Collaborative Consumption and Social Entrepreneurship, A Cautionary Tale

A few weeks ago I attended a panel discussion at Oxford’s Said Business School entitled “Trust Me, I’m A Stranger: Learn from leading entrepreneurs innovating in the collaborative economy”.

The panelists were Lily Cole founder of Impossible, a social network that encourages users to exchange skills and services for free in the hope of encouraging a peer-to-peer gift economy; Sam Stephens founder of streetbank, a website that helps neighbours build community, reduce consumption and save money; and Ivo Gormeley founder of GoodGym, a growing movement of runners who run to do good.

The panel was moderated by Rachel Botsman, a self-styled expert on collaborative consumption.

Collaborative consumption is a growing trend and looks set to continue for some time. It refers to the fact that the Internet enables people who have things to sell or share them, and people who need things to buy or borrow them.

Buying and selling, sharing and borrowing are nothing new. They have been going on since the dawn of humanity. But the hype around collaborative consumption is due to the fact that the Internet allows people to connect at very low cost (in terms of time and money), and so makes it possible to create markets that didn’t formerly exist because they weren’t economically viable.

While the collaborative economy does offer exciting possibilities and significant promise to enable us to consume more while producing less, I was underwhelmed by the three self-proclaimed social entrepreneurs who spoke.

For three reasons.

Firstly, the panelists demonstrated a lack of understanding of how things work online. 

Lily Cole spoke about the slow growth of her platform, Impossible, and argued that people just need time to become familiar with a new medium, and that it just takes time for people to trust each other online.

This sounds like a plausible argument, but you don’t hear Mark Zuckerberg or Reid Hoffman talking about lack of trust online.

Facebook and LinkedIn are platforms that launched successfully because they were able to attract the critical mass of active users needed to create sufficiently strong network effects, and thus a self sustaining community.

Secondly, the self-proclaimed social entrepreneurs all seemed blissfully aware and yet surprisingly apathetic about the fact that they lack the resources required to compete should a new venture-backed start-up company decide to enter one of their market segments.

Uber poses a significant threat to the taxi industry worldwide largely because it has $1.6 billion to spend.

Good intentions are meaningless if you lack the resources required to carry out your mission; and the panelists were full of good intentions.

Thirdly, two of the panelists (Lily Cole and Sam Stephens) typified the social entrepreneurship movement in that they were slightly too self serving and self congratulatory to be given the respect that they so desperately crave.

Lily Cole has a net worth of around £8 million, and yet was happy to take around £250,000 from the UK government in order to launch her (lackluster) collaborative sharing platform.

Sam Stephens took a similar amount from the UK government. He joked during the panel discussion about needing a new laptop and whether he should borrow one through streetbank, the sharing platform he founded with the money. He conceded that since nobody was likely to lend him the Macbook he so desperately coveted, he would probably just spend some of his grant money to go and buy one.

Social entrepreneurs love to frame themselves as public benefactors, but sometimes the only people they are benefiting are themselves.

Why business can be good at solving social problems

By addressing social issues with sustainable business models, business leaders have the potential to provide scalable solutions

MICHAEL PORTER makes an astute observation – the world is full of social problems.

From environmental degradation and disease to unemployment and inequality, solving social problems has traditionally been the domain of NGOs, the government and philanthropists.

Meanwhile, business school professors and corporate CEO’s like Jack Welch spread the gospel that the primary goal of business is to “maximise shareholder value”.

If the relentless drive for profits happened to create social problems like pollution or obesity, then that was certainly regrettable. And the government should probably do something about that.

Traditional business thinking drew a very clear line between social problems and the world of business.

Fortunately, a new brand of business thinking has now evolved, and Professor Porter is flying the flag to raise awareness for a game changing business philosophy he calls “shared value”.

The basic idea is fairly simple; by using sustainable business models to address social issues, businesses can create social value and economic value at the same time.

As we identified back in March when we looked at Sustainable Social Enterprise, one of the core problems with traditional charities and government social programs is that the solutions don’t scale. Beholden to government budgets, political interests, or the whim of philanthropists, the very programs designed to solve our most challenging social problems remain financially constrained. Without a sustainable business engine, their wings are clipped, and many promising initiatives never even get off the ground.

The business sector has a role to play in solving social problems since they understand the power of profit.

If you provide good value for a fair price, and recoup your costs in the process, then you buy yourself the chance to do it again, and again. The virtuous cycle of value creation flows from having a sustainable business model and the resulting profits can enable a business to scale the solution.

As fate would have it, solving social problems can also make good business sense:

  • healthier employees are more productive employees,
  • a safer workplace means less downtime and fewer lawsuits,
  • reducing pollution can help a business become more efficient and productive, and
  • helping suppliers improve their capabilities can help an upstream firm to streamline or customise its own production line.

The world is full of social problems, and the opportunities to have a positive social impact are bigger than ever.

The only difference is that, this time, business can be part of the solution.

Flourishing in a Social Enterprise World

Flourishing in a Social Enterprise WorldTHE YEAR is 2050.

Imagine waking up in a world where you feel positive and motivated about going to work, knowing that your work provides value to customers in a way that is sustainable and responsible. Your employer operates with the express aim of benefiting members of the community and reinvests all profits to further its social aims.

This hypothetical future may seem a distant reality, yet many people today recognise a need for change: executive salaries of large corporations have become excessive, senior managers of listed companies worry about meeting analyst expectations rather than customer expectations, and global finance now focuses largely on speculation and market timing rather than funding productive investment.

Rise of Social Enterprise

Bright Future AheadThe growing trend towards social enterprise could be a game changer. A social enterprise, in essence, is an organisation which is not run primarily for profit and is required to reinvest any profits to further its social aims.

A world based on social enterprise may be closer than you think. Since the late 1990s, the social sector has been on the rise. In Canada, for example, these institutions now contribute 8% of the country’s GDP. And the pioneering work of social enterprises in sectors like construction, manufacturing, banking, hospitality and healthcare suggest that innovative and sustainable businesses are able to thrive without being run primarily for profit.

Social enterprise has the potential to change the status quo in three important ways:

  1. Firstly, social enterprises are allowed to make a profit, which means they have an incentive to innovate and operate efficiently.
  2. Secondly, social enterprises are required to reinvest any profits rather than pay dividends. This enables them to focus on long term sustainability and community benefit, and is an attractive model for charities since funding social projects out of profits makes them less dependent on grants and philanthropy. Take, for example, BRAC, one of the world’s largest social enterprises. Since 1972, BRAC has supported over 100 million people through social development services and almost 80% of its revenue comes from commercial enterprises, including a large-scale dairy and a retail chain of handicraft stores.
  3. Thirdly, social enterprises have the potential to out-compete equivalent ‘for-profit’ businesses in three ways:
    • Social enterprises often qualify for tax concessions and free support available solely these kinds of organisations;
    • Consumer preferences are increasingly supportive of ethical and sustainable business practices; and
    • Management are likely to be under less pressure to shrink a social enterprise during a downturn. This may allow social enterprises to make significant gains in market share during periods when ‘for profit’ organisations are making cut backs.

Who is leading the charge?

Our friends at The Post Growth Institute are currently writing a book called How on Earth?, which will look at how we can flourish in a Social Enterprise World by 2050.

We understand that this will be the world’s first book to explore the prospect of social enterprise becoming the central model of local, national and international business by 2050. It will also outline practical steps that people can take to fast-track an evolution towards a sustainable economy.

If you want an advanced preview of some of the book’s main ideas, please see the talk below by the book’s lead author, Dr Donnie Maclurcan, which was given at the Environmental Professionals Forum in 2012:

Sustainable Social Enterprise

Lack of a sustainable ‘business engine’ is a Social Enterprise’s Kryptonite

Sustainable Social Enterprise - Superman

IT’S a charity … It’s a for-profit … No, it’s a social enterprise!

Social enterprise is on the rise (the number of social enterprises in Australia has grown by 37% in the last 5 years).  Just like a regular business, but with one key difference; a social enterprise operates for social, environmental or cultural purposes rather than with a view to profit.

In the third issue of the SVA Consulting Quarterly, Duncan Lockard explains that a social enterprise, despite having a social mission, should also have a commercial business model.

Identifying the business model

All social enterprises have a business model. The business model is simply the method that the enterprise uses to create and deliver value to members of the community in exchange for payment (in cash or in kind).

If a social enterprise does not understand its business model then its financial performance will suffer, and this will undermine its ability to achieve its social goals. On the revenue side, insufficient focus on marketing can lead to weak sales growth. On the cost side, lack of operational discipline can result in inefficiency and high costs.

Without a sustainable business model, a social enterprise is likely to run up against three problems. Firstly, the enterprise will remain dependent on donations and subsidies, which places it in a vulnerable position. Secondly, since the underlying business model is not viable, it will be difficult for the enterprise to grow and expand its social impact. Thirdly, if community support for the enterprise is merely sustaining a poorly run business rather than creating social impact then a fair question might be: “should the enterprise continue to exist?

Assessing sustainability

Determining whether a social enterprise has a sustainable business model can be difficult. Lockard refers to this as the “the haze of the hybrid organisation”.

Basic formula: 

Social Enterprise - Financial Performance 8

The basic formula for business model sustainability is pretty simple: business revenues need to exceed business costs.

Complication:

Social Enterprise - Financial Performance 7

The complication is that a social enterprise will typically generate income from both business revenue and community support, and will incur expenses that include both standard business costs and costs associated with supporting the social purpose.

To assess the performance of a social enterprise, Lockard explains that “[t]he first step is to see through the haze of the different incomes and costs and assess the ‘business engine’ that sits at the core.” This requires identifying ‘commercial’ revenues separately from ‘non-commercial’ revenues, and doing the same for costs.

The case of the Nundah Co-op

SVA Consulting has a lot of experience working with social enterprises, and Lockard shares a recent case of the Nundah Co-op. Based in Brisbane, the Nundah Co-op runs a café and parks maintenance service. As a social enterprise, its aim is to provide employment opportunities for people with intellectual disabilities. This is a valuable social goal, but the Co-op faced a problem. It had been running losses of around $20,000/yr for several years. Could further losses be justified?

SVA Consulting’s analysis showed that although Nundah Co-op’s total revenue was less than total costs, its business revenues exceeded business costs. This showed that the Co-op’s core business model was sustainable, and so the $20,000 subsidy paid by the Co-op’s parent organisation could be justified since it covered the Co-op’s additional costs in meeting its social purpose.

For truth, and justice, and the American way

To read more about SVA’s work with sustainable social enterprise: click here.

To read Issue 3 of the SVA Consulting Quarterly: click here.