Capital Goodness: Political Climate May Boost Social Enterprises, Says Business Researcher

By Tom McLaughlin

Given the rise in social awareness and activism across the nation these days, the political climate may very well be a boost for social enterprises – businesses established with the express purpose to make a social impact, posits Shoko Kato, an assistant professor of management at the Rutgers School of Business–Camden.

“There are many instances of boycott and buy-cott movements going on in this country right now, so social enterprises, such as TOMS Shoes and GoldieBlox, may be in a better position to promote their goods and services emphasizing social benefits,” explains Kato, whose research explores the perseverance of entrepreneurs and the performance assessment of social ventures. “At the same time, however, social enterprises should continue to focus on retaining their customers; their products and services must be good enough for repeat purchases.”

We check in with the Rutgers–Camden scholar, who explains the traits of successful social entrepreneurs, the challenges that they face, and the advantages and disadvantages that they have over traditional business owners. She also shares her outlook on the future of social enterprises.

Shoko Kato

Do you think that the current political climate may also lead to an uptick in more people starting social enterprises?

Because social and environmental issues are being increasingly highlighted, people may see more opportunities to tackle and solve these problems. Furthermore, in areas where government funds may be cut, social entrepreneurs and enterprises may play a greater role than they have had in the past.

 Do social entrepreneurs typically consist of successful business owners who use their businesses to make a social impact, or those who create businesses to accomplish this goal?

Typically, the latter is the case – social entrepreneurs intentionally create businesses that would generate both social and economic, and sometimes environmental, gain.

What are some traits of successful social entrepreneurs?

It is actually really hard to distinguish social entrepreneurs from “traditional” entrepreneurs in this sense. They share so many of the same traits: passion about realizing their ideas; ethical and trustworthy; tenacious, despite so many bumps in the road; good at execution; and good negotiators, networkers, and producers. This probably comes from the fact that money is not a good motivator for starting any business since businesses usually don’t see a profit for several years.

What are some of the challenges that social entrepreneurs face?

Many aspiring social entrepreneurs believe in their causes and, because of this belief, may become blind about the fact that they actually have to sell in order to become successful. “Sell” may not be the right word here, but even starting a nonprofit organization involves lots of sales, such as appealing to donors, grant makers, and benefit recipients. Passion alone will not make it.

Secondly, the market for social products, which usually are priced at higher than similar products, can be small because not many people are willing to pay the premium price. Ideally, you would want to have a company that sells social products to enjoy enough profits in order to serve more populations, but often making profits from sales alone may not be feasible. Also, traditional investors and lenders may be skeptical about investing in social enterprises, which hinders raising a startup capital.

Another issue is the difficulty in evaluating the business. Often the social issues that they tackle are so complicated that they take a long time to be solved, and the social impact may not be seen in the short term. For-profit businesses are ultimately evaluated by their profit, but the true impacts of social enterprises cannot be captured easily by financial measures, which is a barrier for investors and donors who want to see clear returns on their support.

What are the pros and cons of opening a social enterprise over a nonprofit?

What I advise is that, based on the work you are planning to do, set up your organization accordingly. In other words, if your work will have to heavily rely on donations and grants, you should set up your organization as a nonprofit or 501(c)3. Opportunities to work with the government may also give credibility to the organization.

There are many organizational forms that social entrepreneurs can choose: nonprofit with earned income, nonprofit with a for-profit arm, and some special forms of for-profit, such as a benefit corporation, L3C (low-profit liability company), and limited liability company.

The biggest challenge for nonprofits is securing investments. Donations and grants cannot match what for-profit counterparts can raise from venture capitalists and investors.

Are there any advantages or disadvantages that social entrepreneurs have over for-profit businesses?

If the only goal of a business is to make more profit regardless of its method, surely for-profit businesses solely focused on making profit should make more profit. But I don’t believe what moves social entrepreneurs is solely making a profit, so it isn’t necessarily a disadvantage.

Because of their social mission, social enterprises should be able to reach out to a new market where existing, similar businesses cannot. At the same time, because what social enterprises sell may be easy to copy or imitate, other for-profit ventures may start selling inferior quality products to the new market, which may damage the social enterprise’s brand image.

What makes social entrepreneurs stay committed to their missions even when business suffers?

Passion – why you do what you do. This is true for all entrepreneurs. I also need to point out the need to have a level head – being passionate about fulfilling their ideas, but also the need to be realistic and practical about pursuing their passion. If it’s not working, they need to admit it and correct their courses; they cannot be blind.

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