise cannot develop a viable business model with sufficient demand and sustainable pricing, the market will eventually force them to exit, while the same organization – if structured as a nonprofit – could continue operating on grant funding for decades.
5) Approximately two-thirds of enterprises treat social motives as equally if not more important than profit motives.
This finding suggests that most social entrepreneurs are using business as a tool for achieving social impact rather than viewing social impact as a positive outcome that will result naturally from their business. However, the motives of younger enterprises indicate a growing preference toward prioritizing profit over impact with a belief that this will lead to greater social impact over time.
6) India’s social enterprises are capital hungry businesses.
Only 7% report that they do not need any form of external capital currently. Equity is in highest demand across all growth stages, wanted by 78% of survey respondents, but there is also significant demand for grants and debt.
7) Grants from foundations, incubators, fellowships and competitions are a crucial source of capital for early-stage enterprises.
Grant sizes tend to be small and social enterprises would pursue a large number of them to meet their funding needs.
8) Finding and retaining good talent, raising capital, and building the value chain create the greatest barriers to sustainability and scale for social enterprises.
While challenges for social enterprises are plenty, these remain significant obstacles for many social enterprises.
9) The greatest financing challenge is not a limited supply of capital but social enterprises’ limited access to it.
Social enterprises report that they cannot secure available funding either because they do not meet investor requirements or because their business model needs further refinement before they are “investor ready”. The prevalence of funding that is inaccessible to most social enterprises indicates a gap between enterprise needs and investor expectations.
10) Despite the challenges, social enterprises are making a major impact in India.
Nearly one-third of them are operating in more than 100 localities, and almost one-third are serving more than 50,000 BoP beneficiaries annually. While still operating on a relatively small scale compared to successful growth-stage businesses in India, this coverage is significant given the industry’s youth and holds the potential for even greater impact in the future as it matures.
As a young industry, the obstacles that social enterprises need to leap over are plenty. The work in underdeveloped markets requires innovation on many fronts. They have to overcome the skepticism that consumers place on their motives and have to address the challenges of producers as their own. There is still work to be done in securing financial capital. All this must be accomplished within a vast talent gap. Though India may hold one of the most robust social enterprise industries in the world, there are three parties that can facilitate further social enterprise growth:
Sector Enablers can:
1) Leverage human capital from Indian corporations.
There is an opportunity for incubators to capitalize on the current CSR wave in India by establishing partnerships with corporations to connect social enterprises with skilled labour. Corporate partners could offer employees to serve as consultants for a social enterprise for a period of time.
2) Encourage business schools to incentivize students to join the social enterprise workforce.
Business school graduates are prime candidates for middle and upper-management positions at social enterprises, but very few pursue this route. The financial costs of school propel them to higher-paying opportunities. Schools could offer scholarships and reimburse fees to students who commit to working in a social enterprise for a fixed period of time. As an example, the Indian Institute of Management Bangalore offers a partial refund of program fees for students who work at a nonprofit for three years.
3) Streamline the application process for business plan competitions.
Early-stage entrepreneurs aim for prize money through business competitions. To allow them to focus on their business and avoid sacrificing time to fill out applications, a standardized application would eliminate wasted time and at the same time allow competitions to attract more applicants.
4) Facilitate partnership development for social enterprises.
Bringing potential partners together via online forums and physical meetings would greatly benefit social enterprises that rely heavily on partnerships for activities across the value chain.
5) Support peer-learning for early-stage social enterprises.
Pilot and start-up enterprises overwhelmingly report that their most valuable source of moral and practical support is other entrepreneurs. Peer-to-peer exchanges can be encouraged through opportunities to interact at conferences, online communities, and work spaces.
Investors and Donors can:
1) Mobilize a network of impact angel investors.
More than 80% of enterprises in the pilot-stage desire equity, but few are able to secure it. At this stage, the financial return does not justify the risk for commercial investors. On the other hand, a community of social enterprise angels investing their own money can tolerate more risk for the potential of a high social impact payoff. An intermediary can bring together a group of high net-worth individuals with a passion for combining their social values with their business acumen.
2) Encourage the accountable use of grant funding.
Investors often have mixed feelings about enterprises pursuing grants, believing it indicates a weakness in the business model. Yet the challenges in operating in the BoP market and innovating around fragmented value chains typically require such funding. Perhaps investors could consider extending grants alongside a financial investment or collaborating with a foundation to do so. It would require high levels of donor engagement and non-financial support for high-risk, high impact potential social enterprises.
3) Establish lending facilities that cater to producer enterprises.
Particular to those working with small-scale farmers and artisans, securing capital is one of the greatest barriers. They often take out expensive bank loans and become financial providers for the producers themselves. The method is barely viable given the already complicated challenges of operating a social enterprise. Impact investors could establish debt facilities that make below market-rate loans to producer enterprises for working capital needs and use purchase orders as collateral to lower the risk.
Government and Policymakers can:
1) Target early-stage enterprises with the India Inclusive Innovation Fund.
The National Innovation Council (NIC) announced plans for a INR 5,000 crore (USD 1 billion) fund that will support innovations in critical goods and services for India’s BoP. Scheduled to launch summer 2012, it will operate as a private fund with a government stake of no more than 20%. According to the NIC, the Fund will seed early-stage ideas and expand successful ones. Yet there are gaps in the funding landscape that could be alleviated by prioritizing investments in pilot-stage and start-up enterprises.
2) Reform sector-specific policies that restrict private sector participation.
There are many sector-specific policies and regulatory restrictions that limit the private sector’s engagement and inhibit social enterprise growth as a result. For example, India’s education sector requires all formal education institutions to operate as not-for-profit institutions. These regulations restrict equity investment and create significant barriers to entry for private players. Addressing policy changes would benefit social enterprises and the private sector more broadly.
3) Invest in infrastructure development through public-private partnerships.
Weak and inefficient physical infrastructure, particularly in rural areas, leads to high transport costs, power and water shortages, and poor internet connectivity for all businesses including social enterprises. The costs of developing infrastructure are not something the public sector can fill alone. Therefore, public-private partnerships for infrastructure development are key to building a business environment that can help social enterprises prosper.
To view the complete report, visit http://newsite.intellecap.in/assets/156/intellecap_landscape_report_web.pdf.
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