By Travis Hollingsworth
The gulf between the typical size of social enterprises and conventional businesses is often framed in David-versus-Goliath terms. UK data suggests that a typical social enterprise is one-third smaller than the equivalent profit-driven business, and few if any reach the size of a typical Fortune 500 or FTSE 100 company. To date, the venture capital approach that focuses on infusing growth capital into a single organization has often been the preferred formula for achieving growth—but is it the best method?
A holding company—an umbrella body that can act at scale for smaller operating subsidiaries—can give social enterprises the opportunity to operate as David and Goliath simultaneously. By pooling standard business functions such as accounting, human resources, and finance, a holding company can serve as a hub for back-office services. Social entrepreneurs can then tap these services as they grow, enabling them to stay focused on their mission.
In France, Groupe SOS has built a social enterprise holding company from scratch. In 2013, it generated more than $750 million in revenue across 45 businesses that employ a total of 11,000 people. What began as a single medical clinic 30 years ago is now a holding company for day care centers, retailers, cafes, and elderly care facilities—each with a distinctive social mission. In the words of Chairman and Founder Jean-Marc Borello, “We want to create a school of fish, not a whale.”
Managing growth can be expensive and distracting for social entrepreneurs. Shared services provide more flexibility and lower incremental costs. Instead of each social enterprise hiring its own full-time accountant, a holding company can recruit them centrally and share them across the group at a lower overall cost. It can also provide more-specialized services tailored to social enterprise, such as impact measurement. Lower overhead costs during the startup phase can allow smaller ventures to reinvest and scale quicker.
Raising funds can be a daunting task for any entrepreneur, especially if their business is tackling complicated social issues. For most social enterprises, the cost of searching for new financing is high—entrepreneurs looking for relatively small amounts of investment often lack specialized knowledge, and transaction costs can dwarf small gains in capital.
By housing one financing team in a holding company, social enterprises can access dedicated specialists. Additionally, a centralized finance team can pool small financing needs across businesses to gain a critical mass that will appeal to large investors. Groupe SOS, for instance, has established high-level relationships with major banks at the group level—something its subsidiaries could not achieve independently. What’s more, by consolidating capital raised at the holding company level, Groupe SOS has built a positive long-term track record, which is often difficult for pioneering start-ups.
The holding company structure also allows businesses to invest and innovate in ways that small ventures cannot. A holding company can invest more money in young enterprises by redirecting surpluses from more-mature businesses, potentially addressing the “pioneer gap,” identified in a Winter 2013 SSIR article, which sees social entrepreneurs particularly struggling to raise capital at the early stages of their venture’s growth. In addition, each social enterprise can tap expertise and collaborate with other businesses in the group. A larger organization also provides more diverse opportunities for attracting and retaining talent. For instance, Groupe SOS has adopted a knowledge-sharing program and mobilizes talent across different social areas, offering a wide array of career paths.
From 2002-2013, revenues at Groupe SOS grew more than 30 percent annually—the result of both organic and inorganic growth. For instance, the group scaled up its child daycare centers dramatically by standardizing and rolling out a more-consistent model in different parts of the country, including minimum places for working mothers and beneficiary target-setting with local government.
Groupe SOS has also seen a surge of business opportunities from social entrepreneurs who want to exit their business—for example, when an entrepreneur prefers to sell to a mission-aligned investor and management company. Groupe SOS has also begun acquiring distressed charities and for-profit businesses that they feel they can turn around by applying the group’s approach to social impact management.
Most recently, Groupe SOS launched an impact investment fund as a way of leveraging the direct business expertise within the holding company. This will allow the organization to take stakes in social ventures while utilizing its in-house experts to act as relatively active impact investors.
Can it work in other countries?
Undoubtedly, a social purpose holding company model would manifest itself differently outside of France. The holding company will be most effective where there is a clear need for business diversification or larger cross-sector contracts (as with government commissioning). It is also likely more applicable in markets that resemble private markets. But regardless of the specific design, the holding company model could be a useful model for bringing scale to social enterprises.
This article was originally published here.
Could Holding Companies Help Social Enterprise Scale Up?
By Travis Hollingsworth