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Which business model is the best for your venture?

So far, we’ve discussed how your social venture creates social change, i.e.  what we might call your ‘Impact Model’. For a social enterprise, of course, impact alone is not enough. You also need to have a viable business model (i.e. selling goods or services to paying customers) in order to generate the income to fund your social impact. Investors will be keen to know how your business model relates to your impact model. 

We’d like to introduce three types of social enterprise model, each of which combines their impact model and business model in different ways.  We will call these three models the Integrated Model, the Sponsorship Model, and the Hybrid model.

1. 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 fulfill your social mission by selling products and services to your beneficiaries. Impact model and business model are integrated. 

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.  

Consider the example of an education venture, seeking to provide textbooks to under-resourced schools in very marginal areas. The students cannot afford the books. Neither do the schools have the budget to buy them. The venture will have to find alternative ‘customers’. It might consider the following possibilities, starting with those people affiliated to the school: 

  • Asking alumni from the schools to sponsor a book drive.
  • Inviting the textbook publishers to give the books to the schools (‘in-kind’ support – another way of ‘funding’).
  • 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 a 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 education venture that sells books to alumni, to be donated to the school, would be an example of an integrated model selling to indirect beneficiaries

2. Hybrid Model

Suppose that only part of your social mission can be delivered through a business. However, there might be other core parts, such as running a public health education campaign, which simply don’t have 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. 

Example

Fair Finance is a UK-based social enterprise that seeks to improve access to financial services, especially access to a bank account and credit, for low-income communities in London. More than 4 million people in the UK are ‘financially excluded’ in the sense that they are wholly unable to get any form of credit. Many do not have bank accounts, and therefore have to work in the informal economy. For such individuals, access to emergency finance, e.g. for a medical bill, might result in going to a ‘loan shark’ for a loan of up to £500, carrying an interest rate of up to 4000%. Over 12 million people have no access to mainstream lenders and can only lend from loan sharks, many of whom enter into a spiral of indebtedness where they are forced to take out larger and larger loans to repay old ones. 

Fair Finance tackles this problem from multiple angles. It provides debt advice to its customers, helping them re-schedule their debts and develop a budget and a manageable repayment plan. It speaks to landlords and other creditors on their behalf to help reschedule debts. It also provides affordable micro-loans, at interest rates of up to 15% (far below the rates of its competitors), to qualifying customers to help them out of the interest rate spiral. 

Both aspects of Fair Finance’s work – the provision of free customer advice and the offering of affordable personal loans – are integral to its mission to make finance fair and accessible to all. But only one of these, the provision of loans, is a business. Providing free customer debt advice will only ever be a loss-making activity. 

Fair Finance therefore adopts the hybrid revenue model. It runs its loan business as a commercial (or “for-profit”) business, charging just enough (in the form of its interest rates) to be able to cover the costs of all of its operations. It uses the profits from the loan business to support and subsidise the debt advice work. It also continues to raise charitable grants and donations in order to be able to continue to offer the debt advice and other free but vital services to its customers. 

Exercise

  1. Write down all of the activities that are essential to the delivery of your social mission.  
  2. Go through the list and for each item, mark out which ones could have a paying customer and which ones don’t. 
  3. For those activities that don’t have a customer, consider could they be funded as a charitable activity and / or could they be subsidised by your profitable activities?

3. 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 a 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 start-up 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 skilfully. These might include marketing the social cause or giving it brand support as mentioned above, for example. 

Example

‘Mobile School’ is a Belgium-based charity led by Ashoka Fellow Arnoud Raskin, whose aim is to provide education for homeless children. The charity operates a fleet of specially designed ‘mobile class-rooms’ which are vans, which extend to form the “classroom”. The vans open up easily to bring out white-boards, games and other educational tools that specially trained teachers can use to run lessons for children living on the street. They can be taken into slums and other areas where there are a significant number of street children. The charity is now so successful that it operates in more than 18 countries around the world, reaching tens of thousands of street children annually.  

A few years ago, Raskin decided to launch a business whose income could be used to support the work of the Mobile School charity. From working with street children, Raskin observed some of the extraordinary qualities that street children develop in order to survive, which he calls: positive focus, agility and resilience, cooperative competition and pro-active creativity. He saw that these skills could even be taught. He came up with the idea of creating a business consultancy called ‘Streewize’. 

Streetwize provides executive leadership education for companies, offering courses to teach executives how to become more ‘streetwise’, in other words to develop those same qualities that Raskin had seen in the street children. In teaching the skills of becoming ‘streetwise’, Raskin not only raises funding for his charitable work, but he also spreads the word about Mobile School to a wide group of world class corporate clients. Many of these go on to sponsor the Mobile Schools, creating a positive brand effect and bringing further support for the charity.  

Streetwize itself would not be possible without the credibility and the insight from Mobile School. It is therefore a great example of how a separate business (run by a separate team and legally separate from the charity) can still be fully aligned with the social mission and support it in multiple ways beyond money. 

Exercise

  1. Brainstorm in 15 minutes about the step 3 from the previous exercise about hybrid revenue models. Come up with as many different for-profit activities for a hybrid model or a sponsorship model as possible. Be aware that they will have to support your social mission, without necessarily being central to the delivery of your mission.  

    For example:  

    • Could the business sell something that markets your social mission in some way? (as with the Homeless World Cup?).  
    • Could the business educate customers, or provide greater traffic to you?  
    • Could the business employ or generate opportunities for the communities that you serve? 

    The following flow chart can help guide you as to which revenue model to adopt. 

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