Cultivating Europe's Social Business Ecosystem
What policies and practices ought to be adopted by policymakers and stakeholders in order to promote a flourishing social entrepreneurship ecosystem?
What does the social entrepreneurship and social business movement mean for Europe?
It can be argued that in 2015, the old capitalist model with its credo of "profit above everything else" has definitely entered its intellectual death struggle. In the past 30-40 years, the phenomena of the destruction of the environment and the accumulation of wealth in the hands of few have become too obvious to ignore. Both indicate that the economic paradigm that has guided the biggest economies in the world has to change. In the wake of this ongoing fundamental shift, recent years have seen the spread of the idea of social entrepreneurship. The key message of the movement is that you cannot wait for others to provide the solution – you must become a changemaker yourself here and now. In the midst of the ongoing economic and social crisis in Europe, it is time for relevant stakeholders to place greater importance on setting up an ecosystem that promotes the concept and the practice of social entrepreneurship. The following article is an effort to stimulate the discussion in this field by providing an introduction to the concepts of social entrepreneurship and social business, as well as focusing on the efforts that have to be adopted by stakeholders in order to promote a social entrepreneurship ecosystem.
What is social entrepreneurship and social business?
A social entrepreneur is someone who finds creative and sustainable solutions to the world’s problems. Social entrepreneurs have existed for centuries in various sectors and have come in all sorts of forms. Florence Nightingale is seen as an early example of a social entrepreneur by starting the first official nursing training program. Similarly, Jean Monnet is often quoted as inventing the project of European integration as a solution to ensure peace in Europe. In short, social entrepreneurs “find what is not working and solve the problem by changing the system, spreading the solution, and persuading entire societies to move in different directions”.
Social business as a concept is derived from social entrepreneurship and is defined by Nobel laureate Muhammad Yunus, as a business whose purpose is to solve social problems in a financially sustainable way. Social businesses function in most ways like for-profit businesses, yet since the social impact is the primary purpose of this business, all profits have to be reinvested into the business (i.e. no dividends are paid out to the owners) or are used to start new social business to increase the impact of the organization. A famous example of a social business is the Grameen Bank in Bangladesh, which each year gives out loans to the poor that amount to approximately one billion US dollars. Currently, the social business economy is still limited, but nevertheless it is becoming a stakeholder in its own right alongside for-profit businesses, cooperatives, the state, civil society and NGO’s.
But what does an ecosystem that can produce and sustain social entrepreneurs look like?
Access to capital
The most central aspect is adequate funding for social businesses. As the pioneer of the impact-investing sector, Ronal Cohen has put it:
“the supply of money creates its own demand and an increased flow of capital is therefore the starting point”.
Venture Philanthropy Funds:
To start or grow a new business, a social entrepreneur needs capital in the form of, for example, a loan or equity. Venture philanthropy takes concepts and techniques from venture capital finance and business management and applies them to supporting social entrepreneurs. Besides providing funding (e.g. in the form of loans or equity), the funds also support entrepreneurs with their network, business management expertise, as well as pro bono partnerships. Examples for such funds from abroad are Yunus Social Business and Big Society Capital.
Currently, the overwhelming majority of large banks in Europe do not provide funds to social businesses and do not possess the know-how in the area of social and ecological investments. We therefore require the creation of new banks, which put social impact above the bottom line. The scaling of existing cooperative and ethical banks whose focus is on businesses that have a social and ecological benefit to society is also an option.
An angel investment is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. Experiences abroad have shown that an increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital, as well as to provide advice to their portfolio companies (for example the Pymwymic network). The practice of angel investing into social businesses could, for example, be made more attractive by the government through providing tax breaks in the case of the investment resulting in a loss.
Most investors traditionally have thought that they have to choose between impact and profit, philanthropy or investment. Yet experiences so far have shown that there does not need to be a contradiction between profit and doing good. On the contrary: responsible companies that have good governance have been proven to outperform their competitors in the long run. This fact, together with a concern for social problems, developed a new kind of investor - the impact investor, who integrates ecological and social impact alongside profit into his investment focus. The impact investing sector is currently estimated at 50 billion Euro globally with solid growth in the recent years. As the coming 20-30 years will see the largest transfer of wealth onto a new generation that places greater importance on social and ecological issues than their parents, this sector is expected to grow even stronger providing greater funding opportunities to social businesses.
In order to promote the idea of social entrepreneurship, organizations are needed that bring together different stakeholders such as for-profit and social businesses, the state, NGOs and investors. The most obvious example for such an organization is Ashoka, which is active on over 70 countries. Through Ashoka’s vast global network and partnerships, a knowledge exchange network is created for the exchange of best practices for all stakeholders of the social entrepreneurship ecosystem. In the context of knowledge exchange, the scaling of existing social business on a European scale becomes more and more important. Just as in the for-profit business world: you do not have to reinvent the wheel. There are thousands of successful social businesses from which you can learn and help expand. Ashoka, with its more than 3000 fellows, in this context provides an extensive library of potential case studies for young aspiring social entrepreneurs. Innovation still remains a key aspect of any entrepreneurial venture, not least as the social business has to be adapted to fit local specificities.
Education on the practice of social entrepreneurship also plays an significant role. Universities could incorporate concepts of social business and social entrepreneurship into traditional business curriculums. They could also offer courses that focus on teaching students how to start a social business or project and could invite successful social entrepreneurs to present their work. Furthermore, the field of social entrepreneurship offers many possibilities for academic research, particular in the area of social impact measurement or in studying the funding needs of social businesses.
In order for more people to become engaged in the social entrepreneurship movement, the idea of social entrepreneurship needs to be spread through the mainstream media. Stories about social entrepreneurs will encourage more people to get involved for social change, creating a self-perpetuating cycle. Reporting on the work of social entrepreneurs and the social entrepreneurship ecosystem will also serve the purpose of providing role models to our community, especially to youth. In Europe, we need to start shifting our attention from not only the problem, but also the solutions. One way to do this is through the promotion of social entrepreneurship. Similarly, young people need to have the feeling the social entrepreneurship is a viable career option and that achieving social impact has greater value than big bonuses and shiny sports cars.
Currently the majority of foundations limit their work to a donation-based model. The problem is a donation is made once and is not renewed. An investment into a social business on the other hand is constantly renewed, creating a sort of Perpetuum mobile dedicated to the benefit of society. Thankfully, the large charitable foundations in Europe have begun to realize the potential of social investing and have launched pilot investment vehicles dedicated to social investing. The large European foundations have seen that they can use their enormous amount of capital stock from which they fund their operations to achieve a double impact: one the one hand through their investment activities and on the other through their grant-making processes. These pioneer foundations understood that instead of funding businesses that often harm society (e.g. oil companies) and then donating the money, the big charities could choose to invest a fraction of that capital in social businesses to fund their activities.
Nowadays, it is becoming more and more important for customers to know that the company they are choosing to buy a product or a service is not harmful to society. In this context, it is not enough for companies to commit to “stay within the boundaries of the law” (as if that wasn’t expected to them anyways). The have to actively seek ways to do good and helping social businesses is one great way to boost their CSR efforts and achieve this end. For-profit companies can join in and help by for example providing pro bono services to social businesses, as McKinsey is doing in the case of Ashoka.
Together, these stakeholders described above create the social entrepreneurship ecosystem. In contrast to the for profit economy, where ultimate domination of a market is the highest goal and collaboration with “competitors” is out of question, the social entrepreneurship economy enables stakeholders to collaborate on a much greater scale, since the ultimate goal is to achieve social impact for the benefit of society.
Member states and the EU
The state can choose to accelerate or to deter the development of the social entrepreneurship ecosystem. Although it has taken a long time, governments across Europe are starting to realize the potential of social entrepreneurship and want to be part of it. For example, the European Commission embraced the growing importance of social entrepreneurship by inviting the biggest players to Strasbourg for a large conference (“Have your say”) in January 2014 in order to listen to their concerns. Moreover, it launched the Social Business initiative which opened the EU’s structural funds to social businesses and created a 90 million Euro fund for social businesses. In the individual members states, excessive taxation and bureaucracy often times still prevail but even here change is coming with an increasing removal of red tape and allowing tax breaks for social businesses. In Germany, for example, the publicly owned Kfw bank launched an innovative co-investment scheme in 2012, which matches the investments made into social businesses by partner organizations up to 200,000 Euros.
Social entrepreneurship is here to stay. The question therefore is not if the changes described above will come but when, as the foundations for a thriving culture of social entrepreneurship have already been laid. Most importantly, many European citizens have realized that we cannot afford to wait for the politicians to act or for the economy to recover. We have to find creative solutions to societies problems today. In any case, the state cannot solve all our problems, most importantly because if lacks the innovation incentives and freedom of the private sector. Yet, the establishment of a social entrepreneurship ecosystem will not replace the political struggles inside society and solve all our problems. Social entrepreneurship can be part of the puzzle that will create the change necessary for Europe to overcome its economic, political and moral crisis. Nothing more and nothing less.
 The exception is that social businesses can repay loans to investors.
 Although I want to explicitly point out that donations to non-profit organizations are important in their own right.
About the Author
Antonis Schwarz is of Greek-German origin and is based between Athens, Munich and Frankfurt. He studied Politics (BA Kings College London) and Business (MA IE university Madrid). Antonis co-founded a parliamentary monitoring organization in Greece, Vouliwatch (Vouliwatch = Greek for parliament), a website engaging citizens in politics, pioneered by Ashoka fellow, Gregor Hackmack. He is interested in scaling social/impact investing to Greece to help fight the crisis. He currently works as a social business consultant for Yunus Social Business and previously also worked at BonVenture, the first German venture philanthropy fund.