There’s just no way to avoid it. You might fail with your social enterprise. Lose your shirt. Wish you’d never started it. There’s no safety net for social enterprise, and there never will be.
The U.S. Census Bureau reports that half of business startups with employees are gone five years later. Social enterprises probably do a bit better than that. So perhaps your odds are a bit better than 50-50. But it’s still risky business.
Yet all is not lost. There are things you can do to reduce risk. Write a business plan. Need help? Review the Free Management Library and blog on business planning. (Full disclosure: I’m the author.) The blog is currently running a series about feasibility testing, a central part of good business planning. That means lower risk.
Also, don’t forget the “enterprise” part of social enterprise. Many nascent social enterprisers behave as if awareness of their social impact will translate into sales and profitability. While in certain circumstances people will purchase, and even pay extra, for something that creates a desirable social impact (think Girl Scout cookies), most of the time they won’t. Or if they will, it’s only if the product meets or exceeds their expectations. Fair trade coffee sells if it tastes great, but if it doesn’t, no matter how much the other stuff exploits indigenous Latin American farmers, it sits on the shelf. That particular social premium ends at their taste buds.
Finally, failing isn’t as bad as it’s cracked out to be. Most successful entrepreneurs hit their stride after failing a few times. But each time they learned important lessons. So my final tip for this risky business is to decide that you’re OK with failure. Stuff happens.
There are 3 contributing factors for business failures, which are actually quite common in existing businesses today. The only difference is that established businesses have momentum and brand while the new business has neither.
Factor 1 – Clear articulation of value. This is not the value proposition (here’s what we do / offer). This explains in very simple terms exactly how your product / service will help someone get a job done. Services are just harder to sell than a product because it is intangible therefore you need to go the extra step in getting your customer to understand how the service will solve one or more problems they are facing. You have to create an instant “visual” in their mind. Example: Suppose you are providing crisis management services for local communities. Your value prop would be “we offer crisis management services”. But, your clear articulation of value is “We address the processes and reduce the costs (time, money, & effort) for crisis management so community leaders can address the needs of their community.”
Factor 2 – Marketing & Sales. This involves establishing / extending your network (establishing is much harder and takes a lot longer to ramp up). If you have credibility, you’re off to a good start and should be able to garner a few sales to prime the pipeline. If you are a new entrant in a field, then you have to establish credibility with pro-bono work and/or publishing and speaking opportunities. This can be a lengthy process (esp. in this economy). This is where most businesses fail because they need 3-6 months just to get their messaging right w/o professional services. Probably one of the hardest challenges the entrepreneur will face. This is much more intense than coming up with logos & taglines and websites. It’s getting people to understand what you offer, what problems you will solve and why they need YOUR products / services. Price is not an issue at this point, credibility is everything. Set your price at a competitive level to cover your costs and discount as necessary to gain initial entry. Price will firm up as demand increases.
Factor 3 – Cash on hand. Well, this is what buys you time until you address Factors 1 & 2. Most folks don’t have more than 3-6 months of cash available before they need to bring in revenue or close up shop. In a tough economy, double your ramp up time. If you have zero credibility, you may need to add 3-6 months of add’l time just to get the sales pipeline. That’s a lot of cash and most businesses need luck or an angel investor to keep them going.
There’s plenty of other challenges, but these are the foundational ones that must be in place so the entrepreneur can be positioned to address this other “stuff”.
I think of risk as being a function of two things: likelihood of failure x consequences of failure. You can reduce both by starting small – as small as you can without compromising your value proposition. Smaller generally means less complicated = lower likelihood of failure. It also means that the consequences are going to be lower, so making a serious error can be a learning experience instead of something that cripples the venture. And, besides, if you look at the start-up stories of most (all?) successful social entrepreneurs, you’ll see people who started part-time, “off the side of their desks”, with just a little capital. And those that fail are often the ones that tried to short-cut the process and start out to big. Schumacher was right: Small is Beautiful.