Filling in the Blanks: How Increased Transparency Would Help Social Entrepreneurs’ Credibility at Davos

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While flicking through the brochure of the selected social entrepreneurs attending the World Economic Forum (WEF) in Davos, I found it hard to believe it was a promotional brochure of market-based solutions for social problems. Proof of financial sustainability is scarce – ‘percentage earned revenue’ is the sole indicator and the term is left undefined. My assumed definition: the percentage of revenue that comes from selling the enterprise’s core business or service. Furthermore, the responses given for this indicator were not even that positive.

Of the 29 social enterprises represented, roughly one third earned less than 50 percent of their own revenue, with the figure in some cases as low as 15 percent.  Admittedly, another third earned either 90 percent or above of their own revenue, and the low figure might be understandable if the ventures are in early stages, but no explanation was given for the low figures. I found it startling that the people selected for being able to find market-based solutions for social problems were showing limited financial success. Can we expect all social enterprises working in difficult social and environmental areas to be financially self-reliant? Does it affect their ability to reach their social mission if they are not? And what other information do potential business partners at Davos need to be convinced of the long-term viability of a social enterprise?

The only figures shown in the brochure – widely distributed in the Davos Congress Centre – are the number of direct beneficiaries, the annual budget, and the percentage earned revenue. From the first, we get an approximation of the impact, and the second, an idea of the size of the enterprise, but why is percentage earned revenue so important? It’s because social enterprises are celebrated for the fact that they are financially sustainable alternatives to grant-dependent organizations. Consequently, earning a low percentage of their revenue indicates that they too are financially dependent on other actors.

According to some of these social entrepreneurs, the reason why they are not always profitable is because it would require compromising their social mission. For Anne Hastings of Fonkoze Financial Services (90 percent earned revenue), which serves low-income, rural communities in Haiti with financial and social services, there is a clear trade-off between social mission and profit. Providing finance to the poorest sector of the population means operating in areas with poor infrastructure and high risks on rate of return, thus higher costs, so such a microfinance institution is not going to be as profitable as its counterparts that don’t take on hard-to-reach clients. When I asked Ms Hastings if Fonkoze would ever be truly market-based or if it would always need some sort of subsidy, she replied “That’s the question that I really don’t know how to answer.” Despite predicted profitability in the near future, the track record of repeated disasters in Haiti keeps Ms Hastings’ expectations muted.  Fortunately, Fonkoze is backed by supportive investors who have agreed to change debt to equity investments in order to help the long-term development of the microfinance institution.

Generous investors can tide over an organization until the break-even point, but for social entrepreneurs who pursue a mission with a permanent trade-off between social mission and financial sustainability, a different solution is needed. Enter the hybrid model. When I talked to social entrepreneur Mark Ruiz, he explained how he had operated his program to empower the Filipino micro-retail sector, Hapinoy, as a for-profit for three years before realizing he couldn’t reach all of his social goals with a for-profit legal structure. So he set up a non-profit organization to perform the unprofitable activities such as teaching better inventory skills and customer service methods. The non-profit currently receives private capital support from companies such as Coca Cola, but Ruiz makes it clear that “the long-term aim is for the for-profit organization to be able to cover the costs of the non-profit organization.”

Another advantage of the hybrid model is that the legal structure can provide more flexibility when looking for partners. For example, consider social entrepreneur Brij Kothari, who aims to tackle illiteracy through subtitling on television programmes and films. Kothari explained to me that he can only access popular Bollywood movies for subtitling with a non-profit structure (as he is not allowed to make a profit from their distribution), but subtitling popular films teaches more people how to read. Therefore, he operates both a for-profit organization (BookBox) and a non-profit organization (PlanetRead).

So should we really be concerned that many social enterprises don’t earn all of their revenue? In short, no. These organizations are operating in places that rank at the lower end of the World Bank’s Ease of Doing Business Index.  Even if their ‘percentage earned revenue’ is not 100%, they find ways to work around this fact. The real problem is the lack of convincing communication that these organizations are financially viable, which may still be deterring Davos delegates and other potential partners from investing.

The purpose of bringing social entrepreneurs to the WEF is to demonstrate that people have found scalable solutions for social problems, and to enlist Davos delegates as powerful partners and advocates. But without clear communication of how a social enterprise plans to be financially sustainable, how can we expect the business-focused Davos delegates to take social enterprises seriously? Indicators such as ‘percentage earned revenue’ do not mean much in isolation; the brochure needs to explain the larger financial picture, giving context and providing explanations where figures could be misinterpreted. While I initially felt pessimistic when looking at how little revenue some social entrepreneurs made, by talking to them directly, I learnt that this can actually help to achieve greater social impact without jeopardising the finances. Innovative legal structures, financing mechanisms, and hybrid models all help to mitigate low revenue. But this is not obvious to people casually browsing the brochures distributed in the Davos Congress Centre.

If the organizers want social enterprises to be taken seriously at the WEF for finding market-based solutions for social problems, explanations about financial sustainability should be included in the brochure – it is after all the unique selling point of social enterprises. With this information at their fingertips, potential partners and investors can judge for themselves whether social enterprises are worth investing in.

Feature Image: Coins; Source: Nikolaj Fischer / Student Reporter

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