social enterprise failure case study

3 reasons why social enterprises fail – and what we can learn from them

Sharing the reasons for failure is integral for success Image:  REUTERS/Pilar Olivares - RTX1JF59

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When a tech startup fails, it’s inevitably a harsh time for the founder, the employees, the investors and the customers.

But when a social enterprise shuts down, its failure also affects those populations or ecosystems that the business was supposed to serve, increasing both the stakeholders’ sense of responsibility and the real-world consequences of their failure.

Although that’s likely why so many social entrepreneurs are reluctant to talk about their business failures, it’s also the reason they should share them more openly.

In other words, the failure of a social enterprise is much more sensitive than that of a traditional company, and for that reason it is very important to understand the factors that led to failure.

Recently, the Failure Institute published a study focused on the main causes of failure of social enterprises . Although it was focused on Mexico, the findings and learnings can apply to any country.

For this study the Failure Institute worked with a population of 115 Mexican for-profit social entrepreneurs who had experienced failure in their initiatives to create and maintain social enterprises.

Failure rates

Some facts about the sample: 49.6% of the social entrepreneurs were older than 30; 71.3% had one to three founding partners; and most of the businesses were small: 65.2% had from one to five employees; 19.1% had five to 10 employees, 10.4% had 10 to 30 employees, and only 5.2% had more than 20 employees. Most of them (78.3%) were never supported by a business incubator or accelerator.

As for how long the social enterprises remained operational, 38.3% survived less than one year, 45.2% lasted between one and three years, 8.7% lasted four to six years, 2.6% seven to nine years, and 5.2% lasted more than 10 years as a company.

This means that in Mexico the life expectancy of social enterprises is one more year than traditional businesses.

The three factors that stand out as causes for failure among social entrepreneurs, in the perception of the participants, are:

1. Lack of resources and infrastructure

This is defined by the lack of support funds for social entrepreneurs, as well as ignorance as to how to get funded and the lack of skills to integrate projects to obtain social funds.

A piece of advice for social entrepreneurs: in order to create an impact, you need the hard financial skills that will help you obtain investment and grow your business.

The environment in which social enterprises operate is often not ideal because public policies have not kept pace with them. For instance, in Mexico there is no special legal designation for social enterprises.

3. The board of directors

In most social enterprises, the board is constituted of founding partners. It was surprising to learn that this tends to be perceived as a source of conflict; this can be caused by a lack of clarity in the areas of responsibility, a lack of commitment by the founding partners, and the presence of interpersonal conflicts between members.

A short video about this research can be see here .

Unlike other initiatives, social entrepreneurship is directly related to the personal qualities of the entrepreneur.

This includes their social skills to attract members, volunteers and investors on the one hand, and their ability to create support networks and mediate interpersonal conflicts among members of the organization on the other.

Such skills are significantly correlated with the project management and the achievement of a relevant product.

This research opened new questions that will be explored in the following years: Why do social entrepreneurs fail less than the rest?

What is the failure rate of social enterprises in other countries?

How can we reduce the impact of failure of a social enterprise?

Probably the answers will help social entrepreneurs all over the world to understand that failure is part of the journey, and that when failure is unavoidable, it is possible to fail in a smarter way.

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This paper examines the experiences of a single social enterprise that grew rapidly but ended in failure. Over more than 8 years, the author conducted intensive field research during the social enterprise’s life and held detailed post-mortems with key players after its death. This material is part of longitudinal research on social enterprise activity in the voluntary and community sectors, (Pharoah, Scott and Fisher, 2004; Russell and Scott, 2007). It is complemented by a review of five studies of social enterprise failure, together with some wider reflections about reporting on various ‘troubles’ (e.g. error, failure and scandal). The primary emphasis is upon problems involved in ‘making sense’, but is illustrated with reference to the experiences of this case study and the limited literature relating to social enterprise failure.

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Social Enterprise Case Studies

Requests for teaching notes, as well as your comments, can be sent to  [email protected]

If any case is reproduced and used in a course please contact us before distribution. For a complete listing of case studies by the Yale School of Management, please visit the Yale SOM Case Studies Directory . 

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Free cases on nonprofit governance

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Having avoided self-scrutiny for most of its sixty year history, a youth agency is forced to take a hard look at its future when finances begin to decline. The executive director and the board president hold differing views on the appropriate course of action, and the reader is asked to decide which position is in the best interests of the organization.

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Hospital joint ventures and conflicts of interest

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Social Enterprises and Public Value: A Multiple-Case Study Assessment

• Research Papers
• Published: 02 November 2020
• Volume 32 , pages 61–77, ( 2021 )

Cite this article

• Federica Bandini 1 ,
• Sabrina Gigli 1 &
• Laura Mariani   ORCID: orcid.org/0000-0002-3862-8894 2  

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Positioned at the crossroads of the market, public policies and civil society, social enterprises are private organizations that achieve social goals and, in an entrepreneurial way, respond to collective needs. By considering the micro-foundation of value generation as emerging from the assessment of three Italian social cooperatives’ business models, the aim of this paper is to understand the contribution, and the approach adopted by work integration social enterprises to the creation of public value. Our findings suggest that the approach adopted in order to generate value, changes according to several contextual factors. We identified, in particular, three models (the cooperative-driven, the people-driven, and the market-driven model) that are characterized by different relationship with the cooperative system, a differentiated tension toward commercial activities and specific catalysts for value creation.

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More specifically, a cooperative may respect eight founding principles: internal mutuality; external mutuality; limitation to profit distribution; participation; representativeness; accessibility; intergenerational solidarity; and inter-cooperative solidarity. Because of these principles, the main aim of cooperatives is not so much to achieve the highest return on capital investment to satisfy a common pre-existing requirement or need, to give members a greater advantage or saving than would otherwise have been possible separately (Thomas 2004 ).

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Bandini, F., Gigli, S. & Mariani, L. Social Enterprises and Public Value: A Multiple-Case Study Assessment. Voluntas 32 , 61–77 (2021). https://doi.org/10.1007/s11266-020-00285-8

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Accepted : 05 October 2020

Published : 02 November 2020

Issue Date : February 2021

DOI : https://doi.org/10.1007/s11266-020-00285-8

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Social Entrepreneurs Correcting Market Failures (A)

In the most basic sense, a market failure occurs whenever the production or allocation of goods or services by a market is suboptimal. On one hand, this can mean that the output, price, or distribution of products is either inefficient in the sense that the overall level of economic value or social welfare could be increased (typically through transactions that should occur, but don’t even though they would create value or through transaction that do occur, but should not because they destroy value). On the other hand, it can mean that the resulting allocation is inequitable or inconsistent with values of justice or fairness. From a public policy perspective, such failures are of concern because the public interest or overall social welfare is lower than it could be if the market were functioning more efficiently or, in the ideal case, was what economists would characterize as “Pareto-efficient” or “Pareto optimal.” Traditionally, societies have looked to government intervention to correct these market failures. At times, when a market failure affected a population’s access to food, shelter, clothing, medical care, or other basic necessities, charitable organizations also got involved. However, private businesses were rarely called upon (or expected) to respond to breakdowns in efficient market operations by modifying their behaviors in a free-market system. However, a new class of actors has recently gained recognition. These individuals often found and manage organizations drawing on innovative ideas, using entrepreneurial skills, and leveraging market principles, but with one important difference from traditional entrepreneurs they prioritize social impact over the creation of wealth. By shifting their emphasis from financial to social returns, these “social entrepreneurs,” as they have come to be known, have been discovering and implementing new ways of creating social and environmental value by serving the needs of poor, disadvantaged, and neglected communities. In a world where a billion people earn less than $1 per day, and four billion people have an annual per capita income below $1,500 (the minimum necessary to sustain a decent standard of living), many observers see these social entrepreneurs as poised to play an increasingly important role in addressing important social problems. This case examines the insights, aspirations, and impact of three leading social entrepreneurs, their organizations, and their efforts to correct a diverse array of classical market failures: • David Green, of Project Impact, who developed an innovative approach to manufacturing low-cost, high-quality medical supplies to treat and prevent blindness and deafness in the developing world; • Victoria Hale, of OneWorld Health, who worked to develop new medicines for infectious diseases that killed millions of people in the poorest parts of the world; • Jim Fruchterman, of Benetech, who created technology-based projects that ranged from reading machines for the blind to innovative software to protect information (and the people who collect it) in the human rights field.

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Broke and Idealistic: Why Do Social Enterprises Fail?

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What happens when social activists masquerade as business people?  

They still go hungry. According to The Guardian and UnLtd , 71% of social entrepreneurs struggle to make a living from their ventures, and the same proportion face problems creating sustainable revenue streams. Additionally, 60% of social enterprises cannot access the right type of funding. Clearly, social enterprises can’t seem to resolve issues around money. Are social entrepreneurs financially incompetent, or are there deeper causes for their struggles?

Why do social enterprises fail?

While investigating this question in Mexico, the Failure Institute discovered that only 17% of social enterprises remain in operation for longer than 3 years. Social entrepreneurs who were surveyed identified two primary causes for the failures of their enterprises:

• Lack of resources and infrastructure: Social enterprises could not secure funding because teams lacked fundraising skills, teams did not know where to find funds, or funds did not exist.
• Social and economic context: The inconsistent context that social enterprises were operating in did not effectively respond to their needs. Contextual problems included inadequate regulatory environments for social enterprises and insufficient public/private participation in social enterprises.

Both of these factors heavily influence a social enterprise’s ability to create sustainable revenue streams. However, they fall outside of the social enterprise’s domain of control.

Funders dictate resource accessibility, and policy makers determine contextual factors. Do these two groups exclusively control the fates of social enterprises?

Let us explore some additional possibilities.

Social Enterprise Problems Fall into Four Categories

In Social Entrepreneurship: What Everyone Needs to Know , David Bornstein and Susan Davis detail four interconnected categories of problems that affect social enterprises:

• Talent Cultivation: Social enterprises fail to recruit, train, and retain talented employees.
• Resource Acquisition: Social enterprises experience difficulties raising funds.
• Impact Evaluation: Social enterprises struggle to measure and report their social/environmental impacts. Furthermore, impact metrics are not standardized as well as risk/return metrics.
• Cross-Sector Collaboration: Social enterprises must often collaborate across industries and sectors to succeed. This presents challenges, such as facilitating communication and aligning stakeholder interests, that can be difficult to manage.

With the exception of resource acquisition, funders and policy makers appear to have little influence over these factors…

Blame Funders and Policy Makers for Social Enterprise Failures

Interestingly, these four categories of problems can all be traced back to the Failure Institute’s two primary causes of social enterprise failures, which revolve around funders and policy makers.

Talent and resource problems most-likely stem from ROI and wage differentials among for-profit, non-profit, and hybrid models. Improved government regulations and financial instruments would incentivize higher rates of investment in social enterprises, which could close wage gaps. Unfortunately, innovations in public policy and finance fail to keep pace with the rapidly progressing field of social entrepreneurship.

Impact evaluation and cross-sector collaboration go hand in hand. Standardizing impact metrics requires consensus from stakeholders across industries and sectors. Conversely, facilitating cross-sector collaboration and aligning interests would become much easier with standardized impact metrics providing a common framework. Alongside social enterprise teams, funders and policy makers the two main stakeholders when it comes to impact evaluation and partnership formation.

Why do social enterprises fail? In most cases, we can blame funding and policy failures.

Since funders and policy makers cause social enterprise failures, they should resolve the situation. Right?

Knowledge is Power for Social Entrepreneurs

Actually, educators and connectors are the people who should reduce failure rates among social enterprises.

Universities, accelerators, incubators, and ecosystem builders are uniquely positioned to address the four categories of problems. Educators, such as academic institutions and enterprise support providers, can cultivate talent and teach social enterprise teams how to acquire resources.

While educators possess technical knowledge, connectors have social intelligence and ecosystem knowledge. Connectors, also known as ecosystem builders, can bring stakeholders to the table to resolve impact evaluation and cross-sector collaboration problems.

Furthermore, finance and policy innovations for supporting social enterprises do exist. Although their use and availability is not widespread, new strategies for funding and regulating social enterprises are being conceived, tested, and iterated constantly. Educators and connectors should take on the responsibility to disseminate knowledge of these innovations across borders and ecosystems.

Follow Social Sector Network ‘s Example

Here at Social Sector Network, our primary objective is helping social enterprises succeed. Tackling the four categories of problems head-on, we have modeled our enterprise to empower social enterprises through education and connection.

Social Impact Startup: Online Social Entrepreneurship Training

Our most extensive course, Social Impact Startup , guides aspiring social entrepreneurs through key startup processes, such as market research and rapid prototyping. Furthermore, we cover several strategies for social enterprises to create revenue streams, as well as raise capital. Reduce your chances of failure with this self-paced online program.

If you are an educator or connector, we highly encourage you to follow our example and work to reduce failure rates among social enterprises. Help feed a social entrepreneur!

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