Growth prospects: investing in social entrepreneurs

All start-ups need investment to step up to the next level and truly realise their potential. How might budding social entrepreneurs best go about making their project an attractive proposition to would-be backers?

Having spent several years working for Proctor & Gamble, the multinational giant that produces consumer goods ranging from beauty creams to dog food, Zeina Abou Chaaban was ready for a change. “I knew traditional business was not going to be fulfilling,” she recalls. “I wasn’t happy, and I knew that I wanted to take a step and have a direct impact on the world around me.”

Chabaan looked at the traditional NGO sector, but on the advice of her mother decided to look for a way to use her experience in business, and pursue her desire for social impact inside a for-profit business. In 2009 a visit to the Al Biqaa refugee camp in Jordan, which houses 80,000 displaced Palestinians, opened her eyes. “I was inspired by the refugee women, with such love for their heritage and their skills. Despite the difficult situation they are living in, they are trying to offer a better life for their children,” she says.

It was the spark she needed. Using her own seed capital, she started a company, Palestyle, which provides jobs to embroiderers from the refugee camps in crafting leather goods that are now sold in high-end department stores, including Bloomingdales and House of Fraser. A portion of the profits also goes to support social projects to help disenfranchised refugee communities. It has been a successful few years, and the products have started to make the kind of impact that luxury brands dream of, appearing on the arms of Hollywood stars including Eva Longoria and Lily Cole.

Now, she is looking for the right investor to help the company expand, hoping to tap a small but growing community of social and impact investors, and in doing so prove her business model. “This is the challenge of the social business,” she says. “You have to succeed on a financial level, and at the same time you have to show your social impact, without the one jeopardising the other.”

According to investors, mentors and entrepreneurs themselves, the mistake that most social start-ups make is not focusing enough on their financials. Although social enterprises and the wider impact investing sector are often pitched as a blend of financial and social returns, the first concern of most investors is usually the sustainability of the business.

Ankur Shah, who heads overall sector strategies for the Acumen Fund in Dubai, says this is fundamental to the entire notion of impact investing, which works to complement traditional philanthropy and bring for-profit financing into the social space.

“We see that investing [money] is more effective than giving the money away, because the company that we invest in, theoretically, will be sustainable and will not need additional infusions of philanthropic capital in the future,” he explains. “More than that, they will go out and leverage commercial capital as time goes by, giving a considerable amount of leverage for the philanthropic dollar.”

At Acumen, Shah looks at two types of company: those with innovative business models that are yet to fully prove themselves, and those who have validated their approach but need financing to grow. The former requires a more venture capital-type approach, whereas the latter necessitates closer examination of an existing company.

“Our view is that it is important for us to prove that the unit economics are proven before the business expands,” Shah says. “Let’s say we have a chain of primary healthcare clinics that are based in slums. Each clinic needs to generate profits, such that the sum of the profits of all of the clinics will pay for the corporate overhead.” Management quality is equally important, Shah says, and founders need to demonstrate a close fit with the fund’s values and mission, as well as “grit, integrity and skillset”.

Of course, impact matters, and Acumen will look in detail at a company’s social profile, determining the breadth and depth of its impact, and the mechanism it employs to achieve it. Again, the fund is looking for something more than just a donation-based model. “There has got to be some sort of innovation that breaks some kind of constraint that is pre-existing,” Shah says.

A good pitch, he argues, incorporates numbers that demonstrate which sections of society the company will impact, what critical services it will provide to how many people, and what growth plans are in place.

“We made an investment in a vocational training company, whose pitch was to train informal sector workers who did not have formal contracts, and were being paid on a daily, weekly or seasonal basis,” he cites by way of example. “The first order impact was the number of people they trained, the second order impact was the quality of training, which means the incremental improvement in skill level, along with the incremental wage increase of that worker.”

There are data challenges in measuring and calculating the metrics, he admits, “and we don’t expect early stage companies to have solved these things,” however they are an indication of the rigour of thought that the industry expects.

“We don’t necessarily expect all of this to be figured out up front,” he clarifies. “We see it as concentric circles. You need to hit all the headlines first, so that we’re interested in the business, and then the headlines need to stand up to scrutiny and due diligence.”

The red flags for investors, he adds, are basically a failure to address these key criteria. “There’s not enough impact, or the impact is half-hearted. The impact has not been thought through or doesn’t reach low-income consumers. The financial viability has not been thought through, the operating expenses are way too high, there’s no plan to break even and there are reckless plans to expand the business. Management is looking for cheap money rather than trying to prove a point, or not really thinking about it commercially enough, or not doing anything really innovative.”

The laundry list of requirements sounds fairly daunting – all the more so when it is added to the traditional problems that start-ups in emerging economies can experience, such as finding talented staff and accessing markets. Successful start-up ‘scenes’ tend to boast a well-developed ecosystem of mentors, investors, recruiters and fellow founders that extends well beyond just the venture capital industry.

“At the end of the day, regardless of what country you’re in, the network that an entrepreneur can build around him or herself has arguably the biggest role to play in advancing your company from stage one to stage two to stage three, et cetera. That’s not limited to a network of investors, but a network of knowledge and a network of mentors,” says Jamil Wyne, a research associate at Wamda, an Amman-based platform for entrepreneurs in the MENA region.

“There is a general consensus that something’s forming, but it’s at an early stage,” he continues. “We have more incubators, we have more investors than before... you have formal and informal gatherings where people are meeting and sharing ideas.”

Although there are marked differences between countries across the region, Wyne cautions that venture capital is limited when it comes to purely for-profit entrepreneurs in the Middle East and North Africa (MENA) region. This translates into an even tighter supply for social entrepreneurs: despite the hype, and despite a well-established tradition of philanthropic giving across the region, he says investors are not yet fully sensitised to the impact investing and social capital sectors.

“You have a very, very small population of investors that are actually thinking about social enterprise... The institutional support is minimal,” Wyne cautions. “I also think that the maturity level of many of these social entrepreneurs isn’t yet at the point where an investor would want to step in.

“Entrepreneurs who are driven by the social mission sometimes think and feel that because of that social mission, people will be nice on their financials”“I think there’s just a grey area around it. If you look at other parts of the world, like sub-Saharan Africa or Latin America, India, even the US as well, it’s much easier for people to convey this point of fusing for-profit and social returns. I think that is a practice that really hasn’t come to fruition [in MENA] just yet.”

Not everyone agrees entirely that the amount of available funding is the central issue. Medea Nocentini, who mentors and consults with social enterprises through C3 – Consult and Coach for a Cause – in Dubai, says that while investor networks are still fairly new, there is still a sizeable amount of capital around.

“Everybody complains about the lack of funding, but the funding is there,” she insists. “People are going to the US to invest, so it’s not that people don’t have the money or they don’t want to invest the money in entrepreneurship or social entrepreneurship. It’s more that there is a phase before reaching that level that entrepreneurs need to go through.”

In many ways, C3 is a social enterprise itself. After looking for volunteer opportunities in the UAE, Nocentini began helping out at a couple of fledgling social enterprises, offering pro bono consulting time. By the end of 2011, enough friends and friends-of-friends had become interested that the group could hold networking events, “as a fun thing to do”.

Today C3 has a database of around 800 entrepreneurs and volunteers from the corporate world, and has taken 20 enterprises to scale. C3 events have gone from four or five people in a room to hundreds filling conference suites – a bellwether for the growth in the industry. And even though it all began as a simple volunteer programme, Nocentini is forthright about the hard business logic that underpins successful social entrepreneurs.

“The challenge that a social entrepreneur is going to go through is building a solid story on pilots, past performance data on the financial side of things and the social side of things, in a data-driven way,” she says. “Entrepreneurs who are driven by the social mission sometimes think and feel that because of that social mission, people will be nice on their financials. And then they go in front of investors...”