Social Enterprise Mistakes
Our industry is good at highlighting and celebrating the popular, well known social enterprises that have done great things.
We go to conferences to learn about the secrets to their success, so that we can improve our own organisations.
There’s also a lot to learn from the failed organisations. These groups may not have become household names, but a post-mortem can save us making the same mistakes.
Scrambling for grants
One enterprise seemed miraculously able to have just enough money to cover 75% of their organisation’s costs. That’s no mean feat, but it means that once or twice a year, the founders had to drop everything to chase some grants that could cover their financial shortfall.
When you’re starting a project, grants can turn an idea into reality. But you also had a lot of time and headspace to write those applications, a luxury that established entrepreneurs just don’t have.
For an ongoing business, taking 10-20 hours out of your week to find grants and write applications is diabolical. It’s a huge distraction, and has no guaranteed return for your efforts.
I’ve seen many groups run clever fundraising campaigns that made the most of their supporter base. Those campaigns were successful, and the organisation raised well over their expectations.
So what did they do next?
They raised their expectations and ran another campaign a little while later.
On paper, this is a good idea. On a spreadsheet we can assume that this campaign will earn roughly the same as the last one. If each supporter gave an average of $71 last time, we can guess that they’ll do between $65 and $80 this time.
Except real people don’t work like that.
When you run a fundraising campaign, you’re essentially trading a good story and a warm feeling for money. People are happy with that trade, but they have limits. Raising money takes a lot of effort on their part, and it’s awkward asking their same friends to donate more than once every few years.
Clever charities understand this, so constantly search for new donors while expertly retaining their existing supporters.
Clumsy charities hit up the same people over and over again, burn them out, and dilute their brand. If you fatigue your top donors, your income will crumble.
Too many "Top Priorities"
When I heard that the group I was with had chosen eleven top priorities, I thought it was a joke.
They didn’t find their bold plans as amusing as I did. I thought the oxymoron was funny.
There’s a great story about Steve Jobs, who made his team list their top ten priorities on a chart.
Once they’d sat back down, Steve calmly, quietly grabbed a marker and crossed out the bottom seven.
It was clear to him that the company could have no more than three targets, if not just a single top priority.
I wish I’d thought to do something that clever.
When you stretch yourself thin, you lose your ability to get things done.
If everything is important, then nothing is important.
Turning down cash cows
Your business has two fuel tanks – a bank account, and a collection of impact stories.
The dream is that our work will re-fill both of tanks at once.
Sadly, that’s not always possible. In that case, we may need to fill each tank individually.
The pieces of work that bring in lots of money are our cash cows, and they can get us out of some tight spots.
Some of my clients have admitted to turning down cash cow opportunities because they don’t have impact.
These same clients then struggle to make ends meet, underpay their team and have to take on debt.
Cash cows are to be celebrated and pursued. These keep you alive – and you can’t create impact when you’ve gone bankrupt.
I remember staring at a financial model, trying to work out how these two co-founders were going to be paying themselves just $24,000 in the fourth year of their plans.
“Isaac, you’ve got to understand: neither of this are in it for the money. We’re prepared to make sacrifices”
A very noble sentiment, and a common one for any startup.
Except this wasn’t a startup, this was the plan for 2018, when the business would be (allegedly) running across two continents.
My concern wasn’t about the co-founders intentions.
My concern was how risky their assumed discounts were.
Imagine one of them had to leave. Maybe it was due to illness, tragedy, or a good opportunity. How can we hire a replacement CEO for $24,000?
The solution? Budget for a fair salary.
If that new person wants to take a pay cut, great.
If your model can’t survive paying a fair rate, then you’re plan sucks.
If your business relies on underpaying your team, you’re taking a huge risk.
If your talent walks out the door, you have no way of getting someone that good again.
By all means, if you can save cash, do it. Especially early on.
But if you are relying on people working for free or cheap, any deviation from the plan can crush the business.
Sprinting from one huge project to another
Talented people are attracted to the idea of working in an organisation that can change the world. They’re drawn to charismatic leaders, noble causes and the chance to do something innovative.
I’ve seen incredible people use all of their creative and emotional energy to make a miracle happen – be it a campaign, product launch or hitting a sales target.
I then see leaders forget to replenish that energy.
Sprints are exciting, but sprints aren’t sustainable. If you forget to budget rest and re-invigoration into your coming plans, you risk burning out yourself and your team.
Taking investment too early
If you can avoid taking investment, do not take on investment.
Investors aren’t bad people, and they often do want to help you.
Unfortunately, selling partial ownership (also known as equity) of your enterprise to someone else makes things complicated.
Now someone else has a say in how things are run.
If you need to buy something expensive for the business to work, like equipment or machinery, then fair enough, you need to sell equity.
But if you can survive on loans, grants and cheekiness, you’ll be much better off in the future.
I’ve had several enterprises go through the diligence process of a capital raise, then awkwardly admit
“Oh, we should tell you about (some mysterious person previously never mentioned), they actually own 30% of the business”
From our side of the table, this is really bad news. More compromise, more legal work, less money for the enterprise. It will probably kill the deal.
All because the founders gave away equity in the early days.
There’s a great story about David Choe, the graffiti artist who painted Facebook’s office in 2005. He was paid in shares for about $60,000 worth of work.
In 2012, David’s shares were estimated to be worth US$200 million.
Equity isn’t free money.
Retain as much equity as you can, because it’s really hard to get back.