How do social enterprises make money

Can you earn (a lot) money with good ideas?

You can also discuss rhetorical questions splendidly, as demonstrated in an evening at the WU start-up center with Lena Gansterer (ImpactHub Vienna), Werner Wutscher (business angel) and Martin Wesian (helioz founder). One thing was quickly agreed: Why should the good, social entrepreneurs not be allowed to get really rich when the bad (within the framework of the law) with the harmful ideas are also allowed?

Much speaks against it

One can see Max Weber's distinction between ethics of conviction and ethics of responsibility, as suggested by Fred Luks in the introduction. For the ethicist it is not enough that good arises as the result of action; the mind must also be good through and through. Pecuniary motives are harmful here. Ethics are difficult to reconcile with social entrepreneurship, and many of the critics of social business are ethics at heart.

The more exciting question is whether you can even earn a lot of money with social business. Much speaks against it. First, the empirical evidence: We are not aware of any really rich social entrepreneurs. The Maserati and Jaguar drivers exist as black swans, but these are more social managers than social entrepreneurs. They always remain exceptions, the normal social manager earns a fraction of a profit manager with a comparable range of leadership and responsibility.

Second, the economic theory. Social enterprises are companies that primarily pursue a social or ecological goal and that generate at least half of their income from the market. There are three types:

Three types of social enterprise

· The first guy that Integrative, includes companies that integrate people into the production process who would otherwise hardly find work and that are in competition with profit-oriented companies on the sales market. Examples of this are magdas Hotel in Vienna, but also most of the work integration companies and socio-economic companies.

· The second guy that Innovators, includes companies that manufacture products or services for which there is (currently) no functioning market because there is no solvent and willing demand. Examples of this are bottom-of-the-pyramid providers such as helioz, who have developed an effective technology to sterilize polluted water. This also includes Mohammed Yunus's Grameen Bank, which popularized microcredit and made its founder a Nobel Prize winner. In a broader sense, the providers of new social services (e.g. care, learning aids) also fall into this category.

· The third guy that integrative explorer, are companies that both integrate disadvantaged people into the production process and solve social problems with their products and services. You will discover completely new solutions through a novel combination of production factors. One example of this is Discovering Hands, blind women who can feel breast cancer. Another is Capito from atempo Graz, where people with learning disabilities help to write more understandable texts.

No optimistic forecasts

In a functioning market economy, none of the three types has an optimistic forecast. Compared to capitalist competition, the integratives have productivity and efficiency disadvantages, which in the best case can be compensated by skimming off an extra consumer surplus. The socially engaged consumer may be prepared to accept poorer quality or to pay more for the same quality. If this increased willingness to pay is stable, the competition with social sales arguments will also come, e.g. B. in terms of intensified CSR. It is unlikely that the integratives will be able to survive without public grants or donations, as productivity disadvantages persist because of the integration goal. Should these disadvantages turn into advantages, e.g. If, for example, the ethnic diversity of the workforce leads to a special quality of service, imitators will quickly be found on the market. These social enterprises are thus taking on an important pioneering role, but anything but a cozy market niche. As with classic NPOs, their greatest success would be that they become redundant.

The same applies to innovators. These are often entrepreneurs in the sense of Schumpeter: completely new products and services for new markets, against the previous rules. If innovation and market development succeed, the imitators are ante portas. Often these are financially strong multinationals who buy the ideas, discreetly dispose of the social goal and then earn a lot of money. In India, for example, microcredit was scaled in a way that resembled an epidemic proliferation of loan sharks. So helioz turned down an immoral takeover offer because the bidder wanted to shorten the lifespan of the helioz product for profit-increasing reasons. Like many high-tech start-ups, social entrepreneurs are also faced with the alternative of earning quick money by laying off children or developing the baby themselves with an uncertain outcome.

The niches are tight

Only for integrative explorers is there a more optimistic long-term perspective. In economic terms, this is explained by a privileged access to special resources - the specific talents of disadvantaged groups - in connection with a product innovation that finds a market niche and can occupy it thanks to a quality stance. However, as the examples of this type show, the niches are narrow and the social entrepreneurs can lament the hardships of scaling and the limits of scalability.

As an ethicist, one can stick to whether one is allowed to earn a lot of money as a social entrepreneur. The economic analysis shows us the irrelevance of the question.

This is the bad news for social entrepreneurs: they are very unlikely to get really rich. With a lot of passion and commitment, they can survive, also thanks to public funding, donations and awards. Some mutate into completely normal entrepreneurs. This ambivalence also explains why the direct SROIs (Social Return on Investment) of social enterprises are noticeably low compared to traditional NPOs. The values ​​only rise when the time horizon is extended and indirect effects are taken into account.

That is the good news for business and society: Social enterprises can change systems even if they are economically unsuccessful themselves. The pioneers of CSR have already shown how this system change works. The Body Shop, for example, has permanently changed the cosmetics market. Even if a single social start-up should not survive, it can help to change the institutional rules in markets and thus make the world a little better again. (23.2.2017)

To the people:

Michael Meyer is a university professor for business administration and scientific director of the competence center for NPOs and social entrepreneurship at the Vienna University of Economics and Business, while Reinhard Millner is senior researcher and head of social entrepreneurship there.