A growing number of civil society organizations are exploring ways to generate alternative funding streams with social enterprise and earned income models. Earned revenue can help organizations weather funding shortfalls and reduce dependence on donor support, but runs the risk of distracting from critical work or traditional fundraising efforts. The costs and human resources required can be significant, but organizations that effectively navigate these challenges can unlock increased flexibility and sustainability.
Over the past two years, the Open Society Foundations have supported over 40 organizations in the legal empowerment field as they experiment with earned income models. We have employed a variety of support models: human-centered design workshops, earned income accelerator courses with Acumen Academy, and two country-specific cohorts with intensive consulting and direct mentorship in South Africa and North Macedonia. Here, we share some of the key lessons from these efforts, many of which are still ongoing.
Most frontline staff and leaders of these organizations are expert community problem-solvers, relying on exactly the same type of flexible and iterative thinking required of entrepreneurs. A deep understanding of community needs and a problem-solving mindset are crucially important to building successful social enterprises.
Below, we offer four key lessons learned from our work. In a follow-up article, we will share promising earned income and social enterprise models from the legal empowerment field.
1. Developing a sound business model is crucial, but applying business thinking is not enough on its own.
Most social enterprise courses, accelerators, and workshops emphasize the development of effective business models – using tools like the social business model canvas to identify a target customer, consider costs and pricing, define distribution channels, and determine a value proposition. This work is important, but can be challenging for organizations that are ultimately accountable to their boards and beneficiaries rather than shareholders and customers. Drawing in new stakeholders (customers, investors, suppliers, distributors, etc.) alongside an already-complex web of donor priorities and beneficiaries is a daunting prospect, and requires the organization’s leadership to prioritize attention, time, and staff resources effectively.
A deep understanding of community needs and a problem-solving mindset are crucially important to building successful social enterprises.
In some cases, it may be easier for an organization to address a need in their geography or field – such as renting existing office space, collecting member dues, or charging for services that people are willing to pay for. However, some stakeholders might be better positioned to pay for products and services than others, and organizations will have to carefully weigh trade-offs in how they work with beneficiaries. Great ideas may still fail if they undermine their organization’s core mission.
The Health Education and Research Association (HERA) in North Macedonia, a participant in our accelerator and mentorship programs, illustrates this difficult balance. The organization launched a social enterprise called Nega Plus to train and place Roma women as caregivers for the elderly, thereby addressing a crucial market gap for in-home care in the country. While the organization could likely generate a larger surplus if it hired previously certified caregivers, part of its core function is to empower women in the Roma community, and thus it invests significant resources into training and mentoring activities for its employees, who do not begin with prior professional qualification. This approach is not the result of business thinking alone, but rather a careful process of blending mission and market opportunity.
2. The local context and enabling environment matters. A lot.
Organizations also may face particular challenges, or be able to leverage unique opportunities, based on where they are located. For example, in many countries, legal frameworks for social enterprises may be lacking or nonexistent, which requires organizations to be careful not to jeopardize their charitable status and articulate how they intend to use the funds generated by a social enterprise.
Another key factor in the enabling environment is whether a local social start-up ecosystem or peer learning community exists. Many social entrepreneurs find great value in attending workshops and gatherings with peers that have already navigated the challenges of launching successful social enterprises within their own context.
Lastly, the availability of local investment capital is an important factor of the enabling environment, whether from private investors, traditional donors, or public entities. It may be difficult to find sufficiently ‘patient capital’ for a fledgling earned income idea to begin generating returns locally, and while foreign capital may sometimes help avoid certain local biases, it comes with its own risk.
Through our work with legal empowerment organizations, we have seen all of these environmental factors at work. For example, lacking a national social enterprise legal framework in North Macedonia, local organizations often express confusion about how to demonstrate a proper relationship between the social enterprise activity and the core nonprofit operation. A generally low level of awareness of social enterprise and few investors or financial instruments means that local social entrepreneurs have relied on private philanthropy or public funding (such as from the European Commission). However, we have also seen how organizations like Public MK and CEED are developing peer learning networks to advocate for a national strategy and a clear regulatory framework for social enterprises.
3. To identify opportunities for earned income, organizations should think less about “mission alignment” generally and more about their particular role in the community.
Many social enterprise experts argue that organizations should seek to develop earned income streams that align as closely to their mission as possible. For some organizations, this may be a viable option, but for those working with communities that live in extreme poverty, reaching a paying customer may be very difficult without significantly deviating from their existing programs and operations.
It is crucial to get buy-in from the entire team and community stakeholders, and set realistic expectations.
We have seen the value of mission-aligned social enterprise models in our work, but have also observed that some organizations discover viable earned income streams by thinking deeply about their role in the community, rather than the specific mission or services they receive donor support to provide. For example, the Kgatelopele Social Development Forum (KSDF), a paralegal network in South Africa, discovered from their work with the community that food production was a viable earned income stream, even though it did not relate directly to their mission to provide community legal advice.
4. It takes time, dedication, and experimentation to develop a successful social enterprise. Donors should invest in this process, rather than just investing in the promising models that emerge from it.
It may sound self-evident, but this point is often overlooked. Social enterprise ideas rarely emerge ready for investment without a significant period of experimentation, testing, and iteration upfront. It is crucial to get buy-in from the entire team and community stakeholders, and set realistic expectations. Many organizations choose to designate a specific social enterprise staff person as responsible for testing a variety of business models. It is critical that this person receives support from the whole organization, especially the leadership, given the likelihood of early failures on the way to achieving something new.
Of course, for most community-based organizations, staff capacity is the single most valuable and scarce resource. Funders can support mentorship programs or dedicated staff time, rather than simply waiting for a particularly promising idea or trying to graft a model from one context onto another. Funding experimentation spaces (incubators, accelerators, workshops, etc.) that are responsive to an organization’s context, values, and priorities is a critical role for funders hoping to support sustainable earned income and social enterprise models.
For example, alongside Open Society Foundation for South Africa we supported a mentorship program for Community Advice Offices, grassroots organizations that provide critical legal advice and advocacy to communities across the country. Like the other cohorts, online accelerators, and innovation workshops we funded, the intention was to share fundamental social enterprise approaches, and then to create a space for peer learning and exchange among organizations. We did this recognizing that Community Advice Offices are best positioned to identify and test the ideas that make sense for their own contexts.
Our approach embraced core legal empowerment values: 1) a focusing on bottom-up strategies that build community power and agency; 2) leveraging participatory co-design methods that build solutions with, not for, affected communities; and 3) linking resourcing efforts to grow opportunities for systemic advocacy and policy change, not just direct services. For community-based organizations, innovation comes from exchanging experiences, iteratively testing new approaches, and centering the knowledge and needs of the community. The quest to uncover earned revenue streams can (and should) be informed by these principles.