This story originally appeared in our May 5, 2011 e-magazine. Click here to subscribe.
Entrepreneurs face common challenges to growing an idea into a profitable enterprise. Three successful social entrepreneurs offer their insights to Beyond Profit.
Social entrepreneurs are not very different from their counterparts in the business world when it comes to the challenges of starting, running and sustaining a business. However, when one’s business depends on offering solutions to a social problem in a profitable and sustainable manner, the question of identifying the problem is only half the battle. The other half is understanding the right product or service to take to the bottom of the pyramid (BoP). Before entering a market with a new offering, an entrepreneur should then have a clear understanding of which institutions are in place and which are missing, and how successful – determined by profitability – will the business model be.
For the social entrepreneur, success or failure is determined by its social impact, or how effectively the company’s offering improves upon the status quo. And because one of the key goals of a social enterprise is to create social impact upon a vulnerable section of the population, it becomes all the more critical to identify both the barriers and solutions to entry.
Fortunately, there are numerous social enterprises worldwide that have dealt with the process of starting up and sustaining a business, each with its own unique set of challenges.
Beyond Profit spoke with three social enterprises across the world to identify some of the most common problems that a start-up social enterprise typically encounters.
The Funding Gap
This is by far the earliest and most common problem facing most start-ups – most countries with a large BoP population simply do not have an established culture or tradition of venture capital or angel investing. Moreover, banks in such countries are often loath to extend credit to an untried, untested product that often aims to service what is viewed as a high-risk demographic.
Gabriel Manjarrez, co-founder and chief executive officer of Mexico-based Finestrella, a financial intermediary that enables the BoP to access subscriptions to mobile phone services, says that fundraising was a major challenge.
Which was not very surprising, considering that Finestrella was attempting to extend credit to a population that neither held a credit card or had the funds to pay the required minimum of four months of billing, mandatory in that country to get a mobile phone subscription.
“There is very little understanding of real start-up funding in Mexico, which leads to conversations that go like So, how profitable are you? Answer: We are in the red and will be for some time. Ah, they answer, well that is not really the type of start-up we invest in,” he told Beyond Profit.
With these sorts of dead-end conversations, Finestrella concedes he was fortunate to secure financing from IGNIA, Latin America’s first impact investing fund. In 2010, IGNIA invested US$4m (INR 180m) in Finestrella.
Nat Robinson, CEO of Kenya- based Juhudi Kilimo (JK), which focuses on Kenya’s very rural areas and finances specific agricultural assets that offer farmers more “immediate and sustainable” income.
“The assets [JK finances] act as an alternative form of collateral in case of default, reducing the farmers’ risk of greater poverty through indebtedness, and assets are insured to protect clients from heavy business losses,” explains Robinson.
But despite a business model that actually created assets for the BoP population, Robinson recalls that “Access to investment—both debt and equity—was probably the greatest challenge for us in starting JK.”
His advice: “The process of fundraising can be long and exhausting, but in the end, very rewarding.”
Movirtu, a UK-based for profit social enterprise that focuses on re- inventing mobile identity, was more fortunate. While it faced the ques- tion of how to demonstrate that the BoP is an underserved market, yet an attractive one at that, they have been able to find investors such as Grassroots Business Fund, Gray Ghost Ventures, Stichting DOEN and TLcom Capital LLP that believe in its technology that separates the mobile identity from the phone and SIM, and allows a user to take any GSM capable handset and transform it into ‘their own’ without revealing any user data.
“We help bridge the gap between affordable mobile access for BoP users and profitable business for the operators,” says Ramona Liberoff, executive vice-president of Marketing, Strategy and Planning.
As Manjarrez of Finestrella puts it: “Find the right investors. Don’t be afraid of losing money while you learn. There are so few that are truly willing to invest in the learning that whatever you glean will be hard to replicate by anyone else.”
Structure and Team
One of the key challenges for start-ups, says Madhukar Shukla, professor of Organizational Behavior and Strategic Management and who teaches social entrepreneurship at the XLRI School of Business and Human Resources in Jamshedpur, India, is organizational structure and talent acquisition.
“The challenge is that many people who get into this sector do not have an idea about the way organizations are structured, the need for corporate functions, processes and where to find the right talent,” he cautions.
A world away, in Mexico, a major challenge that Manjarrez and business partner Pedro Zayas confronted was that there were no companies able to deliver Finestrella’s services to BoP consumers.
At first, the co-founders thought they could outsource the function, but gave up; when they realized that vendors did not appreciate their “customer-centric culture.” Instead, Manjarrez and Zayas formed and trained their own nationwide team to support operations.
Similarly Robinson says that once funded, their “…next challenge is to attract and retain quality people for the company.”
Learnings and Needs
Another critical factor for a start-up is to know what it needs to know, both about what it wants to do, as well as about what its consumers need.
In 2004, for example, the K- Rep Development Agency (KDA) launched JK as a not-for-profit project to address the challenges of low agriculture productivity and the limited reach of microfinance institutions (MFIs) in Kenya, 80% of whose population is in agriculture.
“Farmers are the backbone of the Kenyan economy,” says Robinson. “But their families often live without adequate food or income needed to cover educational and medical costs.”
What’s more only 17.9% of Kenya’s population has access to MFI funds.
In April 2009, after five years of outreach and testing, JK was spun off from the KDA and became an independent, for-profit organization.
“We benefited from the previous experience and knowledge of the K-Rep Group with starting new businesses in Kenya,” says Robinson.
Today, JK has financed over 5,500 assets worth US$3m across seven field offices while retaining an average repayment rate of 95%, and has received new funding from the Acumen Fund and the Grameen Foundation.
At Movirtu, the “importance of a real understanding of the user and user experience needs to inform everything we do,” says Liberoff, as well as the “need to make a profit to make the best pos- sible impact.”
“Many [BoP consumers] already use phones, but that revenue wasn’t being counted by the operator,” she points out. “Many have a high level awareness of mobile services despite low levels of literacy. Many BoP consumers are both aspirational and highly brand loyal.”
At the same time, what Movirtu represents, she adds, is “a new way of doing things, for a new market, for many operators.”
“The sales cycle is predictably time-consuming and complex, but I’d say we are as or more successful than most software providers as we bring the operators the solutions to problems they haven’t been able to solve, and opportunities they haven’t been able to address,” Liberoff told Beyond Profit.
All too often, a smart idea has been stymied by regulatory hurdles, which makes it critical to be aware of legal or legislative hurdles. For example, a firm like Movirtu could be hit if the Kenyan government decides to impose a tax on SIM cards.
In other countries, just the process of starting up a new firm can be cumbersome enough to discourage even the bravest innovator. The recently-released Innovation for Development Report 2010-2011 ranks countries for their friendliness to innovation, drawing from data on a variety of factors, policies and institutional characteristics.
Having said that, some nations are friendlier towards start-ups than others. The Mexican regulatory environment, for example, has been “very friendly so far,” admits Manjarrez. “Mexico has made an effort, and succeeded, in streamlining government paperwork and doing away with obsolete regulations,” he said.
“Start-ups also need advice in terms of what legal entity their organization should have, should they be registered as non-profit, for-profit, private limited or some other,” points out Professor Shukla.
At the end of it all, though, the key thing is to not give up. As Robinson says “Persistence, patience and determination can help over- come all obstacles.”
Photo credits: IFAD/Nana Kofi Acquah and Flickr user manunderstress