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When setting up a social enterprise you need to think carefully about how to generate income to fund your impact, therefore you should create a business model. There are a few ways to go about doing this but keep in mind that funders will be keen to know how your business model relates to your impact model so work that into your plan.
To help you create a plan we’d like to introduce to you three types of social enterprise models which combine impact and business models in different ways. We will call these three models the Integrated Model, the Sponsorship Model, and the Hybrid Model.
1. The Integrated Model
In the integrated model, your beneficiaries are your customers: they have the capacity and the willingness to pay for your product. In this model, there is no distinction between your business work and your social work; you fulfil your social mission by selling products and services to your beneficiaries. In this instance, the impact model and business model are immediately integrated.
However, in many cases, your beneficiaries cannot afford to be your customers, for example when you serve very young children’s educational needs or support homeless communities. If your beneficiary cannot afford to pay you, perhaps there is a group willing to directly pay for your services, even if they are not the direct beneficiaries.
Take the example of a venture providing textbooks to an under-resourced school in a marginal area, the students probably cannot afford the books, and nor can the school. Therefore the venture has to find alternative ‘customers’. Here are some ideas to consider, starting with
people affiliated with the school:
- Asking alumni from the schools to sponsor a book drive;
- Inviting the textbook publishers to give the books to the schools;
- Inviting local businesses to sponsor local schools to get the books as a community goodwill project;
- Asking donors to fund the books, e.g. through an online donation page at DonorsChoose.org
In each case, it may be possible to find a group who have an interest in the beneficiaries, and therefore may be a willing customer. An example of an integrated model selling to indirect beneficiaries could be, an education venture that sells books to alumni, to be donated to the school.
2. The Hybrid Revenue Model
Suppose that only part of your social mission can be delivered through a business, but other core parts, such as running a public health education campaign cannot for lack a natural paying customer. In this situation, you may wish to consider separating the different activities, which results in a hybrid revenue model.
Under a hybrid revenue model, you separate activities for which there may be paying customers and those which will only ever be loss-making but are nevertheless essential to the delivery of your mission. You will therefore have to find individual revenue streams for each of those activities: paying customers to support your business, and perhaps charitable donations or grants to fund your non-business activities. You will also have to identify if the loss-making activities could be carried by the profits made in your for-profit activities. But even if that is the case, additional philanthropic funding can lift some of the pressure, so do consider donations and grants even if the profits could carry your non-profit section.
An example of a hybrid revenue model might be a healthcare venture seeking to eradicate disease caused by drinking dirty water. The venture may sell purification tablets to help cure the disease and also run public health campaigns teaching people to boil water before using it. There is no natural paying ‘customer’ for this campaign, so the venture must use profits from the medicine business to subsidise the campaign while drawing on philanthropic funding from a foundation, with the mission to increase access to health care.
In the hybrid revenue model, both the business (e.g. selling medicine) and the non-business (running a public health campaign) are core to the delivery of the social mission. Both are needed if the mission is to succeed. When it comes to raising external funding, hybrid revenue models should typically consider raising both investment (to fund the business) and donations/grants (to fund the non-business activities). This might involve setting up two legal entities – for-profit and a non-profit – in order to be able to do this. You can learn more about how to structure funding for hybrid businesses in Module 6 (‘Legal Structure’) of our Social Investment Toolkit.
3. The Sponsorship Model
Finally, it may be that none of your activities has a natural customer. For many social innovators, the default option at this point is to become a pure charity, funding all activities through philanthropy. However, this either might not be appealing to you, or there might not be philanthropic funding available in the context you’re working in.
Some social entrepreneurs are able to create new revenue streams to support their social mission by setting up a wholly separate business to sponsor the work of the non-profit. Profits from the business are used to ‘sponsor’ the work of the non-profit. This business would typically be set up with a different team running a different set of activities to the core team.
Many social sector organisations set up secondary businesses as a means to generate more income. Think of a medical charity running a café or selling Postcards to support its work – the business is solely there to generate income, not because the business itself is central to the delivery of its mission. Often this secondary business supports the charitable activity in creating awareness in the public about the social issue, either through awareness marketing materials in the café or a compelling story on the postcards.
We recommend that a sponsorship model only be adopted as a last resort. You should really only adopt one if you cannot fund your venture either as an integrated or hybrid model. It can be distracting to set up a separate business that has a completely different mission and day-to-day operation than the core activity. The new business will be a startup and as such carry a lot of risk of failure as well as requiring a different team with a different set of skills. The new business may actually become a cash drain if it doesn’t work out. Managing both teams can be a challenge for the senior management.
If you go this route, you should try and find ways to make sure that the sponsoring business is strongly aligned with the social mission, and supports it in ways beyond simply financial. Don’t simply set up an unrelated business just for the money. The social enterprises that succeed find ways to do this skillfully. These might include marketing the social cause or giving it brand support as mentioned above, for example.
For more tips on how to work on setting up your social business take a look at our social investment toolkit website.