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How to take an impact business to scale?

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.

  1. 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.
  2. 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.
  3. 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.

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Top Scale-up Reads of 2018

Our favorite reads of 2018

Ready to curl up near the fire and increase your learning velocity? Merry Christmas and Happy New Year from ScaleUpNation. Looking forward to an enlightening 2019, full of growth. Please find below our Christmas gift to you: the top scale-up relevant reads of 2018.

Skin in the Game by Nassim Nicholas Taleb

Can you make significant change in the world without putting some skin in the game? No radical innovation happens without an inspiring leader, and these are often the ones that shoulder the biggest risks.

In this year’s release from economist-turned-philosopher Nicholas Nassim Taleb, he challenges the hypocrisy of advising, selling, or participating in any endeavour without being directly involved. Some would say that only those people should be heeded or trusted if they have a personal stake in the outcome, especially if they also partake in the consequences. For instance, if you do not pay your cobbler upfront, he will take care in repairing your shoes knowing that if he screws up, you will not pay him. In a more brutal and honorable past, men were executed if the building they had constructed fell down.

But what if we expect our agents of change to take serious risk? Should we punish an army general that devices and executes a high-risk strategy aimed to significantly shorten the war, that becomes a disaster costing many young lives? Should a political leader be sued when her innovative policies proved highly counter-productive? Should an entrepreneur that wants to bring a new medicine to the market, fails and goes bankrupt, lose his life’s savings?

Ideally the potential personal loss should be designed to align with the amount of risk we want the change agent to take. So, for us as mission-driven entrepreneurs the consequences of putting our skin in the game should not be career ending or resulting in personal bankruptcy. If that were the case, we would act too conservatively. We want to remember heroes for their attempts, not just their results.

“If you don’t take risks for your opinions, you are nothing. People want to have their soul in the game.”

Building on Bedrock by Derek Lidow

More than 30% of the USA population is currently or at some point engaged in or related to someone in entrepreneurship. Some economists argue that we are all entrepreneurs, so long as we can make decisions for ourselves – for whom will we work, what will we buy, how do we spend our time? All of it is entrepreneurial, and is recognized as such.

In this book, the author and Princeton professor Derek Lidow asks whether you are ready to be an entrepreneur, and if it is the right thing for you. It asks you to explore your skills as a founder, co-founder, investor; it answers the who, what, when, where, how, how much, and why of founding. He divides entrepreneurs in two separate groups: the high-risk entrepreneurs, helped by VCs to create fast-growing companies, and bedrock entrepreneurs, who act with patience, low-risk and build a company with steady vision. It explores motivations, creativity, balancing life with entrepreneurship, and whether or not this is the path for you. The final, daunting statistic? 70% of people who actually become full-time entrepreneurs in a typical year abandon their efforts, or do not make their money back whatsoever, losing time and risking relationships.

 “Contrary to popular opinion, ideas cannot generate a passion required to lead successful and self-sustaining companies – not even great ideas. Passion for an idea, inevitably, fades when you realize customers want something different, or during the hardships to making it happen. Setting up a company is easy, but growing it into something valuable and self-sustaining is extremely hard.”

Powerful by Patty McCord

Netflix chief talent office Patty McCord writes the book on how to build a strong culture. In her book, subtitled Building a Culture of Freedom and Responsibility, she outlines how a world-renowned company like Netflix was able to develop and restructure its team as it went from mail-order DVDs to leading streaming platform, now to an entertainment empire.

The most important takeaway from Powerful is to abandon the idea that the people with whom we work are family, when they are a team. Like all teams, changes and rotations to the roster as crucial to the success, sometimes at the cost of trusted and loyal employees, or preferred ways of working. While weaving stories of culture building using discipline, self-efficacy, trust and freedom, a company’s culture begins to form thanks to “stunning colleagues with excellent skills”. As business grows, bring in high-performing people and minimize rules, McCord advises. An outstanding team and culture can solve almost any challenge together, while ensuring the best chance of success for the mission and dream at a given stage.

Just as great sports teams are constantly scouting for new players and culling others from their lineups, our team leaders would need to continually look for talent and reconfigure team makeup. We set the mandate that their decisions about whom to bring in and who might have to go must be made purely on the basis of the performance their teams needed to produce in order for the company to succeed.”