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CHAPTER 2 SOCIAL ENTERPRISE START-UP

2.1 This section discusses the typical characteristics and needs of new-start social enterprises and the public sector responses to these.

Defining the territory

2.2 In order to move forward with a degree of clarity it is important to begin by considering what we mean when we refer to 'social enterprise start-ups'.

2.3 First and foremost, this study focuses on social enterprise as a way of doing business. Social enterprises are run to generate profits that are used to provide social, community, or environmental benefits. They are distinct from other voluntary organisations in that trading forms a significant part of their activities and a significant source of income (typically 50% or more).

"Social enterprises are businesses with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders or owners".

Source: Department of Trade and Industry ( DTI)

2.4 Second, in considering start-up social enterprise we must recognise the central role of social entrepreneurs. To get off the ground, social enterprises usually require the drive, commitment and enthusiasm of an individual or group of individuals. It should be noted that not all social entrepreneurs are working towards forming a social enterprise, and of those that are, not all will be successful.

2.5 Social entrepreneurship is about "using entrepreneurial skills for the public good rather than for private profit that is using imagination to identify new opportunities and determination to bring them to fruition" ⁶.

2.6 Third, we would distinguish between a new entrant and new start. Some organisations - the new starts - will form as social enterprises from the outset. Others - the new entrants from the community/voluntary sector - may change and adopt enterprising characteristics over time. This study focuses mainly on the former (where start-up support is required), rather than the latter (where business development support is needed).

2.7 There are a number of recognisable starting points for social enterprise ⁷:

• Social entrepreneur - where an individual with a particular vision will create an enterprise to meet an identified social need;
• Community development - where members of the community come together, often informally, to tackle specific community needs;
• Public sector externalisation - where a public body sets up, transfers, or contracts out services to an independent non-profit entity;
• Private sector venture - where a firm is bought out by employees, acquired for social aims, or sets up a subsidiary social venture;
• Voluntary sector spin outs - where a voluntary organisation transfers existing activities to a new trading subsidiary; and
• Voluntary sector transformations - where a voluntary organisation realises or builds earned income potential from fees or contracts.

2.8 Finally, it should be recognised that the start-up process is likely to involve a period of transition and change. We would therefore offer the distinction at the start-up phase between aspiring, nascent, and baby social enterprises.

2.9 Emerging social enterprises can be categorised in four main ways ⁸:

• Aspiring social enterprises - social entrepreneurs and voluntary organisations with the potential and desire to embark on trading;
• Nascent social enterprises - actively establishing a social enterprise - normally refers to start-ups of between 0 and 3 months old;
• Baby social enterprises - 'social enterprises' active for between 4 and 42 months, albeit often heavily dependent on grant subsidy; and
• Established Social enterprises - those active for longer than 42 months and with a significant proportion of income from trading.

The Start-up Process

2.10 In order to deliver effective support it is important to recognise that the start-up process begins by developing an awareness of social enterprise before moving on to establishing a venture that can survive and flourish.

2.11 It is likely that the overall prospects for the formation of new activity will be influenced by the cultural affinity towards social enterprise - the values, experience, and aspirations of social enterprise developed by the population.

2.12 In Scotland, an estimated 3.2% of the working age population are engaged in social entrepreneurial activity (circa. 100,000 people) ⁹. This is the same as the rate for the UK overall.

2.13 For any form of new start or entrant to the social enterprise sector there is likely to be a period of familiarisation, preparation, and exploration ahead of embarking on the social enterprise activity. Once these preparations shift to engagement in start-up and launch, the challenge is to navigate the start-up process and to ensure survival of the new venture.

2.14 It is possible to identify four stages in the birth and start-up of new social enterprise ventures. These are illustrated in Figure 2.1.

Figure 2.1: The Social Enterprise Start-up Process

Rationale for Intervention

2.15 The Social Enterprise Strategy for Scotland ¹⁰ stressed the importance of establishing an effective pipeline of support to social enterprises - before they start-up, when they have just started, and to the point where they are advanced enough to access one-to-one mainstream business support.

2.16 However, the Strategy has not at this stage offered an explicit rationale for intervening to stimulate social enterprise start-ups. Also, it has not yet articulated the priority to be assigned to supporting start-ups as opposed to more established social enterprises.

2.17 Enterprise policy in Scotland over the last 15 years has been underpinned by a commitment to addressing the market failures involved in new business creation and in growing the contribution of start-ups to the economy. This is reflected in the entrepreneurship policies and approaches of the Enterprise Networks in Scotland.

"Building an enterprise culture is not enough. It needs to feed through into a dynamic start-up market showing high levels of entry by new businesses and the efficient exit of less productive ones. This 'churn' of more efficient and innovative businesses replacing less efficient ones, is an important contributor to productivity growth and to a competitive economy."

Source: DTI, A Government Action Plan for Small Business, 2003

2.18 Among the main arguments in favour of supporting enterprise creation (social and private enterprise) are:

• generating the stock of new activity from which high growth/impact enterprises will emerge;
• contributing the bulk of jobs and prosperity to the economy;
• enhancing overall competiveness, as entrants bring innovation and open up new market niches; and
• encouraging entrepreneurship and enterprise skills that can provide a route out of exclusion for disadvantaged groups.

2.19 Social enterprises can make a particular contribution to the level of business start-up by involving people not attracted by conventional business. The goods and services that they create also bring a range of social and environmental benefits.

2.20 On the other hand, there are a number of arguments which question the effectiveness of start-up policy (although not the importance of start-ups themselves) and advocate a shift in focus from assisting start-ups to more established businesses ¹¹. For example:

• a high proportion of start-ups do not survive beyond their early years, increasing the risks of public investment;
• only a small number of start-ups create the majority of wealth and employment;
• displacement of activity is common where businesses often compete in low-value, low-entry markets; and
• the additionality, or added value, of public sector support interventions tends to be low.

2.21 Given that social enterprise is first and foremost a business model, albeit an underdeveloped one, it might be assumed that the above benefits and challenges are relevant. However, given the limited intelligence available on levels of formation and churn within the social enterprise sector, and the limited evidence available of the effectiveness of support measures (discussed throughout this report), further clarity on the detailed objectives for promoting social enterprise start-ups will be required.

Segmenting the Start-Up Market

2.22 While there may be a case for intervening to create more new social enterprises, this provides little clue as to which start-ups merit support. With a limited supply of resources to provide start-up support, choices are inevitably required as to where best to channel efforts and how to prioritise.

2.23 This is a dilemma that has faced the enterprise agencies for a number of years - the extent to which the public sector should spread resources thinly and assist a high volume of start-ups (because more is better) or should focus on high growth new starts (from which impacts are more likely).

2.24 There may be some lessons from private sector venture capital practice here, which might be applied within the social enterprise context.

2.25 Recent work suggests that experienced investors in start-ups look for the overall potential of the business model (its market, proposition, market readiness, financial viability) and the people starting the business ¹². The higher the quality of these two factors, then the greater the likelihood that the enterprise will establish itself, survive and develop the capacity to grow.

2.26 This approach, of focusing on the business idea and the experience/skills of those involved in it, provides a useful means of identifying six different types of start-up. These are illustrated in Figure 2.2.

Figure 2.2: Potential Quality and Capability of Start-Ups

2.27 This type of framework assists with choices on where to direct support. Assuming the aim of support is to create viable social enterprises, the goal is then to reduce the wasteful effort in supporting 'subsistence starts' and targeting support based on a thorough assessment of potential.

2.28 The challenge for support agencies is then to effectively assess whether the start-up has genuine future potential for viability, and under what circumstances public intervention could enhance the prospects for start-up and sustainability.

Start-Up Support Needs

2.29 It is also important to consider what types of support will be required to promote start-up social enterprises and aid their survival.

2.30 The needs of social enterprises can be broken down into:

• needs that are the same as mainstream businesses - the accepted wisdom is that social enterprises are 80-90% similar to mainstream private sector businesses ¹³;
• needs specific to social enterprise - there are specific needs related to the process of starting-up or acquiring a new legal form and securing financing appropriate to the sector; and
• needs specific to the market sector - there are particular needs relating to the specialist market niche or industry sector that the social enterprise is seeking to enter.

2.31 It is also important to bear in mind that the needs of social enterprises will not remain the same, but evolve through the different stages.

2.32 A study for the Welsh Assembly has suggested that as a social enterprise matures and begins to operate in a more businesslike way, its needs become increasingly similar to those of a 'mainstream' enterprise ¹⁴. This seems to be confirmed by research for Scottish Enterprise that suggests that more mature social enterprises derive similar levels of satisfaction from mainstream business advice and from specialist support ¹⁵.

2.33 The implication is that the support needs of nascent social enterprises are likely to vary markedly from mainstream businesses.

2.34 For example, recent research on behalf of Senscot has suggested that it is start-up and smaller social enterprises (trading at levels up to £50K) that feel least supported ¹⁶.

2.35 Likewise, a study examining support for fledgling social enterprises has identified the unique and challenging nature of start-up support - influenced by the variety of start-up routes, aspirations and capabilities ¹⁷.

2.36 In particular, during the formative stages, it has been identified that groups often:

• dislike the language of enterprise and may perceive that it contradicts their social objectives;
• are unaware of the commercial potential of their activity and the possibility of creating social enterprises; and
• if unassisted, lack the confidence to develop a social enterprise.

2.37 The same report highlights three particular types of support needs evident among nascent social enterprises:

• general micro-business skills - a lack of technical skills such as the identification of break-even levels and knowing how to become financially sustainable without grant income;
• marketing - particular challenges relating to identifying new business opportunities or markets, developing marketing activities, and setting pricing levels; and
• management and decision-making - specific challenges related to the democratic structure of social enterprises often leading to drawn-out decision-making and conflict/tension between stakeholders.

Common Interventions

2.38 In examining the interventions at start-up stage it is also useful to consider the typical forms of publicly funded intervention to promote start-ups.

2.39 The Social Enterprise Strategy for Scotland recognised that there can be no 'one size fits all' form of support for the social enterprise sector, which incorporates a number of sub-sectors and organisations from different backgrounds and at different stages of development.

2.40 In considering the necessary support interventions it is helpful to draw the distinction between:

• pre-start support that raises awareness of social enterprise opportunities and encourages activity;
• start-up support that focuses on the mechanics of bringing the nascent organisation to the stage where trading can commence; and
• post-start support that seeks to ensure ongoing survival by providing appropriate support during the initial phase of operations.

2.41 At the immediate post-start stage, the priority then shifts to business development support, designed to grow the social enterprise and strengthen its long-term financial sustainability.

2.42 It is also helpful to consider the range of broad interventions that are provided to emerging social enterprises:

• capacity building - up-front measures to tap into latent community potential, form a coherent group, and build its capacity to plan for social enterprise activity;
• ongoing counselling - ongoing or intensive support from an expert advisor may be used to provide the advice, reassurance and 'hand-holding' that groups require in their formative stages;
• ad hoc technical support - one-off or short-term technical aid may be provided to, for example, conduct market research, develop a business plan, prepare financial forecasts, select a legal form etc.;
• training - various forms of training may be offered to prepare groups with the awareness, skills, and knowledge required to operate a successful social enterprise;
• networking and mentoring support - various formal and informal arrangements may be put in place that offer learning visits, one-to-one mentoring, or peer group support;
• access to premises - an incubation space may be made available that provides the office base and back-office support required by fledgling enterprises; and
• access to finance - various forms of grant and risk capital may be provided or packaged around the financial requirements of the start-up enterprise.

2.43 The challenge is to provide the right package of interventions, for the right organisations, at the right time.

Key Points

2.44 Among the key points raised in this chapter are that:

• policy in Scotland is suggesting that social enterprises require an effective pipeline of support, offering different forms of interventions at different stages of development;
• any consideration of start-up support should acknowledge social enterprise as a distinct business model and recognise the central role of social entrepreneurs in this;
• existing evidence highlights that the needs of start-up social enterprises differ significantly from those of private sector firms, although these variations may decline as enterprises mature;
• it is important to adopt a broad perspective on the range of interventions that might be provided during the start-up process; and
• the former social enterprise strategy for Scotland does not outline the rationale for offering start-up assistance to the sector and the circumstances under which various forms of support might be provided.

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