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

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.

2. Context

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.