Hiding in Plain Sight: SMEs and Social Enterprises
It was mid-summer 2000 in San Francisco, and Ellen Sugarman looked worried. Sitting in my living room, looking out the window and watching the cold fog blowing down Dolores Street, she was visibly distraught. I thought about making her a cup of tea, and then changed my mind and poured her a glass of white wine. “John,” she said. “I’m going to sell my company.”
This was really unwelcome news. Ellen was the founder and owner of BigTop Newsstand Services, the last remaining independent distributor of magazines in the United States. She handled many of the smaller-circulation magazines that the big corporate distributors found uneconomical, but -- unable to retain market share -- she was planning on selling to one of her competitors. My problem was that many of these magazines were members of the Independent Press Association (IPA), a network of 500 independent and social justice periodicals. As the Executive Director of the IPA, my job was to ensure that these magazines had access to sales channels.
Prior to the 1990s, independent magazines were mostly distributed through the 4,000 small bookstores and newsstands across the country. The rise of the big chains like Borders and Barnes & Noble, however, had decimated the ranks of independent bookstores. By 2000, the number of independents had been cut in half. We talked a lot about this issue at the IPA, and some sister organizations resolved to fight by protesting the expansion of giant bookstore chains and the general corporatization of the media. Me, I personally thought this was about as likely to be effective as a grassroots campaign to ban earthquakes.
Ellen drank her wine, and we talked for several hours. By the time she left, I had decided to buy BigTop from her, and make it part of the IPA. She gave me a Right of First Refusal, and I started thinking about how to find the money needed to buy her company. No easy task; at the time, the IPA annual budget was around $250,000 a year, and BigTop was doing about $2.5 million in annual sales. Later that year, I did manage to borrow the funds from the David and Lucile Packard Foundation, and bought BigTop – and then cut major deals with Barnes & Noble and Borders to distribute our member magazines (they also donated hundreds of thousands of dollars worth of promotional space).
Where are all the Social Enterprises?
I’ve been thinking a lot about BigTop lately, as I put the finishing touches on my dissertation, a statistical analysis of the use of impact measurement in social enterprises around the world. Before I could determine how social enterprises use various form of impact measurement, however, I first had to find at least 3,500 social ventures to include in my survey. This proved to be surprisingly difficult. For one thing, there is no agreed-on definition of what makes a business a social enterprise – or even whether a social enterprise is a business at all. Some academics and practitioners include non-profits and even government agencies in their definitions, as long as they act in socially-positive ways and generate revenue through sales of goods and services.
By scouring the registration lists of B-Corps, L3Cs and similar business categories, membership directories for groups like the Social Enterprise Alliance and the Social Venture Network (and their counterparts in India, Africa and Asia), and the portfolios of impact investors, I was eventually able to come up with a list of 3,682 unique self-identified social enterprises – a number far below what is often claimed to be a giant global network of hundreds of thousands of social enterprises.
The Great Social Enterprise Census conducted by Pacific Community Ventures a few years ago, for example, was only able to come up with 200 social enterprises, despite a broad definition of social enterprise. There are at present 1,489 companies from 42 countries that have registered with B-Lab as benefit corporations, a very tiny fraction of the total business community. Except in the United Kingdom, where Social Enterprise UK claims a mailing list of around 70,000 for-profit social enterprises, self-conscious social ventures of the sort interesting to impact investors seem to be rather few in number.
As part of my research, however, I also looked into the status of small and medium enterprises (SMEs) around the world, because I think in most cases the difference between a good SME and a social enterprise is more how they talk about themselves, as opposed to what they actually do. There are just not that many SMEs engaged in reprehensible business behavior like manufacturing landmines or predatory lending. On the other hand, had BigTop been around when I was doing my survey, it would not have been included, simply because Ellen never saw herself as leading a social business. Her personal politics, for example, were far more conservative than mine or the other IPA staff. From my lens, however, her core business was an essential support component for independent and social justice publishing in America.
SMEs make up the vast majority of businesses in the world, and there is an enormous literature demonstrating their contribution to employment and economic development. In developing countries in particular, SMEs are the engine of the economy, making up more than 95% of the businesses in the formal economy and 70% of all employment. Businesses in low-income countries are often not formally registered; it is estimated that the informal SMEs outnumber formal ones by a wide margin. Worldwide, 60% of all employment is in SMEs. A recent literature review of more than 50 empirical studies of SMEs in developing countries conducted by the International Labour Organization and German Cooperation showed that 80% of job creation in low-income countries came from SMEs, as opposed to the state sector and large businesses. In the European Union’s 25 member countries, 23 million SMEs provide 75 million jobs and represent 99% of all registered businesses, while in the United States there are 28 million SMEs employing 50% of the workforce.
From SME to Social Enterprise
My hunch is that there are a lot of BigTops in this giant ecosystem of SMEs – private companies that, with a little tweaking or a change in their marketing, could be transformed into social enterprises. If the social enterprise sector is ever going to reach real scale, perhaps the place to start is not by launching new social ventures, which is both risky and time-consuming. It might be more efficient to help existing SMEs re-define themselves and move in the direction of acting in more socially-responsible ways. Unlike trying to locate social enterprises within the SME sector, finding SMEs themselves is quite easy – most countries have directories containing tens of thousands of small businesses. They might not yet see themselves as social enterprises, but my guess is that quite a few of them would be amenable to being approached by one of the network organizations that are part of groups like the Aspen Network of Development Entrepreneurs(ANDE).
If I’d had the time and money to undertake this research for my dissertation, I would have created a list of several hundred thousand SMEs in the developing world and sent them all a survey designed to figure out if they could in fact be categorized as social enterprises. One option would be to ask them to complete the assessment tool developed by B-Lab. Another more academic option is a framework developed by researchers in Australia, using Likert scales to determine the degree to which a social enterprise displays “Vincentian values.”
This is an elaboration of the notion (articulated by Jed Emerson) that the “intentionality” of the social enterprise managers matters a lot. This intention to improve the world (known by researchers as a “pro-social orientation”) can be measured by social scientists, as my colleagues in Australia do in their research. In other words, it is possible to imagine conducting a survey of millions of SMEs, calculating the degree to which the current leadership of each one is more or less “pro-social,” and from there setting a baseline score above which an SME can be considered to be a true social enterprise.
The results might surprise us all. Wouldn’t it be amazing if the potential market for B-Lab certification or membership in the Social Venture Network suddenly expanded by multiple orders of magnitude? What a field day for impact investors!