Why things are harder for social entrepreneurs
Starting a successful company is no small feat, statistics surrounding the failure rate of small businesses are cliché for good reason. There are no shortage of challenges facing any entrepreneur.
But for social entrepreneurs, things get even tougher. As a result of the social good built into their business models we have to overcome extra challenges, from non-traditional risk-return profiles, slower times to profit or simply the increased cost of socially fair business features.
At Enviu, we have a survival rate of over 80% when it comes to building our social ventures. One of the key ways in which we manage such a high rate of survival is by using the lean start-up methodology, ideating, testing and validating before we get hung up on immediate profitability.
This approach to venture building is not just effective in general, but holds particular benefits for social entrepreneurs. Here’s why:
Lean? What’s that?
Lean thinking was a term coined by James Womack and Daniel Jones to describe Toyota’s production system, an innovative system of working that allowed the company to compete internationally despite the limits of a post-war, resource strapped Japan.
In its essence the approach cut unnecessary waste, focused on learning and strived for continual improvement. This remarkably successful methodology laid the foundation for Toyota to become the world’s most successful automobile manufacturer and the first to construct 10 million automobiles per year.
Since Toyota’s success, lean thinking has been applied to everything from construction and higher education to software development and governance. Then in 2011 Eric Reis wrote his book The Lean Start-up and applied the methodology to starting a business.
From this, we took three key learnings:
- Gather good data, and learn from it.
- Improve the product with ideas from data
- Measure product performance, and repeat the cycle.
Crucially, this is all achieved by starting with a minimum viable product (MVP), which is the focus of these continual cycles of improvement. With this approach we can learn and build as we go, rather than sink time, development costs and working hours into a project which we might only realize is a complete failure after the fact.
This fail fast, learn quick approach is key to keeping our success rate so high.
A great example of this in practice is our farm-to-fork ecommerce venture, Fresh, in Chile. When we kicked off, we could have started by making an enormous upfront investment in developing a branding, flashy website, app and marketing efforts. Instead the team started by contacting local farmers to see if they were interested in the idea at all. From there the team stamped the word “Fresh” on wooden crates, and began running small scale deliveries out of the back of a van, advertising by word of mouth to small groups of friends and validating the market with small scale Instagram ad campaigns
So the methodology is beneficial, but why is it useful for social entrepreneurs in particular?
Benefit for social entrepreneurs 1: Low cost, low waste
Social entrepreneurs are in a uniquely difficult situation when it comes to finding capital to fund their ventures. Non-traditional risk-reward profiles (higher risks against lower rewards) and longer times to profit make it hard to compete with ‘normal’ companies, whose traditional business models make them a more attractive prospect for profit focused investors.
Lean start-up methodology can help tackle this roadblock, providing a framework for social entrepreneurs to work within the confines of lower capital availability. Looking again at the case of venture Fresh, initial budgets were tight, but by starting with a MVP and learning fast, we were able to validate interest for the business model with both consumers and suppliers. All using but a fraction of the budget which would traditionally be required.
Impact driven ventures become a much more attractive investment prospect once validated. It’s in the interest of social entrepreneurs to do this as quickly as possible with the least up front investment, all while gaining from the best possible learning curve
Benefit 2: Learning fast
The social good present in the business model of social ventures is not only associated with higher cost for the business. It can also translate to additional cost for the user, either as a direct price increase when compared to a competitor’s product, or in terms of product user experience – Think the extra responsibilities associated with remembering your reusable cup, or returning a reusable meal container.
When it comes to designing ventures that ask consumers to make big departures from the ways in which they typically use a product or service, learning fast is vital. Using the lean start-up framework as a guide we focus on the following:
- Collecting data before we even get started, in the form of an extensive issue analysis.
- Working to deliver a minimum viable product and piloting the business models as soon as possible.
- Gathering good data from our initial pilot, learning from it, then developing ideas as to how we can improve the product.
- Making adjustments to the product, or pivoting the business model entirely.
- From the very beginning implement a continuous improvement cycle, based on measuring, learning and building.
This process is crucial as it allows us to identify both whether or not there is consumer demand for our solution, and if it even creates impact in the way we assumed it would. With an MVP and fast development cycles, social entrepreneurs can quickly pivot their whole business model to meet what the market demands, rather than getting hung up on perfecting an heavily developed product for fear of sunken costs.
Benefits 3: Getting started now
As social entrepreneurs, we have a dual responsibility both to design the ventures that drive a sustainable future and, to convince corporates, investors and consumers that our solutions can drive this future in a financially sustainable manner
There’s no better way to do that than well, doing it! Taking business models to the field, testing them, and coming back with proof in the form of good data is the best way to attract all the right kinds of attention.
When we started our reusable care and home goods venture, Koinpack, in Indonesia, we did so with a series of small scale pilots whose initial success allowed us to approach and form partnerships with two of the world’s largest FMCGs – Nestle and P&G – opportunities that would most likely remain closed to us had we not got out there and proven the potential of our solution in the field.
Working lean can help tackle our most urgent challenges
The urgency of the challenges facing our planet puts the burden on social entrepreneurs to bring their solutions to market as fast as possible.
From capital constraints, to bridging the gap between entrepreneurs and funders the challenges we face are many. Yet, if we truly believe impact through business can effectively drive us towards a more circular and inclusive economy, it’s vital we get to work and show just how effective these solutions can be.
We hope that more social entrepreneurs will adopt a lean approach to building their solutions and conducting their operations. In addition to the benefits laid out above, if more social entrepreneurs can adopt lean thinking, we can demonstrate to funders the benefits of a funding approach that enables working with a system of of ideation, testing and validation.
With this in place we can focus on building the solutions our world so urgently needs, without being forced to forget our impact goals as we race toward profitability.