Over the past ten years in Sub-Sahara Africa (SSA), there has been a proliferation of social enterprises replacing traditional donation-led philanthropic organisations.
A social enterprise is a business whose main objective is to tackle social problems, improve people’s lives and improve the environment. Additionally, a common characteristic shared by all social enterprises is sustainability, both social and economic.
Emerging markets pioneered the development of social entrepreneurship by developing and scaling successful social enterprises in the form of micro-finance and mobile phone banking. In Kenya, M-Pesa transformed the banking sector by providing affordable mobile banking solutions to more than 10 million poor local businesses and individuals.
In Zimbabwe, there are more than 500,000 social enterprises generating nearly three million jobs across the agriculture value chain. This translates to more than $5 billion value generated, contributing nearly 60 percent of the country’s overall GDP.
Contrary to common misconceptions, social enterprises are outperforming the small and medium-sized enterprise (SME) segment. Per market research conducted by GIIN in 2016, almost a third more social enterprises compared to SMEs increased their revenues in 2016.
Although historical industry performance has been favorable, there are some significant constraints slowing full growth potential.
- Many social enterprises are still in infancy stages of development and operating at a sub-optimal scale. Consequently, these businesses have limited capacity to optimize business performance, hence struggle to compete with larger established for-profit businesses. Approximately 80 percent of social enterprises in SSA, have less than five employees, while just 1 percent have more than 100 employees. However, in developed markets like the United States, social enterprises operate at larger profitable scale with approximately 10 percent having more than 100 employees. African social enterprises generate less than $10,000 annual revenue relative to $250,000 annual revenue generated by social enterprises based in United States.
- “Lack of appropriate capital across the risk-return spectrum” and “shortage of high-quality investment opportunities with a track record” are slowing industry growth. Approximately $13 billion in impact investing funds were looking for investment-worthy social ventures in 2014, up 19 percent from the year before based on the latest industry report published by GIIN in 2016. However, there is a shortage of tools for developing compelling propositions to promote investment. To close the gap, industry leaders are mentoring social entrepreneurs, developing networks, enhancing information transparency and diversifying capital streams – in the form of blended patient capital, debt, equity, or hybrid financing that better serve the needs of social enterprises.
- Individual geographies have their own economic and political issues that can constrain growth or impact the viability of a social enterprise model. Last year, Ignition Impact Fund assessed the social enterprises in its portfolio to determine which ones would best scale up in certain country. That analysis yielded specific insights about the interactions among product innovations and ideas, business models, and country-specific conditions. As such, investors should carefully assess each deal to determine its standalone attractiveness given large discrepancies in different environments.
- Logistical and value chain barriers limit full growth potential. A product or service may be innovative, but appropriate ecosystem enablers must be in place to ensure access, availability, and affordability. For instance, A.T. Kearney helped establish a cash-and-carry chain in Ethiopia, based on the government’s aspiration to lower food prices. The focus was on developing the resources and infrastructure behind the food supply chain.
The successful evolution of social enterprises requires both commercial and legislative mindset shift. Investors need to look beyond the expectation of turning a quick profit and consider the benefits of patient capital. On the legislative side, investment incentives, such as partial tax subsidies, would encourage investors to finance social enterprises over profit-oriented businesses that offer more compelling returns. From a policy perspective, this is a justifiable trade-off, since social enterprises often substitute for or complement public sector services.
Until changes are incorporated into the ecosystem, the fundamental question social enterprise leaders should be asking is not just “How do we expand?” but rather “How do we expand in a commercial and regulatory environment that restricts our growth?”
I am keen to hear your thoughts.
Jo Chidwala is an experienced business leader with proven record of accomplishment to transform businesses by formulating and executing product and pricing strategies that generate value. He is a strategic thinker with strong analytics, modelling and communication skills; can lead and motivate teams to drive projects to completion.