Always with the back against the wall - A story of self-exploitation, black & white thinking and structural funding asymmetry

My impression is that, due to the crisis, public interest in social entrepreneurship is at an all-time high. The social issues that call for innovative solutions are too obvious. Recently, the German government has (again) emphasized that it considers us social entrepreneurs to be important and wants to provide more support. Not surprisingly, this is the topic on which I have received the most requests for interviews, podcasts, and webinars lately. The questions I get asked most are about the pleasure and pain points of becoming and being a social entrepreneur. In my opinion, the positive aspects far outweigh the negative ones! I am passionate about being a social entrepreneur. But I would also like to put some uncomfortable truths up for discussion:

1. Being non-profit opens many doors, yet keeps others closed

Following the definition of the Social Entrepreneurship Network Germany (SEND), Social Entrepreneurship is a hybrid of classical startups and non-profit organizations. That makes it harder to match with public funding programs as they are usually available for one or the other. Thus, there are not many pots for our venture. At Social-Bee, we are grateful to be supported by e.g. the Sch?pflin Foundation and Aqtivator by Stefan Quandt. With our business model we want to become at least self-sustaining, and before Corona we were close to that. But the Corona crisis led to revenue losses and a severe funding gap. According to SEND’s recent member survey(https://www.send-ev.de/positionen/), half of the respondents might face insolvency within the next half year.

Why is that? The business models of social enterprises aren’t set to maximize profit, but to maximize impact. Depending on the cause, the business models can be strong, even quite profitable, but however, margins are usually lower income than traditional for-profit businesses. Many are even generating structural deficits. Of course we all want to maximize profit and impact at the same time, but you know from maths that if you optimize two variables instead of just one you need to compromise to some extent.

In addition, non-profit businesses - by design - cannot build up reserves for times of crises. Credits, the favourite state support tools, cannot be paid back due to the margin structure of our models. Therefore, Crisis-losses, but also growth, scaling and new projects must be financed from donations - as we lack different funding mechanisms. Donations in large quantities are highly scarce, and asking for donations always feels like begging. This does not match with our identification as entrepreneurs, achievers, changemakers and value creators! That means as a social entrepreneur your entrepreneurial spirit is limited and so are your innovations. That usually sparks my creative energy to come up with workarounds, but to be honest, its extremely frustrating.

2. Why aren’t the brightest minds working on the most pending problems?

Money and social work are in a complicated relationship. There is a firmly held (and very black and white) opinion that people who work in the social sector cant profit off of their work. This has resulted in talented and passionate people being highly under-compensated for their work. If you think differently your friends, relatives or strangers start to question your integrity. “Its way more honest if you go full capitalism if you want to benefit yourself!”

But is that true? Is it better, that smart business people invest 40-60 hours a week at companies with questionable ethics and work one or two hours a week on a voluntarily basis to create impact or donate parts of their money? Imagine they spent all of this time and energy working for social impact AND earned a good living while doing it! Instead of cheering this and imagining how our world would look like then, immediately your "real motives" will be criticized. This is reality. This happens all the time. And this needs to stop.

In fact, we as social entrepreneurs take the full entrepreneurial risk like any other entrepreneur. Invested our own capital, worked for free until we finally got some funding. Just to set up structures that cannot be exited with crazy multiples, but work for the common good. And then we get highly criticized if we dare to pay us a decent salary. Thus we continuously exploit ourselves - because we feel bad, because we learned it that way, because "it is just like that". This happens all the time And this also needs to stop.

In spite of, NO, exactly because of that I strongly believe that people working in the social sector need to earn more. To show ourselves and others our worth. To be respected. And to be attractive. Because, for crying out loud, we need the best talent available! Isn’t it completely irresponsible that most of the brightest minds and most skilled people aren’t working on the most pending problems of society and the environment, but are being bought off by successful corporations? 

3. Whos paying?

So, if social businesses aren’t always profitable, but work in the social sector should be higher rewarded, who’s paying the deficit? I think that there are two options: Governmental funding and a modern “indulgence payment” system:

Social Businesses per definition work for the betterment of our society instead of at its cost. With our work, we save the government quite a lot of money. For example: Within the last 3 years, Social-Bee has had a revenue of 6,5 Mio € and a burn of 1,3 Mio €. In total, we have saved the Government 5,2 Mio € (in employment benefits and integration cost) meaning that we created a “societal gain” of 3,9 Mio €. And that by changing the lives of over 250 refugees by integrating them into longterm employment and helping them to live a self-determined life. By funding our losses of 1,3 Mio € so far the government could obtain 5,2 Mio € of governmental savings, thats a "4x multiple in 3 years". Sounds like a good deal, doesn’t it? But sadly governmental funding doesn’t work like that. Funding generally doesn’t work like that.

I dream of a world in which organizations producing negative externalities have a hard time obtaining capital, while those (non-profit or for-profit alike) producing positive externalities have it much easier. This could be made possible by incentivizing social impact by setting up e.g. a governmental funds that make investment decisions based on a new formula for profit:

Revenue - the cost of the company + /- measurable positive/negative externalities in € created for society or environment = net profit

With this equation, a social business, that is only 50% self-sustainable but creates an enormous impact is suddenly a very attractive financial investment. And with this equation, classical profitable businesses producing strong negative externalities would not get access to funding. This formula would set right incentives to a "new normal", towards an economy that works FOR society and environment and not on their cost.

Is that a new theory? No. But whats new is that we as social or environmental entrepreneurs fill this theory with hands-on expamples how to bring it to life and built the knowledge basis how such a fund can be structured. Impact bonds could be an alternative solution. The first impact bonds have been successful - now we want more of them!

Another way would be by establishing a system of “indulgence payment” between companies and social enterprises. Many corporations produce quantifiable negative externalities laying the consequences on society or its citizens. If those corporations would be fined or forced to support organizations, with equal positive social impact they could compensate for the damage they are doing. CO2 taxation is the first step for such an indulgence system - hopefully more to come.

I am clearly not a researcher or economist. I am a practicioner that is exposed to this funding and value definition asymmetry every day. Thus, I would like to contribute with my view from the practice how we can reshape the economy of today and tomorrow.

4. Impact beyond the measurable

I love numbers and tangibles! And like I discussed in the foregoing section, making impact measurable is the strongest tool to make it a priority in financial decisions. But social impact isn’t always a straight line of cause and effect. It’s more of a snowball effect whose full extent is almost impossible to estimate. Seeing how much money we save the government by employing over 250 refugees is impressive, but the intangible impact is what makes it all so wonderful:

With every refugee Social-Bee employs, we not only impact one life but several people’s worlds. The family, friends, colleagues, and employers benefit from working with that one person. Even further, empowering refugees through employment reduces prejudices, prevents conflicts, and makes our society more accepting and diverse. But how do get that across? How do you quantify the systemic change we aim for in the long run?  

In conclusion, we are fed up! 

To establish social entrepreneurship as a valuable part of our economy we need to rethink the way we approach funding. We need to finally give social entrepreneurs the appreciation they deserve, by rethinking the structures stopping them from fulfilling their potential, seeing more than black and white, and dropping the stigmas. We are social-entrepreneurs and our net added value is clearly positive.