[We have covered Social Entrepreneurship in depth and here is a great article written by Aarti Shrivastava covering the various aspects of Social Business]

The major boost in social entrepreneurship was given by the Nobel Prize winner Dr. Mohammad Yunus when his brain-child Grameen bank became successful in helping people lift themselves out of poverty in rural Bangladesh by providing them with credit without requiring collateral. Yunus developed his revolutionary micro-credit system with the belief that it would be a cost-effective and scalable weapon to fight poverty.  It was soon realized that profits can be made along with serving the society, provided you treat profits as a means and not the end result.

The impact of such enterprise largely depend on its successful implementation to those that need it the most, those at the Bottom of the Pyramid. And of course a discussion about the BOP wouldn’t be complete without mention of India; where hundreds of millions critically need a compelling movement in social entrepreneurship to improve their welfare.  There is a natural predilection towards rural areas as 70% of the population lives in the hinterland. Recently, the rural scenario in the country has emerged as a lucrative option for the mainstream economy. Various organizations are viewing rural areas as potential markets, resulting in a gamut of innovative solutions within the social entrepreneurship space that focuses on and emerges from rural areas.

The popularity of SE is growing at a very high pace in India even through the current economic downturn. In the last three years more and more youth are developing interest in this field including those from prestigious Stanford, MIT and Oxford. This new evolving field has also got early venture capitalist interested in funding with many seeking out such enterprises that hold out huge potential. Earlier, organizations solving social problems were often assumed to be idealistic, philanthropic and lacking business acumen or the ability to be entrepreneurial. However, as the social sector has been coming in touch with the private sector, both have begun to realize that just one approach either pure philanthropic or pure capitalist is inadequate to build sustainable institutions.

In recent years, ‘not-for-profit’ has been pushed to the back partly because of responsible lenders and social enterprises are being run more like businesses today. The focus is on enterprising micro groups which want to transform their own, and the community’s, circumstances but can’t access any finance. 

Fast company in their March 2010 listed “top 10 by Industry”. And four of the top 10 most innovative companies in India were standalone social enterprises or have socially entrepreneurial initiatives.

In India alone social entrepreneurship space has a countless mixture of models with a one billion thinking structure. One billion thinking requires cost-effective models involving the bottom of the pyramid. The majority of these models are scalable and replicable.

Few for-profit Social Business Models

The other notable change is the involvement of mainstream financial institutions in social entrepreneurship. Various venture capital firms are investing in for-profit entities with social objectives. Interestingly, specialized social investors provide capital, networking, marketing and business expertise to such ventures.

This trend was kick-started in the area of microfinance when Sequoia Capital invested in SKS Microfinance.

Social venture funds measure their investments on social, environmental and the traditional financial returns. Acumen fund expects to make an impact on million people with every investment in a five-year time frame.  The fund measures returns in terms of financial, operational (internal processes and systems) and social impact (outcome and output). Output is number of people who are impacted and outcome is how it has affected them. For example, if 1,000 people have had access to clean drinking water, the investors also check if the rate of diarrhea has come down. More heartening is the fact that the mainstream venture capitalists are also recognizing this as a business opportunity. So far, VCs have invested $220 million in 77 social businesses in India. But there hasn’t been a single exit. In conventional commercial ventures, VCs work with a holding period of 3-5 years. In social businesses, the holding period is longer — typically, 6-8 years.

Funds Currently Available

Acumen Fund : It supports sustainable enterprises providing the poor with critical goods and services at an affordable price. Primary focus on healthcare, housing, water, energy and agriculture Companies invested in: 12 Fund size: $40 million (approx)

VenturEast: It builds profitable businesses that cater to under-served markets. Focuses on meeting India’s domestic needs (primarily rural and semi-urban markets) by backing early-stage / rapid-growth businesses Companies invested in Over 50 (including 25 social enterprises) Fund size $250 million

Oasis Fund: It supports enterprises that develop innovative solutions that provide the poor with better access to critical goods and services. Invests mostly equity, with some debt. Investments generally range between $1 million to $6 million Companies invested in 4 Fund size $30 million (still raising)

Song: It supports entrepreneurs in high-growth sectors like education and training, agriculture and food, healthcare, financial services, basic utilities (waste, water, rural telecom, affordable housing, etc) that are aligned with inclusive growth Companies invested in None Fund size $17 million

Aavishkaar India Micro Venture Capital: It creates sustainable change by increasing economic activity at the bottom of the pyramid and boosting the entrepreneurial spirit. Investments to date have focused heavily on the rural and agro technology sectors Companies invested in 17 Fund size Rs 60 crore (approx $14 million)

Gray Matters Capital: It invests in the information, communication and technology space to bridge the urban-rural digital gap Companies invested in 4 Fund size $12 million

Elevar Equity II: It creates market-based solutions for poverty eradication. Focuses on sectors like healthcare, education and information Companies invested in 1 (another two in micro-finance ventures) Fund size $40 million (additional fund-raising on)

The above figures simply state that there is an estimated $100 million (Rs 400 crore) chasing deals in India’s social enterprise space.

But there is a divide between those that have access to mainstream and/or commercial funds and those that rely on personal connections and grants/donations to raise money. The ratio is about 50/50.

• Foreign grants: 8%
• Domestic grants: 8%
• Debt (credit loans): 11%
• Government Funding: 3%
• Charitable Organization: 5%
• Bank Loan: 13%
• Loan from Family and friends: 21%
• Equity Investors: 21 %
• Others: 10%

As per Beyond Profit survey, Forty-five percent of respondents obtained funds from commercial sources whereas 21% of respondents source their funds from personal connections such as family members and friends; another 21% rely on grants and donations from charitable organizations. Arranging finances for a social enterprise in India is still very difficult. And knowing in which sector to finance is even more difficult. In bar diagram mentioned below is a mention of profitable sectors and a trend which clearly states areas to divert funds.

Social Entrepreneurship in India – Profitable Sectors

Education: Sector with a track record of profit: The Education sector has shown a marked degree of financial stability and growth potential. There are two key elements. First, the sector represents the highest number of profit-making enterprises (38%) among others, and also has one of the lowest numbers of loss-making entities (24%). Second, the observation says that there is a good growth potential; 38% of education enterprises are breaking even — which means the number of profit-making enterprises in this sector could increase in the coming years.

Health: Sector with large growth potential: Although the sector currently produces a very small number of profit-making entities, it has the lowest percentage (13%) of loss-making enterprises. Most importantly, at 73%, the Health sector has the largest segment of break-even businesses. If/when these enterprises begin to turn a profit, the Health sector could sustain a multitude of successful, profit-making enterprises.

Rural Development: Sector to watch out for future growth: Despite the fact that the largest number of social enterprises are in this field, it is the biggest loss-making sector at the moment. However, Rural Development demonstrated the largest revenue increases last year, so there could be more surprises in store.

There are more enterprises that are loss-making (34%) than those earning a profit (25%). And 41% percent of enterprises are currently breaking even. If you look at the profitability by measure of years in operation, you can clearly see that making profit through social enterprise is no easy task.

It is true that the percentage of loss-making enterprises steadily goes down as the companies get older. But there is virtually no disparity in the number of profit-making entities across age categories. Many enterprises stop making losses as they grow older but do not begin to turn a profit; they merely start breaking even. Surprisingly, even after 11 years or more of operations, the percentage of profit-making enterprises is only 27%.

Social entrepreneurship in India is emerging primarily because of what the government has not been able to do. The government is very keen on promoting social entrepreneurship – not necessarily by funding it or by advising on it or enabling it. What they do do, is not disable it.

For example, in Mumbai alone, non-profit organizations educate more than 250,000 children on a daily basis. The government has not told these organizations not to do it. Whereas in some countries, when someone takes it into their own hands to start a facility for education or healthcare or empowerment, the government often puts in place barriers to prevent this from happening.

Our country does not have a homogenous people or geography, so the impact largely remains regional. With the current economic climate, it is very likely that social needs will increase and, consequently, the number of people committed to addressing them will increase. Definition of social entrepreneurship has changed over time. From corporate philanthropy to non-profit and now to self-sustainability, Social Entrepreneurship has evolved and will keep evolving with time and needs of the world.

[Reproduced from Aarti’s blog]

Recommended Read: Social Entrepreneurship – Interview with DesiCrew [Rural BPO] Founder | Interview with RangDe Founder (on Business Model, Startup Journey..and more)