#06 innovation
Paula Cardenau

Empowering Communities with a Social Business Approach

What do Greg van Kirk, Tri Mumpuni, David Kuria and Moses Musazi share? Many things, probably, but one of the most relevant is that the four of them – like all members of the Community Impact Development Group (CIDG)[1] - are implementing innovative and effective solutions for energy provision, health, and sanitation in underprivileged communities. These are not just short term solutions either; they are systemic. They change the rules of the game by transferring power to those communities.

How do they do so? Solutions are designed and implemented together with the communities, guaranteeing long-term empowerment. They enable access to affordable new critical technologies that improve the lives of community members and they have a market-based approach that both spurs local economies – creating new assets and generating business opportunities – and guarantees the economic viability of the model, making them scalable or replicable in other regions.

Electricity through start-up technology

Tri Mumpuni brings electricity to rural communities in Indonesia, where 110 million people from a total population of 240 million still do not have access. How is IBEKA [2], her organization, achieving this? By building community-owned micro hydropower systems that go beyond providing electricity for lighting, also contributing to unleashing local economic power. Small off-grid 0.5MW plants help increase local productivity (i.e. agribusiness), and larger 2MW plants enable the community to sell electricity to the national grid and benefit from a streaming monthly income. In both schemes, IBEKA facilitates the creation of a local cooperative and provides start-up technology and training to operate the system, then reinvests the income in local development priorities such as infrastructure improvement, health care or basic education scholarships.

A "toilet mall"

In a similar way, in Kenya, where an estimated 69% of the population does not have access to a safe toilet or latrine, David Kuria has devised the Ikotoilet, which bundles toilet and shower facilities with other services to create a "toilet mall" that includes shoe repair, food and drink stands, and phone booths. This combination removes the stigma of being associated with a toilet as a user or proprietor. This is both a powerful incentive for people to use them, and also creates viable enterprises for young people. In order to guarantee the consumer's needs are met, local communities participate in the design of the facilities. Even when users pay a fee for services, the model's viability relies heavily on other sources of revenue like corporate sponsors who place ads in the facilities, or processing urine into urea for organic fertilizer. In this way, Ikotoilet [3] is not only setting new standards in sanitation and transforming social behaviour; it is also making sanitation an industry ready for investment.

How sanitary pads ensure school attendance

Moses Musazi, an engineer by training, discovered that girls in Uganda drop out of school because they don't have access to sanitary pads or know how to deal with menstruation properly. Shame, fear of being mocked and social exclusion force them to miss school when they have their period. This leads to dropout and often results in them being forced by their families into early marriages. Half of Uganda's population – 17 million – are women and 70 % of them live on less than one dollar a day. Moses researched and tested the technology behind sanitary pads, then designed an affordable and environmentally friendly papyrus-based sanitary pad. It is 95% biodegradable and costs over 50% less than the next cheapest brand on the market.

Furthermore, the pads generate employment for local people, who can operate small-scale factories in their backyards because Moses invests in the construction of small, hand-operated processing machines and provides training. Just to put this in perspective, a US$ 20,000 investment enables access to sanitary pads for 19,000 schoolgirls and provides employment for 130 socio-economically disadvantaged members of Ugandan society. Moses is planning to reach out to other East African countries and to include biodegradable diapers in the product line.

New business opportunities for village women

Greg van Kirk has created the MicroConsignment model, a leap from well-known microfinancing that enables the distribution of critical products – such as solar lamps, reading glasses, water purifiers or economic stoves -- in isolated rural villages in Latin America. How does this work? The local entrepreneurs – typically women – are provided with products and sales training and do not have to pay for the goods until they have sold them. Unlike other micro-franchise solutions, Community Enterprise Solutions [4] funds the working capital for the entrepreneurs and removes any risk of unsold inventory. Furthermore, local entrepreneurs have the chance of becoming co-owners and operators of the local company and training new employees to become social entrepreneurs in their own communities. In this way, MicroConsignment opens new business opportunities for village women while providing their neighbours with access to products that contribute to making their lives healthier and more productive. The model originated in Guatemala, and now has expanded to Nicaragua, Ecuador, Argentina and Perú.

The importance of community impact

These examples back up the statement: "in a social business, community impact comes first", a fundamental insight and claim that CIDG members want to voice in the impact investment field. But what does community impact mean for a social business? As the four examples show, it goes beyond providing access to needed and desired goods and services. It must include stimulating ownership and empowerment through diverse strategies. These include sharing revenues and assets with the community, opening up management opportunities for community members, the total transfer of know-how and technology, empowering community members as co-creators of a solution, and becoming implementation partners on the ground. These guarantee revenue and power transfer to the community, generating new skills, dignity and ownership.

Being community impact driven therefore has implications for the business model. Social enterprises cannot be funded using the same logic as a traditional business. Mathew Bishop, in his article "The Capital Curve for a Better World" [5] states that this is the key to understanding how the capital curve for social businesses works, and insists that: "the challenges they face are arguably far harder than those confronting commercial entrepreneurs, not least because the primary goal of a social entrepreneur is not to generate revenue and profit, but to generate less financially tangible but socially more valuable returns on capital".

A new perspective

New, more creative and flexible financial tools are needed if we want social businesses with community impact to grow. Investors typically blame social enterprises for "not being ready" for investment. This may be true to some extent. But from our experience working with social entrepreneurs who want to attract growth capital, we can provide a different perspective: the problem is not just related to how ready a company is to receive investments. It also lies in the structure of venture capital funds that impose major constraints on funding social enterprises. They require a clear exit strategy, though a social entrepreneur is probably not willing to sell the company. Funds still expect market rates for return on investment, and have to try to figure out how to monetize the social and environmental return on investment of the social companies they want to invest in. The structure of a typical venture capital fund is probably not the most adequate financing mechanism for a social business. We are seeing evidence of evolution in the impact investment field, and suggest that financial tools of this kind should have elements such as below-market interest rates, exit strategies based on cash flow and not the sale of the company, loss cushions to mitigate risk and attract more traditional investors, and time horizons long enough to allow the social business to start repaying, among others.

Social entrepreneurs, on their end, need to have a deeper understanding of their business model, the stage they are at and their ideal type of funding – in short, financial literacy. There is no magic recipe here, and over the lifetime of a social enterprise, diverse types of funding – grants, credits, quasi equity, and equity – are needed. There are some hints, though, that could make balancing options easier for an entrepreneur. One element to consider is the role of the community in the business model. If the business seeks to reinvest a significant portion of the profits back in the community, it is likely that equity – where profits are distributed back to investors – is not the best option, as it will generate tensions related to issues of governance and control.

In any case, a crucial aspect in any financing strategy for a social business is to safeguard its social mission by creating a strong corporate governance structure that allows the social entrepreneur to retain primary control of the organization, even in times of growth. In addition, experienced social entrepreneurs cannot stress enough the importance of only bringing on board investors who are strongly aligned with the social mission of the company.

Empowering communities through market-based solutions that stimulate knowledge and power transfer, technology access, and asset building is possible. Still, one of the main challenges to scaling up or replicating these solutions is how to build bridges to close the gap between capital demand and supply. As Greg van Kirk states "The big question is how we bridge impact with impact investment. As a sector, we need to bring together the potential of social entrepreneurs and impact investors in order to scale up change".

Links

[1] The Community Impact Development Group (CIDG) is a cooperation of Siemens Stiftung (Foundation) and Ashoka. Working under the motto "Technology for Human Needs," the CIDG is a network that unites people who want help their communities. The social entrepreneurs selected use technologies to develop products and services to improve living conditions in their home countries. The network offers them the opportunity to share their experience and apply the knowledge they acquire to further develop their own enterprises.

[2] Yayasan Institut Bisnis dan Ekonomi Kerakyatan (IBEKA) (Indonesia)

[3] Ikotoilet (Kenya)

[4] Community Enterprise Solutions (CES) (Latin America)

[5] The Capital Curve for a Better World (Feb 2010)

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