Social enterprise isn’t new – but it is increasingly mainstream. Trouble is, combining making money with doing good is tricky, especially if you are an SME or start-up business. Raising money for expansion is even harder. Teuila Fuatai and Nikki Mandow look at the challenges facing our growing cohort of social enterprises.
Raglan-based Xtreme Zero Waste sounds like it’s a cool company. Perhaps it’s that missing ‘E’ on Xtreme.
But what Xtreme does is far from sexy. It collects household rubbish and operates Raglan’s dump shop. It’s been doing that since 1999, after the Raglan landfill was closed.
It’s a business, with boring things like annual reports and financial statements. It contracts to council for kerbside collections, offers business waste services and waste audits; it sells recycled goods, and bits of wood and metal at its shop.
It employs 40 people.
But it does all this because it wants to make a difference in Raglan; to quietly move the town towards being 100 percent landfill-free.
Which is where the term “social enterprise” comes in handy, says Louise Aitken. Following a successful career at our biggest company, Fonterra, Aitken is now head of social enterprise development body, the Ākina Foundation.
Social enterprises are businesses with a positive social or environmental impact, she says. They aren’t “business-like” companies. They aren’t charities that make some money. They are businesses, period.
Ākina’s research into the sector, expected to be completed next year, suggests there could be as many as 2500 social enterprises in New Zealand. The sector isn’t new – social enterprise has existed in New Zealand since trading began – it’s just better-known now.
“Traditional Māori enterprise has always had a social or environmental purpose – it’s always been about the kaitiaki, the whenua or the land, and the people are always at the heart of why you trade,” she says.
But the large number of different “social enterprise” models in the modern world can make the sector difficult to understand.
At one end of the scale are companies which make money so they can do good – companies like Xtreme, or Auckland-based hi-tech social enterprise start-up Thought-Wired, which created ‘nous’, a wearable eye blink switch to give computer access for people who cannot move or speak.
Then there’s Kaitaia-based CBEC. CBEC runs a number of businesses in the town, including the local swimming pools, a garden centre, cycle hire, a marquee rental company, Far North link buses, and the dump/recycle centre.
But the reason it does this is to provide employment for local people and money for the local economy.
Making money is vital, otherwise the business wouldn’t survive. But generating businesses and jobs is the real raison d’être, Aitken says.
“It’s a great profitable business, it’s been there more than 20 years. But profitability isn’t the primary motivator, it’s an enabler.”
At the other end of the scale are for-profit businesses which are social enterprises not because of the work they do, but because of what they do with their profit. Startup company Choice, for example, is developing a technology platform that reduces transaction fees on credit card store payments, but also involves distributing half the (smaller) fee to a charity of the customer’s choice.
Kiwibank first started to support Choice through the Kiwibank FinTech Accelerator and has continued involvement, including helping it get its first pilot customer – Wellington’s Moss Café.
“With these sorts of social enterprises, they know their skills are in making money and they leave it to other people to deliver the impact. In Choice’s case it’s charities,” Aitken says.
But actually, the model or legal structure being used by a social enterprise shouldn’t be the focus, she says.
“You can do social enterprise in a thousand different ways. We should be focusing on the impact that’s delivered.”
But there’s the rub. Social enterprises are stuck between a rock (running a financially successful business) and a hard place (wanting to make a real difference).
And just because social enterprises have ‘good’ on their side, doesn’t mean they aren’t subject to the same challenges facing other small and medium-sized companies in New Zealand, Aitken says. In fact, the tension between the social or environmental side of the business and the commercial imperatives can make running a social enterprise harder than running another SME.
Perhaps the biggest challenge is how to get the money they need to fund growth. Traditional angel investment or venture capital funding might not be available to SME social enterprises if potential investors worry the social aspect of their business will dampen returns. But not-for-profit funders like charitable grants bodies or philanthropists will shy away from the money-making side.
The recently-launched Impact Enterprise Fund, an $8 million collaboration between Ākina, New Ground Capital and Impact Ventures, last week made its first investment – in digital chronic disease management company Melon Health.
The fund is looking for companies delivering tangible societal and/or environmental returns from their operations, but also offering attractive financial prospects for investors.
Since launching earlier this year, the Impact fund has evaluated almost 200 businesses and is targeting an IRR, or internal rate of return, of 15 percent.
One of the issues that has become clear is that some social enterprise owners still need to develop the business skills and nous to attract capital, and their companies aren’t ready for investment, Aitken says.
“The challenge is to create investable organisations; to build capability, a pipeline of companies that will be ready for growth in the future.”
She says the Japanese government recently put US$800 million into a wholesale fund for investing in social enterprises. If that sort of money came into New Zealand, there wouldn’t be enough companies to invest in.
“One of the things we’re trying to learn is how to value the impact they’re having. At this stage, that’s still in its infancy.”
Kiwibank’s Nigel Gaudin
Ākina recently partnered with Kiwibank and the Tindall Foundation to fill that gap – helping social enterprises build the capabilities they need to expand to the next phase.
The seven Investment Readiness Grants allocated so far range from $5000 and $20,000, and can be used by social enterprises to purchase professional services aimed at making them more attractive to investors.
Recipients also get the chance to tap into Kiwibank’s network of business bankers, Aitken says.
“That’s key, because it’s free advice on what their business models need to look like to be attractive to investors, whether it’s banks, crowdfunders, angels or others.”
Nigel Gaudin, Kiwibank’s general manager of business banking and specialist markets, says it’s important that social enterprises be seen by potential funders as strong investment opportunities.
“Part of the ethos around social enterprise is that they need to be for-profit. We will work with a business owner around how their business idea stands up and makes money.”
But Gaudin says banks and other funders also have to come up to speed about how to value social enterprises.
“One of the things we’re trying to learn is how to value the impact they’re having. At this stage, that’s still in its infancy.”
Still, Gaudin sees changes in business attitudes towards social enterprises, which he says have a key role in shifting New Zealand’s economy towards a more responsible marketplace.
“I think it’s a part of the economy that is trying to be more purposeful about what businesses are about – community and industry groups coming together for the good of the whole country,” he says.
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