In the old days, an investor in a social enterprise startup considered herself lucky if she created a noteworthy social impact and made a modest return on an investment. Nowadays, things are different. Many startups have demonstrated the robustness of their business model and are fully prepared to scale to create 10 or 30 times the impact of the original startup. That changes the return on investment equation.
No surprise then, that serious investors are beginning to make moves into the scaling arena. For example, Husk Power Systems, provider of mini-grid energy systems in India and Tanzania, followed all the right steps to scale, and closed $20 million in equity investment for its scaling initiative.
There are other emerging scaling opportunities that are positioned to multiply the original impact and significantly increase the return on investment. At Miller Center For Social Entrepreneurship, we have worked with over 1,000 social enterprises around the world and know these aren’t always easy to pinpoint. Let’s explore why that is and how smart investors can sort out the potential winners.
Investor Checklist for Successful Scaling
Enterprises encounter diverse challenges when they scale. In reviewing our social enterprise database, we found that less than 10 percent were able to scale successfully — not just growing incrementally, but rapidly expanding their organizations into new markets to multiply impact and revenues. Another analysis of a database of more than 10,000 commercial startups paints an even bleaker picture: fewer than 1 in 100 of these enterprises scale.
Why is scaling a social enterprise so hard? Because what got an enterprise started is not enough to get them the rest of the way. To scale, the enterprise team needs to shift management gears, learn some new things, and act differently.
As an investor, you can’t expect the enterprise to mitigate all of the potential challenges ahead of time. But it makes sense to look for investment options where the big, potentially lethal risks have been identified and a plan developed to deal with them.
Miller Center’s Scaling and Replication initiative has seen firsthand the most recurrent problems that cause scaling enterprises to churn through their cash, burn out their team, and stall or fail. If you are going to invest in a scaling enterprise, you need to be on the lookout for these four things.
1. A business model and team that are really ready to scale
Look to see if the founders have shifted from running their business to knowing how their business is running.
As an investor, you need to see a high-level business assessment of the maturity and scaling readiness of the business model, including the management processes, leadership and operating costs of the enterprise. Launching prematurely while still developing business model elements not only threatens the scaling initiative, it puts the current business at risk.
NUCAFE, a coffee cooperative and processing facility in Uganda, is expanding their business into new markets. Miller Center executive mentors used a scaling readiness assessment to pinpoint strengths and weaknesses in their current model. In using this process, NUCAFE focused on areas that were scaling-ready, such as leadership and financial management, while also identifying areas that will need improvement as they scale.
2. Targeting the right markets
Many savvy entrepreneurs that have a great startup make a rookie mistake by choosing expansion markets for scaling using criteria that don’t illuminate the best options. Conducting due diligence on the selection criteria for the target markets is critical for investors. This includes the fit of the product/service with the customers in the targeted markets as well as the availability of robust partners.
Sistema, a biodigester manufacturer, selected new markets by reviewing geographies that fit their value proposition and customers — farming communities with cattle to fuel the biodigester — and the availability of resources to serve these customers. This diligence has allowed Sistema to reduce the likelihood of scaling failures and create significant growth in new geographies.
3. Recipe that fits the ingredients
Some markets are best served by the original business model. But in many new markets, the strongest approach for scaling isn’t necessarily the startup model. Founders are not always prepared to wrestle with this issue prior to launch and investors can help with a constructive conversation to determine if and how the original business model needs to be adapted to fit commercialization in the targeted markets.
The best approach is to build the conversation around two pivotal questions.
- What parts of the business model will not change in the new market? It is critical to identify elements that are essential to success that can’t be modified without undermining the integrity and viability of the enterprise.
- What parts of the business model will change? Often modifying the approach to fit the characteristics of the market is required to get the business model to fit and thrive.
If nothing changes from the original approach, scaling is a replication function — the business model is recreated exactly the same everywhere. That can work in some markets. But often, to get the right fit with the new market and to drive growth, a tailored business model to fit the new conditions is required.
Some startups have used both approaches. Hippocampus in India successfully implemented a B2C (business to consumer) early childhood education approach. Looking for more growth, they expanded into a new state in India by replicating the original model.
Later, when they wanted to enter the B2B (business to business) market in North America, they shifted their model — selling to businesses was much different than selling to consumers. In every case, they looked at the new markets and asked, ‘What do we change and what do we keep the same?’
4. Execution in a new market
Scaling requires an operational transition — what worked as a startup won’t cut it during scaling. The leadership team has to become ambidextrous and manage the existing enterprise while leading the scaling initiative.
Before hitting the launch button, investors must ensure leadership is ready for this transition and the founders prepared to handoff some responsibilities in the existing business. Promises to shed responsibilities are not enough; success requires having robust operating processes (like financial and human resource management) and specialized functions, such as a CFO, to keep things running smoothly.
All Across Africa, which creates artisanal products, has been expanding operations and sales channels to new markets. The leadership team recognized the need for additional management expertise to keep pace with growth goals. They developed a plan that included a new round of hiring and implementation of more advanced management systems. This allowed the founders to focus on executing the scaling plan.
Scaling social impact enterprises can be a solid investment. But entrepreneurs need to avoid jumping the gun and scaling prematurely. As we tell our entrepreneurs in Miller Center’s Scale Out program, ask tough questions about how the business is running, identify the elements that need to be strengthened, and make the management team truly ambidextrous. With those things in place, investment in social impact scaling is a good bet.