How To Spin Off A New Social Enterprise
I’m often approached to help large institutions (charities, disability support providers, churches) build a new social enterprise.
These are typically organisations who are facing financial pressures.
Maybe their funding is going to be cut.
Maybe their donations are down.
Maybe they are losing market share.
Either way, there’s pressure to build something financially sustainable, which can build momentum and grow on its own.
The idea makes sense, and it’s do-able.
The challenge is, there’s usually a tonne of flawed assumptions that sit behind the idea, and those assumptions smother the life out of the enterprise.
Let’s look at the common issues and the ways you can defend against them.
An enterprise needs an entrepreneur
Pick any charity and you’ll find some wonderful people who are passionate about changing the world.
These are people who have skills in project management, social impact, accounting, donor retention, videography, HR, and have a common cause that unites them.
You don’t find many entrepreneurs – and for good reason.
Entrepreneurs find all that bureaucracy and tradition to be stifling, so they get fidgety, frustrated, and end up leaving within a year.
These same attributes are great for starting a new business – you need someone who is proactive, who moves quickly, and challenges the old rules.
What doesn’t work is when you take a project manager and entrust them with the task of starting up a new business.
You’ve taken a lovely person with the best intentions, and removed them from the environment that allowed them to thrive.
If they have no skin in the game, no freedom and no ability to recruit their own team, they can’t be expected to deliver extraordinary results.
Success =/= Certainty
Entrepreneurship is part art and part science.
Some of it comes down to intuition; reading the market, empathising with your customers, spotting trends ahead of time, finding your core team, and persuading investors.
Some of it comes down to good processes; running growth experiments, building systems, and studying the numbers.
If you give this enough time, your chances of success become quite high.
However, there are no guarantees.
And even if there were, there would DEFINITELY be no guarantees with fixed deadlines.
If you’re spinning off a new social enterprise, it might not work.
If it does work, it might not happen before the end of your financial year.
If that’s an issue, social enterprise is not for you.
What you can measure is effort, iterations, experiments, diligence and commitment.
You can use these to hold your startup team accountable – and you should.
This ensures that your team are doing all the right things, even when the results are unclear.
Values don’t teleport
Every team has a set of values.
These are clearly apparent when you watch how people behave:
· Where they go above and beyond
· Which actions are celebrated
· Which actions are punished
· What stories become office legend (for better or worse)
· Which people are hired
· Which people are fired
You don’t need to write them on the wall or on a lanyard.
And you definitely can’t write them on a PowerPoint slide and expect new staff to take you at your word.
The values held by the institution do not (and should not) automatically apply to the new startup.
If you want to see different behaviours, attitudes and results, then they have to stem from different core beliefs.
Values are set by what your leaders do.
Some will be consistent with the institution, others will adapt.
This is so important because values drive priorities.
If your startup has different priorities, they’re going to make decisions to annoy you.
It’s worth thinking this through ahead of time, so that you can be hyper-clear about what is/isn’t acceptable.
It’s worth either modelling and measuring the behaviours you want them to keep, or you can accept that they will make choices that you don’t quite agree with.
Baby cows, not cash cows
One common myth is that a new business will be able to quickly provide a revenue stream back to the parent organisation.
You can see where this idea comes from – instead of being a financially dependent organisation, it’s a cash generating organisation.
“Therefore we can pencil in some returns in year two…”
Here’s the difference: you have a future cash cow, but it’s still a baby.
Good luck getting milk from a baby cow.
Instead, be prepared to keep fuelling this new venture for a few years, even when it is successful.
When things are going well, that surplus money can either go back to the parent organisation OR grow the new business.
If (or when) your new enterprise is finding success, use the proceeds to double down on what’s working.
Like a baby cow, the bigger it grows, the more you can get from it in the future.
Startups use lean procurement
Another temptation is to look for synergies between the businesses – like when two big companies merge to save money.
Instead of having two accounting teams, two marketing teams, two office leases, etc, they share one and decrease their overheads.
Great on paper, but like most mergers, the reality isn’t so shiny.
Startups behave differently to institutions.
They cut corners, take risks, don’t pay huge salaries, work in uncomfortable offices, sometimes have late nights, and make tough calls about where to spend their scarce resources.
This is what keeps them alive.
It can be unhelpful to burden the new business with the institution’s overheads.
If this were any other startup, would they approach you to use your accounting department, your nice office space or your full time staff?
New businesses don’t match your budgeting cycle
Managers in institutions become skilled in working with their budget cycles.
They know to apply for funding early, make clever cuts where necessary, and to be very patient.
This process is great for building a new bridge or a marketing campaign, but is often irrelevant and unhelpful for startups.
Instead of big slabs of money at the start/end of the financial year, startups need incremental cash injections, often in a hurry.
This might be because opportunities emerge out of nowhere, or urgent expenses prevent the business from operating unless they’re immediately resolved.
Fortunately, this doesn’t have to be a problem – if you’re expecting it.
Instead of large slabs of funding, you can use a “gate” system.
When the business hits a certain milestone or condition, it unlocks a new pool of money to pay for the next stage.
e.g. signing supplier agreements, making sales, running experiments, etc.
This incentivises the right behaviours, and reduces your risk.
If the idea isn’t working, you won’t flush your money away.
If the idea is proving to be successful, you’re not scrambling to alter your budget.
It seems the secret to spinning off a social enterprise is two-fold:
1. Hire the right person to lead the new enterprise – then give them the freedom to act like a startup.
2. Constantly communicate with the new person about progress, expectations and funding requirements.
Yes, there will be fights.
Yes, there will be headaches.
By removing the unspoken assumptions, you make the fights briefer, and the headaches less frequent.
There’s a good chance your first idea won’t work, but the startup process will get you a great result in the long run.
Just don’t let high expectations kill the enthusiasm.