Social enterprise: Bridging the financial social return gap

Q: A well-organized social enterprise can make profit by providing a service or selling a product to the same audience it serves at a small profit margin

There are several issues that should be of concern to the social entrepreneur trying to raise capital for a startup. These enterprises, according to Professor Yunus, founder of Grameen Bank, are non-dividend paying ventures. They are set up only for the purpose of solving societal problems, and combine both social and commercial goals. Their commercial goals are not like those of other kinds of businesses. The commercial goal of a social enterprise is rooted in its desire for sustainability – to ensure the business survives by helping to pay its way. Those who provide them with funding therefore do not expect a return to their money but may be happy with the attainment of the set social goal.

This kind of business is usually registered as Incorporated Trustees stipulated under the Companies and Allied Matters Act (CAMA) in Nigeria and could be limited by Guarantee. As non-profit organisations, social enterprises are not to be set up as profit-making entities. This provision contained in Section 24(4) of CAMA, does not however imply that they will be committing an offence if they make profit. It only requires that such profits, when made, should not be available for distribution to the members. This provision is a significant addition to the hindrances to the funding effort of social enterprises. Not many people are ready to invest without profit expectation, especially in a capitalist economy. It is therefore not surprising that social enterprises face considerable challenges in their fund-raising efforts, which target a variety of sources, including personal savings of the entrepreneurs, funds from their friends and family members, donations, grants, and investments from commercial sources such as Angel Investors and debt financing.

Profits are not entirely contrary to the idea of nonprofit. A well-organized social enterprise can make profit by providing a service or selling a product to the same audience it serves at a small profit margin. It must however, ensure that the cost of such goods and services provided stays below market price or the price charged by commercial entities for the same good or service. This condition requires deft management and careful application of resources to avoid waste, the cost of which may be passed onto consumers. Clearly, the benefits that accrue to society from the provision of affordable services to the less privileged is a lot, even if gauged from the cost of repairing damage that will arise if an ill is allowed to thrive. However, the provisions always cost more than the financial inflow they bring, leading to what is termed the Financial-Social Return Gap– the social benefits exceed the financial returns. This Social Return Gap is at the root of the unattractiveness of social enterprises to investors.

The result is that social enterprises face challenges attracting investors because of their hybrid nature – part charity and part for-profit. They must find investors who are interested in something other than financial reward; perhaps quantifiable impact on society; and who are prepared to see profit from viewpoints other than cash – say social impact. They are unable to access the local financial markets unlike conventional for-profit businesses, which can rely on the strength of its balance sheet to raise funds. They attract different categories of lenders and investors, including venture capitalists, bond and debenture holders, equity investors and banks.

The reality is that startups are increasing by the day courtesy of the unstable economic environment, which is shrinking the pool of white-collar jobs and forcing many into unemployment. The COVID 19 pandemic further compounds the problem by wiping out companies, jobs and livelihoods. People are fighting back by resort to self-employment and entrepreneurship. Available data shows that the global startup economy is growing both in headcount and revenues. It has generated over 2.8tr dollars over the past two years, and over 800 businesses in the United States in 2020 were start-ups that are less than one-year-old. Social entrepreneurs must understand that capital is a coward only where the profit is low. Additional evidence of the availability of capital at the right reward is the fact that the Nigeria Sovereign Wealth Fund, in its current performance report, said that it made significant profit from its venture capital business in 2020, despite the pandemic.

Clearly, capital is greedy for profit and will take risk where the return is adequate. It is the duty of entrepreneurs to explore and innovate instruments and strategies that will give them a strong foothold in the financial markets that are brimming with profit-seeking capital. They can find, for instance, social impact bonds that pay a return if a social project succeeds.