Scaling Strategies for Social Entrepreneurs: A Market Approach

By Urs Jäger, Felipe Symmes and Guillermo Cardoza

Social entrepreneurs often experience difficulties when attempting to scale. The reason for this is that scaling isn’t just about an entrepreneur’s willingness to grow, but also—and, perhaps, even more importantly—his or her capacity to develop a scaling strategy that reflects an understanding of the various components that must be adjusted to accomplish scaling goals. Once entrepreneurs decided to scale the impact of their enterprise, they must develop new capabilities in order to access new resources and skills.

This book will help social entrepreneurs create effective scaling strategies by providing a detailed, three-phased market approach to scaling. Cases based on social entrepreneurs who have successfully worked in low-income markets in Latin America then illustrate three main strategies for scaling impact: co-creating in low income contexts, collective impact, and replicating business models. The market approach to scaling described in this book is based on the theory of negotiating impact for resources, as introduced in this book, and a corresponding study of more than 100 entrepreneurs in the Latin American region.

By offering a conceptual three phased approach as a guide for reflecting on practical case studies, this book appeals to business academics, leaders of incubators and those working with social entrepreneurs as well as current and aspiring social entrepreneurs themselves seeking to improve their management practices in order to scale their impact.

• Language: English
• Publisher: Palgrave Macmillan
• Release date: Nov 2, 2019
• ISBN: 9783030311605

Book preview

© The Author(s) 2020

U. Jäger et al.Scaling Strategies for Social Entrepreneurshttps://doi.org/10.1007/978-3-030-31160-5_1

1. Introduction: Scaling a Social Enterprise by Exchanging Impact for Resources

Urs Jäger¹  , Felipe Symmes²   and Guillermo Cardoza³  

(1)

INCAE Business School & VIVA Idea, Alajuela, Costa Rica

(2)

Viva Idea, San José, Costa Rica

(3)

INCAE Business School, Alajuela, Costa Rica

Urs Jäger (Corresponding author)

Email: [e-mail]

Felipe Symmes

Email: [e-mail]

Guillermo Cardoza

Email: [e-mail]

This book introduces a market approach that social enterprises can use to scale their impact. We show examples of how social entrepreneurs have successfully scaled the impact of their organizations by exchanging impact for resources [1]. i In this approach, social entrepreneurs connect buyers (such as impact investors) and sellers (such as social enterprises) in order to negotiate positive social and environmental impacts in exchange for resources. While the social enterprise model is often considered up-and-coming, in many countries it is well-established and has been promoted by business scholars since the 1980s [2]. ii What is new, however, is that emerging challenges such as global poverty, inequality, and climate change are driving a large number of social enterprises to scale their impact [3]. A growing number of actors are poised to support these efforts, such as government programs that foster entrepreneurial solutions to social problems, or organizations that provide standards related to impact measurement, investment, and production. Although many resources are available to social entrepreneurs in national and international arenas, this book focuses on impact investors as one of the most important drivers for scaling impact.

We introduce exchanging impact for resources as a practice that social entrepreneurs are already using to create new markets and scale their impact. This practice is an extension of the multiple books and articles that propose an "and" approach to social enterprises, meaning that social entrepreneurs and the organizations they lead set both economic and social objectives [4]. What social entrepreneurs now need, however, is guidance on how these objectives relate to one another—in other words, what the "and" means. We argue that the tension between economic and social objectives particularly increases once social entrepreneurs attempt to scale the impact of their enterprises, as this increases their need for resources. Thus, social entrepreneurs intending to scale their impact first and foremost need guidance on how to connect their economic goals with their social ones. Based on our observations of social enterprises that have successfully scaled their impact, we propose a market approach to scaling in which social entrepreneurs obtain the resources they need to scale by negotiating impact for resources.

Based on this approach, we propose three phases through which social enterprises can sustainably scale their impact:

Phase I: Negotiating impact for resources

Phase II: Designing operations

Phase III: Integrating financing and impact logics.

The knowledge presented in this book is based on seven years of research, including more than one hundred cases of social enterprises in the Latin American region that have successfully scaled their impact through a market approach. To show how each of the three phases above play out in the real world, we present examples in the form of illustrative, real-world cases that can be used for training and teaching purposes. Each includes a teaching note to help participants create solutions to the problems presented in the case. A summary of these teaching notes is included in this book, and the extended version of each illustrative case is available via an online platform in which instructors can access additional information, other cases, and discussion boards where they can converse with colleagues on classroom experiences.

This book is for entrepreneurs seeking to scale their impact, nonprofit organizations and for-profit companies that wish to shift toward a social enterprise model, and educators and students in classroom settings who teach or learn about social entrepreneurship in general and scaling impact in particular. We expect that many of our readers are already familiar with terms such as social entrepreneur and social enterprise, but perhaps need guidance on scaling impact in the face of new global challenges.

The origins of the market approach to scaling impact dates back to the 1980s, when a global economic crisis resulted in nonprofits receiving fewer government grants and private donations. This was a tricky situation for nonprofit organizations, as most had excluded a market approach from their organizational model. For many, their raison d’être was to address the social and environmental issues that government and companies were unable to address [5]. However, the nonprofit model failed to offer a solution to the scarcity of resources from grants and donations, and the need arose for new organizational forms and financing mechanisms that would create economically sustainable impacts on existing social and environmental issues.

The social enterprise model emerged, at first mainly in developed countries of North America and Europe, as a solution to this new challenge. These enterprises went beyond the nonprofit model, using a market approach to create impact. Their initial success fostered their growth, not only in developed regions, but also in developing regions such as Latin America. Since the late 1990s, a rising number of social enterprises have begun to explore how they can scale their impact both regionally and globally and, therefore, how they can access more resources. A Thomson Reuters Foundation survey shows that while Canada, Singapore, and the United States are considered the most likely places for social entrepreneurs to access impact investments, more than 60% of all respondents of all 43 countries surveyed report that social enterprises are gaining momentum. iii

Social enterprises with intentions to scale are part of a rising number of actors that support a market approach to scaling impact. At least four groups of such actors have emerged:

First, is the general public . Many populations are experiencing a rise in awareness of major global challenges such as climate change and poverty, which, in turn, creates a demand for economically sustainable solutions. Social networks are the driving force behind this public awareness. For many people around the globe, access to platforms such as Facebook, Twitter, YouTube, and Instagram has exponentially increased, fostering the visibility of social and environmental issues, as well as their potential solutions, on a regional and global scale. Social network communities discuss major challenges across national boundaries, with significant influence. As of 2019, 4.2 billion of the world’s 7.7 billion inhabitants were internet users, iv and 3.3 billion were active social media users. v Margaret Chang, former Director-General of the World Health Organization, argues that social networks have become an important new voice in the political arena, although many of the arguments within are not based on hard data or evidence. vi Whether evidence-based or not, however, the information on social media can construct public meaning. Thus, these platforms have begun to disrupt established hierarchies of communication and erode the power of traditional gatekeepers such as large media companies, political parties, and scientific organizations and journals. This also means that it has begun to elevate the potential of individuals to reach large numbers of people as never before. Twitter, for example, became a crosscutting networking mechanism in an ecological protest that included various gatekeepers and eventually culminated in the 15th United Nations Conference of the Parties on Climate Change (COP15) in December of 2009 [6].

Second, is the increasing numbers of organizations that define and structure the standards of impact trading (norms that structure the exchange of impact for resources). The Global Impact Investing Rating System (GIIRS), for example, aims to shift investor behavior toward a standardized way of measuring impact, and the B Corporation has established a set of standards through which companies can integrate social and environmental criteria into all areas of their enterprise. vii Such organizations promote the standardization of impact indicators and social impact practices and influence public policy to promote related laws and government services [7]. In countries around the world, these organizations are working to strengthen the institutionalization of social enterprises. In Chile for instance, the B Corps national headquarters works at the public policy level to promote B Corp Certification as a mechanism that permits social enterprises to access public funds. Likewise, a rising number of impact investors, governments, social movements, advocacy organizations, and even the social enterprises themselves have begun to contribute to an emerging standardization of a market approach to scaling impact.

Third, is the rising number of impact investors interested in initiatives that address regional and global challenges (e.g., those focusing on the United Nations Sustainable Development Goals) yet expect an economic as well as a social or environmental return on their investment [8]. Generally speaking, impact investors focus on both a geographical and economic scope. Those located in developed regions such as Europe, the United States, and Canada are often interested in investing in developing regions such as Latin America, Africa, and Southeast Asia, in such diverse issues as water, economic development, climate change, and poverty. viii These investments expect both an economic and an impact return. They are often willing to accept a lower financial return than they would from a for-profit enterprise—but only if the trade-off is a measurable and relatively high social or environmental impact. Compared to financial markets, impact investment funds are still relatively small; however, they are expanding rapidly. A Global Investing Network (GIIN) survey of 229 impacts investors reports that there were USD 35.5 billion in investments in 2017, compared with USD 38.5 billion in 2018—an increase of 8%. ix Further, the United Nations supported impact investment on a global scale by strengthening the Global Steering Group for Impact Investment (GSG), which intends to catalyze impact investments in social enterprises through various regional and global working groups that connect and align investors, states, social enterprises, incubators, and other relevant actors. The GSG also provides a platform through which actors can discuss the relevance of social and environmental issues such as poverty, water, health, nutrition, education, and climate change, and search for collaborative solutions on a regional and global level.

The fourth group supporting a market approach to scaling impact includes social entrepreneurs aiming to impact low-income regions [9]. Until the late 1990s, development organizations such as the Inter-American Development Bank and multinational companies that source resources in low-income regions (e.g., the coffee industry and its grassroots producers) conceived these populations as solely comprising basic needs—not necessarily as viable markets. Thus, their efforts focused mainly on philanthropic projects that aimed to help people escape from poverty. These projects focused, among other things, on the empowerment and inclusion of poor and informal actors into established global value chains. However, they ultimately failed to create new, viable markets in the region [10]. The rising discussion surrounding the base of the pyramid changed this discourse entirely [11]. Social entrepreneurs now increasingly perceive low-income contexts as potential markets in which they can base a profitable business while still making a positive impact. In this sense, contexts featuring poverty and informality also include paying customers. While they may only be able to afford to pay minimal prices, they can help cover the costs of the products and services a business provides and even produce profits. For instance, Dr. Jorge Gronda is an Argentine gynecologist who devised innovative ways of providing poor indigenous communities with affordable healthcare services [12]. One day, an indigenous woman told him she intended to visit a private hospital. Dr. Gronda warned her about the high costs, but the woman responded that she could gather the funds from her community. The response surprised him, and he realized that even poor people can be viable, paying customers. He just needed to create a suitable system that reflected their financial possibilities. In many cases, these customers can only afford minimal prices, and depend on the support of their families or communities—but they can pay something, and, more importantly, are willing to pay something. Based on this insight, Dr. Gronda built Humana, a private healthcare system for the poor. This group of paying customers is immense, as low-income regions account for roughly 60% of the world population, with a spending power of more than USD 5 trillion a year. x This is also the group that most significantly feels the negative effects of climate change, hunger, access to water, and other major challenges. In these regions, institutions such as public education, healthcare systems, and the rule of law do not work as efficiently and effectively as they do in more developed areas [13]. Furthermore, most of the profit-oriented markets rarely function here, as extreme poverty and weak market institutions make access to financing systems difficult—particularly with respect to opening new markets with customers that lack the capacity to pay higher prices.

Rather than become paralyzed by the immense number of unmet basic needs and other social and environmental problems that exist at the base of the pyramid, effective social entrepreneurs have a unique capacity to identify opportunities to negotiate impact for the resources they need to scale their business. Whether in high-income or low-income regions, social entrepreneurs and the organizations they lead can exchange impact in return for resources.

Social entrepreneurs can explore these opportunities to scale their impact by first identifying actors that are willing and capable of exchanging impact for resources. The key is to identify how the impact their social enterprises creates, or can create, is of interest to other actors on a regional and global scale. Using a market approach to scaling impact is profoundly different from how nonprofit organizations and for-profit companies work (Figs. 1.1, 1.2, and 1.3).

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Fig. 1.1

Nonprofit approach to impact

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Fig. 1.2

For profit approach to markets

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Fig. 1.3

Market approach to scaling used by social enterprises

Nonprofits aim to serve and help, based on a philanthropic approach [14]. Social enterprises intending to scale, on the contrary, follow a market approach. They explore negotiation opportunities related to the social problem they address, and focus on social or environmental problems that are of interest to market actors that have resources (e.g., impact investors). These investors can expect a return on their investment, as many social enterprises provide services or products to customers who can at least pay low prices, or have customers, as companies do, but also serve beneficiaries—target groups that are unable to pay for services or products at all. In each model, social enterprises exchange the impact they create with actors who are willing to inject the financial and non-financial resources needed to scale. In return, they report to the investor on the impact they have created, and return the invested money after a certain period of time. In many cases, the social enterprise pays a surplus margin on the money they return to investors.

Social enterprises also differ from for-profit companies in that their core business focuses on both impact and financial sustainability, rather than on paying customers alone. In situations of trade-offs between impact and income, they may prioritize impact over profit, or the other way around, but some degree of tension between the two is always present. Consequently, social enterprises typically do not work in markets where there are social or environmental challenges to tackle, but no investors interested in financing their solution nor potential paying customers that could contribute to the development of a self-sustainable business. These markets are covered by nonprofits. Nor do social entrepreneurs work in markets that have enough paying customers to generate a profit and scale their business but no social or environmental impact; these sectors are covered by for-profit companies.

Some social enterprises scale their impact by serving an increasing number of beneficiaries and customers, and reaching more geographic areas through their respective impact targets. Others scale by increasing the quality of their impact [15]. In both cases, scaling can be attempted through internal financing, meaning by generating enough income to finance their scaling plans. However, because social entrepreneurs work in high-need (and, thus, most potentially high-impact) areas, they are often unable to create enough income to finance their scaling plans internally. Therefore, most social enterprises require external financing to scale. Exchanging impact for the resources needed to scale is an effective way to secure external financing.

For instance, Juan Fermín Rodríguez, a social entrepreneur from Guatemala, discovered that most of his country’s rural, poor, indigenous communities lacked access to electricity. Through a crowdfunding campaign that eventually gained the support of international organizations, he founded Kingo, a company that developed a solar technology device that is now installed in homes throughout several poor, rural zones of Guatemala. Through this device, Kingo’s customers can choose how much energy they use and when they use it, giving them flexibility at rates they can afford. After testing the technology, Juan Fermín negotiated impact with interested investors. These resources then permitted his enterprise to develop a financially sustainable business model that succeeded in creating a market for solar energy poor, rural regions and was even able to scale its impact to other parts of the world.

Thus, social enterprises that successfully scale:

Use a market approach to scaling impact.

View impact as the core of their business model.

Address social and environmental problems that are of interest to impact investors.

Pay a financial return to the investor, or at least repay the original capital invested.

Often sell to paying customers; however, in most cases this income is not enough to cover the cost of scaling.

Measure their social and environmental impact and report it to current and potential investors.

These criteria show how social enterprises intending to scale their impact differ from other closely related forms such as social innovation initiatives, enterprising nonprofits, and companies with corporate social responsibility (CSR) programs (Table 1.1).

Table 1.1

Differences between organizations with impact goals

Social innovation initiatives link ideas and find creative solutions to certain social problems. Impact is the core of the resulting business model. For example, young people and organizations often come together in entrepreneurship hubs or other collaborative spaces and find new ideas to addressing social or environmental problems. Nevertheless, innovation is an investment for organizations and does not necessarily generate solutions that scale impact. What scales impact from innovation is the organization’s ability and willingness to standardize, routinize, and constantly improve the products, processes or interventions that generate impact [15]. We extend this discussion, arguing that social enterprises exchange impact for resources and develop efficient operations and systems of revenues in order to scale and address social or environmental change.

In the case of enterprising nonprofits , market activities are not directly related to impact [14]. To understand this, it is important to know the difference between a business model and an operational model. A business model is formed in simple terms of a financing model (where resources come from) and an operational model (how products and services that reach the target group are created). Nonprofits are mainly financed by donations (financing model), and their operations focus on social impact (operational model). Market activities are fairly limited and are used to increase funding, and not directly linked to the core social mission. This is why nonprofits commonly focus their products and services solely on their beneficiaries’ needs. To secure additional resources through market activities, enterprising nonprofits create an organizational unit through which to sell additional products or services, aiming to generate income outside of their operational model, which focuses on impact. Furthermore, based on their nondistribution constraint, they do not offer financial return to their donors, nor do they repay the capital they received. Many nonprofits serve as an example of this organizational type. UNICEF, for instance, sells Christmas cards to raise funds. However, Christmas cards are not how UNICEF creates impact. Rather, it uses this market activity to fund core impact activities that are focused on children. Social enterprises intending to scale are different from enterprising nonprofit organizations such as UNICEF, in that exchanging impact for resources is at the core of their business model. They focus on social problems that are of interest to impact investors and, by exchanging impact for resources in impact markets, create self-sustaining business