By Joy Lee, March 25, 2019
THE notion of social impact is growing among entrepreneurs. More and more startups are taking the form of a social enterprise, where their businesses are built around a social mission.
According to the British Council, it is estimated that there are over 20,000 social enterprises in Malaysia.
But there is always room for more. Social enterprises present a significant opportunity to generate employment, support vulnerable and marginalised communities and realise sustainable development goals as set out by the United Nations.
Of course, it is not only about social impact. The sector can also contribute significantly to the economy.
In the UK, research notes that there are around 100,000 social enterprises contributing £60bil to the UK economy and employing 2 million people. In total, social enterprises are estimated to be worth around 3% of the UK’s gross domestic product and 5% of all employment.
Locally, the social enterprise sector is said to be vibrant and growing. But awareness and understanding of social enterprises still have a way to go.
A recent report published by the British Council, titled “The State of Social Enterprise in Malaysia”, highlights the lack of knowledge among these enterprises about an existing and workable social business model. This could be a barrier for them to grow as they seek out a sustainable model that balances making a profit with making an impact.
Additionally, low public awareness on the sector makes it difficult for these companies to garner support from consumers and investors, which also makes it difficult for them to scale up.
According to the report, one of the most common financial challenges faced by social enterprises is low access to investors due to limited supply of capital (46%). It notes that investors remain cautious when it comes to investing in social enterprises due to a lack of reliable information and data on the sector.
The report, produced in partnership with United Nations Economic and Social Commission for Asia and the Pacific (UN ESCAP), Ministry of Entrepreneur Development Malaysia and Yayasan Hasanah, covered responses from 132 organisations.
“In terms of actual activity on the ground, that’s been a bit more challenging, largely because of the size of the market, which is smaller than other Asean countries like Indonesia or the Philippines. The markets there are much more vibrant and the scale of the market means bigger opportunities for general entrepreneurship, which spills over into social entrepreneurship.
“So you see a lot more venture capitals moving into those countries and they are starting to see how they can switch from venture capitalists to social funds.
“So the government has to solve the problem of scale (here),” says British Council global social enterprise partnerships and development lead Tristan Ace.
In Malaysia, the most common source of funding was bootstrapping (39%) with many social entrepreneurs pitching in their own resources to start or sustain their ventures. Other sources of funds were through donations (32%), foundation grants (26%) and government grants (25%).
The funds obtained are mainly used for operational costs (62%) and purchasing or maintaining equipment (52%).
Operating costs remain a huge obstacle for social enterprises as they often report having insufficient revenue to cover these costs, the report says.
Most startups, including social enterprises, face challenges in accessing mainstream finance institutions. This, again, is probably due to the uncertainty about their business models and sustainability of the companies.
Interestingly, though, the British Council report found that social enterprises in Malaysia are largely viable and successful businesses. About 37% of the respondents were making profits while 32% were breaking even.
In 2017, the social enterprises surveyed generated an average revenue of RM234,071.
Also, a majority of social enterprises are looking to grow their operations by introducing new products and services, acquiring new customers and expanding geographically.
But while growth is good, Ace cautions the industry from focusing too much on scale.
“I think there is this fixation on scale. And I think that might be the wrong question (for funders) to be asking. Would you rather have one superstar social enterprise, or 1,000 small robust, community-driven enterprises that are each creating 10 jobs?
“I would say the second solution is a more sustainable, robust and resilient system to have instead of focusing on superstar social enterprises,” he says.
“Social enterprises typically don’t achieve scale, because if you look at the character of a social enterprise, they are focused on a particular vulnerable population. So inevitably, those businesses are difficult to scale. So they don’t scale and they are not supposed to scale. You might franchise them or use different ways to achieve scale.
“It’s not that social enterprises are bad at scaling. It’s just the model doesn’t allow it to. And that is absolutely fine.
“Having said that, it’s a diverse ecosystem. Some social enterprises are small, and some can scale. And we shouldn’t criticise the ones that are small,” Ace adds.
As such, the sector needs “patient capital”, where funders are willing to give their money and expertise and allow the business some time to establish itself before focusing on growth.
He says these companies could seek out funding from a mix of sources including grants.
An investor who has experience investing in social enterprises points out that investors typically look at three criteria before putting their money into a company: that company’s ability to be sustainable financially, scalability and its social impact on society.
In a panel discussion during the launch of the British Council’s report, YTL Foundation programme director Datin Kathleen Chew notes that there is a need for an assessment framework that will help social enterprises and the other players in the ecosystem better assess their impact. This could help raise awareness and attract funding for social entrepreneurs.
The panel, moderated by Malaysian Global Innovation & Creativity Centre’s Global Accelerator Programme manager Yusuf Jaffar, included UN ESCAP’s representative Maame Agyeben, Ministry of Entrepreneur Development representative Ariffin Samsudin and Earth Heir founder Sasibai Kimis.
Unleashing the full potential of social enterprises requires an improvement of system-wide coordination between ecosystem enablers.
Observers note that the Malaysian government has been very encouraging towards social enterprises, with initiatives such as tax breaks for investors. However, there needs to be greater alignment between various policy measures, which currently seem somewhat scattered.
The report also provides several recommendations to further develop the social enterprise ecosystem. One of which, is to improve the flow of finances to these companies.
“Cash flow management, in particular, remains a significant challenge for many social enterprises. While most Malaysian financial institutions cater to SMEs and larger corporations, there are not as many avenues available to social enterprises seeking capital,” it says.
It urges regulators to promote available initiatives that are relevant to these companies and for more financial services to be extended to them.
Another tool that will help the ecosystem is to develop impact assessment practices.
Funders say there is an acute lack of information for assessing social impact and policymakers are increasingly interested to see better data to monitor the impact of the sector. At the moment, investors are developing their own metrics, some of which may be confusing and complicated for social enterprises to implement.
“There is an opportunity to develop simpler, more coherent and consistent impact assessment approaches, and translate them to methods and tools that small-scale social enterprises can practically carry out without negatively impacting their work.
“Funders working with social enterprises should collaborate with each other to develop common protocols and tools that can be implemented by all stakeholders.
“At the central level, relevant ministries and agencies can act as clearinghouses for resources and establish an overall guideline framework that can be adopted based on the needs of both funders and social enterprises,” the report notes.
There is also a need to ensure that practices and resources are accessible to companies outside of the central region.
Additionally, social enterprises need to improve their business skills and hone their business models to ensure a more sustainable setup.
The report recommends more government support in the area of educating and nurturing social enterprises beyond the ideation stages. Ace adds that there could be more bespoke accelerator programmes that tailor specifically to the needs of the sector.
Social enterprises should also look into succession planning to help the organisation remain sustainable apart from its founders.
“It’s about developing all the different parts of the ecosystem. So it’s getting a robust intermediary layer, incubators and accelerators. The government here has done a good job so far.
“Having (the government take) that leadership is important. It sends a signal to the market to support the sector,” Ace concludes.