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Formalizing: the road towards Social Entrepreneurship’s sustainability

4 March, 2021 - Autor: Recon Colombia

The Social Entrepreneurship context in Colombia makes us reflect and take action: 44,8% of social entrepreneurships are still informal. The tax and commercial loads to which they are subjected when they become formal are high, taking into account that most of them are initially financed with personal resources and do not receive income from their entrepreneurships. The financial mechanisms for this type of entrepreneurship and the incubation and acceleration programs are still insufficient.

Is Social Entrepreneurship a truly differential model? Which are the obstacles for the formalization of social entrepreneurships? How is it different from for-profit enterprises, non-profit entities, hybrid models, and B Corporations? Is it possible and desirable to have a special legal structure that enables social entrepreneurships to formalize and generate economic value, due to their social and/or environmental contribution to society? Could new public policies solve these legal voids? What can we learn from international experiences on legal figures and public policies?

In view of this context and in the effort to answer these questions, we held a dialogue with different experts and social entrepreneurs about legal structures and public policies, how to Strengthen Social Entrepreneurship in Colombia, and how this business model could, through the promotion of becoming formal, generate better conditions for greater impact.

In alliance with Gómez Pinzón, a law firm that cooperates in the legal orientation process for RECON’s community of social entrepreneurships, we created this space reflecting and sharing experiences towards the strengthening of the Social Entrepreneurship ecosystem in the country.

“Colombia is currently going through a crucial moment for business models that promote integral and sustainable development. Social Entrepreneurship is one of these models, since it strives for the building and consolidation of a development system with social and environmental value. However, 44,6% of social entrepreneurships identified by RECON are informal. Among these, 78% are non-profit organizations, 25% are for-profit societies, 2% are solidary economy entities, and 1% are BIC Corporations. 59% do not earn any income and 81% used their personal savings for their creation. Independently of the model, it is important for Social Entrepreneurship to be recognized and accepted as a business model. Non-profit, for-profit, BIC, hybrid, or a special structure, Social Entrepreneurship in Colombia must be strengthened as a dynamizing and impact-generator vehicle in the territories” said Andrés Santamaría, RECON’s executive director.

Our allied moderator Natalia García, partner at Gómez Pinzón, agreed with this position: “RECON’s data about informality in Social Entrepreneurship is surprising. More than 44% of social entrepreneurships identified are informal and are generating social impact for the country. Our organization is an ally in order to guide this process of becoming formal and strengthening this business model”.

International experiences and lessons for Colombia

We had the participation in this virtual gathering of three successful international experiences for the strengthening of Social Entrepreneurship in the United States, United Kingdom and Jamaica, through public policies and legal standing for the social business model. They concluded that it is essential to innovate in the existing legal structures, support social entrepreneurships to become formal through tax benefits and exemptions and financial alternatives, and incentivize the creation and growth of legal entrepreneurships through education.

“ I don’t think that we necessarily need new legal structures, because what separates social entrepreneurs from regular businesses is mostly their social mission. But we do need governments to create that environment by incentivising social entrepreneurs through tax exemptions and reductions. We need to encourage young lawyers to move in the direction of system change lawyers and bring about these changes. At Ashoka, we work with universities developing a curriculum to implement Social Entrepreneurship in law education” explained Annette McGee Johnson, Global Legal Director at Ashoka.

Saffrey Brown, The Leap Co Innovation Director in Jamaica, exalted the benefits of this business model in her country, where she is one of this ecosystem leaders. “Social entrepreneurship started from the non-profit sector as a way to create employment, reduce poverty, and finance its operations. One of the best results in Jamaica is with the involvement of people with disabilities who were not economically active. It is important in Colombia for the government to be a channel that supports informal social enterprises towards a more formal structure, promotes their growth, and develops a public policy with all types of social entrepreneurships in mind”.

Lastly, Dan Gregory, Director of International and Sustainable Development Social UK Entreprise in the United Kingdom, explained the peak and greater empathy generated in his country by social entrepreneurships in their communities, a bet that makes them highly viable as sustainable business models. Furthermore, he mentioned the concept of innovation applied to the process of becoming formal.

“There is no single magic trick for social entrepreneurship policies. It’s about funding and finance, legal forms, education, skills and capacities. We have seen successes when the governments have developed strategies, not just individual policies. In the UK, we created a new legal form specific for social enterprises and it has been a remarkable success, but this is due partly to the weaknesses of the charity model. You in Colombia need to ask, what is the gap between the legal figures? Could existing legal forms be adjusted? We have also had innovation in the cooperative solidarity model, which has been rediscovered and used to enable community ownership of important assets. Sometimes you don’t need to create new things but be innovative with the figures that already exist”.

Social entrepreneurships committed with formalizing in order to be sustainable

We held a dialogue with five social entrepreneurships from the RECON Community, who showed the different legal structures with which they became formal.

“Undoubtedly, social entrepreneurships should be formal, go into the market, and search for greater profitability through their goods and services. The more profitable it is, the more sustainable through time it will become and the greater social impact it will generate”, reflected Juan Esteban Garzón from Alimentos Casai, which is currently registered as a for-profit enterprise (S.A.S.).

In Putumayo, the social entrepreneurship Sabias y Mágicas is looking for a legal structure that enables it to continue advancing with their economic activation project for gender equality. “Sabias y Mágicas is born from the urge to work with local development and to empower rural and indigenous women. We want to show our ancestral legacy with products 100% handmaid. In Putumayo, we do not have clear public policies for entrepreneurship. We want to know what are the options besides non-profit and for-profit; other alternatives which may give us the chance to grow in our region”, said Nancy Ponce.

Following on this, a legally constituted social entrepreneurship with a great trajectory and economic sustainability, shared his experience, and recommended other social entrepreneurs to take their impact projects to the next level. “We started with a $30 USD loan and began the legal formalizing process with a clear view of a powerful idea that could transcend. We started as an NGO with no income, no salaries. Today we have a for-profit model and we work in a different and sustainable way. It is a business model that generates income from an impact idea. We realized we had a product that enterprises and other clients could acquire”, said Camilo Herrera from Un Litro de Luz. Currently, this entrepreneurship is expanding through Latin America with its low cost technology that provides energy services to vulnerable communities.

On the same note, the social entrepreneurship Kitsmile showed how her product became a social innovation with impact in a specific community capable of generating income with sustainability. “Kitsmile is born from a life experience which took us to analyze the market, and we realized that rural children had no garanties for accessing physical rehabilitation processes, which was why we created and registered our home rehabilitation kit. We created a non-profit but this model had flaws which limited our growth and possibility to receive investment or participate in public bidding. And since without growth and economic sustainability there is no impact, we created a for-profit enterprise so that, through sales we could finance the NGO’s impact actions”, said Leidy Cuestas, entrepreneur from Bogotá, who was the youngest colombian woman to acquire a health invention patent.

Nevis Cadena, from the social entrepreneurship Frutichar, closed this panel. Legally, his enterprise is for-profit SAS – BIC. However, he promotes the creation of another legal structure that understands social entrepreneurships’ needs in their local contexts. “What we want is for Social Entrepreneurship to have its own structure, besides SAS, BIC or non-profit. This is an important reflection to be made. It is not that social entrepreneurs do not want to be formal. The problem is that there are no economic and tax conditions for it” he pointed out.

Expectations for the new Entrepreneurship Law

Legislators, public policy makers, and experts in the social entrepreneurship field indicated the steps to follow and which are the benefits of the Entrepreneurship Law, which recognizes Social Entrepreneurship and gives it legal viability, enabling its strengthening.

“It is important to highlight that without law, there are no options. But we cannot have a concept of entrepreneurship if it is still unknown. With this Law, Social Entrepreneurship will benefit from bankarization, tax reductions, and democratization of resources”, said Orlando Beltrán, General Secretary of INNpulsa.

Ruta N, the business and innovation center at Medellín, agrees with the government’s view and promotes the articulated work to make the Law’s benefits for social entrepreneurships known to them. “Most entrepreneurships should be social, understanding each local context. From Ruta N, we work with the public, private and academic sector, and the citizen as a referent and benefactor; this is what has made Medellin’s ecosystem stronger. Institutionality should generate formation to visibilize the instruments that the local and national governments offer to generate opportunities in the territories, understanding Social Entrepreneurship’s particularities” said Paula Roldán, Public Policy Articulator at Ruta N.

Mauricio Toro, congressman at Partido Verde, spoke about the financial and communication public policies in favour of this business model. “It is important to change our colombian mentality and culture, and find a way to implement, from education, what it means to be an entrepreneur and generate social impact. We should promote public policies with guidelines to financing Social Entrepreneurships”. 

This panel closed with the perspective of academia and research: “Universities should generate new methodologies for Social Entrepreneurship, promoting its action fields, type of impact and ways to generate value. Due to research, we know that Social Entrepreneurships include cultural elements in their formation”, expressed Margarita Martínez, leader at the UR Emprende incubator.

New legal figures?

In this discussion panel about for-profit enterprises and non-profit organizations, the panelists concluded that, in order to advance in the social entrepreneurships’ sustainability, independently of the legal structure, they all should generate triple impact and be profitable.

“Every organization, for-profit or not, should be sustainable. In the last year, BIC enterprises have grown, they are realizing they have to align their interests with, not only the generation of profits for their shareholders, but also the search for social and environmental impact, adjusting their vision and rentability with the community and the territory’s needs” informed the Delegate of the Superintendent for Economic and Corporate Matters at the Superintendency of Companies, Santiago López.

For Adriana Suárez from Matterscale Ventures, “a social entrepreneurship is an entrepreneurship which solves a problem that most of the population has, and this is not done only by a non-profit structure. It could be a for-profit business like any other which allows scaling and financing”.

From the experience and vision of a mentor and high impact investment consultant, “today, the for-profit enterprise is not conceived without generating impact and sustainability, without income and scalability. It is about understanding, educating and approaching existing legal structures  to advance towards formalizing Social Entrepreneurship”, emphasized Carlos Castaño.To conclude, the director of Sistema B Colombia, Camilo Ramíez specified: “we are living a paradigm change. The State and the NGOs used to be the ones to solve social and environmental problems, while the others made money. Now, for-profit entities are joining these causes. It is important to demystify formalizing and to stop being afraid of being an enterprise, a SAS, of being for-profit”.