Companies that create social and ecological solutions are on the rise globally. Especially in developing countries products and services that tackle pressing challenges of the Bottom of the Pyramid (BoP) are in dire need. With the Corona pandemic threatening the growth path of many economies, social enterprises are taking on an even more important role.
Many companies in Germany are committed to generate added value for society. However, in contrast to many other European countries, there is still no state-adapted definition of social entrepreneurship in Germany. In order to provide a first classification, the Social Entrepreneurship Network Germany (SEND) has elaborated current approaches and developed a concrete first definition. It is divided into three dimensions: the social dimension, the entrepreneurial dimension and the governance dimension.
The primary goal of social entrepreneurship is to solve social challenges. This is achieved through the continuous use of entrepreneurial resources and results in new and innovative solutions. Steering and controlling mechanisms ensure that the social goals are lived out internally and externally.
Last week the 3rd German Social Entrepreneurship Monitor (DSEM) was published giving an update on the state of the social entrepreneurship ecosystem in Germany. The study highlights 10 key facts:
- DSEM social enterprises operate in a wide range of sectors. The most common sectors are “education” and “health and social work”.
- The DSEM social enterprises most frequently impact the following SDGs through their activities: “Sustainable consumption and production”, “Health and well-being” and “Reduced inequalities”.
- The DSEM social enterprises are committed to inclusion. Almost one third employ people with physical or mental disabilities in their organisations.
- At least 92% of DSEM social enterprises aim to scale their organisation to maximise their impact.
- The range of legal forms chosen is very wide. Overall, 58.6% of DSEM social enterprises have a more commercially oriented legal form, while 46.4% operate from a more socially oriented legal form.
- However, the choice of an adequate legal form for social enterprises in Germany remains a challenge. Six out of ten of the DSEM social enterprises criticise the current legal situation.
- Two thirds of DSEM social enterprises use hybrid income sources, i.e. they generate income through both market and non-market activities.
- DSEM social enterprises are most often financed through their own savings, government funding and internal financing.
- At the same time, the issue of funding is the biggest challenge for DSEM social enterprises. The difficult-to-track allocation of public funding, the lack of targeted follow-up funding and the lack of usable forms of startup funding are among the biggest hurdles for DSEM social enterprises.
- In 2020, the DSEM social entrepreneurs were again rather dissatisfied with the support from politics. 80.2% rated the support for social entrepreneurship as poor.
Social enterprises are located in all regions of Germany. Most DSEM participants come from Berlin (19.4%), North Rhine-Westphalia (14.0%), Bavaria (12.6%), Hesse (11.7%) and Hamburg (11.2%). Together, the five federal states account for 68.9% of all DSEM social enterprises. Berlin has become a global hotspot for social enterprises and thus also offers excellent conditions for foreign social entrepreneurs seeking to found their business in Germany. New initiatives for local funding, such as the Berlin Senate-funded project “Social Economy Berlin”, as well as a further opening of existing funding instruments and the establishment of a dedicated impact VC fund of 30 million euros, underpin the capital’s claim to be a pioneer in the field of socio-ecologically sustainable economic activity. Fortunately, the promotion of social entrepreneurship is increasingly moving onto the agenda of the federal states and municipalities. With the “Social Innovator Hessen”, the first state-wide promotion of social entrepreneurs was launched. In addition, the economic development agencies in Hanover, Dortmund, Bremen and Mannheim have set up programmes to advise and support social enterprises.
As highlighted above, social enterprises operate in all sectors. While in each of the last two years “Information and Communication” was the most mentioned sector of DSEM social entrepreneurs, this year the largest number of DSEM social entrepreneurs associate themselves with the sector “Education and Teaching” (21.5 %). Together with “health and social work” (17.5%) and “arts, entertainment and recreation” (9.1%), almost one in two DSEM social entrepreneurs (48.1%) associate themselves with activities in the traditional social economy. In addition, 22.4% said they belong to more than one sector.
When expanding to Germany, the right legal form is of utmost importance. However, even German social enterprises struggle to identify the most suiting legal form. Unlike many purely profit-oriented companies, social enterprises combine a focus on the common good with economically sustainable action. This is also reflected in the fact that 58.6% of DSEM social enterprises operate from a more commercially oriented legal form and 46.4% from a more socially oriented legal form. The limited liability legal form followed by the non-profit limited liability legal form and the non-profit association legal form are the most frequently chosen legal forms of DSEM social enterprises. Unlike in many other countries, there is still no recognised legal form for social entrepreneurship in Germany.
The impact of the Covid 19 pandemic has shaped social life in 2020. Worldwide, the spread of the virus and the subsequent containment measures have led to a collapse of the economy and a serious increase in mental illness, poverty and unemployment. The economic consequences of the pandemic have plunged many companies in Germany into a deep crisis. Social enterprises are no exception. In a study by SEND from spring 2020, the considerable negative effects of the Corona crisis on the sector already became clear. 46% of the respondents stated that they would not be able to keep their companies or organisations going for more than six months under the conditions prevailing at the time. The challenges are predominantly related to the containment measures (lock-down) initiated by the federal government. Almost every second DSEM social enterprise (47.9%) is affected by closed shops and facilities and the cancellation of events.
However, the Corona pandemic also holds new opportunities and possibilities. Overall, two thirds of all DSEM social enterprises have helped target groups affected by the crisis, e.g. by developing new services or digitising their existing services. Additionally, 92.5% of DSEM social enterprises want to scale their business models. Here, international markets also play an important role for German social enterprises. 41.4% want to diversify or expand into new geographic or other consumer markets. This offers potential for partnerships with social enterprises from other regions and countries.
In order to make Germany a more attractive location for social enterprises, some basic conditions still need to be improved:
- Coordination & clear responsibilities: Complex social challenges do not need simple answers, they need integrated action with a view to systemic interrelationships. Social entrepreneurship is a cross-cutting issue that requires interdepartmental coordination and a coherent social innovation strategy. Currently, social innovations are treated as a cross-cutting issue in different policy areas. An integrative-strategic approach in the form of interdepartmental coordination does currently not exist. A national strategy should be developed.
- Access to finance: According to the latest DSEM, four of the five biggest challenges social enterprises are facing relate to financing issues. In addition to opening up existing instruments, the development of target group-specific financing instruments for innovative social enterprises and social innovations is recommended. The development of these instruments could be implemented via “dormant assets” for taxpayers in a cost-neutral way.
- Innovation centers: While innovation and incubator centres in the commercial context are supported by the state, there is a lack of a corresponding infrastructure for social entrepreneurs and social innovations. It is recommended to establish a programme line for the establishment of social innovation and start-up centres as well as accompanying qualification programmes. Existing centres should be supported in their further diversification to work with social enterprises.