Large social challenges = large entrepreneurial challenges
My own daughter – a young gifted modern classic music composer – once shared with me: “Dad, you think like someone from the last century when you say: first learn, then earn and finally return. Millennials want to learn, earn and return all at the same time.” I came to understand that this means launching innovative businesses (learn) with products and services that make the world a better place (return), and also turn a good profit (earn). So, in essence: large social challenges are also large entrepreneurial challenges.
We have now worked with about a hundred young innovative companies that act on this vision. Think about Ampyx Power, Senfal and Exasun providing alternative energy; iLost and Fairphone, LGSonic, BioDetection Systems, and Voltea replacing existing products or services with more social and responsible choices; Black Bear Carbon, Ecochain and Peel Pioneers reducing waste and making products organic; LandLife working on nature restoration; Social Medwork, Micreos, Quantib, Nemo Healthcare, OneFit, Siilo, and Sensara providing increasing access to education and healthy living; Dopay and Impact Terra reaching the poorest socioeconomic groups; or Codaisseur and Mantelaar creating employment for people normally excluded from the labor market.
All of these innovative businesses create new products and services that aim to make the world a better place and do so with an attractive business model.
Let’s not call these businesses “social enterprise” because this includes also incomparable endeavors, such as initiatives that focus on awareness building to change the public opinion, or that lobby for changes in regulation, or stimulate community participation and new forms of cooperation. These approaches have success factors very different from those impact-oriented businesses.
Let’s not call them “social enterprise” for another reason: “social enterprise” often seems to imply that the enterprise is not seeking financial gains for its shareholders. We believe this to be counter-productive given the entrepreneurial nature of scaling. Risk taking, performance, and value creation should be rewarded. For-purpose can also be for-profit. We believe in the power of private initiative with attention given to the longer-term interests of all stakeholders: customers, society and employees, but also entrepreneurs and shareholders.
We need to improve the odds of scaling
If your customers crave the product and if the product has direct social impact, you have achieved “lockstep”, i.e., the more you sell the more impact you achieve. Successful impact scale-ups have pure alignment on this.
Only what scales moves the needle in terms of impact. Scale-ups contribute vastly more to economic growth, job creation, taxes, wealth, and impact than start-ups or small businesses that do not reach scale. For an entrepreneur with an innovative solution, the holy grail is scaling it—that is, taking it to a level where the new approach operates efficiently and effectively and reaches so many customers as to truly contribute to resolving a social problem.
Many initiatives exist. Corporates are looking beyond social responsibility. NGOs are introducing entrepreneurship into their organizations. Everywhere companies are being set up by individuals who believe in the potential of ‘doing good’ in an entrepreneurial, business-oriented way.
However, the odds of scaling are very low. We found that only 0.4% of start-ups are able to scale above $ 10 million revenues within 5 years. We also found that the odds of scaling an enterprise focused on social impact are even lower.
Fortunately, in our portfolio the growth rates are promising. About half of the impact-oriented ventures in our Runway are able to grow more than 50% per year.
From our work with impact scale-ups and our research on scale-up success factors, we found some clues on the opportunities that social-impact oriented scale-ups can leverage and some of the pitfalls to avoid.
No simple formula for scaling
There is an understandable wish for clarity regarding what to do. Witness the attractiveness of Blitzscaling or Rockefeller Habits or Lean Start-up methodology or, in case of social enterprise, the SCALERS concept or the Zebra framework.
However, a straightforward formula does not exist. Scale-ups operate in a volatile, uncertain, complex, ambiguous world – so a lot is outside of their control. Scale-up entrepreneurship is about risk taking and therefore scaling depends on good fortune. Scale-up success is path dependent. Each scale-up success story is a unique adventure dependent on the background and strengths of its founders: it does not repeat itself. And scaling is organic, interconnected, and symbiotic.
The art of scaling
We have come to realize that scaling is an art. And although every artist produces something unique, some common characteristics and practices can still be distilled. These are typically practices that are deceptively simple to grasp and incredibly difficult to master. It is the opposite of a formula, like painting by the numbers.
It all starts with having scaling potential: otherwise scaling is just not possible. Scaling potential results from delighting customers, having a competitive edge, creating a scalable business model and experiencing favorable market conditions. Favorable market conditions means first of all that the market is ready, i.e. receptive to the innovative product. And that the industry is growing, with limited competition and positive industry margin.
As the enterprise scales it needs to build its sales capability and focus it sales efforts. It also needs to build an efficient and reliable delivery engine – without this scaling is premature. And while building this delivery engine, it needs to keep experimenting and learning. A scale-up needs to act strategically when going international, keep launching innovative products and act swiftly when favorable opportunities suddenly pop up. The organization needs to rapidly onboard new recruits, install processes, a performance ethic and consolidate best practices. All in all, a tall order best taken on by teams of seasoned entrepreneurs with high ambition, resilience and competitive drive.
Impact scale-ups operate in similar high risk, competitive markets with similar underlying business economics so would be naïve in assuming that the rules to flourish in the jungle do not apply to them.
However, impact-oriented scale-ups have something extra that makes them truly special: they also create social impact, and this can be much larger than the value they monetize through their sales income. The key question is how to leverage this potential and what special powers are needed for this.
The archer fish (photo on front) is a fish able to survive and thrive in its ecosystem because it is equipped with a special power: it preys on land-based insects and other small animals by shooting them down with water droplets from its specialized mouth.
Let’s leverage the social impact
There are at least three major ways to leverage potential for social impact: (1) building coalitions of supporters, (2) leveraging premium resources, and (3) generating indirect income and attracting low-cost financing.
- Building coalitions of partners. To create traction, you need to educate the market, break through initial resistance and increase trust in the new solution. In case of impact-oriented scale-ups, the opportunity for this is much enhanced because the world has a lot to gain from your product or service. So, you would have more potential in rallying stakeholders around your cause and get them to support you. Think about brand endorsement, privileged customer access, support in lobbying. To leverage this opportunity your special power needs to be: social impact story-telling, so persuasive, inclusive communication to bring stakeholders to the level of committed partners.
- Having access to lower cost resources.Having social impact invokes contribution from suppliers, partners, employees and customers beyond what is a purely market-based transaction. For instance, you might be able to engage your customers in advocacy and co-creation. Suppliers might be willing to support you at reduced fees or even for free. Your special power is to leverage this opportunity, and reduce your cost base and burn rate while maintaining a performance orientation and a strong business beat. After all, you want to achieve the social mission while at the same time build a profitable business.
- Generating indirect income and attracting low cost capital. In many cases, the social impact scale-ups create is recognized by the public and social sector. You need to get them to put their money where their mouth is, i.e., not just support your cause but also remunerate you for the social impact achieved and to invest in you at “blended” returns (combining social impact with reduced financial return requirements) with patient capital. Your special power is to attract these sources of income and funding without becoming a victim to the resulting administration and bureaucracy.
Let’s avoid the pitfalls
At the same time, a situation where the social value is much more significant than the commercial revenues puts additional pressure on the art of scaling. Specifically:
Delight customers, even when they do not have to pay. Scaling requires delivering a product or service that is significantly better than the alternatives. This starts with a customer centric mentality and serious customer sensing – understanding their behavior, needs, wishes, pain points, value in use. And the capability to create a product that is truly essential, surprising and beautiful, also when the beneficiary does not have to pay.
Commit to operational efficiency even if you funded handsomely. Some impact scale-ups appear legitimized by doing the right thing, just adding staff when they grow, and not necessarily by being efficient and using resources productively. Scaling requires to be very disciplined in improving efficiency and scalability, and to be motivated to build efficient organizations that deliver reliable products and services.
Keep focus on learning through failure while having sponsors. Your learning is reduced if sponsors force you to report good progress through standardized impact metrics. This will make it difficult to establish a critical, evidence-based perspective on your own performance and to treat funding as learning experiments that benefit from early failure.
Bring in seasoned entrepreneurs while being on a mission. Many impact scale-ups have been founded to resolve a social challenge – not per se to capture an entrepreneurial opportunity. As a result, the leadership (CEO, MT, Board) often lack the entrepreneurial experience, mindset and capabilities for the business to thrive.
Impact scale-ups make the world a better place, but it takes two to tango. Their potential for social impact should trigger strong support – financial and in-kind – from funders, service providers, and talent. It is our mission to contribute to this – through our research activities, practice support, and by providing access to growth funding.
Image from: https://blog.nationalgeographic.org/2014/09/04/mystery-solved-how-archerfish-shoot-water-at-prey-with-stunning-precision/