“The glamorous stories of social enterprise success and all the announcements and launches has led to a really disconnected view of just how hard it is,” says Bessi Graham.
In her role as CEO and co-founder of The Difference Incubator (TDi), Graham works at the coal face of social enterprise, helping businesses develop sustainable business models that allow them to do good AND make money.
“When all the talk about social enterprise is glowing and there’s no discernment to speak of, then that can be really misleading,” she says.
“I speak with a lot of nonprofits in the sector and it’s very easy for them to be swept up in all the hype and think, ‘Great! We’ll set up a social enterprise or a business and within months it’ll be generating income.’ But that’s not the reality—there’s no business that does that, much less a business that’s trying to grapple with a tough social or environmental problem.
“Potential to fail is going to be part of the game. It’s just part of what you have to cope with. We don’t do ourselves any favours when we’re not being honest about that.”
Bessi is a truth teller who pulls no punches as you’ll see in this transcript of a recent chat with Generosity editor, Nicole Richards.
NR – How do you define what is or isn’t a ‘social enterprise’?
BG – At TDi, we’re completely agnostic to legal structure. I’m not interested in that at all because it doesn’t tell me anything. For example, you could be a nonprofit and you could be wasting money and not delivering good outcomes. Or you could be a for-profit spending money really wisely and delivering amazing outcomes.
So, to me, legal structure is not an indicator of whether or not a business is delivering the right outcomes to the world.
What I am interested in is what is at the heart of what this business is trying to do. Is the social or environmental mission an add-on, or is it key to the drivers of the business?
I think this obsession with what is done with profit—with the redistribution or the reinvestment of profit—comes from people who don’t understand how business works. If you understand how a business works then you know a profit line can be manipulated.
All I have to do, if I want to suddenly say I have less profit or no profit, is to spend more money by paying more salaries or send more people to a conference and then, ‘Oops I don’t have any profit!’
Manipulation of the profit line is very easy to do. If the only good in the world you can do as a business is by donating or giving away or reinvesting a certain percentage of profit, then you have completely missed the point of the power of business as a tool for change.
The limitations of definitions that are based on legal structure and distribution or reinvestment in profit—all that does is keep social enterprise niche.
At Two Feet, we’re breaking up with the term ‘social enterprise’, we’ve removed all reference to ‘social enterprise’ everywhere because we’ve seen over the last few years that instead of cracking open and being this avenue of business as a powerful, exciting opportunity that’s ready to tackle social and environmental problems, social enterprise has become more and more trendy and niche and be about nonprofits with some kind of trading.
When you’re a nonprofit with some kind of trading and you’re just obsessing over those aspects of the definition of social enterprise, you do not change the game. You are still only able to access philanthropy and government funding and the goodness of people’s heart giving you money.
And we know that to crack the problems we need to crack will take more money than what’s available from government and philanthropy. They play a really important role and we’d never take away from the critical role of subsidisation and granting as that catalyst for change and there is always a role for that, but building models that are ongoing grant reliant that don’t need to be is just unethical in my opinion.
That focus on definition and trying to shift that game only can happen if you start to build businesses that have built into their DNA a social or environmental mission and can do that in a way that can pay for the capital that needs to access. That means suddenly I’m doing something I can scale; I can confidently know my program will be running in five years, regardless of whether a funder stays interested or not.
The game changes when you have a business model that can pay for capital.
So what are you calling these enterprises instead? How are you referring to them?
Well, that’s the challenge! We’ve had this conversation with so many people who are also looking for a new term.
Four years ago Paul [Steele] and I started talking about investible social enterprises to try to distinguish what it was we were talking about. But even that is a failed term, I think.
So the honest answer is I don’t yet have a powerful name for it. We’ve gone back to our original intent which was to say that we’re trying to prove that you can do good AND make money. So, we’re now just talking about building investible enterprises which are about trying to do good and make money.
I think we still have to figure this out because people do want terms and they gravitate to terms and the honest answer is I don’t have that answer yet.
We’re about unlocking broader pools of capital and you can’t do that with social business because it’s niche and always will be.
So, by extension, is impact investing another label that’s been corrupted?
Possibly. I’ve been heavily influenced by Trevor Thomas and I used to work for him at Ethinvest 17 years ago, and having watched him and seen that growth in ethical investment over the last 25 years, I think impact investment is just the next step along the spectrum.
Most people who’ve come to impact investing in the last few years having skipped ethical investing and that’s quite interesting because the things people are calling innovative impact investments, I would say are ethical investments and people have been doing that for 30 years. Don’t get me wrong, that’s still great—it’s better than not thinking about what your money is doing, but it is not impact investment.
We always focus on impact investment having two critical terms: intention and measurability. If you go back to that spectrum, ethical investment has intention, not measurability. Impact investment has to have both and I would argue even the big players who are held up as innovative impact investors – they don’t have measurability. They are good investments, they are ethical investments, they are intentionally choosing where they put their money and for that I congratulate them and I wish everyone was doing that. There is no excuse for not doing that because we have decades of track record that proves it can de-risk your portfolio and you will ride out difficult economic times better with an ethical portfolio than you will with a mainstream one.
So many people who haven’t had that exposure to ethical investing are coming to impact investing as this new, sexy thing. You have to be careful to not rely on intentions which are really just what you hope will occur. Instead, you have to figure out appropriate ways that you will know if that change has occurred in the world. If you connect measurability with that intent, that’s powerful because you’re not only enabling the flow of capital to organisations that are doing great things in the world, but you also start to see not just an output level piece of how much capital flowed but actual change of programs and organisations being incentivised to make sure they’re delivering the outcomes they’re promising. That will change the game.
Measurement has always sat in that government and philanthropic space where the person with the money tells you what you have to do and people engage with measurement as if it were more of an acquittal. So it’s ticking boxes, listing what you did with the money, here is my acquittal. That’s not sustainable. Measurement, when it’s properly integrated into the business, will align with the same indicators that will show you whether the business is doing well. So as the business owner, you should want that kind of measurement. As an investor you need to know them from both the social and financial aspects. It should be aligned with what the beneficiary wants.
Measurement is far more holistic than people think.
What are your thoughts on ‘blended value’?
We use that term all the time when we’re talking about having a social or environmental return and a financial return without compromising on either. And that’s what I’m most interested in—how you get to both without compromising on either.
The problem is that too many people will still say, ‘Are you social first or financial first?’ Or, ‘In my portfolio, this investment is social first and this one is financial first.’
That worries me because it feels as though if it’s ‘financial first’ then it’s as though you’re just putting your money somewhere and not thinking about what harm it’s doing and if it’s ‘social first’ it means you’re engaging with it as if it’s a grant.
Is philanthropy living up to its potential in nurturing the social enterprise sector?
No, not at all. But, I think it has a critical role and is such an exciting opportunity if it’s used well.
For instance, donkey wheel is one of the best case studies on how to do catalytic granting, how to think about a system, how to intervene without ego. Paul is a pretty extraordinary human being and he has created amazing things.
For me, there’s always going to be a component of philanthropy that is about giving without any expectation of return for things where you’re just giving from the heart, for instance natural disasters or the like. It’s just giving where there is need.
But, the problem is that we have these huge issues that need to get dealt with and philanthropy needs to play a role that’s catalytic and incentivising and doesn’t encourage the whole nonprofit sector to stay in a grant reliant space.
But, instead, if you’re a nonprofit and it looks like you’re building something sustainable or succeeding in any way, you won’t get funded and your programs won’t get scaled because it looks like you know what you’re doing and you don’t need help.
Philanthropy should be about enabling others to do great things. Helping organisations build up the skills and the model that helps them open up revenue streams and deliver great things to the world sustainably. If that happened, then instead of having to fund the same things from here to eternity you go through cycles and you’ll see some things that failed and others that worked. If that’s happening, then that money that’s no longer in that particular place can go to the next thing and we can continue to refine and change and respond to what is needed in the world without locking limited resources into things that are not necessarily delivering the outcomes or the change we want to see happen.
I passionately believe there’s a really powerful role for philanthropy but it has to fundamentally shift how it thinks about the use of its capital and the ways in which it needs to not be about ego or its own interests or programs but about leveraging money to catalyse change.
About TDi: The Difference Incubator (TDi) exists to prove that you can do good and make money. TDi create and lead programs, events and bespoke consulting sessions that bring out the best in people and mission-driven organisations, and ultimately identify, strengthen and grow investment-ready enterprises that create positive social or environmental impact and are financially sustainable. Read about TDi’s recent work with social enterprise Able Bakehouse here.