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I'm a consultant and advisor  for social enterprises - using business to change the world.

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Disappointment and Heartbreak in Social Enterprise

Disappointment and Heartbreak in Social Enterprise

This is an ugly topic; one we don’t tend to talk about.

In private, many other people in the industry have expressed similar sentiments, and now I feel compelled to call it what it is:
It’s a hard time to be in social enterprise.

Before we get too heavy, let’s remind ourselves of the good news:

Our industry is one of the best.

That’s because we’re striving for such good things, things that will chip away at huge problems, things that will help marginalised communities, things that will help maintain the planet, things that will bring employment and end extreme poverty.

We can’t imagine that in 50 years we’ll still have starvation, high infant mortality and children who don’t receive any education.

This industry, the idea of businesses helping make the world better, will win eventually.

Right now, our industry doesn’t feel like it’s a roaring success.

“Boo, Isaac don’t be so pessimistic”

Five years ago, there was a lot of optimism, a lot of goodwill for the concept of a “Social Enterprise” or “Impact Investment”. There weren’t a lot of case studies, but there was a lot of hope.

Today, there’s still a lot of optimism, goodwill and hope. If you’re just encountering the industry now, you’re in a good place at an exciting time.

What can’t be overlooked is the amount of disappointment, heartbreak and sacrifice that’s felt by many, many entrepreneurs and investors today.

Every incubator and accelerator I’ve met tells the same story.

Waves and waves of entrepreneurs have come through, dreamt up amazing ideas, pooled together their own savings, money from friends and family, pulled all-nighters writing dozens of grant applications, pouring their heart and soul into their enterprises.

I don’t know how to calculate the amount of philanthropic support that has gone into these ideas. I dread to think about the amount of investor money that’s been raised and never repaid, predominantly from people who aren’t millionaires.

The results are in: almost all of these enterprises are out of business.
Which means the vast majority of those grants and investments have been lost.
After all of the PR and posturing, not a lot remains today.
Even some of the incubators are closing – without success stories they’ve struggled to attract participants and philanthropists. It’s not a great look.

The armchair economists argue “that’s the nature of all startups
and that “everyone knew the risks going into each deal”
or “In the long run things will sort themselves out

Ok, that’s true, although it misses two key details.

Firstly, most other sectors have a stream of high profile successes, the rare few who go big and become “Unicorns”.
These household names help validate the industry, and provide huge returns for investors.

Social enterprise and impact investment don’t yet have an equivalent.
Our successes are delightful yet modest, and our failures are still painful.

Secondly, this economic outlook doesn’t capture the emotional toll - the mental health issues and strain on relationships that comes from failure.

Our industry’s advantage is that we have a noble cause, which adds to the commercial appeal of the things we sell.

It drives us to work harder and for less money, whilst evangelising about the potential impact that comes from the enterprise.

This advantage cuts both ways.

When our business fails, it feels a lot like we’re failing the causes we care so deeply about.

We put so much of ourselves into the venture, that when it falls over it really hurts.

In 2013 I spent the majority of my time preparing our first capital raise, for a social enterprise in Far North Queensland.

The opportunity itself was fantastic: we buy a struggling business, redesign it, refurbish the assets, and deliver a top-quality service that customers rave about.

The business also ran a program for young offenders, giving them practical skills, emotional stability and eventually offering employment.

The stats were incredible; in 2012 they worked with 56 young people who were in and out of the correctional system.
18 months later, 48 out of 56 had stopped offending altogether.

Genuine impact, and seriously profitable.
Win-Win.

I’d spend hours each day on the phone to the entrepreneurs, walking them through the process. We were rebuilding their financials, prepping them for their interactions with investors, performing due diligence, negotiating with financiers, and helping to write their offer documents.

Long story short, the capital raise was a success, and the business thrived for a few months.
Then the troubles started, and a combination of issues with the entrepreneur, investors and a devious bank sunk the business.

Our company lost money, it really hurt.
Our founders lost their personal investments, as did our network of investors.

Our flagship case study was gone.

About eight months later, I found myself in Port Douglas, walking around the Marina where the enterprise was located.
There was no trace of it ever being there.
The office, the signs, the assets, all gone.

I felt hollow, like I’d dreamt the whole thing.
So much time, so much money, so much opportunity to change the lives of young people, and you’d never know it existed.

When you look at the list of social enterprises that sprung up in the last few years, many of them no longer operate.

The optimist in me delights in the personal growth within the founder, who will probably go on to bigger and better things.
But that doesn’t change the fact that for that entrepreneur, their family and their network, that failure took a huge toll.
A financial, social, and emotional cost that can’t be overlooked.

The same goes for their staff – all of whom need to suddenly find new jobs.
Again, they’ve gained experience, but in the process sacrificed higher salaries, proper sleep and lived with constant anxiety over whether they’ll still have a job next month.

The main reason for collapse is generally cashflow – specifically, they didn’t have any.
They pitched well, they recruited great people, they began to make a difference.
Then the money ran out, and the doors closed.

Running a social enterprise is borderline impossible.

It has the same challenges as any other business, plus the added complexity of creating genuine impact.
Just because we don’t publicly talk about it doesn’t mean the exasperation isn’t there.

At a recent pitch night, I spoke with one entrepreneur as she was about to go on stage.
She said she felt so tired –she’d spent months scrambling for grants and donations to keep the lights on.
She constantly receives praise and media attention, but that wasn’t paying the bills.

I admire the way she put on a brave face, pitched beautifully, and ended up coming second, narrowly missing the $5,000 cash prize.
Once again, lots of applause, but no financial assistance.

If you go to conferences, you’ll hear the inspiring stories and successful case studies.
You’ll see the groups who made it, who tell you that you can do the same thing.
That’s true.

You should also ask about the other 99% of entrepreneurs who aren’t on the stage, who didn’t make it big.
Their stories will probably teach you more anyway.

The list of famous success stories isn’t that long.
When you dig deeper, you’ll discover that most survived their initial years thanks to generous partners and a lot of “Free Kicks”, often in the millions of dollars.

Some find that upsetting, whereas personally I find that reassuring.

The successes have a common thread – they had a strong cashflow. Maybe from customers, maybe from donors, the money was always there.

But even these hero entrepreneurs struggle.

One famous social enterprise founder spoke at our event, and was asked about her experience leading such a successful business. She said:

“A few days ago I was taking our staff Christmas photo, and was trying to fit the whole team in the picture. As I look through the viewfinder, all I could thing was: How on earth am I going to pay all these people next week?”

If you have money in the bank, you have time to experiment, time to make improvements. That means you can create impact and make payroll.

I often look and feel like “The Bad Cop” to the groups I advise.
At first I thought I needed to fix my attitude – that I was being too harsh of a judge.
My colleague told me I should assume that things will work out in the end, and not to fixate on things like low acquisition rates or uncertainty over funding.

Unfortunately, history proved that this financial lens is the most accurate –the best predictor of sustainability.

The dollars are not about greed or profiteering, they’re about preventing more of the same heartbreak and loss that is so prevalent today.

Last week I learnt that a group we were going to take to a capital raise had collapsed.
The founder and I used to disagree quite a lot – he’d often challenge me to back up everything I said.
At first it bugged me, but it made me a better advisor.

I’d always raised concerns about their target customer base, and wasn’t sure they would be as enthusiastic as was anticipated.
It turns out my gut feeling was correct, and the slow uptake rate led to the demise of the organisation.

I am not looking to say “I told you so”.
Instead it made me really sad.
I wished I’d done more.
I wish I had have been able to offer better solutions, and offered more practical assistance.

It just sucks.
Yes, someone will one day build a better version of their idea, but that doesn’t feel like much of a consolation right now.
There is no magic bullet, no quick fix.
The scramble sucks. The anxiety sucks.

It’s why I write about financials and measurement and customer acquisition and value propositions.

No, they’re not fun topics.
No, they’re not always inspirational.
But if a business can remain desirable, feasible and viable, it will stay alive.
And if it stays alive, it has a fighting chance of achieving its mission.

“Isaac, is this just you complaining, or do you have anything productive to say?”
A bit of both.
Yes, it’s good to vent, it’s good to crystallise the thoughts that have been forming over the last few years.

But there’s also a few things I’d like to say directly.

To the entrepreneurs who have fought and fallen: Thank you for your service.
Thank you for being the first ones through the wall, who went up against impossible odds and gave it everything.
Thank you for setting an example, both through your triumphs and struggles.
Your stories are valuable, and it’s a privilege to be able to tell them to the next waves of inspired founders.

To the investors: Thank you for taking a punt.
Thank you for putting your money where your heart is, and funding early stage social ventures. I’ve seen how frustrating these failures have been, and how you’ve put up with some appalling founder behaviour.
Your contributions have put impact investing on the map, and at great personal expense that should not go overlooked.

To the entrepreneurs who are battling: Thank you for persevering.
Thank you for backing yourself in the face of constant disappointment, and for dedicating so much to making an idea a reality.
There are others out there who are like you, who can teach you so much and save you some frustration.
My hope is that you reach financial sustainability and security this year, and that strong sales, loyal customers and cash in the bank allow you to get a good night’s sleep.

To the young people looking to start their own social enterprise: Thank you for being interested in our industry.
Thank you for choosing to follow your cause instead of the corporate ladder.
Creating something viable and impactful is tough, and you have the chance to study those who came before you, to follow in their footsteps and to learn from their hardships.

You’re going to need to get good at financial management, customer insight, picking a great founding team, recruiting a board, and making good decisions in times of crisis.
There is no alternative – make two bad decisions and it’s over.

I hope I can help minimise the downsides, increase your strengths, and make your business sustainable.

 

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