Socially impactful companies differ from regular for-profit organizations as their primary intention is to generate positive social and environmental change. While these companies prioritize the creation of positive social impact, for-profit social enterprises must also yield a profit in order to make their goals a reality. Due to the nature of their work, there are many factors that hinder their ability to grow. Things such as the challenge of balancing social and financial obligations, the burden of proving the viability of business opportunities in untapped markets, and the risk of getting caught in niche markets with little room to expand present significant barriers to scale. However, consumers, governments, and financial markets are driving increased capital, support, and resources towards businesses that serve not only their shareholders, but also their communities and society at large.
Scale Matters
Many find the notion that positive social impact and profitability can be intertwined to be baffling, but social enterprises were founded on the premise that impactful companies can also achieve conventional business success. To make a large-scale change, social enterprises must also generate profit. Without the proper capacity and business model to reach profitability, these companies will be left with little capital available to attract talent, reinvest into expanding their operations, and further their positive reach. While facilitating positive social impact may be their primary objective, they have no chance of achieving this goal if they are forced to fold before doing so.
Along with this need to scale individual social impact, organizations seek to generate interest in their industry. While copycat companies are seen as an unwelcome threat in the corporate world, they are tolerated, and even encouraged, in the social impact sector. Stefen Zappa, the founder of Blind Cow, a restaurant where diners eat in the dark to promote awareness for the visually impaired and incorporate them into the employment process, said, “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” (Sosense, 2013). In all, copycats aid in scaling impact and are, at times, vital in ensuring that a viable solution to societal challenges will reach as far as it is needed. If a company cannot demonstrate the potential for profitability and expansion, then few people will want to replicate the concept.
Similar to how social impact businesses need to entice copycats, they need to also entice inventors. Impact investing is built on the principle that someone can invest in companies that are doing good things for the world and still make a financial return. If little potential is shown that a company will be profitable and scalable, it’s unlikely to attract investors. Because impact investors are still at their core investors, they seek to place capital where it will have the largest impact.
Key Barriers to Scaling Social Purpose Organizations
Social enterprises are not only accountable to their monetary shareholders, but they are accountable to a broader group of stakeholders, including community members, government organizations, and in some cases, the natural environment. On their path to growth, they can’t neglect their social obligations or their financial ones. As mentioned, if they focus solely on their social impact initiative, they may fail to yield the profit required to deliver the intended social impact. Alternatively, if the company is too profit-oriented, they may find themselves moving up markets, in some cases moving away from the challenged communities they first intended to help.
Additionally, social enterprises are often plagued with the challenge of being the first to prove that there are viable business opportunities in low-income communities as they work to solve issues such as food insecurity, homelessness, and promote economic growth in low-income areas. There is a general pre-existing fear of investing in emerging markets as they come with many risks, including increased risk of bankruptcy, market unpredictability, lack of liquidity, and difficulty raising capital. These pre-existing risks, coupled with the industry-specific barriers of scale in the social impact sector, leave investors hesitant and uninterested in social impact companies.
Lastly, it is easy for social impact companies to get caught in niche markets, leaving them with no room to expand. As large-scale social issues require unique solutions, starting in a niche market may seem like the best and most viable option at an organization’s inception. This decision may be the organization’s downfall as “there are significant challenges related to the diffusion of niche innovations, particularly related to the scale of niche innovations within a wider regime, making scale-up challenging and presenting difficulties with replication of conditions for success across wider regime environments” (Hillman, Axon & Morrissey, 2018, p. 445). Being planted in a specific niche market may limit its ability to scale and deliver a large-scale social impact solution.
Looking Towards a Bright Future
In recent years, mainstream investors have begun to see the value of investing in sustainable and socially conscious companies. In an interview with Wharton University, Audrey Choi, the CEO of Morgan Stanley’s Institute for Sustainable Investing, stated, “Investors have started to realize that caring about the environment, thinking about social justice, gender equity and other issues around social impact can actually help your investment strategy. They can help you be aware of risks and opportunities earlier, and make sound investments” (Knowledge@wharton, 2019). As positive returns continue to roll in, the viability of sustainable and impact investments continues to be proven. In all, as socially conscious investing continues to yield similar financial results, often with less volatility in doing so, more money will be driven towards deserving companies.
As a new age of investors is ushered in, there has been an increased interest in the social and environmental impact of the companies in which people seek to invest. In the next forty years, it is projected that women will inherit nearly $29 trillion in intergenerational wealth (The Philanthropic Initiative, 2016) and will begin to play a larger role in financial and investment decisions. This will have a large scale impact on the market as a whole as women are much more concerned about the social and environmental implications of their actions than their male counterparts. Likewise, as millennials begin to age and have an increased influence on the global financial market, experts predict that they too will have an increased interest in the social and environmental impact of their investments. This shift is already being demonstrated through the influence the millennial generation has had on their parent generation’s investments.
Furthermore, the rise of e-commerce has opened an avenue for social impact companies to deliver their products directly to consumers. Before the development of e-commerce, social impact organizations were at a disadvantage as they were likely to have weak distribution channels for their products as they often did not have an operation large enough to achieve economies of scale (Ng, 2020). For a long time, this was a significant barrier for social impact companies as they were forced to sell their products at a premium to offset distribution costs. Now with the availability of e-commerce, this barrier has been alleviated.
Lastly, the maturing of the impact-economy will continue to expand the capacity for impact investors to deliver resources to organizations that can benefit from them the most. Considering the term “impact investment” was only coined by the Rockefeller Foundation in 2007, the sector has come a long way in a short amount of time. That being said, there is still significant progress to be made for the impact-economy to function productively and effectively. According to McKinsey & Company, the four hallmarks of maturity in the impact-economy will include clarifying impact measurement standards, professionalizing the practice of impact investing, supporting social enterprises and impact-orients businesses, and improving market practices and product development (Fine, Hickson, Pandit & Tuinenburg, 2018). Although experts agree we have a long way to go until these hallmarks are achieved, the impact-economy is slowly trending towards this maturity through the constant development of policies, practices, and standards seeking to govern the industry.
Overall, the world of impact entrepreneurship and investment is incredibly complex. Social impact organizations’ unique goals leave them to face many challenges when attempting to grow and scale. These barriers have a broad impact on their capability to yield a profit, attract investors, and achieve their overarching social or environmental goals. It is important to remember that the future is hopeful as it is predicted that demographic, market, and industry shifts will propel innovation and growth in the impact sector.
By Abigail Falle