Hundreds of social enterprises have come across our desks at Acumen over the past 15 years. As an impact investor, we’ve had some wins, misses (models we passed on that went on to do well), and struggles (models we invested in but never worked quite right). In the process, we’ve learned that no matter how elegant a social enterprise model looks on paper, a lot can go wrong when you bring it to life in the real world.
We asked Acumen's Karuna Jain (Portfolio Manager) and Amon Anderson (Associate Director, Portfolio), about the most common pitfalls they see social entrepreneurs encounter when building their business models. Karuna focuses on the healthcare sector in India and Amon has worked on deals across East and West Africa. Together they have a combined 15 years of investing experience. Below are the top ten mistakes they’ve seen trip up social entrepreneurs time and time again. Learn more on how to avoid these mistakes in our new Social Enterprise Models course.
Mistake #1 Solve problems that are too small.
When assessing a social enterprise model Karuna’s first step is always to evaluate the company’s potential impact. She asks herself, “How will the company change the lives of bottom of the pyramid (BoP) customers in a transformative way? How many BoP customers could this business model reach? And will it reach the poorest of the poor?” Similarly, Amon says that he focuses on trying to determine the scale of the problem the company is trying to tackle. “Is this a big market and impact opportunity?” he asks. “Will it only be marginally impactful, or is it oriented towards systems change?” Evaluating the size of the potential market is important not only from an impact perspective, but also from a business perspective. You want to chase a market that is big enough so that you have room to pivot if you realize that your first approach is not quite right.
To learn how to size your market, take this course.
Mistake # 2 Prioritize the business model over the team.
Amon and Karuna can’t emphasize this enough. Your business model is important, but the people behind your company matter just as much, and maybe even more when building a business for social impact. Impact investors assess not just the soundness of your value chain, cost structure, and revenue streams, but also your willingness to learn, listen, pivot, marshal through tough times, work in resource-constrained environments, and maintain your commitment to the poor. Don’t get so focused on your business model that you underestimate the critical importance of building a team with the right cultural fit. Do make sure to carve out time to assess the skills of the people you currently have in place, understand how those skills match the demands of your market, and make plans to fill any necessary gaps. Then start from day one to build out a culture where everyone at your company—from the management team to the front-line staff--are committed to the company’s values.
To read how social entrepreneurs are recruiting, retaining and developing talent, click here.
Mistake #3 Invest in sales and marketing before they know their customers.
Steve Blank, serial entrepreneur and grandfather of the Lean Startup movement, often says, “Premature scaling of sales and marketing is the leading cause of hemorrhaging cash in a startup.” In the beginning, the founders should be on the frontlines talking to customers and answering phone calls to figure out how their product is being received. Amon agrees that this can be a big challenge for social enterprises too. “You don’t want to scale faster than you can learn,” he says. “Don’t build out a sales force, marketing function, or customer service before you’re ready.” Similarly, Amon says that investors assess how resource-intensive a social enterprise’s strategy is. “Are they sinking all of their money into building one product or service? If so, what will happen if that approach fails? Try to reduce the rate at which you’ll be burning through cash while trying to figure out what works.”
Mistake #4 Lack a clear roadmap for growth.
Starting a social enterprise can be overwhelming so it’s important to define clear milestones and metrics at every stage of growth. Investors look to see if you have validated product-market fit. That is, are you actually solving a problem that your customers have and is your product or service adequately meeting this need? Amon says that it helps to be very intentional about outlining milestones and assigning a target number for each of those goals. You’ll want to see if you are on the right track or need to adjust your approach.
For tips on how to discover your product-market fit, take this course.
Mistake #5 Lack a plan to reach the poorest or most remote customers.
You could have a great idea for a new product or service, but if you don’t have a plan in place to actually reach your customers, the entire business could fall apart. Impact investors will look to see whether you’ve identified the right supplier and distribution partners. If they don’t exist, you’ll have to account for how your company can build those functions into your own business model. For example, if you realize that there are no roads or corner stores in your target market, you’ll have to address whether the cost of developing some of that infrastructure needs to be built into your capital requirements. Where possible, identify key partners who are positioned to help you scale. But also don’t get too far removed by putting too many levels of partners between you and your customers. This is a delicate balance that social enterprises must strike.
Mistake #6 Fail to appreciate how different micro-markets will respond, even within the same country.
It seems obvious that when you introduce an innovative product or service to a new customer segment, you have to deeply understand your local market and context. However, this point is often overlooked. Many social entrepreneurs approaching Acumen for investment have a proven business concept in one market, but when they try to replicate their approach in new markets, they encounter complexity and challenges they did not adequately plan for.
Karuna has seen healthcare companies, particularly hospital chains, struggle to enter new markets in a country as large and diverse as India. Even clinics that successfully entered one state, could face rocky adoption when they enter another region. Entrepreneurs need to adequately appreciate the challenges of entering new markets and build those into their financial projections and plans for expansion.
Mistake #7 Fail to adequately account for overhead expenses.
Efficiencies of scale are what every business strives for. Once you set up several clinics or offices or schools, you can aggregate some functions such as accounting and HR at a central office. However, these central offices still cost money to operate, and some social enterprises forget to account for these expenses as they build their business model. Karuna and Amon have seen enterprises create businesses that are profitable at the unit level (i.e. one individual hospital or one individual school is profitable), but they do not build in adequate profit margins to support the head office. This spells trouble. Social enterprises should carefully consider the geographic spread over which their various business units (schools, clinics, offices, etc) will be dispersed and determine the optimal number of head offices needed to support business units.
For steps on how to bound your business unit and calculate head office costs, join this course.
Mistake # 8 Underestimate the continuous need to fund research and development.
Blockbuster might have been a market leader in movie rentals at one point, but it has quickly been overtaken by Netflix because new video streaming products and services emerged. This is why companies need to invest in research & development (and self-reflection) at all stages of growth. Your solar lantern, pharmaceutical drug, mobile application, or micro-drip irrigation system might be selling like hotcakes today, but what about tomorrow? If you don’t plan for how you will continue to innovate and stay ahead of the competition, you risk ending up with an outdated product.
Mistake #9 Underestimate capital requirements for starting a business.
You can spend hours plotting out all aspects of your business model on paper and complete 50 different versions of the business model canvas. But there will always be things that don’t go as planned. It’s one of the few guarantees you can count on when taking on a social enterprise, especially in emerging markets. “In 100% of cases,” Karuna says, “things do not go according to plan.” You should estimate the capital requirements for your business accordingly. Build those contingency costs into your models.
Mistake #10 Try to do everything all at once.
Social entrepreneurs are ambitious, driven and idealistic (Some of the top reasons Acumen loves working with them so much!) But sometimes social entrepreneurs get so invested in all of the problems their customers are facing, they try to solve too many issues at once. Amon recommends companies in the early-stages of development find one discrete pain point a customer segment is facing and solve it. Use that success as an entry point to take on other challenges strategically, instead of trying to do everything at once. This principle of “focusing on your core” is also a key factor identified by Bain & Company and Acumen as part of a study of social enterprises in the agricultural sector. If you can enter a market and solve one key problem for customers first, it helps you build the trust to expand into adjacent products or services later.
To learn how to identify your core and build off it strategically, take this course.