A social entrepreneur should be actively building and testing the assumptions in the business model from day one. Using a canvas to model the business makes the process easier and faster.
This post is the second in a series on business modelling. My previous post on how to model a non-profit on the lean canvas is recommended for changemakers in non-profits or government.
In this post I will cover how to use the lean canvas to model your social business in a way that also highlights its purpose/impact. This post applies to all types of social businesses, including for-profit social ventures and social enterprises housed within non-profits. The lean canvas can also be used whether the business seeks to create its impact with a stakeholder group (e.g. customers, employees) or is looking to donate all its profits to a non-profit.
A brief history of business modelling
Entrepreneurs used to write their “Plan A” in a business plan and then execute it until the plan came into contact with the outside world. The entrepreneur would then waste a tremendous amount of time and money confronting the gap between the plan and reality. The problems with business plans include:
- Most of the content is made up but written in a way that portrays it as certain
- They are often lengthy, 30-40 pages, and time consuming to write and update
- Are out of date almost as soon as they are written
- Most of the people who ask for them don’t even read them
- Do nothing to quickly communicate the critical assumptions the idea is based on
More recently, entrepreneurs use canvases to track the critical assumptions in their business models. This enables entrepreneurs to confidently make strategic decisions faster and with fewer resources. Specifically business modelling on a canvas is:
- Fast – To prepare and to interpret, which make it easy to brainstorm and test different models simultaneously
- Iterative – Easy to revise canvases as hypotheses are tested and keep a current snapshot of the business model being tested
- Concise – Forces the entrepreneur to distil the idea into its essential core and focus on the critical aspects of the model
- Accessible – Easy to read, share, and communicate when gathering feedback and testing
A social entrepreneur should be actively building and testing the assumptions in the business model from day one. Using a canvas to model the business makes the process easier and faster. For an overview of this process, I recommend reading Ash Maurya’s post Your Product is NOT “The Product”.
Why the lean canvas?
There are several canvases available to social entrepreneurs including: lean canvas, business model canvas, and social business canvas. Although all are still faster than writing a business plan, many of these canvases add additional boxes that are not critical to building a sustainable business model for the social entrepreneur to leverage her or his impact. I recommend using the lean canvas for the following reasons:
We as social entrepreneurs tend to focus on the social or environmental problem that we seek to address and not fully consider the customer, what problem are we are solving for them, and why will they buy our product or service. The lean canvas makes these key assumptions explicit.
In addition to ensuring the problems are explicit, the lean canvas keeps the solution constrained. Solutions flow from an understanding of the problem so it is more critical to focus on customer problems in the initial stages rather than the solution.
Sometimes in social enterprises housed within non-profits there is a tendency to focus on the solution as it is how the non-profit will generate revenue for its programs. In these circumstances, focusing on the solution too early can create challenges later when presumed target customers are not willing to pay for the solution. In cleantech, there is often a technological solution in search of a problem. In the cases where the entrepreneur finds a market she or he spends additional resources to adopt the technology or the problem that the technology seeks to solve is not big enough to build a scalable company.
Focusing on the customers’ or users’ problems helps ensure the business is solving a worthwhile problem from which it can scale.
In order to gain enough traction to be financially sustainable before the startup runs out of resources (i.e. time, money), an entrepreneur needs to focus on the few metrics that matter and ignore the many that don’t.
In social businesses the entrepreneur should focus on a metric to show it is gaining traction with its customers, and a metric to assess whether it is achieving its desired social/environmental impact. The lean canvas clearly defines what are these key metrics.
To measure impact, a social entrepreneur can use tools from the non-profit world such as logic models and theories of change are still part of understanding and defining the long-term outcomes and should be used alongside the lean canvas.
Focuses on the critical assumptions of a social business
The lean canvas was designed to make explicit those assumptions that are the riskiest in a business model, which are usually a combination of:
- Identifying who has the pain – customer segments
- Finding a problem worth solving – problem
- Building a viable business – revenue and pricing
- Tracking progress the right way – key metrics
The riskiest assumptions are those that are uncertain and the consequences of being wrong are critical to the existence of the organization. After making them explicit, the social entrepreneur can then validate whether they are correct or not through the lean methodology.
How to model a social business – Grameen Bank example
The Grameen Bank originated in Bangledesh in 1976 to provide credit in the form of small loans to the rural poor. By offering an alternative to usurious middlemen and village moneylenders, the bank helps its members get out of poverty. The Grameen Bank earns a financially sustainable profit but its purpose is to break the cycle of poverty. Below is what an early lean canvas for the Grameen bank could look like:
In this example, the purpose of the organization is embedded into the customer segments, problem and value proposition. As Grameen has a higher purpose in its service to customers it targets a vulnerable customer segment experiencing problems that reinforce poverty. It is not sufficient to become financially sustainable by maintaining a high loan repayment rate but it must also help its customers get out of poverty. That is why Grameen has two indicators under its key metrics.
Tips on modelling social businesses
If how you do business is not why customers buy then keep it off the canvas
If a business’s social mission is not core to why customers buy it then its purpose should be left off the canvas because it is not a critical assumption for the business model to work. For example, a for-profit company that improves the recyclability of plastics may be founded out of a passion to clean up the oceans but if the startup’s customer segments is not looking to solve that specific problem then it is not part of how value is delivered to them and should be left off.
In the event that a social venture creates impact for a segment other than its customers and it is part of the reasons why customers buy the product or service, such as a catering company whose mission is to provide employment opportunities and programs for people with barriers to employment, then it should be included. However, since it is serving two distinct customer groups in a multi-sided model and I recommend using my previous post on modelling non-profits as reference.
Only highlight short-term indicators in key metrics
In a social business, it is not sufficient to measure the financial indicators of how the venture is performing. I also put the output or short-term measures of how the organization measures its mission success under the key metrics section.
Although the social business may have longer term impacts as its ultimate goal, I recommend keeping these off canvases as the lean methodology requires actionable, accessible, and auditable metrics. The longer the time horizon, the less actionable and auditable they are due to other external influences that enter over a longer time horizon. However, they are key in measuring performance relative to your purpose so you can include them in a logic model or theory of change, which is the nonprofit world’s lean metrics before lean existed.
- Create a lean canvas for your social business
- Reach out to me if you would like feedback on your canvas
- Join our waiting list for the next social business modelling webinar