The Business of Social Innovation

Social enterprises—hybrid businesses whose profits support community needs—can be a strong force for local economic development and job creation.
by , , , | November 7, 2011 AT 11:00 AM

As we work our way out of our economic straits, what could be more important than finding an innovative way to create job opportunities while helping to address some of our communities' toughest challenges?

One way to nurture and propel local economic growth from the bottom up is by supporting and providing incentives for what are known as "social enterprises." Whether working in real estate, education, social media, legal services, renewable energy or beyond, a social enterprise is a hybrid of a non-profit organization and a for-profit business. While it aims for financial viability and growth (in the process creating new jobs), a social-purpose business has a "double bottom line," viewing profit as a tool to achieve social good—from creating opportunity for the marginalized to providing access to healthy food to protecting the abused and neglected.

Together our two organizations shine a light on this prospect by illustrating the value of social enterprises and introducing some strategies for nurturing them.

The Menkiti Group is a Washington, D.C.-based real estate-services company dedicated to providing attractive affordable-housing opportunities while enhancing the fabric of urban communities. This social enterprise has been strengthening neighborhoods in northeast Washington since 2004. It has hired local construction crews to restore more than 70 vacant, abandoned or foreclosed homes and more than 40,000 square feet of commercial property that is now leased to small businesses and non-profits serving the local neighborhood.

How can you capture the energy of latent or emerging entrepreneurs and, ultimately, help catalyze enterprises like the Menkiti Group in your community?

Social enterprises are often more difficult than traditional businesses to successfully operate. You need to mind bottom-line financial projections while keeping track of whether, and how, you are driving social impact. There is often no existing path cleared by those who have gone before you, and thus no existing networks or infrastructure of supports in place.

As a result, there are a number of common deficits facing new or growing social enterprises: business savvy, professional networks, talented employees, entrepreneurial confidence and the know-how to develop clear metrics of both economic and social impact.

Further, financial capital is often difficult to come by. Investors in a social enterprise potentially forgo maximizing financial return in favor of an additional "social" return. And because foundations cannot give to profit-making ventures, social enterprises like the Menkiti Group are also typically restricted from accepting philanthropic grants.

One way to address these challenges is to look to models like Bull City Forward, a Durham, N.C.-based intermediary that supports local innovators and creates an ecosystem to help social enterprises emerge and thrive (a model that, incidentally, is catching fire in other communities, including the launch of Queen City Forward in Charlotte, N.C.).

Bull City Forward builds pipelines of future entrepreneurs through school and university partnerships, recruitment of outside talent and more. It provides a strong environment to incubate and accelerate new ideas through physical space for co-working, a comprehensive assistance network and access to critical support resources including financial capital.

In recognition of the political nature of public problem-solving, Bull City Forward also advocates for buy-in from local- and state-government officials. Through an ecosystem approach, it pays attention to the broader landscape, including regulatory barriers, the policy environment and the need to build public support in uncharted waters—especially around economic-development strategies.

Here are some key lessons we have learned that might be helpful for public officials considering the potential of social enterprises in their communities.

Where will the money come from? Many private-sector investors are afraid to live at the margins, even though it is often where change occurs. More foundations should be able to make program-related investments as the number of states recognizing low-profit, limited liability companies (L3Cs) grows. Government loan funds for community development, such as the federal Economic Development Administration's green-economy acceleration grants, also are starting to be reconfigured for social enterprise

But money is only part of what social entrepreneurs need. The Durham Chamber of Commerce, the city government, local community foundations and Duke University, among others, have backed the launch and scale-up of Bull City Forward. They are attracted to the promise of new jobs and employment opportunities and to making progress on the environment, poverty alleviation and more.

How do you show material progress? Bull City Forward's target is a dramatic increase in the number of high-growth social enterprises and, ultimately, a high return on investment of two types: positive economic growth and social impact. It is focused on economic-development measures that include the density of the social-enterprise cluster in Durham, growth in the number of local jobs and the tax base, and investment in local enterprises. Other tangible metrics include retention of entrepreneurial talent, citizen engagement in entrepreneurial solutions and social impact.

You will also want to track the progress of individual enterprises. A positive social impact means you will count people served—not just jobs created—when calculating the overall benefit of encouraging social enterprise. The Menkiti Group, in addition to its restoration and development successes, has created more than 300 temporary and full-time jobs. It also has helped more than 400 families purchase and maintain their first homes while brokering the sale of over $160 million in real estate.

What about the risk of failure? Most of the financial risk falls on the entrepreneur starting a double-bottom-line enterprise. In the case of the Menkiti Group, the additional growth risk was underwritten by friends-and-family "angel" investors. The political risk probably outweighs the financial risk to a city official looking to create a hub or incubator such as Bull City Forward for social enterprises.

Bull City Forward mitigates its risk by carefully selecting enterprises to support. It takes significant expertise and time to identify good ideas that are financially sound and market-ready, and that will have a social impact. Bull City Forward also maintains a high degree of accountability with its portfolio. If an investment's impact in a community is not measurable, Bull City Forward diverts its resources elsewhere.

Becoming a fertile environment for social enterprises has the potential to boost your community's economic, civic and social well-being. Imagine the pitch: Let's cultivate entrepreneurial spirit in a way that produces jobs plus a positive social impact.

Bo Menkiti | CEO, the Menkiti Group |
Bo Menkiti | CEO, the Menkiti Group |