Top 4 differentiators between social and mainstream startups

Social startup
What's in a name (1)

“It is always tricky with social enterprises. I think it is because people mistake “creating an impact” with charity. We also aim to make this a sustainable business, along with creating value in society – that does not mean we are doing charity.” says Maniti Modi. Maniti Modi is the founder of ConnectFor, a volunteering platform that aims at taking the volunteer culture in India to its full potential. As pointed out, there exists a lack of awareness about social enterprises. A social enterprise may be non-profit or a for-profit, but the objective is always to deliver social benefits.

Just like for-profits, a social enterprise needs at least a minimal level of revenue to meet expenses. But, for a social enterprise, conventional measures such as scalability and profitability aren’t necessarily the ideal metrics to track. As businesses are coming up with more accumulated or hybrid business models, the distinctions between a social enterprise and a for-profit are becoming blurred. But, there are absolute differences in the theoretical foundations of the two –

Microeconomic practices The theoretical functioning of a social enterprise is different from that of a for profit enterprise. Take for instance the production. A for-profit will look to keep labour costs minimum or utilise raw materials with the lowest costs to optimize costs. But this might contradict the very purpose the social enterprise exists. The difference exists in the goals – For-profits optimize profits and the social enterprises optimize social impact.

Scalability – Economies of scale dictates that an enterprise keeps on expanding production to reduce costs. But, it may not be practical for a social enterprise. Social enterprises generally cater to a locality, harnessing local resources for the community. Scaling up while being profitable, may dilute the targeted impact. Moreover, a particular solution that has worked in one community might not be so well received in another, so there might exist a trade-off between scale and feasibility. For instance, SELCO, a pioneer in solar energy, has concentrated its efforts on providing energy access only in Karnataka. They want to make sure that they offer customised and high quality service to their customers and hence work very close to their users.

Beneficiaries – For a social enterprise, the aim is to deliver positive externalities along with profits – it targets social benefits whereas a for-profit enterprise targets private benefits. For-profit are accountable to equity holders and customers, delivering the returns to these investors. While social enterprises tend to be answerable to entire communities and most of the returns are reinvested in the enterprise itself. The focus is on profitable growths (for-profits) and social change (social enterprise)

Funding – Approach to funding is different for the two. For-profits have a wider spectrum to look forward to as the economic returns are higher. Whereas, as social enterprises optimize social returns, economic returns are thinner, thus, they can’t solely depend on traditional channels of investment. On the flip side, though, social enterprises might offer tax benefits on returns that for-profit donations can’t.

From a legal standpoint, the difference might just reflect on the label. But, in essence there are fundamental differences between the two. It might be said that a social enterprise brings together efficient business practices to create social good.

 

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