Monthly Article(April 2017): Innovative pathways to scale

In our April newsletter, we focus on pathways to scale up.  Over the past several years, there has been a tremendous growth in the number of new social enterprises in Hong Kong.  This has been a result of the international spotlight on social entrepreneurship, and also local government and institutional efforts to support and fund them.

(For Chinese Version, you may refer to 創新企業的擴展之路-張凌瀚)

Chinese University Hong Kong Social Entrepreneurship Challenge, initiatives launched by the government’s SIE Fund, and my own incubator UnLtd Hong Kong have been amongst those supporting social entrepreneurs in recent years at the start of their journey.

Bolstered by the incentives and the encouragement, the result has been a ‘baby boom’ of social enterprises that have sprouted up in the past few years.

Initial funding allows these social start-ups to test and pilot their ideas, with grant funding anywhere between $5,000 to upwards of $400,000 for them to run in the initial years to refine their model for impact and financial sustainability.  However, this kind of funding can only last so long.  What I’ve found it that after this, the options for growth start getting quite slim after this period.

After those initial 2-3 years, let’s assess the main pathways for scale,

  1. Impact Investment
    One of the hot topics in previous years, we don’t hear it that much anymore. My assessment is because the deal sizes and the required due diligence of typical investments didn’t really quite fit with the size of investment that the companies wanted to make, and also the terms were not favourable enough for companies with short track records.  Some angel investors have made investments, but it’s still a limited number.  Still growing in other parts of the world in the scalable sectors like sanitation and renewable energy, unless you’re targeting mainland China or the geographical region with your product/service, this probably won’t go through.
  2. Venture Philanthropy grants
    In recognition of the lack of ‘investable’ opportunities, a small number of funds and foundations have focused on this investment unreadiness by providing grants to help them get to that sustainability. It’s also been called capacity building, and goes beyond giving funds, with some providing crucial contacts, networks and pipeline of deals for the company to grow.  Social Impact Partners and the Lee Hysan Foundation has been making some pioneering moves in this space, with both organisations for example supporting Blue Sky Energy Technology, a smart energy company in growing their capacity.
  3. Loans
    I’ve known a variety of companies that have borrowed money personally and also taken huge salary cuts (or not taking a salary at all) to run their social businesses. Not really a possibility in my experience as most banks don’t understand the models of social enterprises to give them loans. DBS has been making some strides in Singapore on this, but the program has not come to Hong Kong yet.
  4. Funding from various foundations
    For the social enterprises that provide more services and employment programs, many will rely for their future sustainability on winning contracts and grants from foundations and government schemes. They will then get a few more years at a time to continue their services, however, it is never very secure as these grants for 1-3 years, with no guarantee of future support after that.
  5. Self funded, and organic growth
    This means that you’re reinvesting all the profits back into the business, relying on organic growth, which will probably mean that your impact will grow, but very slowly, and not be able to scale to the size of the social issue.

These are the 5 general categories on which social enterprises have relied on to continue their work after that initial start up phase.  The options are limited, and to be honest, not that innovative!  What other possible approaches are available that haven’t been tried before to reach large scale, impact and sustainability?

This question of ‘what other possible options are there?’ have challenged me when I talk to the social enterprises we support, and it’s here where I want to present two possible options, which I’ve seen from other parts of the world, which to my knowledge have not yet been considered in Hong Kong.

  1. Have a larger company or charity ‘take you in’ under their wing. In the business world, that’s a merger and acquisition of your company.  Something founders of for profits look forward to as a way to reap in their years of personal investment, but in the social sector, definitely something that doesn’t happen often.  The recent examples of this has been when Save the Children and Merlin, two large international children’s charities merged in the UK back in 2013.  On a much smaller scale, the social enterprise local tourism company Tripbod was acquired by Trip Advisor in 2014, so they could integrate their product offering into the large web based tourism company.Of course, this process would be quite complicated, involving lots of negotiation from both sides, with each other and also with their own stakeholders.  Much more important than this is how the smaller start up needs to put aside their ownership of the company, and the larger charity needing to say, ‘we can’t do it all, so let’s bring in some outside inspiration’.  With the number of large companies and NGOs in Hong Kong, many with a healthy reserve, it’s not in the realm of impossibility for them to take under their wing a budding entrepreneur and their idea to incorporate into their services into their existing ones.  The biggest challenge here is not financial, it’s mainly one that requires a change of mindset from both established NGOs and startups on how to scale impact.
  1. Another approach is to share your model with the world, either franchised with a fee or openly sharing it. If impact and scale are the key, why not just develop something that can be shared and replicated by communities and organisations?  This approach has been done successfully on various scales.  Food Donation Connection (US), Campus Kitchens Project (US), FoodCycle (UK) and Disco Soupe (Fr)  have all varying degrees of sharing their model to empower local communities to replicate their work.  You don’t need to start your own organisation.  Just replicate what others have done and be part of a network of people doing the same thing.

The main challenges to all these things again is not how to do it, but actually a mindset, a mindset of a founder becoming an employee of a bigger organisation, who might see it as a failure if a merger was taken (instead of celebrated as it would be in the commercial world), or seeing that replicating something is less honourable than founding your own company.

What does this mean for the funding community?  For the forward thinking foundations, consider capacity building grants to fund mergers, rewarding collaboration and scaling up on synergies.  We don’t need new ideas right now, we just need to scale up the many ideas that actually work.

Hong Kong has a long list of social issues that we must tackle, and I’m afraid that if we continue to use the traditional scale up approach, the issues are actually going to grow faster than perhaps the solutions.  If we are to really put social impact as a priority, we must match our innovative solutions with innovative ways to scale up.

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