Sosense

The finance paradoxon for social enterprises

Starting a social venture should be easy. Isn’t it that a social enterprise with its half charitable half commercial structure can access both charitable and commercial sources of funding? Wrong, argues Andreas Renner, social finance expert at Sosense. The financial sector cannot keep up with the vibrant development within the sector; solutions to fund social enterprises still need to be found.

In former times the world seemed to be simple. Corporations existed to make profits. Charitable organisations took care for the social well-being where public welfare left a gap.

This model obviously is exaggerated. How drastically the categories have been shuffled becomes clear when we look at a new player in the market – social entrepreneurs. Their ambition: To demonstrate how to a good portion of “entrepreneurial spirit” may help to tackle our social challenges.

The rationale is: The fact that an organisation has a charitable status says relatively little if it is able to produce the greatest social impact possible. The converse argument that a for-profit enterprise does not produce a social value added is as wrong as it is misguided. Companies are founded because a customer demand is identified. Typically, such an individual demand does not contrast with social wellbeing, in the contrary.

Social entrepreneurs blend a social mission with business acumen. They explicitly make use of entrepreneurial values and principles. They puzzle out new models to transfer innovation, problem solving competence, customer orientation, professional management structures and efficiency to areas that traditionally had been reserved for the charitable sector.

The key idea is: A business model which is financially self-sustaining, can be replicated and scaled. Profitable enterprises have access to almost unlimited growth capital (a favourable risk/return ratio presumed), while charitable organisations compete against each other within a capped market for donations and philanthropy – a win-lose situation.

Most importantly, the social impact of a functioning social enterprise increases alongside the company’s growth; it is a win-win situation.

The business model spectrum

The question if an organisation is set-up as a charitable or as a for-profit entity has hardly any relevance from a social entrepreneurship perspective. A maximum social impact can be achieved within different legal settings, depending on the strategy chosen.

In a simplified manner a social entrepreneur can chose between three alternative models:

He opts for the charitable sector but works out a business model to generate a significant revenue contribution from market revenues, thereby reducing the dependency from grant income and potentially becoming financially self-sustaining (e.g. see our blog about the street magazine surprise)
He opts for the model of a „social business“ as designed by nobel award winner Muhammad Yunus, as indicated in the center of the above chart. A social business seeks to operate in a profitable way but does not pay out dividends to its investors. Profits are re-invested or do not occur as the company may sell its products and services to disadvantaged target groups at low prices which do not allow to accumulate profits. The joint venture Grameen Danone Foods as well as our Sociental AG with Sosense platform are examples for such hybrid social purpose enterprises.
Last not least he may set-up a mission-driven for profit enterprise, i.e. a for-profit legal entity is chosen to pursue a socially-driven business model. The Berlin based start-up Coffee Circle which was described in the blog “Risk or Venture” is a good example. The B-Corp certification is a new tool which allows to differentiate such an enterprise from mainstream competitors. Coffee Circle is one of the first companies in the German speaking area that is underway to get certified.

Which models allows to generate the greatest social impact? – As the legal structure is a priori not a good indicator to judge about the impact achieved, we can rephrase the question in a simple way: Which model is best suited to attract sufficient funding to be successful?

Here the tricky part begins. The majority of social start-ups fail before they are in a position to attract capital to nourish both company growth and impact. This may sound at first sight paradox.

The finance paradoxon

Theoretically social entrepreneurs, and particularly young social start-ups live in heaven. They can access more different sources of capital than charities that e.g. cannot attract equity investors or than mainstream for-profit enterprises that typically cannot access donations or grants from foundations.

The reality is different. There do exist various starter kits for social entrepreneurs such as awards or fellowships. However, many social entrepreneurs are confronted with a funding gap when it comes to financing the next stage of the company to reach a stage of maturity which allows to attract also commercial funds. Social start-ups often are caught between chairs and just slightly miss the criteria of each source of funding, even if there is good will on each side:

For local banks the risk is too high.
For venture capital firms the upside potential from an increase in company value in case of a later exit is too.
For foundations it is an unfamiliar situation and typically a constellation not foreseen an a foundation’s statutes to allocate funds to corporate entities; besides, it is often not easy for a foundation to oversee all legal risks of from a charitable law perspective.

Often those social start-ups are successful that were lucky to meet the right business angel at the right time. As there exists no market place for social business angel investments, such a financing strategy is difficult to plan. That is: While social enterprises have a much greater choice to opt between different financing tools, they receive a much smaller piece of the cake then expected.

Ultimately, the finance industry could not keep up the rapid pace within the social enterprise sector. Felix Oldenburg, head of Ashoka Europe and initiator of the Ashoka Social Finance Initiative, describes the situation as follows:

There is a high wall which separates the world of foundations from the world of commercial investors. Each world has its own rules and codes. The social entrepreneurs who do not really fit in either of these worlds, sits on top of that wall. They look down on each side and contemplate which side they should jump down if they do not want to starve on top of the wall.

This dualism is a challenge for any of the three type of social enterprises sketched in the chart above. It seems, however, that it creates the greatest challenges for the hybrid model of a “social business” as a business that does not pay dividends to its investors. It is positioned exactly in the middle, with no tendency to either side. It does not surprise therefore, that the most known social businesses are all spin-offs of multinational companies that fully funded the set-up costs of these ventures from their own budget – it is very difficult to find alternative sources of funding.

Sosense seeks to actively contribute to build a market for social risk capital. In particular, we want to inspire corporations to enlarge the circle of social entrepreneurs that benefit from a strategic corporate engagement. It is a rewarding endeavour to accompany promising social start-ups in their most critical phase and to strengthen Switzerland as a location for social innovation.

Venture or risk: How, when and why corporates invest in social organisations

At the beginning was an idea, but then a huge hole appeared: the funding gap. Every founder knows this problem. This applies all the more to socially oriented organisations, which are all too often overlooked by traditional investors. This allows large corporates to step in – to their own advantage.

At the start of the cycle was poverty. The founders of Coffee Circle were no longer prepared to accept that the whole world loved coffee while Ethiopia, the motherland of the coffee bean, remained one of the poorest countries in the world. So Moritz Waldstein-Wartenberg, Robert Rudnick and Martin Elwert searched cooperative after cooperative for the best beans and then sold these premium-quality beans online. The target audience is the ever-growing group of “foodies”, who are tired of drinking black dishwater and are on the lookout for exquisite quality. What is special here is that for each kilo of coffee sold, one euro is given to the farmers in the form of newly built schools, wells or solar plants. The coffee buyer can choose online which project they wish to support. With their idea, the three young entrepreneurs were able to persuade a prominent investor to support them. Tengelmann Ventures, a fully owned subsidiary of the eponymous German retail group, joined the coffee startup in 2011. It was the first time that the venture capitalist – otherwise more interested in e-commerce models such as Zalando – invested in a socially oriented company. The combination of an auspicious approach to the fiercely competitive coffee market and the unique social aspect won over Tengelmann, which itself first started out as a seller of roasted coffee beans.

In the USA it has been common for years for large firms to invest in startups that combine economic and social approaches. Also in the German network of Ashoka, a non-profit organisation that promotes social entrepreneurs worldwide, one now finds the names of DAX concerns such as SAP, BMW and Siemens. Awareness of the business opportunities offered by social entrepreneurship is growing. For example, improved educational opportunities for underprivileged children can pre-emptively overcome the shortage of skilled labour – even when that is not the primary goal of a social entrepreneur. The Swiss pharmaceutical concern Novartis achieved a comparable effect through its social-venture programme “Arogya Parivar”. In remote Indian villages, Novartis train locals as health advisors who later independently advise community members on health issues. Together with doctors, they organise mobile clinics in which medication and treatment is made available to the population. After nearly two years the model began to yield profits. Novartis received extensive recognition for its contribution to improving living conditions in these areas and at the same time created the potential for developing new markets.

The children’s centre Kunterbunt also addresses an important topic. They build crèches and day-care centres throughout Germany that offer particularly long and flexible opening hours. The venture capital came from BonVenture, an investment trust with a special focus on socially, ecologically and societally relevant enterprises. It is quite possible that Kunterbunt will be able to generate long-term returns from the huge demand for childcare. However, BonVenture also finances projects that would never fully get by without donations. Projects include Hand In, a youth welfare service that offers a new perspective to young offenders through a combination of boxing training, work experience and social support. The portfolio mix minimises the risk for investors, who are not looking for a financial return but who want to preserve their capital. “Companies are sometimes worried about the suspicion of profiting from a good cause when they invest in NGOs”, says Angela Lawaldt, investment manager at BonVenture. This is an unfounded concern, because through investments social enterprises become less dependent on donations – an unreliable funding source. In addition, at the end of a successful investment the investors’ capital can flow into new projects. At BonVenture, investors are predominately wealthy private individuals. They are however also open to cooperating with companies, for example as co-investors in individual projects.

In Switzerland, the situation is slightly different. There are few countries with a similar concentration of philanthropy capital as well as of social investment funds. For example, the Zurich based responsAbility Social Investment AG currently manages around 1.4 billion dollar that are invested in microfinance institutions around the globe. Nevertheless, an investment fund with a hybrid model – such as above mentioned BonVenture in Munich – that packages philanthropic and commercial funds in a way that allows to invest in socially driven organisations in Switzerland does not exist as of today.

Daniela Becker
Independent journalist

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Business Model Innovation June 11, 2013

Sosense has matured

Sosense has matured and offers technology and consulting services for corporations, NGOs and foundations. 3 years after its establishment, Sosense is standing on its own two feet.

In 2010, the young entrepreneurs Patrik Elsa and Linus Gabrielson founded Sosense as a donation and crowdfunding platform. Very quickly they managed to gain the support of foundations, companies and private donors and by the beginning of 2011 they secured three years of funding from the Frey Charitable Foundation.

”We are very proud that we were able to enthuse the Frey Charitable Foundation with our ideas” says Patrik Elsa, CEO of Sosense. “FCF has not only offered us financial support over the years, but has also guided us with know-how and a valuable network in order to become a self-sustaining business. Without the support of the foundation of Rainer-Marc Frey, we would have been unable to achieve this milestone within such a short period.” With the completion of the start-up funds the Board of Advisors has positioned itself anew with Tatjana Frey withdrawing from the Board of Directors and Rainer-Marc Frey from the Advisory Board.

From the beginning, Sosense had the vision of building a business model that would enable the growth of a financially independent enterprise that simultaneously empowers social impact. “Very much like other Start- Ups, we needed to advance our business model and set aside some previous ambitions. It has for example become evident, that in Switzerland it is difficult to run a pure donation and crowdfunding platform focusing on Social Enterprises. Only a combination of a donation platform and the sale of the platform technology and the know- how related to its management, presents itself as a business model that can be sustainable.”

With the service offer Sosense Solutions, the young social enterprise is set out to use technology as its core area of competence. Many resources have been invested into developing this competence over the last three years and so now Sosense can offer companies, NGOs and foundations such technology to make their Corporate Social Engagement Initiatives and Fundraising Initiatives more efficient and professional. The first opportunity to apply the Sosense technology is in collaboration with the renowned Magrabi Foundation (http://magrabi.org) whose mission it is to address blindness in the Arabic countries, especially in the under-served areas. Other companies like PricewaterhouseCoopers (PwC) have also shown a great interest in the Sosense technology.

“With a combination of Technology service provision and a donation platform, we are surely working towards positive figures for 2013, and are preparing for an exciting expansion in 2014“, says Patrik Elsa.

Updates about Sosense June 1, 2013

Sosense will assist Magrabi Foundation: Building an Eye Care Social Business in Egypt

Sosense will assist the Magrabi Foundation in revamping its communication and fundraising activities, based on our state-of-the-art online platform technology and processes. The aim is to broaden the Foundation’s donor basis, as an interim step to becoming a financially self-sustaining social enterprise with huge growth potential.

Eye health care service, for the poor, is an ethical imperative. However, from a social entrepreneur’s perspective, it also represents a business opportunity and a hugely untapped market. The Magrabi Social Enterprise; thereby, tackles a market segment with the utmost social impact in mind: preventing blindness, by standardizing cataract eye surgeries and providing basic eye care to the world’s most marginalized individuals.

Worldwide, the blurring of the eye lens, known as cataract, accounts for more than half of world blindness – about 20 million people. Moreover: it is needless. The loss of sight can be cured by a highly reliable eye surgery. However, according to the WHO, 97% of all people that suffer from cataract eye-sight caused disabilities live in low income regions, do not have the financial means to afford surgery and/or access to quality proven health care services.

Patrik Elsa (CEO of Sosense) and Andreas Renner (Sosense Business Development & Research) were hosted for a 3 day workshop, last week in Cairo, on a mission to assist the Magrabi Foundation’s new Executive Director, Tamer Makary (as Patrik, a co-fellow of the BMW World Young Leaders Network), in its transition from a charitable foundation into a sustainable social enterprise, based on a scalable business model aiming to prevent “needless blindness” for the poor in Egypt, the Middle East, and beyond.

It became very clear that the Magrabi Foundation is in a unique position to catalyze partnerships that make it a world leading provider of eye care services for all – with no discrimination related to income, religion or ethnic affiliation.

It has best-in-class capacities for training & education on all levels, including eye surgeons, paramedical staff, nurses, hospital management, as well as blind or visually disabled people that are bundled in a joint venture with the international organization, Christoffel Blinden Mission (‘CBM’), through the establishment of the Egypt Institute for Community Ophthalmology or ‘EICO’.
It builds on a, more than, 20 year track record of successful partnerships, with leading global, regional and local organizations, as well as running outreach programs through local vision centers and mobile caravans.
The foundation greatly benefits from the high recognition of its decorated founder, Dr Akef El-Maghraby, within the international ophthalmology community, as well as from synergies with the family’s businesses that include one of the largest chains of specialised eye hospitals in the world and other related eye care businesses (surgical equipment distribution, optical retail and lens manufacturing).

A key for successfully reaching people, at the base of the income pyramid, is affordability. Inspired by the world’s largest provider of low-pay eye surgeries, India’s Aravind Eye Hospital, Magrabi developed an organizational set-up that allows it to reduce the costs of eye surgeries to a fraction of the costs experienced in the developed world, without compromising quality. The Foundation’s price segmentation policy and tiered payment strategy, enables the Group to provide services, for free, to those who cannot afford the associated costs.

This social business model will be fully tested in the anticipated launch of the Magrabi ICO Cameroon Eye Institute, currently being constructed, which will serve as a blueprint for replication and scale throughout the developing world, beginning first with Central and Western Africa.

The “market” seems to be close to unlimited. Dr Gamal Ezz Elarab, Medical Director of the Magrabi Foundation, stated that in Egypt alone, there exists a need for approximately 400,000 cataract eye surgeries to remove the backlog alone (excluding new cases) and prevent severe eye sight disability or blindness, inspiring ambitious targets for the Magrabi eye care service social enterprise.

Updates about Sosense April 29, 2013

Copycats in social entrepreneurship – threat or opportunity?

An interview with Stefan Zappa, the founder of Blind Cow, the first restaurant in the dark globally.

For company founders, copying business ideas from different markets has become fashionable. Such enterprises are frequently called Copycats. Copycats select the best business ideas and then replicate the original business model. A very well-known example is the online trader Zalando, who was “inspired” by zappos.com. A large number of investors even specialize in screening markets for promising business ideas which are suitable for “cloning”. Globalization and internet facilitate and reinforce the possibility of this transfer of ideas. There emerged a controversial debate whether such “cloning” helps to develop markets rapidly and more efficiently or not. On the one hand the threat of your business idea being copied in the early stages is an obstacle for investing in innovative ideas. On the other hand some of the most successful businesses are based on ideas from others that have been modified and scaled. We are interested in how social entrepreneurs perceive the Copycat discussion in their areas. An interview with Stefan Zappa, the founder of the first restaurant in the dark internationally, provides us with some firsthand insight.

Mr. Zappa, Blind Cow is the first restaurant in the dark globally. In a dark restaurant the guests eat in complete darkness and are served by visually impaired people. How did the business idea originate and what have the positive effects been?
The idea originated from the exhibition of “Dialog im Dunkeln”. We liked the approach of facilitating a dialogue between blind/visually impaired and normal sighted persons. However, we wanted to create a permanent institution which promotes the understanding of blindness and integrates visually impaired people into the employment market. Since its founding, our restaurant in the dark has had more than 750.000 guests and more than 70 workplaces have been created.

What challenges do you face?
Restaurants in the dark are very labour-intensive. Labour costs account for more than 50% of all expenses. We have managed to optimize the work flow so that today we can almost cover all our costs. In this respect we are surely taking a pioneering role.

Your business idea has been copied in many cities wordwide, an indicator that you managed to build a replicable business model. How did the copycats go about it?
Nowadays the internet is a highly transparent tool which makes it easy to copy ideas. Some of the copycats approached us directly, learnt from our “know-how” and built a franchise model for restaurants in the dark.

In the for-profit business sector, such a “know-how” “pinch” would probably result in a lengthy legal dispute. How do you feel about others copying your ideas?
This is a double-edged sword. We invested a great amount in the development of our restaurant in the dark, both emotionally and financially. Seeing others copying our idea without our direct consent and participation is somewhat painful. For us however, it is the cause that matters. We want to facilitate the dialogue between sighted and visually impaired persons. If the cloning of our idea helps to multiply the impact the end justifies the means.

Are there any ideas that you copied from your copycats?
Of course you are always interested in what others are doing with your initial idea. We were for example inspired by the dark restaurant “Dans le noir” in Barcelona that introduced a two shift operation. After replicating the two shift model it helped us to operate the restaurant at a higher capacity and to work more efficiently.

More information about the dark restaurant Blind Cow.

Social Innovation April 19, 2013

Leading social entrepreneurs in Zürich

This engaging and oversubscribed event featuring 5 leading social entrepreneurs on their way to the World Economic Forum in Davos attracted the key players of the Zurich social entrepreneurship and philanthropy scene. The event was organized by the Hub Zurich in collaboration with the Schwab Foundation and Sosense. The 5 inspiring social entrepreneurs: Martin Burt of Fundacion Paraguaya; Bart Weetjens of Apopo; Elizabeth Hausler of BuildChange; Sebastian Marot of Friends Int’l and Juergen Griesbeck of Streetfootballworld shared their stories and discussed their challenges with the participants.

Photos of the event can be found here: http://on.fb.me/zf1PKt

Updates about Sosense January 23, 2012

Sosense expands its advisory board

Sosense Advisory Board with leading figures has been formed

An Advisory Board with leading figures has been formed to support Sosense in strategic matters. Initial members include Regula Fecker (Rod Kommunikation and Advertiser of the Year 2010), Prof. Georg von Schnurbein (Head of the Centre for Philanthropy Studies (CEPS)), as well as, entrepreneur and investor Rainer-Marc Frey.

Update: The Sosense Advisory Board has been expanded

The newly appointed members are: Dr. Thomas Held, former Director of Avenir Suisse, Dr. Rolf Dobelli , Chairman of getAbstract.com and Founder of ZURICH.MINDS, Maximilian Martin, former Global Head & Managing Director of UBS Philanthropy Services and Founder & Managing Director of Impact Economy SA, as well as Mirjam Schöning, Head and Senior Director of Schwab Foundation for Social Entrepreneurship, the foundation established by Prof. Dr. Klaus Schwab (founder of the Word Economic Forum) and his wife Hilde.

Updates about Sosense July 9, 2011

The Frey Charitable Foundation (FCF), established by Tatjana Frey und Rainer-Marc Frey, invests in the Swiss start-up, Sosense

The Swiss start-up Sosense accelerates its expansion

Sosense secures additional capital and converts its legal form from an association into a (social business) corporation. The Frey Charitable Foundation (FCF), established by Tatjana Frey und Rainer-Marc Frey, invests in the Swiss start-up, Sosense, and provides basic funding for the organisation for the coming three years. To this end, a corporation based on the social business concept, has been founded.

“We believe in the potential of social entrepreneurship and would like to emphasize this with our engagement in Sosense”, says Tatjana Frey, Chair of the Frey Charitable Foundation.

The legal form of a corporation based on the social business concept has been intentionally chosen over a foundation.

“In a dynamic market, a corporation as a social business has immense advantages over a foundation in terms of flexibility. Furthermore, this underscores our entrepreneurial thinking”, says Patrik Elsa, CEO of the newly founded corporation.

Since its inception in 2010, Sosense has been able to gain the support of leading organisations including PwC, Credit Suisse, the Commission for Technology and Innovation (KTI-CTI), the UBS Foundation for Social Issues and Education, and the Avina Foundation of Stephan Schmidheiny.

Updates about Sosense April 19, 2011