Social Enterprises in the Middle East Gain Momentum | Taka Solutions

Original article is published by Stuart Matthews in Bloomberg Businessweek Middle East, September 04, 2016.

Michele Grosso is out to save the world, or at least protect some of its most vulnerable people. The 29-year-old Italian behind Dubai-based micro insurance firm Democrance is part of a new wave of social entrepreneurs launching businesses with a purpose. His mission is to get the safety net of insurance under the people who need it most: the low-income populations that scrabble for a living across the Middle East.

The task is no easy one. Like any entrepreneur Grosso has had to fund much of the concept development from his own pocket and convince potential investors of the idea’s value, all while staying true to his core purpose of having a social impact. Grosso’s plan is to make insurance cheap enough for even the lowest income groups by cutting out paperwork and delivering insurance through the one channel readily available to many: a mobile phone. He says the return on investment his streamlined business model can offer insurance partners, mobile operators and investors is attractive. He’s also adamant that Democrance’s social impact has to come first and that they must avoid putting the wrong insurance products in the hands of a low-income population. “Protecting our customers should come before monetising them, and this should be a joint effort from us, our investors, insurance partners and distributors,” he says.

Having started with his own money, then raised financing from the bank of friends and family, Grosso hopes to start a formal funding round after the summer. He’s optimistic that what he describes as “concrete interest” will translate into solid investment. The optimism comes from his confidence in the scale of the opportunity. Insurance penetration in the Middle East runs at around just 1 per cent, according to research from consultancy PwC. In addition, a report by The World Bank found that just 14 per cent of adults in the Middle East have a bank account. By stark contrast mobile penetration runs much higher, with unique subscriber numbers in the Middle East and North Africa region surpassing 50 per cent of the population in 2014, according to GSMA Intelligence.

This combination of uninsured and potentially unbanked individuals, with access to mobile phones, creates a customer pool that could benefit from health and life cover, but hasn’t had affordable access to it. Democrance’s biggest attraction to investors is “from the business opportunity to monetise the 99 per cent uninsured market in the region, which suddenly becomes accessible through our financial technology platform,” says Grosso, who plans to connect insurance providers with the customers of mobile networks.

Part of Grosso’s challenge in raising funds has been the fact that the idea of impact investing—investment that generates a measurable social or environmental return, as well as a financial one—is at best nascent, at worst non-existent in the region. Grosso says this relegates the social impact of Democrance to being more of a “nice to have” than a real performance indicator that investors monitor. “We are confident though that our work will contribute to the birth of this new investment philosophy, which is well established in other economies,” says Grosso.

Globally, numbers around social enterprise sound promising, though critics say they suffer from enthusiastic over-inflation. For instance, in Britain, the sector is thought to contribute $35 billion to the economy and employ a million people, according to research by Social Enterprise UK. But it can be hard to get an accurate assessment because of the broad and varied definitions of what a social enterprise is and the relative youth of the idea: In 2010 the Asian Development Bank found nearly half of social enterprises in India were less than two years old.

The creation of the sector has been spurred on by different forces. According to Matthew Lee, an assistant professor of strategy at INSEAD, it is partly driven by new systemic views that people have of social problems and an increasing scepticism that charities and governments will be able to solve them. Add in a millennial demographic in search of meaningful work and careers measured by more than financial success, and Lee says people are starting to scrutinise the system that leads to social problems. “The education system, the cultural barriers to employment, the job training paths available all leads us to look for systemic solutions that can be more self-sustaining and scalable than charity,” he says. Social enterprise “provides an avenue by which people can try to find meaning in their work.”

What sets a social enterprise apart is the social mission that runs throughout the organisation, standing distinct from superficial marketing slogans, vision statements or one-off CSR activities. Instead, the mission is core to the identity of the organisation, influencing strategic decisions, says Lee. “The social mission is built into the business model so that if the business is run successfully then it also has this positive social impact. There is no trade-off between the social impact and the financial impact,” he says. One of the sticking points in this is the measurement of that social impact: it has proven both difficult to do and, as Michele Grosso has learned, tough to convince potential investors of its value. It’s a challenging area that will have to be addressed if the sector is to attract capital. But if you’re the entrepreneur behind a fledgling social start-up the skills and resources to measure accurately are unlikely to be at hand. “It is tricky: Most don’t have the required capability to measure their social impact,” says Adnan Fakhoury, an associate consultant with Bain & Company, which includes a social impact advisory initiative among its pro bono work. “Their main focus is to try to do good, survive the ups and downs in the first years and then after that they start to pay more attention to measuring impact.”

Sector proponents shy away from defining what a social enterprise is, leading some to believe the core concept has been diluted. As the idea has expanded away from organisations tackling systemic issues to include charities that simply have revenue streams, or businesses that do some good, questions are being raised about how social enterprise will progress. “I think it’s the enormous elephant in the room of the whole industry globally,” says Soushiant Zanganehpour, founding partner at Tribeca Impact Partners, a social impact advisory firm. Zanganehpour says the definition of what it is to be a social enterprise is the key to segmenting the sector down to what he describes as “a handful of highly promising ventures” that are doing interesting work. For him the defining issues are whether or not the intervention that the social enterprise claims to be making creates an irreversible change in the problem it’s tackling. “If it doesn’t, you don’t count, you’re not doing your job,” he says.

Pressing systemic problems in the region that could be positively changed by a strong social enterprise sector include environmental issues and improving gender equality. While Zanganehpour isn’t an advocate of getting a ruler out to measure every move an organisation makes, he does expect to see the assumptions a business makes and the story it tells about itself to line up with how it is being run. “Does your theory of change have logical assumptions that line up to demonstrate that you are doing stuff that is systemic, irreversible, interesting and potentially quantifiable?” he asks.

As an example Zanganehpour points to the success of Saudi Arabia’s Glowork. Set up in 2011 by 33-year-old Khalid AlKhudair, the recruitment business has found employment for more than 26,000 Saudi women, in a country where women account for more than 60 per cent of the unemployed. It’s success that has seen state backing in the form of a fee the company earns from the Ministry of Labour for each placement, plus $16 million in investment from Saudi headquartered SAS Holding, buying it a controlling interest and going some way to providing the funding the organisation will need to scale up. “Whether he started off calling himself a social enterprise or not doesn’t matter; what matters is that the intervention actually places women into higher positions of power and economic ability for the long term and he can prove that,” says Zanganehpour.

Others have stumbled into social enterprise as a side effect of their business model. Dubai-based Taka Solutions is an engineering and technology company that helps building owners—and soon consumers—reduce energy consumption and thus their carbon emissions. The company earns its living from the financial savings its work creates by making better use of existing technologies to control energy usage. Charles Blaschke, one of the company’s co-founders, says techniques like these can reduce the world’s energy consumption by as much as 20 per cent.

This potential for environmental impact is what helped Blaschke and his colleagues earn the judges’ vote in the Gulf round of The Venture. The global competition—Zanganehpour is a judge—rewards social enterprise start-ups like Taka Solutions with a shot at a share of $1 million in funding, the winners of which were announced at an event in New York in July. While Taka missed out on a place in the top five and a share in the prize, the company’s involvement has done its bit to raise awareness. “We didn’t really realise we had such a social aspect to what we do until The Venture,” says Blaschke. “It changed our outlook on our company and our mission. We are going back to our roots and sculpting [our business] based on our experiences; we have The Venture to thank for that 100 per cent. We were lucky that what we do as engineers actually has a positive social impact. We aren’t just building a new structure for the sake of it; we’re fixing bad stuff and that happens to yield money, which makes it a business that solves one of the world’s biggest challenges.”

While a share of the million-dollar prize-pool would have been welcome in any business, for Blaschke the process the company has been put through as part of the competition—which included an accelerator week at the Skoll Centre for Social Entrepreneurship, part of the Saïd Business School at the University of Oxford—has been worth more. By Blaschke’s own admission Taka Solutions went from “zero presence” in the world beyond its existing client base to building a platform from which to educate people about energy efficiency through different channels. The company even went so far as to bring on a specialist environmental impact communications consultant to teach them the ropes of spreading their message. “It’s got easier to explain and we’re way better at it now,” says Blaschke. “One thing The Venture and accelerator week has shown us is that we are a social enterprise, even though we come at it from a pure business standpoint.” Blaschke found that relative to the other competitors Taka Solutions was stronger as a business, one of the biggest in terms of team-size and revenue, and one with projects under its belt. Having succeeded in starting a company with a good business-to-business model it’s now learning from its The Venture experience to add a business-to-consumer element in order to scale its impact up, via an energy-monitoring app.

Even though Taka Solutions didn’t set out to create a social enterprise, judges from The Venture, including David Freeborn, managing director at Pernod Ricard Gulf—the company behind the competition—recognised the positive and irreversible environmental impact that makes it a social venture. “From our perspective it’s a great opportunity to continue promoting social enterprise within the Gulf and giving people the chance to think that if they do have that idea to genuinely make a difference it is something to push ahead with,” says Freeborn.

There are plenty of incentives to be found for social enterprises. Aside from The Venture, other competition platforms offer combinations of funding, incubation and acceleration. The Hult Prize offers a similar scale of cash to entrepreneurs coming out of the world’s universities and tackling particular challenges: 2016’s is crowded urban spaces. Locally, both Emirates Foundation and E7 Daughters of the Emirates offer competitive opportunities to source funding and mentoring. Emirates Foundation’s Emirates Award for Arabian Gulf Youth targets Gulf nationals aged 18-35—Khalid AlKhudair won first prize in 2015—while the Daughters of the Emirates Promise of a Generation Initiative challenges young women residents of the UAE aged 18-25 to impact the lives of 20 people in their community. While differing in scale and strategic intent their methodologies are similar, giving budding entrepreneurs a focal point for their idea and incentivising them with various levels of reward. “What those individuals have in common is a certain self-belief, all of which helps to generate support and backing,” says Clare Woodcraft-Scott, CEO at Emirates Foundation.

Business plan competitions have their critics—one judge noted that frequent competitors have learned how to earn the prize—but they also inject some of the five components Woodcraft-Scott says are necessary to build the social enterprise ecosystem. These include the need to identify talent, access to patient capital or grant finance, a regulatory framework that recognises social enterprises, access to markets and non-financial support. There is no doubt that some of these elements are lacking in the Gulf, particularly the regulatory framework and access to funding, which can make it tough for start-ups to get going, but the support is there. “People need to be really aware of what we are setting out to do here,” says Woodcraft-Scott. “It’s to eradicate social problems that traditional developmental actors and traditional businesses have not been able to eradicate. This is no mean feat. Setting out to resolve social issues at scale using an entrepreneurial model is not an easy thing to do.”

A slowly rising tide of awareness and support is becoming available for those brave enough to enter the sector. Driven in part by a gradual growth in ethical consumerism, large organisations are starting to think about solutions to tackle some of the social problems in the communities where they operate, as part of their community investment. “Large organisations play a vital role in nurturing social enterprises to create a bigger social impact,” says Ibrahim Al Zubi, head of sustainability at Majid Al Futtaim Properties. “This can be achieved through cross-sector collaboration by investing in multiple programmes, especially those that bring people and corporations together to increase consciousness of the challenges faced by social enterprises and to provide support for their causes.”

Formally or informally, big-business skill sets are finding their way to social entrepreneurs through experienced people sharing what they know. This mentoring helps start-ups formalise processes and map out plans, but even those who do it can see signs of the sector starting to mature. “Normally entrepreneurs are pretty young and at the early stage in their journey, but now we get more established companies interested,” says Medea Nocentini, co-founder and CEO of Consult and Coach for a Cause (C3), a Dubai-based consultant specialised in working with social entrepreneurs. Nocentini describes the typical social enterprise they see as either at launch stage, pre-seed funding, up to the point where they need that first round of investment. “We’re not talking about companies with years of experience,” she says. C3 has managed to attract nearly 1,000 experts happy to share their skills and knowledge as mentors to the 40 or 50 enterprises engaged in the organisation’s development programmes at any one time. The organisation helps the fledgling businesses focus on social impact measurement, their theory of change, governance and shareholder agreements—all necessary for a business trying to get investors to buy in.

Mentors report a positive experience too. Former management consultant Matteo Bianchi starts from the very beginning with the entrepreneurs he mentors, structuring their model to create one that has the all-important social enterprise element, but is also a business. Matthew Nobles, who has nine years in various finance-focused roles with General Electric under his belt, has passed on the hardcore financial forecasting skills many start-ups simply don’t possess. “The keyword is monetisation. Can you take the nice idea and translate it into a business model?” he asks. “That is a challenge for many social enterprises: Translating the idea into a product or service that the market demands at a price that they will buy it is a difficult thing to do.”

The overriding challenge though remains finding serious investment. While measured impact may help, for it to do so potential investors would have to care about that impact in the first place. But according to Kamel Al-Asmar, head of communications and community engagement at Wamda, an outfit that promotes entrepreneurship across MENA, there’s almost no investment in the sector. He says the obvious factor holding them back is worry about investing in a company with a social mission, versus one focused on revenue generation.

This though hasn’t stopped social entrepreneurs getting established, especially in Al-Asmar’s native Jordan. Over the last five years he has seen an exponential rise in the social enterprise sector, where new enterprises are still being established, despite the investment gap. “Usually it’s because entrepreneurs are stubborn to the point they make it happen regardless,” he says. “Money might be a problem or a challenge, but if they don’t scale up, they still do the work on a smaller scale.”

Entrepreneurs who just get out there and do things are much admired for getting on with it, reflecting the values of a movement that’s founded on combining innovation, resourcefulness and opportunity to address social and environmental challenges. Many of those working at a smaller scale don’t see themselves as social entrepreneurs, but are simply tackling an issue they think they can fix. This is an important part of the social enterprise movement and one the region could benefit from in the long term.

“There are so many issues that social enterprises need to address; let’s just go out and do the work,” says Rama Chakaki, one of the co-founders of the VIP.Fund, which targets education. Chakaki was behind the formation of Baraka Ventures in 2005, which set out to seed social enterprises with investment from a $1 million funding pool. Some eight years later the fund morphed into BarakaBits—a news website—and Baraka Advisors, after the ventures arm “ran out of steam.” “The investors weren’t there to give it the funding that it needed to continue to scale,” she says. “Most of the enterprises had a strong social impact, but were not sustainable businesses.” From this experience the thing Chakaki feels would give the sector a solid footing is a social impact investment fund prepared to back up the ground work done by the business plan competitions, incubators and mentoring programmes.

Such a fund could make the pivotal difference the sector needs and Soushiant Zanganehpour says what’s required is greater investment in venture philanthropy. “The GCC and most of the world is focused a lot on conferences, networking, or meet ups, not on putting some risk capital to work to see what models would be really appropriate as solutions to the problems that we have in the world.” Zanganehpour’s recipe is to have more risk-taking from both entrepreneurs and the finance sector and a call for philanthropists to shift funding from “band-aid solutions” to what he says are more innovative approaches that potentially are more effective in the long term. In so doing they may eventually be able to attract the attention of private equity that will provide the finance to scale them up. “It takes a couple of forward-thinking corporate leaders, or forward-thinking families, that have a strong legacy of doing charitable philanthropic work and are looking for innovation. A little bit of capital could go a very long way in demonstrating that these models are viable.”