The Definitive Guide To Scaling Social Enterprises

I was recently asked to give a talk on scaling social enterprises to Oxford MBA students at the Saïd Business School, which prompted me to put together an outline of the different mechanisms of scaling that I've used or considered in the work I've been doing with social enterprises around the world.

The Definitive Guide to Scaling Social Enterprise

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The Case for Critical Thinking

Somewhere along my recent Latin American journey I had a conversation with a friend who suggested that the big problem with people is that they use whatever hammer they possess to hit any nail they're presented with. In other words, management consultants will tell you the answer to your problem is strategy; marketing specialists will tell you it is presentation; IT consultants will chuck technology at it; sociologists will focus on impact; and business people will apply numbers.

This is a classic example of the lack of critical thinking seen in problem solving today. The trick is not to start solving the problem immediately, but to strip it down to it's root causes or underlying success factors and go from there, rather than defining the problem by it's surface presentation.

Marketing is the perfect case. Charities often tell me that they struggle to raise funds because their marketing is ineffective, or because they really can't afford any. When you strip it down however, you rapidly find that the problem is not marketing but what's attempting to be marketed. The vision is unclear, the services don't really fit together cohesively, outcomes are not compelling, and no one is really sure what this marketing is supposed to achieve. Your typical marketing person has no idea how to address any of these issues, and for the most part would never think to ask the questions - their skills are differently oriented. But the problem has been defined as marketing, so along comes the person with the marketing hammer and what you get is basically a paint job that doesn't stack up to closer look.

Here's a couple of real examples from the last three months. I have tons of these from the last few years of advisory work.

Simple Problem

• Startup: We need to build a better looking website.
• Obvious Solution = Web Designer + New Site
• Real Solution = No you don't. Your organisation is too small to waste money and doesn't have the skills to manage a fancy website. Set your site up as a blog, using free platforms. What you really should do is to figure out how the web fits into your organisational strategy and then focus on creating more compelling content. 

Complex Problem

• Medium sized NGO: We need to scale into other countries.
• Obvious Solution = Management Consultant + Business Plan
• Real Solution = No you don't. Your organisation is not financially stable in its current location, doesn't yet have a neatly systematised model, lacks transferable skills/people and is still completely dependent on the CEO for direction. Scaling will spread limited resources even thinner, divert from delivering the core mission, and jeopardise both organisational survival and social outcomes. You should focus on developing a stable and replicable organisational model, both financially and systemically; and on developing human resource that can either run the organisation in the CEO's absence, or is at least capable of set up new entities without central direction. 
• But someone has already offered us the funding for it.
• Turn it down politely and maintain the relationship until you're really ready to scale

So the million dollar question: If you are the CEO of a social enterprise, how do you approach these challenges?

1. The ability to look at root cause or key factors is a skill you must have in-house, or on your board. Only once you know what you're really dealing with, should you start looking for people to help you solve the problem. 
2. Another other trick is to only contract help from people who question the validity of your problem definition. 
3. Finally, if you can, try and find advisers that understand holistic/multiple aspects of organisational development (yes they do exist!).

Dummies Guide To Microfinance

(From http://www.globosocial.org: My global journey covering social enterprise)

While in Mexico I had the fantastic opportunity of spending time with Frida Ruiz Fernandez who worked in regulation for microfinance and banking for Peruvian Government for 4yrs, and Juan Ahedo who works with Fin Comun, a microfinance organisation based in Mexico. From Frida I learnt a bit more about Microfinance, much of which is summarised below, and through Juan I was able to accompany a couple of branch managers on their site visits around the city.

Fascinatingly for me, I learnt that microfinance is not just about lending to rural populations, but also a support system for tiny shops, restaurants and stalls all over low-income areas in cities too. The most fascinating thing was being transported back to a world of notebooks and hand-written accounts.

Microfinance in the City – Typical Clients

 

Introducing Microfinance

Traditional Banking

The mechanisms of traditional banking essentially function around monetising (investing/re-lending for financial return) deposits that people store with the bank; and on providing interest based credit that is offset either by collateral, or risk managed through the use of standardised credit rating systems for medium to high income populations.

Why Low Income Populations Can’t Use Traditional Banks

Low income populations typically have neither the collateral nor ratings needed to access credit, because their wealth base is too small for collateral and standardised credit rating systems are not designed to assess their circumstances. Traditional banks therefore have to invest in completely new mechanisms for managing these demographics, which isn’t worth their effort so they ignore the space altogether.

Finally, where low income populations do have savings, they generally don’t deposit their money in normal banks because

1. There is a lack of accessible infrastructure. i.e. no branches in their areas since it is not profitable for traditional banks to provide these.
2. Low income populations are not used to going into big banks. They feel out of place and intimidated by the experience.

The Critical Problem

Since low income populations often have greater immediate needs around borrowing money, the lending space has traditionally been covered by loan sharks, where exorbitant interest rates mean that people can end up paying many multiples of the money they borrowed, under threat of personal violence. This simply exacerbates their poverty.

The second problem is that without access to mechanisms of depositing, managing and growing money, these populations are typically excluded from opportunities to create the longer term wealth that can help them to escape the poverty cycle.

Microfinance

So microfinance is really just a fancy name for the mechanism of providing safe small (typically high interest) loans to people, groups or enterprises who’s incomes are too small to provide collateral or credit ratings, and are therefore risky and highly cost intensive to manage.

Microfinance organisations make it cheaper and profitable to provide these services by basing themselves and working in the same areas as these populations, and they have adapted their credit methodologies to lend to low income sectors in 3 ways

1. Their assessment model is very human intensive in terms of finding entrepreneurs, getting to know them personally, helping them with paperwork etc, typically by having branch managers which personally go out to meet clients rather than have them come into a branch, which means a much higher cost base than traditional banking.
2. They provide loans without collateral, and manage the risk by replacing collateral with information about the people they are lending to. Hence they are significantly more diligent than traditional banks about each individual being lent to. Branch managers establish close relationships with borrowers and work to understand their networks and personal circumstances.
3. They charge higher interest rates than traditional banks – anywhere between 25% and 40% annually, which although high is still less than loan sharks.

The Goal

Enable people to exit poverty through profits from assets or activities accessed through small loans.

The Gap

Microfinance organisations however are typically not banks, which means that they still do not address the issue of saving and wealth accumulation. One reason for this is that lending entities (like store finance) operate without much scrutiny, but taking deposits makes you a bank, which requires compliance with a whole new range of costly financial regulations that can otherwise be avoided.

Since these organisations fall outside traditional banking mechanisms, in many countries they often exist without any regulation. This means they often grow too quickly and operate at very high risks of bankruptcy.

Another issue that is now being recognised is that the mechanism of micro-finance still struggles to bring people out of poverty. Apparently the reason is to do with the focus on funding entrepreneurs rather than stable business models, and because of the lack of education and understanding of money management in low income populations.

Finally, microfinance is a profit model, and many of the players are not in it for the social goal. They don’t always operate ethically, and are not necessarily interested in mobilising communities out of poverty. Education and health components added to the financing model, can cynically be seen as mechanisms to reduce the risk of default, but the really good ones invest significantly in the development and mobilisation of the communities they work with.

Solution 1: Regulation

Peru recently won an award for the creation of regulated environments for successful growth and scaling of microfinance. They minimise the risk of failure of microfinance orgs by enforcing a step by step system of growth by modules. Every step in scaling operations requires governmental approval, using a risk based approach covering 4 areas:

1. Credit
2. Market
3. Liquidity and Operations
4. Capital adequacy (i.e. having enough capital to support operations).

This approach prevents microfinance organisations from growing too fast or taking risky decisions, and unregulated Microfinance organisations are not allowed to take deposits.

Benefits of regulation

1. Access to ratings and ranking makes these organisations open to investment
2. They get feedback that helps them grow and get better
3. Regulation means they are better run, so they have access to better human resources
4. Access to guarantee funds up to a certain amount of deposit to help offset risk.

Solution 2: Education & Community Investment

Microfinance organisations are now beginning to provide financial and health education, in order to offset risk (well educated and healthy populations are better placed to repay loans), but the really good ones also invest in education and community programs to transform civil society in low-income areas.

Solution 3: Microfranchising

Entrepreneurs are great at finding opportunities to set up ventures, but not necessarily so good at scaling or creating stable and repeatable business models. Since microfinance typically lends to small entrepreneurs in low income populations, the quality of enterprise is typically not suited to scale or growth. Your average tiny corner shop isn’t very likely to become 10 large corner shops. Results are starting to show that while microfinance has benefits, it isn’t necessarily mobilising communities out of poverty in the long term.

The solution may involve offering finance for proven micro-scale business models that can be scaled by franchising. The value here lies in the creation of new jobs as it does not involve funding existing enterprises. Next week I will be talking to Melissa Richer who is developing microfranchising in Brazil through her organisation Ayllu, and I’ll provide some more insight into this model once I’ve done that.

How To Write Successful Funding Proposals

At it’s core, the goal of any corporate funding is Return on Investment i.e. what your project is going to do for them or their brand. Large corporations want mass recognition and kudos through their association with social projects, and clear indicators of social impact that can go into their stakeholder reporting.
So the first thing you need to remember is that corporate funders really only care about 3 things that underpin this

• Scale (how big in terms of geography and replicability)
• Reach (who are the audiences that will know about or benefit from the project)
• Impact (what will it achieve for all the different stakeholders)

FOCUS!! on these 3 things in your proposal, rather than infinite details about the content, structure and cost of the project and it’s planning/delivery mechanisms. Corporates need enough detail to assess your approach and likelihood of success, but this does not cover their goals.
Finally if it is possible to demonstrate that you can use their money to create sustainable revenue streams that mean you won’t need to go back again year after year, you’re probably onto a winner!

Suggested Proposal Structure

1. Executive Summary
   
• Introduce the structure of the document
• Outline the project that needs funding
• Summarise what you’re looking for
  
2. Context
   (This is critical for sharing the big picture)
• Introduce your organisation
• Outline the problem
• Outline your vision and what you believe can be done
  
3. Project
   (Here’s where you cover details)
• Repeat overview of the project / solution (more info than in the Exec Summary)
• Describe the mission and goals
• Discuss the mechanisms (strategies/tactics) it will use to achieve those goals
• If there is a creative aspect cover it here.
• If the funding will enable future self-financing, describe how
• Describe the reach
• Target audiences: groups you will impact; groups you will mobilise; and groups you will engage. Outline what this means in numbers
• Geographies – Local, National and Global Networks you will mobilise; Locations of online audiences you will target e.g. US, UK; and the Offline locations for mobilising action and support.
• Describe the mechanisms of engaging audiences across different channels
• Offline
• Online
• Delivery Planning
• Timelines and Milestones
• Resources and Materials
• Costs
• Impact (This is IMPORTANT!)
• Specify and reiterate what your project will aim to achieve for all it’s different audiences
• Outline the metrics you will to use to monitor and report on the change you are creating
  
4. Funding/Sponsorship Proposal
   (Here’s where you sell)
• Outline the type/nature of Funding/Sponsorship e.g.
• Number of funders
• Focus area
• Timeframe of association 
• Describe opportunities for Funder/Sponsor involvement e.g.
• Signage (name/logo) on project material
• Personal appearances for key staff
• Events, Speeches, Talks
• Opportunities to showcase product and brand 
• Engagement with project audiences
• Engagement with web traffic
• Potential opportunities to influence positioning and geographical location of advertising
• Value of association with your organisation/project e.g. 
• Reiterate scale and nature of exposure
• Exclusive/Non-exclusive rights to use project branding (subject to appropriateness with project mission)
• Networking and recognition opportunities with key partners including Local or National Government, and/or other Corporates.
• Other services you can offer them
• Long-term value
• Reason why you want this particular Funder/Sponsor
  (Do your research and show you understand their needs and why you believe they fit)
• Financials
• Total you need to raise or want from them
• High level reiteration of what the money will be used for and the impact it will have
• Financial ROI for the Sponsor (try and guesstimate if possible, but don’t worry if too complicated) e.g. reduced costs of engaging audiences, brand value, new markets, product sale
• Decision deadline if you need the money by a specific date, plus the reason why

Download Funding Proposal Template

For reference, here’s a real world brainstorm of a sponsorship pitch for a large corporation that should give you a quick overview of what you need.

Fundraising - Recruitment Strategies for Corporations & HNWIs

One of the biggest fundraising mistakes that social organisations make is chasing anyone who might potentially have some money, without really assessing whether or not their goals or interests fit the project.  This is why generic applications get nowhere, and why creating specific proposals often fails too. You absolutely must have some kind of selection criteria to filter the right organisations to approach, before you spend time on funding proposals.

The next mistake involves assuming that presenting the social need and tugging on heart strings is enough to get people (HNWI = High Net Worth Individuals) or organisations to part with their money. This is a hit and hope affair – you might get lucky, or you might not. The real trick is to understand what your target audiences needs are, then make sure you are actually able to deliver the benefits they might want from their association with your project, and finally, stay true to your promises.

Above is a real life example of how to select your fundraising targets and then work out the benefits that might attract them. Once you understand these you can then create the messaging and marketing needed to attract them, and the engagement plans to manage the relationships over time.

Fundraising In A Nutshell

This is more for social enterprises and charities that are raising funds in order to continue to operate and/or grow rather than for startups.

The trick is to do these in parallel. Start your research and network to build relationships with potential funders, while simultaneously putting the platforms in place. This means that by the time you've built your relationships with the people interested in your work, you've also got all your messaging sorted out and ready to go.

Additional notes:

• Networking = emails and conversations (phone and face-to-face meetings)
• Recognition = not just for brand but also methodology in terms of getting accepted as experts in the type of work being done
• Shareability = having the technical ability to share your content in social media, as well as creating and chunking it so that it is valuable and motivates people to pass it on.

Managing Projects: An Overview for Social Entrepreneurs

I put together the following presentation for the UnLtd Network Plus training and networking day for the social entrepreneurs they fund. It provides an overview of all the different elements of managing projects. I've kept it a very high level with just one or two key points to remember for each area. If you want the notes for each slide, either view it on the slideshare.net website or download it and view it on your computer.

I hope you find it useful. Feel free to comment with feedback or questions below.

Managing Projects - An Overview

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