Social startups are here, but going nowhere

Social entrepreneurs in Europe are struggling to scale their startups due to a lack of growth mindset and little awareness and confidence around sourcing new finance options, a new report has found. 

The NESTA report found that just 0.5 per cent of European startups are able to scale because entrepreneurs aren’t equipped to overcome the hurdles in their business that allow them to grow.   

Entrepreneurs faced four major hurdles: a lack of growth mindset, not being aware of external finance options, being unable to put the time and effort into growing the business, and a lack of confidence when talking to venture capitalists or equity investors about finance options. 

Only 2 per cent of startups were able to overcome all hurdles, while others often remained small (one to three employees), stayed in local markets, and many collapsed after a few years. 

The report said this was an issue because the ones that did manage to scale contributed “disproportionately” to economic and social welfare. 

Previous studies on why so few startups scale have focused on the supply of talent, markets, finance or other environmental factors. This report said it aimed to provide a different perspective by looking at entrepreneurs’ demand for growth and finance.

A key factor in growth for startups was found to be accessing external finance. An overreliance on internal and informal finance, such as funds from family and friends, was found to reduce risk-taking, creating lock-in effects by keeping the business small.

“It, therefore, is crucial for entrepreneurs to access the most suitable types of finance to support the growth of their business,” the report said. 

But it said that entrepreneurs were often unaware of the finance and support options, like loans, grants, and insurance, that were available to them, and they lacked confidence in believing they could be successful as entrepreneurs.    

“Entrepreneurs with low self-efficacy are likely to lack confidence when talking to banks, venture capitalists or equity investors,” the report said.  

Social Change Central co-founder Anne Lennon told Pro Bono News that Australian social entrepreneurs faced similar barriers. 

“A lack of awareness of and access to funding options is definitely a barrier for Australian social entrepreneurs,” Lennon said. 

She also said the legal landscape for social enterprises posed a challenge when scaling, with many having to choose between structuring as a not-for-profit or a for-profit organisation.  

“They may seek to rely on grant funding in the startup phase but then in order to scale they may require equity investment,” she said. 

“However there is currently no distinct legal structure for social enterprise in Australia that easily accommodates this. It is complex and requires specialist advice.” 

Using the data from interviews and roundtables with 64 startup entrepreneurs, the report suggested that the entrepreneurs who had successfully scaled held a strong desire to create a positive impact on society, were innovative, a dominant player in their field and were building a value-creating business. 

More often than not, growth was found to be an individual process spurred on by personal triggers like personal, social, business, financial and environmental factors.   

For entrepreneurs to overcome the hurdles, the report said growth mindsets in entrepreneurs had to be nurtured by including mindset training alongside business practices, and in the education spectrum. 

Margaret O’Brien, the CEO of Young Change Agents, told Pro Bono News that considering Australia’s poor ranking when it came to entrepreneurship school education in the Global Entrepreneurship Monitor, a similar recommendation to encourage social startups to scale was needed. 

“If Australia is going to help build growth-oriented entrepreneurs we need to invest more in building the mindset, skillset and toolset of our youth and link them into the wider startup ecosystem,” O’Brien said. 

She said that by helping young people see problems as opportunities through business was a key way to get more Australians starting and scaling businesses.

“Purpose is becoming a key driver for business growth and that is good for us a society,” she said.

The report also recommended improving awareness of, and access to, resources for growth and to facilitate risk-taking through loan guarantees for startups, “second chance” policies and the removal of perverse tax biases that discouraged growth. 

Lennon added that in Australia, more investment was needed in programs to help train social entrepreneurs. 

“More funding should be made available for professional development and capacity building within the sector as well as more opportunities for peer to peer support,” she said.