Age of the Unicorns
As described by Thomas Friedman in his book, we are in an era where the year-on-year capacity of technology to do more and the ability of startups to scale up in the global market is witnessing hyper acceleration. This phenomenon has given rise to emergence of ‘Unicorns’. Quite simply, these are startups that have attained billion dollar valuations. Uber, Airbnb, Dropbox, Xiaomi, Flipkart and Ola are some of the poster boys of this league. Fathom this- According to a study done by Harvard Business Review, startups founded between 2012 and 2015 were growing in valuation twice as fast as companies from startups founded between 2000 and 2013.
So, why do these startups have such stratospheric valuations? A cursory look at the type of businesses these startups are into will reveal that all of them are associated with the Internet. All of them are part of the accelerating digital economy that relies on super-fast access to information, breaking down the restrictions of asset-driven industrial world and at a basic level, simply empowering people by giving them more choices in life.
Investors who invest in them do so because they are convinced that these startups have the ability to get big fast by quickly capturing a size-able market share in their industry, and out doing competitors through smart products thus returning multiple times over their initial investment. Thus unlike a listed company, startup valuations are a result of their potential to disrupt the industry which can deliver huge financial returns to their investors. While the high valuations does turn out well for the investors and founders alike, there are always questions related to sustainability of the startups in the long run.
Can Social Enterprises Become Unicorns
A social enterprise primarily applies itself to solving a single or multitude of socio-economic problems through resourceful and positive intervention by employing social innovation and principles of modern business management to create social impact. It is sufficiently different from a conventional business enterprise in that the key force driving it is the need to do social good.
Valuation of a social good business or a social enterprise depends on a double or sometimes a triple bottom line of profit, people and planet. The core of a social enterprise is the impact it creates. Thus the nature and scale of social impact determines its valuation. To understand a social enterprise, it is crucial to understand its impact model- how it creates impact while sustaining its operations.
Social impact is the hardest objective in the performance matrix of a social enterprise. It requires patience to build trust towards the organization within target communities. One of the prime features of social impact is the need to collaborate with several partners. Take Oorja Development Solutions. It is in the business of providing access to clean energy to rural communities by setting up agro-waste based power plants in their villages. It then hands over the operations of these plants to the local community thus encouraging micro-entrepreneurship. In this endeavour, Oorja needs to tie up with several NGOs and training partners in the field to achieve its twin objectives of social impact.
Secondly given the astounding scale of energy and economic poverty prevalent in India, a startup like Oorja can never expect to address it single-handedly. In all probability it will take multiple like-minded companies and organizations to collaborate with each other either directly or through the government to create a tangible country-wide impact.
Clementine Chambon & Amit Saraogi, co-founders of Oorja
Collaboration over competition is the golden rule of a social enterprise. This seems antithetical to the principles of valuation of a conventional business startup. In a potential situation of conflict between profit and purpose, a social entrepreneur is expected to weigh in favour of the later. As a matter of fact, to avoid purpose-drift, countries like the UK and the US mandate designated social enterprises to lock in their profits and reinvest them back in business.
It is evident that given the nature and philosophy of a social enterprise, it is practically difficult for it to attain the status of a ‘unicorn’ in the technical sense of the term. Would it not be counter-intuitive to expect a social entrepreneur to chase market share over number of people impacted or focus on cost cutting over employment opportunities for the bottom of the pyramid?
Well, I am not implying that social enterprises cannot be commercial success. Blake Mycoskie, Founder and Chief Shoegiver at Toms Shoes is a shining example of success in the world of conventional business. He started Toms in 2006 as one-for-one shoe company wherein he donated a pair of shoes to a needy person for each pair of shoes bought. Today, his company applies the same one-for-one model to a variety of eyewear, bags and coffee. Given his effectiveness at scaling his impact, Bain Capital acquired a 50% stake in Toms Shoes in 2014 valuing it at $625 Million.
Social Enterprises Need Not Be Unicorns
Valuation of a social enterprise is clearly not amenable to conventional methodologies followed by venture capitalists and investors. One of the biggest variable in this process is measuring the social impact created as well as the potential to scale it up beyond the original context. Acumen fund, one of the global leaders in the impact investment industry, follows a slightly different methodology to evaluate social impact models of entrepreneurs.Irrespective of whether they meet financial criteria, social enterprises that seek funding are universally expected to measure their social impact. An interesting article in Quartz, a digital media website, argues in favour of ‘Zebra companies’ as alternative to Unicorn startups.
It suffices to say that becoming an unicorn is barking up the wrong tree for a social enterprise that derives its sense of purpose from doing social good. Instead creating and sustaining social impact should be the major criterion of valuation and this can only happen when the business of social good can be re-imagined.