Study of Emerging Patterns of Social Enterprises
March 2022
Dr. Vishal Gaikwad, Mr. Mandar Joshi, Ms. Nupur Gandhe, Ms. Kanak Jaiswal
Introduction:
Innovation is considered the main driver of economic growth. Innovations benefit consumers, entrepreneurs and society and make them better off at large. Joseph Schumpeter, who is considered a champion of ‘Theory of Innovation’ (Dorfman, 1991), listed five major forms of innovations: “(1) The introduction of a new good… or of a new quality of good. (2) The introduction of a new method of production…(3) The opening of a new market… whether or not this market has existed before. (4) The conquest of a new source of supply of raw materials or half manufactured goods, again irrespective of whether this source already exists… (5) The carrying out of the new organization of any industry…” (Schumpeter, 1934). Though Schumpeter discussed his ‘Theory of Innovation’ keeping capitalistic entrepreneurs in mind. Innovation is important for organizations and businesses as it gives them an edge in penetrating markets fasters and provides a better connection to markets which can lead to bigger opportunities. In any organization following processes are used a) Delivery process of product/services b) hierarchy/information flows between entities c) parallel/sequential patterns of activities and d) feedback and reinforcement. Organizations required better coordination and integration of these processes. Therefore innovative ideas and methods, which are nothing but something new or different ideas and methods, were used to achieve better coordination and integrations for better products and services. The world has changed significantly since the theory of innovation was proposed. Today, not only are we talking about innovation but we are also talking about social innovation; though in 1960 Peter Drucker and Michael Young in their writings discussed social innovation. Today social innovation and social entrepreneurship are gaining a lot of traction. The distinction between innovation and social innovation is fluid and there is often overlap between these two. There are many definitions of social innovation but there is hardly any consensus in the academic field (Amanatidou, Gagliardi, & Cox, 2018; Edwards- Schachter & Wallace, 2017; Howaldt, Butzin, Domanski, & Kaletka, 2014; Howaldt & Hochgerner, 2018; Van der Have & Rubalcaba, 2016). A widely cited definition of social innovation is: ‘Social innovation is a novel solution to a social problem that is more effective, efficient, sustainable, or just than existing solutions and for which the value created accrues primarily to society as a whole rather than private individuals’ (Phills, Deiglmeier, & Miller, 2008, p.39). In this definition, ‘social’ is mainly equated with ‘improvement’. Social innovation is driven by the welfare need. Social innovation is highly contingent and contextually sensitive. In India, social innovation has emerged to address a combination of minimalist state welfare structure and growing welfare failure (Nicholls A. et al, 2015). Social Innovation offers a space for research. In this paper, we have studied social innovations and social entrepreneurs. This paper draws on the finding from the forty-four social innovation start-ups based in eight different states. Our objective is to asses the effects of social innovation. We aim to address the questions like to what extent can social innovation start-up benefit the society; how does this innovation arise in terms of role, organization, the problems faced by these social innovation start-ups, and their future goals.
The research for this project involved the selection of social innovation start-ups that benefitted from the program ‘Social Innovation Lab’ run by Pune International Centre (PIC). Detailed semi-structured interviews were carried out with key stakeholders who were paid staff, and founders.
The next section discusses the review of the literature. The third section reviews a sample of social innovation start-ups and their performance. Finally, we draw out some conclusions regarding how social innovation start-ups are working and what might need to be done to strengthen them.
Review of Literature:
Academic research on social innovation is rare and mostly practice-oriented and has been published in the form of research reports of various organisations and foundations as well as articles in journals such as the Stanford Social Innovation Review (Majumdar et al. 2015). Corporate-funded innovations under Corporate Social Responsibility (CSR) are published in the form of annual reports. Organizations in Europe and USA publish reports periodically on social innovations, for example, British Council surveyed in 2016 ‘Social Value Economy: A survey of the social enterprise landscape in India’ to understand the profile of social enterprise in India and map the larger ecosystem within which they operate’. A similar survey has been conducted in Pakistan, Ghana and Bangladesh, apart from the organization’s journals like Stanford Social Innovation Review publishing the social innovation research. Yet the impact evaluation academic research is still rare. Apart from the available literature, there is no accepted metric is available for social innovation (Bund et al, 2015).
The growing importance of social innovation within policy circles and academia makes it necessary to explore ways how metrics can be applied (Reeder et al, 2012; Wobbe 2012) and to overcome the narrow focus of metrics on economic issues (Hoelscher and Schubert 2015).
There is no accepted methodology or indicators or metrics that can capture or allow the evaluation of social innovation and its impact (Nicholls, 2015). Social innovations are multidimensional, multi-sectoral, and multi-disciplinary includes actors at a range of various spatial scales, focusing on the social aspects and community development, making them difficult to measure (Baturina & Bezovan, 2015). The growing importance of social innovation within policy circles and academia makes it important to explore how indicators can be applied and to overcome existing metrics’ narrow focus on economic issues (Cunha and Benneworth, 2018). In this research paper, we have evaluated the social innovation using a large set of indicators, assessing through different periods, at different spatial scales.
Methodology:
The data comprise social innovation start-ups and projects that were applied for the PIC initiative ‘social innovation lab’ from 2013 to 2020. These start-ups mainly work in the field of agriculture, education, skill development, energy and clean technology, water and sanitation healthcare, food and nutrition, rehabilitation human rights, and information and communication technology.
Since 2013, PIC has been organizing the ‘National Conference on Social Innovation’ in collaboration with the National Innovation Foundation & Tata Institute of Social Sciences (TISS). Social innovators send their applications from all corners of the country. Every year twelve innovators from the Urban and Rural categories were selected for the final presentation after scrutinising all applications. For this study, we have selected all social innovator start-ups qualified for the conference as well as the start-ups that sent their applications for the conference.
Quantitative data were collected by using a detailed structured questionnaire. The questionnaire was emailed to social innovators. Qualitative data was collected by conducting an online-focused group discussion (FGD).
This study provides an analysis of cases of social entrepreneurship. We seek to identify patterns and regularities across these initiatives. Instead of testing a hypothesis, we are generating a proposition to a complex and not yet well-understood topic.
There are some drawbacks to this sampling approach. Focusing on initiatives applied to the PIC social innovation lab than on initiatives working in all sectors limits our capacity for analysis. We accepted the limitations of our study because of the covid-19 situation and the high costs of collecting data from different states of India.
Survey Findings:
Years of Operation:
The survey indicates that 52 per cent of the start-ups were registered between the years 2017 to 2019. Twenty-seven per cent were registered in 2019. 61 per cent of start-ups were registered in Maharashtra. Maharashtra is a hub for start-ups. As per the Department for Promotion of Industry and Internal Trade (DPIIT), Maharashtra, Karnataka, Delhi, Uttar Pradesh and Gujarat have the largest numbers of entrepreneurs.
Figure 1: Year of registration of start-up
Location: Where Were Respondents Based?
Survey findings revealed the tendency for social enterprises to be headquartered in metropolitan and major cities. 68 per cent of the social enterprises were headquartered in Pune, Mumbai, Nashik, Ahmedabad and Bangalore. One of the main reasons for headquarter situated in metro cities is decent infrastructure, access to financial capital and a good pool of knowledge, skills and talent.
Legal Status:
57 per cent of entrepreneurs said that they operate as a private limited company. This mirrors the social enterprise model – the section 8 company. 20 per cent of respondents said they are operating as NGOs (societies and trusts) and 7 per cent are operating as sole proprietors. As per the British Council report before 2000, social enterprises were primarily of two kinds: private limited companies or societies/trusts (plus a few sole ventures). However, after 2015, social enterprises are operating in various forms such as Section 8 companies, limited liability companies, public limited companies, partnerships, and sole ventures (although private limited companies and societies/trusts still form a large proportion of the sector).
Table 1: Legal Status
The main reason for the popularity of the private limited structure is greater autonomy over how to use profits or surplus. NGOs must utilize their profits/surplus towards charitable objectives. This makes them unfavourable for equity investors, who expect a return on their investments. In recent years, the organizations registering under NGO status has declined.
A company is referred to as Section 8 Company when it is registered as a Non-Profit Organization (NPO), i.e., when it has motive of promoting arts, commerce, education, charity, protection of environment, sports, science, research, social welfare, religion and intends to use its profits (if any) or other income for promoting these objectives.
Current Stage:
Every business goes through different phases of the business life cycle. Respondents were asked at which stage their organization is operating. 41 per cent said that their organization is at an early revenue stage, whereas 34 per cent said that their company is at a growing revenue stage. 11 per cent of organizations were expanding to new markets and another 11 per cent were at the beta stage.
Indian start-ups are in the second stage of the business life cycle, in which they are solidifying their stance in the marketplace. In this stage, organizations focus to build teams and hire people to run operations.
Table 2: Current Stage
Social Innovation Start-Ups Profile:
Though the majority of start-ups are registered under the private limited company, the number of founders is restricted to two. 45 per cent of start-ups are having 2 founding partners. 25 per cent are having one founder and 20 per cent are having 3 founding persons. This backs the argument why start-ups are registering under private limited companies even though there is an option of proprietary or partnership.
Gender:
When it comes to female representation in the company as a founder, then 50 per cent of companies do not have a female founder. 43 per cent of companies have one female as a founder. And when it comes to heading the company, 70 per cent of start-ups are having a male in charge and 30 per cent start-ups are led by females in charge. According to the World Bank’s Enterprise Survey data, 8.9% of mainstream enterprises in India have a woman top manager, and 2.8% have majority female ownership (World Bank, 2014).
Leadership Age:
Indian social entrepreneurs are most likely to be in their 30s and 40s. The survey found that people aged 25-34 are the most likely to lead a start-up (32 %). 18 per cent of the social start-ups were led by individuals younger than 25 and 20 per cent were led by individuals younger than 44. However, 30 per cent of start-ups were led by individuals older than 45, which shows that when it comes to leading the organization, more weightage is given to experience.
Figure 2: Age of Social Start-Up leaders
Profile of Founders:
The survey indicates that 32 per cent of founders had only university education without any professional or economic activity experience. 11 per cent of founders had only professional experience before the launch of their social enterprise. Whereas, 7 per cent said that they had the experience of enterprise before starting the current social enterprise. 5 per cent were having professional experience and experience in starting up an enterprise. Another 5 per cent said that they had professional experience and starting up an enterprise before the current one and further they had formal business training before starting the current social enterprise.
Areas of Focus
Objectives of social enterprises:
The survey asked about the overall objectives of the social enterprise. The most commonly stated objective of social enterprises in the survey is protecting the environment (23%) followed by supporting agriculture and allied activities (18%), improving health and well-being (14%), promoting education and literacy (11%), supporting vulnerable children and young person’s (11%), empowering and uplifting women (10%), supporting other social enterprises and social enterprises (6%), addressing financial exclusion (5%), creating Social Awareness for Tribal and Marginalized people (1%), and generating Livelihood by promoting handcrafted products to stop the migration of tribal people (1%).
Table 3: Overall objectives of your social enterprise
Sectors that social enterprises work in:
Over half of the social start-ups surveyed operate in the agriculture sector, supporting agriculture and allied activities. Another important sector was the skill development sector, providing skills training to unskilled and semi-skilled workers. Other prominent sectors are education, non-farm livelihood, food and nutrition, information and communication technology, water sanitation, health care and human rights.
The survey shows that affordable housing, financial services, recycling, wildlife conservation, dairy and fishery have the lowest proportion of social enterprise activities. Only one social enterprise surveyed works in the affordable housing sector. Other areas of activity reported by social enterprises are justice and tourism.
Table 4: Social Enterprise Sectors
Innovation:
The surveyed social enterprises were asked about their innovation. 38 per cent of social enterprises stated that they are in product innovation that means their enterprise introduced a new good or service in the market. 25 per cent of social enterprises revealed that they are in process innovation in which they introduced a new production process or method. 23 per cent stated that they have created a new social enterprise of management. And 14 per cent said that their enterprise has discovered a new way of selling goods or services, means they are in marketing innovation.
Figure 3: Innovation Categories
Social Impact:
Primary Purpose:
A key aspect of social enterprises is that the start-up benefits groups of people beyond those directly involved in the business. 64 per cent of the social enterprises surveyed stated that their core purpose was to pursue both financial and social/environmental objectives equally. While 32 per cent said that they primarily focus on social/environmental impact. And 5 per cent said that they focus on profit as they prioritise maximising profits and strive to make a social impact only when it enhances profitability.
Beneficiaries:
The survey asked respondents to report how many beneficiaries they had supported but did not specify the time limit. 36 per cent of social enterprises worked in the rural, urban and tribal markets. 32 per cent of social enterprises operated only in the urban markets and 27 per cent focused on the rural markets. And 5 per cent of social enterprises had focused on the tribal markets.
Table 5: Market Focus
73 per cent of the surveyed social enterprises work with women, 50 per cent work with people from socially and economically disadvantaged communities, 66 per cent work with people with underserved regions, 32 per cent are working with people with disabilities, and 50 per cent are working with children.
Table 6: Beneficiaries reached by social enterprises
Women form the main group of beneficiaries of social enterprises (73 per cent of the social enterprises work with women). However, there is a difference between female-led and male-led social enterprises concerning education and children, with female-led ventures far more likely to work with children than male-led social enterprises and also more with children and in the education field.
Employment Generation by Social Enterprises:
According to the survey, the average number (median) of employees in social enterprises is 12 (10 full-time employees and 2 part-time employees). 52 per cent of surveyed social enterprises have fewer than 5 full-time employees, and 18 per cent of social enterprises have between 6 to 9 full-time employees. 9 per cent of social enterprises have more than 15 full-time employees.
At 8 per cent, the proportion of female full-time employees in social enterprises is lower than the 14 per cent in mainstream business in India (World Bank, 2014). Despite this, a large proportion of social enterprise employees are part-time female employees (37 per cent of total employees).
100 per cent of female-led social enterprises employ more than 30 per cent of women, compared to 69 per cent of male-led social enterprises, indicating that female-led social enterprises are more likely to hire women.
Table 7: Gender distribution of social enterprises jobs
Barriers to Start:
Social entrepreneurs were asked in the survey what barriers they faced while starting up the current social enterprise. Access to finance is the largest stated barrier identified by social enterprises. 52 per cent of social entrepreneurs said the funding was the biggest challenge. 50 per cent identified maintaining the cash flow as a constraint and 43 per cent said the capital was another problem.
Over 52 per cent of the social enterprises felt that there was a shortage of managerial skills and technical skills in the social enterprise sector; less than 10 per cent of mainstream businesses face this constraint (World Bank, 2014). 39 per cent of social enterprises felt that recruiting staff is the barrier they faced while starting up their social enterprise. 30 per cent social entrepreneurs said that understanding or awareness of social enterprise among the general public is another barrier, whereas 25 per cent said there is a lack of support and awareness among the banks. 23 per cent of social enterprises felt a lack of access to technical support and advisory services the major challenge they faced while starting their social enterprise.
Figure 4: Barriers to starting up an enterprise
Red tape barrier and National Policy:
30 per cent of the social enterprises surveyed for the study stated that the red tape obstacle was very high. 27 per cent said that the red-tapism was normal, whereas 43 per cent said they faced a little red-tapism.
43 per cent of the social enterprises surveyed for the study stated that they are partially satisfied with current national policy measures the Government has taken regarding innovation and start-ups in India and for its promotion. 30 per cent of social enterprises said that they are not satisfied, whereas 27 per cent of social enterprises said that they are satisfied.
Challenge to Scaling-up
The survey asked respondents to report the biggest challenge they are facing in scaling up. 39 per cent of social enterprises felt that it was lack of distribution channels, whereas 36 per cent said access to finance is the biggest hurdle they are facing while scaling up their social enterprise. 32 per cent of social entrepreneurs said the shortage of staff is restricting them from scaling up. And 25 per cent of social enterprises felt that accessing new markets is the main challenge in front of them.
Figure 5: Biggest challenge to scaling up
Finance Sources:
Respondents were asked what forms of equity financing they have received since they started operating. The types of financing received includes funds from government, funds from spouse or life partner, funds from other family members, funds from other individuals excluding business angels, other companies, grants from foundation or corporate social responsibility (CSR), public financing or investment from venture capital and angel investors.
The most common source of funding grants was from foundation/CSR/donation (66 per cent). 43 per cent of respondents relied on their funds. 27 per cent took grants from the government.
Figure 6: Debt Financing
48 per cent of respondents said that they never used debt financing to run their social enterprise. 43 per cent used a debt option to run their business. 11 per cent of respondents took a loan from family or friends. 9 per cent took a loan from a commercial bank.
In a survey, social enterprises were asked whether they sought a loan from a formal institution like commercial banks. 77 per cent of respondents said they never sought any type of loan from banks. 9 per cent applied for the loan but did not get it. Another 9 per cent applied for a loan and they received once by giving guarantee but they felt that the loan was expensive.
Table 8: Access and availability of finance
70 per cent of the social enterprises surveyed for the study stated that access to finance was very difficult, whereas 30 per cent said that access to finance was normal.
Social enterprises were asked whether available financial resources are sufficient or not. 43 per cent of social enterprises revealed that they are insufficient. 34 per cent stated that they are partly sufficient and 23 per cent said that they are sufficient.
Plans:
The social enterprises were asked how they see themselves in the coming three years in terms of financial requirements. 52 per cent of social enterprises said that they will seek finance from others against the equity. 25 per cent of respondents said that they will manage through their revenues and won’t be needing any finance. 14 per cent of social enterprises said that they will opt for loans from banks or other financial institutions to meet their financial requirements.
Further, these social enterprises were asked if they get easier and/or cheaper finance, how they will grow in the next three years. 59 per cent of social enterprises said that they will grow much faster, 18 per cent said they will grow faster and 20 per cent said that they will grow at a normal rate.
As mentioned earlier, this survey was conducted among the social innovation start-ups that benefited from the program ‘Social Innovation Lab (SIL)’ run by Pune International Centre (PIC). At the end of the survey, social enterprises were asked how they were benefited from the SIL program. 75 per cent of social enterprises stated that knowledge transfer has been increased. 52 per cent stated that the program helped them to achieve the goals and objectives of their social enterprise. 50 per cent stated that the program has developed the leadership skills in the enterprise. 32 per cent said that their internal network became stronger. 20 per cent of social enterprises stated that the program has improved smart succession planning. 32 per cent of respondents said that they got motivation for professional development and accountability. 18 per cent of social enterprises stated that the program has improved their staff retention.
Figure 7: Program Benefits
Conclusion:
Growing recognition but lack of awareness about social enterprises: 25 per cent of the social enterprises reported that there is a lack of understanding or awareness among the banks and supported social organizations. 30 per cent also stated that there is a lack of awareness among the public and customers about social enterprises’ goals and objectives. This lack of awareness often causes the social enterprises to be neglected when they are going for the funds, fundraising either through equity or through debt funding. The work should be done by social enterprises among the banks and other financial institutions to create awareness so that they can differentiate between the commercial and social start-ups, their objectives, impact and needs. Government needs to encourage the banks and other financial institutions to fund more social start-ups. CSR rules need to be amended so that start-ups can also get CSR funds. As of now, only NGOs are eligible for CSR funds.
The lack of infrastructure and resources limits the start-up from expanding its operations. Access to smooth finance is a still a challenge for the majority of social enterprises. Hence, working in the rural part of the country or tribal areas becomes difficult for social enterprises. This is one of the main reasons that most of the start-ups are having their main offices in the metro or tier-one cities.
Lack of Skills:
There is a high potential for productivity and energy to flow from a country where more than half the people are under 35 years of age. Social enterprises are looking to hire more people but staffing is still one of the most common obstacles faced by social enterprises, with 27 per cent of social enterprises reporting a shortage of managerial skills and 25 per cent of social enterprises reporting a shortage of technical skills.
There should be the growth of professional skills to enable an effective and fruitful social enterprise ecosystem. Skill development should start from the early academic stage. More educational institutions, both private and government, should deliver the courses to equip young professionals with the management skills necessary to lead social enterprises and the technical skills necessary to drive forward their activities.
Social innovation start-ups in India need significant further support from key stakeholders to fulfil their growth potential, attract talent, have policy influence, and secure investment. It is becoming increasingly important for the government to create and promote awareness of social entrepreneurship and enterprises. More colleges, universities and research organizations, think tanks need to encourage an entrepreneurial mindset among young people, particularly one geared toward tackling social challenges in communities and generating more jobs.
Lesson for future research:
A large and more representative sample for the future survey would be more useful for a better understanding of the social enterprise sector. Also, studies about specific regions within India can be delved into for a deeper understanding and overview of social enterprises and capture regional ecosystem, challenges, needs, lessons and shades effectively.
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