How to Scale community impact with a Market-Based Approach
“In a social business, community impact comes first,” was one of the fundamental insights in the first Community Impact Development Group (CIDG) meeting hosted by Ashoka and the Siemens Stiftung in October 2010, and one of the essential claims that members of this group wanted to voice within the impact investment landscape.
But, what do we understand by community Impact? Why is it so critical to systems change? What are the diverse strategies that best achieve it? Which type of capital is needed for these types of models? These were some of the questions that CIDG members sought to answer in Munich last September 12-14th.
After a rich discussion where CIDG members provided their different experiences working with underprivileged communities, the group reached a consensus on the following definition of a community impact-driven social business: “Desired community impact enables communities to identify their needs and hopes, to develop self-sustainable solutions and to mobilize necessary resources.
“Community impact empowers a community to take on ownership, enhances capacity and secures dignity. Ownership ensures long term, sustainable community impact and can be triggered and institutionalized in different ways, depending on the nature and the vision of the social business.”
It is clear then, social business is a tool to stimulate not only community access to needed and desired products and services, but also ownership and skills, so a particular community can be better equipped to improve their situation by their own means and resources in the future. In very practical ways, how can this ownership become a reality?
CIDG members implement diverse strategies that range from sharing revenues and assets of social businesses with the community, to opening up management opportunities for community members, to a total transfer of know-how and technology, to empowering community members as co-creators of the solution, to becoming implementation partners on the ground. A combination of some or all of these strategies guarantees revenue and power transfer to the community, generating new skills, dignity and ownership, leading to positive long-term effects on the community.
The role the community plays has important implications for the business model a social entrepreneur chooses. One question an entrepreneur typically wrestles with is: how to create a business model that maximizes community impact in the most financially viable way?
A typical structure that engages communities combines two sets of organizations – one headed by the social entrepreneur and one (or more) operated by the community. The most common way to do this is by creating an “umbrella” or “spread” organization with several community-operated organizations stemming out from that, also known as a “Hub and Spoke” model.
With a Hub and Spoke model, the social entrepreneur´s organization provides assets, trainings, technology and financing to those organizations located in the communities. In this model, a social entrepreneur has two particular things to consider: financing and growth.
Regarding financing, an entrepreneur first needs clarity on which organization requires investment. Are the funds being raised for the entrepreneur’s umbrella organization? Or are they being raised directly for the one operated by the community? In each case, the funders and the type of capital needed – even the scope of the story to be highlighted – are different.
In relation to community impact growth, the challenge is how to strategically design transitioning from working in one or two communities to expanding into several geographic settings. This typically involves adapting the model to the local context without compromising its essence and finding the right local partners to share fundraising efforts and implementation risks. Eventually, this could become a revenue source for the umbrella organization through setting up franchises or with knowledge transfer agreements.
What about the types of capital needed to enhance community impact? There is no magic recipe here, and in the lifetime of a social enterprise, diverse types of funding – grant, debt, quasi equity, and equity – are needed.
There are some hints, though, that could make balancing options easier for an entrepreneur. One element to consider is the role of the community in the business model. If the business seeks to reinvest a significant portion of the profits back in the community, it is likely that equity – where profits are distributed back to investors – would not be the best option, as it will generate tensions related to issues of governance and control.
Another element to consider is the capacity the social business has to return profit in its initial stages. For activities such as prototyping, capacity building, or proof of concept, grants should always be considered. Also, grants can play a significant creative role as loss-cushions, diminishing the risk of more traditional, risk-averse investors.
Debt, on the other hand, makes sense when the ownership is critical to the entrepreneur or to the community, and at a growth stage where there is a capital expenditure with a clear return. In this case, agreements with investors should include below-market interest rates, larger time horizons, or repayment based on cash flows or fixed repayment schedules. Program Related Investments (PRIs) from foundations are another interesting option to obtain soft debt, but are still in an early stage of development.
If the investor is willing to take a high risk and there is no clear exit strategy, a social entrepreneur might want to consider a quasi-equity product, such as convertible loans or a revenue-share agreement. Equity could be considered for projects with the highest risk and return potential, but here the key challenge is to find a partner who is aligned with the social mission of the business and who brings integral skills to the advisory board that the entrepreneur lacks.
In any case, a crucial aspect in any financing strategy of a social business is to safeguard its social mission by creating a strong corporate governance structure that allows the social entrepreneur to retain primary control of the organization, even in times of growth. Not less important is to bring on board investors who are aligned with their values and willing to bring their knowledge and participate as co-creators of the social business, rather than external shareholders.
As social entrepreneurs become more strategic in creating their business models and thinking through financial planning, they will be better equipped to fulfill their missions of systems change and community impact for the widest number of recipients.
The Community Impact Development Group (CIDG) is a cooperative initiative of Siemens Stiftung (Foundation) and Ashoka. Working under the motto “Technology for Human Needs,” CIDG is a network that unites people who want to benefit their communities.
The selected social entrepreneurs use technologies to develop products and services to improve living conditions in their home countries. The network offers them the opportunity to share their experiences and apply the knowledge they acquire to further develop their own enterprises.
CIDG’s goal is to support leading social entrepreneurs working on impacting local communities in sub-Saharan Africa and Latin America with the help of a technological product or service. The program works toward this goal on three levels:
- Further developing and refining participants’ social business plans, establishing clear paths towards the financial sustainability of their social ventures
- Facilitation of knowledge exchange among participants and development of methodologies about how to impact local communities
- Mobilization of external resources to enable social ventures’ impact growth through introducing potential replicators, investors, and partners to participating social entrepreneurs
More information: www.siemens-stiftung.org/en/cidg
Sabine Baumeister, Siemens Stiftung
Michael Vollmann, Ashoka