It has been 21 years since NESsT was launched in Budapest, Hungary. Our value proposition was that socially driven enterprises were a solution for the Centeal and Eastern European (CEE) region’s most critical social problems. They could address issues of exclusion, poverty, marginalization, and inequality, while shifting the paradigm from grant funded short-term initiatives, to entrepreneurial, innovative, sustainable solutions.
Has this proposition been validated? There has been growing recognition that these hybrid enterprises solve some of the most entrenched problems. However, few of them were able to consolidate and grow impact. Why is this? Having worked with thousands of enterprises and hundreds of stakeholders in the region, our response is quite simple: the social investment sector has not evolved. It is still grant dependent, and enterprises lack the enabling environment to become investment ready. There are few pioneers in the region doing incredible work. But they are few and far between. To scale the promise of social entrepreneurship, the private and public sectors need to take some real risks, to enable the difficult transition from startup to sustainability.
NESsT reflected deeply on the lessons from its work in CEE, so here is our list of ten things that we believe need to happen.
1. Social enterprises need different financing at each development stage. Quasi equity (convertible debt/grants, results based funding) and patient debt (low interest, grace periods, revenue based repayments) are appropriate early on. They need this less risk averse financing to grow– usually in the range of €20,000 – €500,000.
2. Social investors must understand that markets need to be built. They cannot just wait for the perfect deal with high returns. Investment readiness efforts must be recognized and paid for. At the 2018 annual ANDE conference we learned that only 14 per cent of global impact investing funds are deployed because there are not enough enterprises ready to take investment. Private investors, intermediaries and public bodies must work together towards unlocking capital. Public funding has a role to play, as a co-investor or by funding for first loss, guarantees schemes and due diligence costs, to develop a market with higher risks/higher social returns.
3. Learn from other ecosystems. In more sector-advanced countries like the UK and newly emerging ones like Portugal, stakeholders work together to create the sector, developing a market that recognizes both the demand and supply side.
4. All players must be clear on the impact thesis and its connections with business growth and investment. We need widely accepted performance indicators to measure and assess impact. Capacity support to help measure impact is a wise way to use philanthropic funding.
5. Governments should revise existing regulations, reduce bureaucracy and develop friendlier frameworks, like eliminating tax burdens on social enterprise profits and providing fiscal incentives to recognize tax savings. The UK’s Social Investment Tax Relief can be used as a starting point.
6. Accelerators and incubators should cooperate more to avoid bombarding social entrepreneurs with support that often replicate efforts, is not appropriate for their stage of development and distracts them from the day-to-day. They should also move beyond the ‘usual suspects’.
7. For profit social entrepreneurship should be encouraged. Educational institutions should consider academic programs, with scholarships and tuition waivers. Investors and donors should recognize the need for livable wages, so that more aspiring entrepreneurs are able to purse such career options.
8. Research institutions should produce reliable, evidence-based statistics, to identify roadmaps toward needed changes. They should recognize the role of intermediaries and document their challenges and contributions. They should not replicate studies but rather build on each other.
9. Public sector funding schemes should consider direct financing for social enterprises, support for intermediaries and leverage private co-financing, including facilitating social entrepreneurs -investors match-making opportunities (as AVPN Enable Impact). Too much funding is going to ‘light touch’ activities such as events, workshops, and exchanges.
10. High Net Worth Individuals, foundations and corporations can provide philanthropic and early stage investments, , pool resources and move beyond national borders. Corporations should consider social enterprises as reliable suppliers and as capable of preparing at risk individuals to fill their talent needs.
Certainly the task of fostering social enterprise is not only the task of the supply side. Social entrepreneurs also need to take responsibility, be diligent and do what is necessary to run a business. Successful businesses require having a validated product or service, proving your cost-revenue structure, building your middle managers, having systems in place to track sales and impact, practicing sound financial management and developing a network of supporters. Selling something for good does not mean that you are off the hook from selling!
But only with a thriving ecosystem, will these serious entrepreneurs be positioned to grow their business and impact, and will the promise of social enterprise and the needed paradigm shift come to fruition.
Nicole Etchart is the Co-Founder and Co-CEO of NESsT.
Roxana Damaschin-Tecu is the Director of Portfolio in NESsT.