Implications of First-Stage Scaling on Operations

In the first article of this series, we explained how first-stage scaling requires complex decisions to ensure that an early-stage enterprise selects the right strategy and business model to move from incubation to its first attempt to significantly grow. Once the strategy is in place, execution will have important implications for the social enterprise. This post analyzes how first-stage scaling affects the enterprise leadership and the team, the governance structure and enabling environment.

Leadership and team

The right leadership is fundamental to the success of an enterprise. Leadership is necessary at all stages of development, including at business plan, incubation, first-stage scaling, and beyond. Leadership traits need to evolve from one stage to the next. At business planning and incubation, strong leadership entails bootstrapping and having very good knowledge of the product side. At first-stage scaling, it entails flexibility to redesign the enterprise strategy and business model for savvier market orientation.

Perhaps the single most important leadership asset of first-stage scaling is to develop a multi-disciplinary team that can meet the demands of the scaling process. This not only means having the right leader, but also making sure that he or she has the team needed for the job. Growing the team is an essential ingredient we’ve seen in a number of early-stage social enterprises we support. For example, two social enterprises in Peru, Koyllor—which sells highly efficient and environmentally friendly cook stoves—and Ingenimed—which designs and manufactures medical devices targeting low-income families—were founded by teams with strong engineering and product-development backgrounds. This proved immensely useful in the testing and launch phases of the enterprises, as prototypes were developed, piloted, and refined based on customer feedback. As the enterprises have grown, they have needed to recruit new team members with strong business acumen who can run the day-to-day of the business, and bring marketing and sales experience.

We find that recruiting middle managers is becoming a real challenge for social enterprises in emerging markets. In a fast-growing region like Latin America, attracting professionals with the right business skillset, values of the social space, and willingness to work for salaries below the private sector is proving difficult. Right now there is no shortage of entrepreneurs who come up with new social innovations, but there is a real bottleneck in the market for middle managers.

A central element of first-stage scaling is for enterprise founders to know when to delegate tasks to the team and when to make complex decisions on their own. For charismatic and visionary founders, this can be easier said than done. For many years we’ve worked with Raul Lucero, founder and director of Andar. Raul is a visionary and strong advocate of the right to work for people with disabilities in Argentina, and he has built his organization from the ground up. Raul launched a successful bakery with $1 million in annual turnover that trains and employs more than 120 people with disabilities. An important success driver of the enterprise and its readiness for scaling was the need to better organize the team, requiring them to adopt new responsibilities and the capacity to make certain day-to-day decisions on their own. As we began working on this process, it became clear that there was a high concentration of functions, roles, and decision-making in the founder’s position, which overwhelmed him with daily tasks, and prevented him from focusing on and advancing strategic decisions of the enterprise. We worked with the director and his team to change decision-making, delegate operational decisions to each coordinator of the organization, and empower middle managers to assume responsibility for decisions and their outcomes.

Governance and first-stage scaling

First-stage scaling sometimes requires changes in the social enterprise governance structure. This stems from having to adapt the governance model to the first-stage scaling strategy to facilitate growth. The reasons to adapt the governance model may be to comply with the legal environment, strengthen the overall management of the enterprise, or attract financing.

With regard to the legal environment, there is a lack of an enabling legal framework for social enterprises in emerging market countries. A good case in point is RODA, a pioneering organization in Croatia that is commercializing organic cotton products to promote natural childbirth and breastfeeding. NESsT incubated the enterprise as a nonprofit entity, and it quickly showed the potential of the model by reaching close to $500,000 in sales during proof of concept. As the enterprise began to plan its first-stage scaling process, it quickly realized that it would not be able to grow significantly under current Croatian law, which restricts the type of distribution channels through which nonprofit enterprises can sell. Importantly for RODA, the law severely limits nonprofit enterprise exports, an important market for the enterprise’s first-stage scaling. To circumvent this issue, RODA is currently incorporating its enterprise as a for-profit entity to reach a wider set of distribution channels, including exports.

Enterprises may also modify the governance structure during first-stage scaling to strengthen overall management. The enterprise leadership may decide to bring in additional skills to the enterprise, allowing outside experts to join the board or become partners in the business. In Argentina, we support Reciduca, a social enterprise running an employment agency that trains and places at-risk youth on the labor market. We’ve helped Reciduca expand its board of directors to integrate professionals with experience in entrepreneurship and private equity to assist with the growth of its employment agency. In addition, the organization (a nonprofit) created a committee of the board tasked with oversight of the employment agency, and external experts were invited to join the committee to advise on the growth and first-scaling strategy.

A final reason for modifying the governance structure is to attract financing. For nonprofit social enterprises, attracting any type of equity investment requires incorporating as a for-profit business. In Hungary, we support the social enterprise Fruit of Care, which sells attractive home decor and gift products made by people with disabilities. Fruit of Care was spun off from a foundation and set up as a business, which attracted the necessary capital from management and three other business partners (including NESsT) to set the entity on its first-stage scaling process (the enterprise now employs 200 people with disabilities).

Furthermore, accepting debt or equity may require policy changes in nonprofit enterprises. UPASOL, a recycling enterprise in Chile that uses profits to sustain a children’s rehabilitation center, successfully incubated its business with grants from NESsT. In first-stage scaling, NESsT offered the enterprise a patient investment in the form of a loan to expand its facilities. Until that time, the organization had an explicit policy to fund itself only through grants, and it had to revise this policy to secure the necessary loan to facilitate growth.

For-profit social enterprises may also need to modify their governance structure to attract financing. Working with one or several equity investors requires significant governance changes. The most obvious one is to share equity with an outside investor, which comes with a host of implications. There are many benefits to bringing investors into the social enterprise governance structure, including the injection of capital necessary for first-stage scaling, the expertise and skills the investor brings to the enterprise, and the large network of contacts that can help the enterprise access new resources. At the same time, it also means sharing decision-making with the investor(s), and in some cases sharing board seats. It is important for the social enterprise to carefully screen investors to ensure that they have the same vision for the first-stage scaling process. The added complexity of a social enterprise is the social side, how to grow it, and how to balance this growth with the financial side. Entrepreneur and investor must be in agreement with what comes first, and how to make decisions that prioritize the social side.

Enabling environment and first stage scaling

Social enterprises entering first-stage scaling must be ready to promote an enabling environment for their model to scale. Often times this means advocating for new laws that make wide-scale distribution possible.

The first product of Ingenimed, mentioned above, is a type of LED phototherapy equipment that addresses the needs of severe jaundice newborns in Peru. The enterprise is the first company incorporated in the country to manufacture jaundice equipment; prior to its creation, there were no other Peruvian companies addressing this need. The enterprise had to advocate for a new law for the certification of home-grown jaundice equipment, which took over a year and delayed the commercialization of the technology.

In addition to improving the regulatory environment, enterprises in first-stage scaling need to change behaviors to maximize impact. In the case of RODA, the sale of organic cotton products is only one side of the enterprise’s current impact. Building awareness of breastfeeding and less-intrusive birth practices is the other, and, in many ways, it is just as—if not more—important. The same applies to the case of La Casa de Panchita, an employment agency that provides training and legal, fair-wage employment to low-income domestic workers in Peru. Alongside its employment agency, the organization advocates for the rights of domestic workers and prevention of child domestic work, building awareness on the need for dignified employment among this sector in Peru and throughout Latin America.

The final part of this series analyses how early stage social enterprise can attract the right financing to embark on their first-stage scaling process.

Read more stories by Loïc Comolli & Nicole Etchart.