Entrepreneurs are highly motivated, innovative and critical thinkers. When these attributes are combined to solve social problems, a social entrepreneur is born. Working in the start-up space, I get the opportunity to work with many social entrepreneurs, and a lot of them struggle to decide which business model and legal structure should they adopt. This not an easy choice since these ‘social’ start-ups can take various business models along the spectrum, starting with pure for-profit companies to pure not-for-profit businesses. This choice is crucial since it determines how this business will operate in future as each business model offers its own opportunities and constraints.
While deliberating around the business model, the two most important determinants are Customers Paying Capacity and Value Creation, as plotted on the grid axis (see image). This grid can help decide which models may be the most suited for your social enterprise. Let me dwell a bit more on each of these two axes.
Customers Paying Capacity
Whether customers can afford the services or products?
Customers paying capacity is the affordability of customers to pay for the products (or services) which the enterprise is offering. Here it is not about the need for the products (market need assessment should have already answered this) but the customer’s ability or inability to pay for them. If the customers can afford to pay, the enterprise can lean towards a market-based approach. If the customers can’t pay, then these customers need to be seen as beneficiaries, and the enterprise has to find a third party to pay for these products. An external party has to step in and pay for the product so that others can enjoy it. The third party could be specific donor’s paying on a one-to-one basis for the beneficiaries needing the products. Else, these could be ‘corpus’ donors who pay in chunks to the enterprise, which then uses these funds to serve beneficiaries without the donor knowing the specifics of each beneficiary helped.
Whether value creation benefits a few people or the public at large?
With your enterprise, you can create private equity or value for a few people or create public value, which is social equity. While private equity is about personal wealth, social equity is about trust and goodwill. Private equity is concentrated and delivered to private individuals and can be easily converted into monetary terms. But, this is not the case with public value creation or social equity. Public value creation is so much more challenging to always measure in monetary terms. It is about outcomes and impacts, which are not as easily convertible into financial numbers. So when it comes to the value proposition, the question is: Are we focusing on public value creation for a large number of people, or are we interested in private value and wealth creation?
While the Customers Paying Capacity and Value Creation are strong determinants of which business model and legal form the enterprise should take, another critical aspect is the orientation of the entrepreneur. The orientation of the entrepreneur also, in some ways, determine for whom will the enterprise create value. The question for the entrepreneurs to ponder here is – Do I have a distributive mindset or acquisitive mindset? And, there is nothing wrong with either. You can create social impact also with an acquisitive orientation through a ‘for-profit’ social enterprise, as long as you can zero in on the right business model. In fact, ‘for-profit’ social enterprises are much more sustainable, as they don’t have to rely on donors and grants.
Even if you fail to do something ambitious with your social enterprise, you will still succeed in doing something important, hence your efforts will be worth it!