How Social Enterprises Can Take Off

Innovative start-ups have multiplied in recent years in Italy. In 2016, nearly 7,000 of them were founded, a 40% increase with respect to the previous year. The evolution of the legal framework for the so-called third sector and the growing orientation toward social entrepreneurship are the drivers behind the creation of numerous social startups.

Social startups are particularly relevant given the increasing economic weight of not-for-profit organizations and the growing recognition that social entrepreneurship will be an effective lever to reform the welfare system and build a new economic model for sustainable development.

Putting innovative startups next to social enterprises is not new, but recently the Italian legislator has introduced the legal form named "innovative startups with a social vocation" (the Italian acronym is SIAVS), encouraging the creation of startups in the areas pertaining to social enterprise (such as health care, social care, protection of environment and cultural heritage, education and training).

Just like their market counterparts, the biggest problem for non-profit startups is raising capital. In the 2016 reform of Italian non-profits there are financial incentives to enable social firms to act as economic drivers for the recovery of investment and employment. In particular, it is possible for all types of social startups to raise capital through crowdfunding. There is the possibility to use a range of financial instruments to access capital markets, also for large companies that undertake initiatives to pursue their corporate social responsibility (CSR) strategy, thanks to the tax advantages granted to social startups: for equity investors, companies that pay the IRES corporate tax and invest in SIAVS can deduct from corporate income 27% of the funds given, while private individuals paying the personal income tax (IRPEF) can deduct 25% of their contributions to non-profits from taxable income. And the financial industry is also evolving on the debt front, with the introduction of the first Italian social impact bonds.

In addition, several social incubators have emerged; these are organizations that promote and support projects and innovative ventures with a positive social and environmental impact through a wide range of activities and services. They are themselves business initiatives that act as an engine for social change and sustainable economic development in the society and region where they operate. They offer structured service packages and mentorship or fellowship programs often related to a theme defined by the sponsoring agent, who will then act as lender for the incubation process as well as provide cash prizes to winners of startup competitions such as, for instance, the Milan Impact Hub Fellowship for e-health with AXA. Then there is the growing use of charity auctions to raise money (Charitybuzz, CharityStars, etc.).

➜ Measuring impact means attracting investment
Finally, with regard to sustainable enterprises, the ltalian Budget Law of 2016 has established the benefit company, a for-profit organization that while carrying out business activities simultaneously pursues beneficial ends, by operating in a responsible, sustainable and transparent way vis-à-vis people, communities, territories, environment, property and cultural activities, social organizations, associations, and other stakeholders. It is a strategic and reputational opportunity for companies and entrepreneurs who want to enhance their CSR profile, by integrating it in their corporate mission and governance. Although working in different spheres, beneficial companies and social enterprises have points in common. Finally, let me recall the new Social Italy Foundation that promotes social entrepreneurship, corporate philanthropy and corporate social responsibility, and will give a further boost to the diffusion of startups, be they for-profit, non-profit, or low-profit organizations.

Summing up, given that the Italian non-profit sector is undergoing a great transformation, for an even more rapid spread and growth of social startups it is necessary to create a culture of measurement regarding the impact and social value generated by non-profit initiatives, in the attempt to provide an objective representation of the change created. Although it is true that high-tech companies can have a positive impact on the welfare of a community, for this impact to be really obvious, it must also be measurable. Many studies point out that impact measurement is also an accelerator for experimenting with new forms of private financing for charities.

In this regard, one of the most widely used indicators is SROI, Social Return On Investment. However, since this indicator combines actual social impacts with economic variables, in analyzing a real-world situation one needs to adapt it according to time and place, and nature of the initiative being assessed. At the same time, the biggest challenge is to make SROI a general-purpose indicator, which would provide a measure as objective as possible of the return on capital invested in the third sector. This for two reasons which are equally fundamental. Firstly, because a private investor who decides to fund a social startup needs to see that her investment is generating a result (and, among other things, she can more easily understand in which start-up it is better to invest). And secondly, because in terms of welfare, measuring means making the mechanism more transparent and providing incentives for growth in the financial resources coming from the private sector, in times when public funding is shrinking. This could mean additional jobs and opportunities for the non-profit sector. Ultimately, it could turn working for the good into good jobs.

➜ Thus Malanchini's fund helped Nazca miners
"Finance is not neutral," says Fabio Malanchini, co-founder of Impact Finance, a fund that supports companies and organizations capable of generating both profit and impact. "The act of investing shapes the real economy: non-profit actors should do well to remember it." Malalchini graduated from Bocconi with a thesis on developing countries,and arrived at impact investing after extensive experience with microfinance, combining the economic skills he acquired with an ethical idea of the economy. He is among the creators of the consulting firm Microfinanza and of MicroFinanza Rating, a rating agency that assesses the risk profile of microfinance institutions. The next step was to create Impact Finance with some business partners. "We wanted to prove that you can generate market return and positive environmental and social impact at the same time. It is an activity that combines the application of professional skills and technical knowledge with an ethical aspect that provides meaning to one's work".

Among the first investments made by the fund was a stake into the Sociedad de Trabajadores Mineros in the Nazca region of Peru. A group of miners had bought a concession for the extraction of gold, by creating a company that worked as a co-op in an industry where exploitation of labor is rife. It was met with lack of interest by the country's banks, since the company is located in a remote place which is at an eight-hour drive from Lima. Impact Finance intervened to help the miners structure the plant needed to process the ore and extract the gold, an operation of integration which gave the employee-owned company higher margins. "The bottom line is that to be social and environmentally sustainable, you also need to be economically sustainable, at least in the medium-to-long term. It's a win-win solution." In such context, the valuation of social impact is crucial. "It's a reputational issue, but there is still no shared metrics although there is a lot of ferment and discussion. It is important to be transparent by explaining to investors the results achieved in terms of impact and the challenges posed in terms of measurement."

➜ Serena Porcari and Paul Newman's Own
Bocconi alumna Serena Porcari recalls the first steps taken at Dynamo, a foundation which aims to support the design and development of companies addressing social problems. It was 2004 and she had left a position at IBM to be in charge of a foundation yet to be born. "The philanthropic spirit was not my first motive," she confesses. "In front of me, I mainly saw a business challenge." Porcari then became passionate about the foundation's mission, and today she talks enthusiastically of the Dynamo Camp, a recreational therapy camp that is part of the SeriousFun Children's Network founded by Paul Newman. "Coming from the corporate world, I used skills and experience to work on a long-term business plan and start recruiting and training people. Established foundations looked at us as if we were Martians. Received wisdom said that the non-profit sector had to rely solely on charity donations, that it made no sense to invest, that only volunteers had to work there. But being motivated by a noble cause is no excuse to run things sloppily. Even volunteers have to be selected, trained, taken care of, just like company employees. Our choices have made a difference in the medium term: today Dynamo is financially sustainable." Dynamo inspires for-profit companies by working with them on volunteering, service to communities and corporate philanthropy projects. "The project makes available its expertise through a social enterprise, Dynamo Academy. Dynamo promotes social education, corporate citizenship and employee engagement through consulting and training services, and acts as source of inspiration for the corporation in times of organizational change." After more than a decade of work, Serena's greatest satisfaction is to see youth who took part in the first edition of the camp come back as part of the staff. "They return to give back what they received. This means that volunteering is not like being on a free holiday. It is an experience that can change your life."