In the first year of our programming after COVID-19, Miller Center observed that the needs of social enterprises we have been serving for the last 20 years have changed.
One of the first signs of the shift we noticed was a decrease in demand for our accelerator programs by non-startups. Our natural demand is around 300 applicants per accelerator cohort offered. In the period January – June 2022, we still received roughly the same number of applications. However, we noted that the vast majority of the applications came from early-stage social entrepreneurs who tended to have an annual earned revenue of less than USD 20,000 (or local currency equivalent), significantly below our program eligibility threshold.
After noticing the trend, we wondered about the state of the market and the needs of those social enterprises in our target market segment. Our strategy defines our target market segment as post-revenue and early growth stage social enterprises working in the areas of women’s economic empowerment and/or climate resilience that meet the earned annual revenue threshold of a minimum of USD 50,000 but not greater than USD 2 million. This, in addition to a few other criteria, defines our target market segment. We believe that this formulates a sweet spot through which we contribute to the ecosystem, given our unique skill set and value add. Concerned about receiving fewer applicants from this segment, we embarked on a journey to understand the underlying causes in order to better serve their needs moving forward and, hopefully, attract more applicants in the long run. We believe that what we unearthed in the process is worth sharing with you through this article.
We conducted this ecosystem market research through direct calls with prospective clients, program alumni, and investors during the period of August – December 2022. The work was implemented by the authors, Jenny Everett, a social enterprise ecosystem veteran who served as an independent consultant and Nataša Goronja, Miller Center Sr. Director of Programs. Please be cautioned that the findings presented below represent a summary of qualitative research and are not necessarily representative of the ecosystem as a whole. These findings are not the result of a deep data dive. We conducted additional conversations led by Miller Center staff, but present here only the cumulative findings of qualitative research undertaken by Jenny, who brings an objective lens to the research. These findings are based on 19 interviews with six Miller Center accelerator alumni, four social enterprise ecosystem investors, and nine prospective social enterprises that are in our sweet spot but have not yet worked with us. We hope that this blog will inspire more market research to be undertaken and prompt some of the players to contact us (and others) for deepened conversations about how we all can address the market needs in this new reality together and individually.
Here are the key highlights from our research:
IN-PERSON TOUCHPOINTS AND COHORTS ARE MORE ATTRACTIVE TO SOCIAL ENTERPRISES AFTER COVID-19
Social enterprises are eager to get back and work together in person. After a lot of time spent working virtually, being together in person for at least some portions of their capacity-building time is a major incentive perceived by social enterprises. Social enterprises also highlighted a desire to exchange knowledge with their peers in their shared industries/sectors.
STRONG FINANCIAL MODEL DEVELOPMENT IS AN IMPORTANT PRECURSOR TO FUNDING
One of the issues we at Miller Center have historically observed within this market segment is a need for stronger financial models. In fact, when we conduct mock investment panels during our in-residence and virtual programs where we simulate meetings with investors prior to investment decisions, we routinely observe a gap in the area of financial modeling.
This was echoed in the conversations conducted in late 2022. Investors cited financials as one of the top areas where they think businesses at this stage need additional support, although it wasn’t always listed as a top concern by the entrepreneurs. This mirrored what we have seen in our own programs. We know that social entrepreneurs are strong at identifying social injustice and finding ways to address it in their markets. However, it is not uncommon for social entrepreneurs to struggle with developing financial models. In fact, we have noticed that some social enterprise founders are intimidated by the “numbers”, and the mentors in our accelerator programs need to spend a significant portion of their time addressing this challenge. To address this weak link, there is a need for social enterprises to strengthen their understanding of the underlying business unit economics and their potential to scale, for example. This practice often also exposes the need for stronger human resources in certain areas of the enterprise, such as having a capable Chief Financial Officer.
An inability to present a strong financial model consequently hampers their ability to raise funds and is a serious impediment, which is the next issue that was raised in the interviews.
FUNDRAISING CYCLE/ACCESS TO INVESTMENT IS KEY
Entrepreneurs look to various capacity-building providers and accelerators as an important path to access investment. In fact, when choosing an acceleration program to attend, entrepreneurs mentioned that they look for practical case studies regarding how the capacity builder has supported participants in accessing financing in order to discern which program is the best fit for them.
The second fundraising issue that came up is related to the development of a better understanding of the types of capital a social enterprise should seek to raise, as well as how to structure the request and read term sheets.
Two additional points were also brought up in this area — the importance of helping businesses connect with local funders in their regions and the benefit of connecting social enterprises to grant funders for the purposes of supporting issues such as amplifying their SDG work and developing local supply chains.
TALENT RECRUITMENT AND TRAINING WAS THE MOST OFTEN REQUESTED TECHNICAL TOPIC
While the first three areas outlined above may be somewhat intuitive as far as the ecosystem’s needs, we were surprised that an overwhelming demand for support in the area of human resources management surpassed investment in terms of importance.
In fact, all of the interviewees mentioned HR and training as a significant issue. Social entrepreneurs cited this as the key area where they would like to receive support from the ecosystem players. We dug in a bit deeper to better understand the specific HR challenges facing enterprises because we wanted to know more about what lies behind this demand, just as you might be wondering at this point.
We found talent recruitment and training to be especially relevant in emerging markets. It is challenging for entrepreneurs to entice highly skilled staff to take a role with an early-stage company vs. a more stable corporate position. In addition, entrepreneurs find helping current staff shift to a growth mindset to be a significant challenge. And while there are many training and leadership programs available for the entrepreneurs themselves, such programs often aren’t available to their staff, so CEOs spend too much of their time dealing with HR and training issues instead of building and growing the business.
The second HR issue that came up as important in this era of digital transformation is hiring and managing appropriate technical talent. It can be challenging for entrepreneurs to identify and hire staff to build out the technical aspects of their business when they may not have a high degree of understanding of the technology themselves. And this lack of know-how can make managing tech staff even more difficult than managing other team members. As one entrepreneur put it, “I would really value the support of an external technology expert, as I sometimes feel I trust too much in my own programming team’s recommendations, but I don’t have the technical knowledge myself.”
The remaining issue in this area is governance. Entrepreneurs interviewed mentioned that they do not feel that they have best-in-class boards of directors or practices, and that they would like to receive additional support in this area.
AN ABUNDANCE OF CAPACITY-BUILDING PROVIDERS MAKES IT HARD FOR ENTERPRISES TO SELECT WHICH PROGRAM(S) TO ATTEND
In our interviews, it transpired that there is now an overwhelming number of capacity-building suppliers, such as ourselves, for social enterprises to select from. As a whole, we provide varying formats, content, and length, which benefits the ecosystem as a whole. However, the sheer number of providers and accelerators in the ecosystem poses its own challenges. Namely, it’s difficult for entrepreneurs to choose which service providers to select from a long list of local, regional, and international players. Often, program information is overly generalized, making it difficult to differentiate among providers, regardless of potential program distinctions. To bridge the challenge of information asymmetry, some rely on recommendations from their funders (current or prospective), especially when the program data available is not sufficient to make a decision.
Entrepreneurs noted that the information available from some of the providers appear to be providing programs that are too superficial for their needs or that only cover basic business needs. What entrepreneurs demand instead are very specific areas of technical content, as we mention below, and mentors with specific specialist expertise.
It is in part in response to this last point that we wrote this blog. We hope that the issues outlined above and the ideas provided by the entrepreneurs will assist all of us as the players in the ecosystem to distinguish ourselves through more practical information and make the concern of appropriate selection easier to manage for the entrepreneurs.
INSTEAD OF A CONCLUSION – WHAT DO ENTREPRENEURS LOOK FOR IN AN ACCELERATOR?
Lastly, here we reiterate our research findings through a bullet point summary of what social entrepreneurs interviewed would like to see from accelerators:
- Accelerators should provide clearer information to enable a better understanding of what is expected from a business during an acceleration program.
- Founders/CEOs would like for their staff to participate in some of the acceleration programming as many founders do not have the time or need to attend another program, but want their staff to have access to this type of training and support.
- Social enterprises would like access to networks of their peers in similar types of businesses.
- Accelerators should provide connections and clear paths to investment.
- Entrepreneurs would benefit from receiving help regarding what they should be thinking about/key foci by the growth stage and developing appropriate business processes and structures.
- More than generalized business advice is necessary. Accelerators should open practical doors and opportunities that social enterprises cannot directly access, as well as specialized mentored support, such as in the area of human resources.
- Board management is a critical horizon issue.
- Connections to other resources and local decision-makers are beneficial.
- Expert-level support, connections, and funding are essential for later-stage enterprises.