Impact Business Design for Social Ventures

The 2019 Internatonal Forum on Design to Solve Social Problems has obtained written consent from the speaker to publish the summarized and edited content

SPEAKER: Sangyeob Han (Korea, Sopoong CEO)


Partner of starting social ventures, Sopoong
When we face certain problems in our daily life or when social problems arise, the government solves them, or non-profit organizations and companies solve them. Someone has to pay attention to the problem and develop and disseminate a solution. Can the government do all this?
Problems can be solved by institutions and policies, or they can be solved by products and services. It can be a public service, or it can be a product or service that needs to be paid for. I would like to think about the ‘company’, which is the entity that makes these products and services.

There are many people who have a bad perception of corporations today, but in fact, corporations are the most efficient organizations or institutions in human history. Most of the products we use now in our daily life are made by companies, and it is us, people, who made the company's production activities possible. After all, people have realized ideas through companies to build services or manufacture and sell necessary products, and now companies to solve social problems have begun to appear. Sopoong invests in people who want to solve social problems through businesses and nurtures businesses.

Social venture with Sopoong

 ‘Sopoong’, an abbreviation of ‘SOcial Power of Networked Group’, is a social venture incubator that promotes the resolution of social problems through impact investment and acceleration to those who solve social problems as companies. Since 2008, we have started with 46 companies such as Socar, Tumblrbuck, and Space Cloud, helping new and early social ventures that create solutions to various social problems to grow rapidly. Most people may think that solving social problems is far from profitable, but we have made a lot of money in the process. Social problems are basically inconveniences and pains experienced by many, so solving them will generate additional profits. Sopoong is a company that was established 10 years ago and is currently in the 3rd term, and plans to convert to the 4th system from 2020. Since 2017, the company has been making investments with its own capital and has been repeating investment and recovery using capital.

Sopoong incorporates a gendered perspective when designing the investment process. As in Korea as well as in the United States, modern society is a difficult environment for women to start a business, and women account for 30% of Korean founders. According to publicly available data, it is estimated that Korea's venture funds in 2019 will be about 5 trillion won and investment will be 2-3 trillion won. Out of this, only 7% of entrepreneurs received investment. Ironically, statistics show that both the US and South Korea receive positive business evaluations if the representative is a woman. In the background, there is the prominence of the capacity due to the glass ceiling, but with prejudice, most people who invest are men. Among the companies that Sopoong has invested in, the proportion of female representatives reaches 34%. Now, there is a growing movement in the investment ecosystem to consider the gender perspective and diversity beyond gender.

Social venture impact investing and accelerating
Discussion on the subject of solving social problems has been active since 1970. Even if this discussion has continued, it is true that if there is not enough capital, neither investment, employment, nor operation will be possible. The story of capital for solving social problems has been active since 2000, and it has become a rapidly growing field since 2007.
In addition, the role of corporations as a main agent in solving social problems is expanding. The reason is simple: because citizens want it. When looking at the government, large corporations, and social enterprises in that order, citizens show tremendous trust in social enterprises. It is to look forward to and support the new attempts of social enterprises. It is also because the government, civic groups, and large corporations have solved social problems well, but they are tired of the basic methods.

Sopoong invests in social ventures and entrepreneurs who use entrepreneurial approaches as a means to solve social problems. Solving social problems is the purpose of social ventures oriented towards social values, and the entrepreneurial approach is a management method of ventures that has the strength to quickly create scale based on technology and expertise. Sopoong conducts impact investing and accelerating. Impact investing is a term first introduced by GIIN (Global Impact Investing Network) in 2007, and refers to an investment method that intentionally pursues financial returns and measurable social impact (impact) at the same time.
What every investor wants when investing in a company is to grow a unicorn company. A unicorn company is a company with an enterprise value of more than 1 trillion won. However, to grow into a unicorn company, at least 300 to 400 billion won of seed capital must be invested. Sopoong's average investment is 50 million won. You can see the seeds of the company's potential to become a unicorn company, but you can't sow it. Accordingly, Sopoong aims to be 'unique'. Before becoming a unicorn, a unique solution to social problems, a unique value is needed. Here, 'unique' is defined as 'to have something different from what already exists, or much more effective and efficient than what already exists’.

Impact investing

Social mission

So, how do you find ‘unique’?
‘Unique’ starts with defining the social problem to be solved. Social problems are divided into three categories: Those that exist but have not been resolved, those that have emerged due to social change, and those that have not yet happened but will become problems in the future. Entrepreneurs and accelerators interpret with a third eye, and come to a consensus through good questions that can be objectified, constant dialogue, and sufficient discussion. This is a 'social mission'.

Pursuing SPA (Social Profit Aliment) and Impact Business Model (IBM)

In order to solve social problems as a company, two things must be considered. The first is profit and the second is social value. The 'impact business model' is a business model designed at the point where these two meet. The pursuit of SPA is a mechanism and strategy that enables the maximization of double returns pursued by Sopoong as an impact investor. As social ventures that aim for and achieve SPA grow, not only social benefits but also returns in the market will increase. Without this design, neither social value nor profit is created. Profits must be maintained in order to solve social problems along with sustainability, and are the funds needed to sustain them. Accordingly, financial and social values ​​should not be separated. Like the double helix of DNA, a social business impact business must have a strong connection between financial and social values. Social value encompasses all environmental values ​​and means the things the business should aim for. Specifically, it includes labor, human rights, inequality, disability, and quality of life. As such, if raising the quality of life is a social value, then trying to create that social value or actually creating it is considered the creation of social impact. Both the process and the result are included. The whole process of solving social problems can be social innovation. If the process itself is meaningful, it means that it has social value.

There may be a model with a strong combination of impact and business, and there may be a weak model. In general, the number of companies with a strong connection between the two is rare, and even if there are, all investors want to invest. Sopoong meets an average of 400 to 500 teams a year and conducts actual meetings. If you include the teams that receive or search for data, there are over 1000 teams. Most of these companies are in a ‘question mark’ state. It is the role of Sopoong to meet two models that have a definition of the customer or are connected to solving social problems and raise them to the target, but the process is not easy. To this end, Sopoong verifies the validity and hypothesis of the solution through the MVP (Minimum Viable Product), a prototype made by reflecting customer needs.

Combining impact and business, transformation

In general, the motivation for starting a business to solve social problems is ‘solving social problems’, that is, impact. Therefore, there are many people who start their business with impact as the center. However, from the moment you decide to start a business and establish a corporation, the business must be the main one. Because without business there can be no impact. The transition between impact and business is very difficult. This is because it requires a lot of change in identity. If you succeed in this process, you can turn into a good social entrepreneur, but if you don't, you will find an investment company like Sopoong. Sopoong not only invests in capital, but also goes through the process of transforming entrepreneurs and founders into social entrepreneurs.

Case 1. Donggubat

Donggubat, a social venture that solves the problem of developmental disabilities

It is difficult for people with developmental disabilities to receive support from companies because their tenure is short as they cannot form continuous social relationships. The reason why we came to Donggubat, a social venture where people with developmental disabilities and non-disabled people work together, is because there are no investment companies that support ordinary people with developmental disabilities, and we thought that the purpose of providing social help to people with developmental disabilities was very good. However, the problem of non-impact business was serious. Because this was a place where people with developmental disabilities received paid education, there could be a problem about what to do with people with disabilities who cannot pay. It was not their fault that they were born with a disability, and it was unclear how many people with developmental disabilities in Korea could be provided with educational services.
The CEO of Donggubat wanted to educate people with developmental disabilities in a garden environment. We wanted to use the hydroponic setup box that was popular at the time, but considering the investment in facilities and professionalism, Sopoong recommended soap products. There may be a prejudice against ordinary soap, but through market research, it was found that a high-end handmade soap market is being formed. Soap has become a luxury handmade product rather than a daily necessity bought at a low price. We derived a business model to make organic, high-quality handmade soaps made by people with developmental disabilities in a garden setting. At first, the CEO stubbornly refused, but after setting a sales target for a month and going through a trial period, Donggubat turned into a soap manufacturing company, and now surprisingly, it has become a company with annual sales of about 3 billion won. Donggubat soap has been recognized for its good quality and is being exported to 8 countries around the world. It is a good example of strong impact and weak business transformation.

Case 2. Student Independence Manse

Student Independence Manse

Student Independence Manse was originally a private tutoring business, and after hearing many stories of students having difficulty paying tuition at the time, I had a new awareness of the problem. Afterwards, the company changed the tuition payment method to a post-payment system, but there was a big problem here. It's good to tutor students who can't pay their tuition right away, but what happens after they get tutoring? Wouldn't it lead to social stratification based on academic experience, a problem in our society? The purpose of helping students without money was good, but the impact it created was negative.
This business problem was discovered through a meeting with Sopoong, and after a few modifications, all training was changed to a post-paid system. If you get a job after receiving education, 2% or 3% of your monthly salary is set and repaid over 3 years. This was possible through the company's ability to become a tutoring company that provided tutoring for 200 people. Student independence Manse, which has undergone many changes, is currently achieving good results. This case can be said to be a successful case of a strong business and insufficient impact transformation.

Sopoong's impact measurement and evaluation
Measurement of social value and impact of social enterprises proceeds through SDGs, impact logic model, and impact KPI consensus. First, it is necessary to specify the social mission in detail. Article 2 of the general corporate articles of incorporation, which is standardized, is described very specifically. After that, clearly set impact KPIs to make it a corporate culture, confirm social venture identity and track impact KPIs, and proceed with investment deliberation reports and regular reports. Finally, we use Impact SDGs, like 70% of impact investors worldwide.

Impact measurement and evaluation method

Impact Logic Model

The Impact Logic Model is a model of Morgan (2010) that applied a logic model to the area of ​​impact investing. To a general company, sales can be an output, but to a social venture, it is an output. Social impact can be created in the entire process from corporate input to output. For example, in the case of Dong-gubat, mentioned above, the 21 people with developmental disabilities who are educated in the garden and employed in the soap factory should be viewed as inputs, not outputs or outcomes. Input itself can create social value. As another example, when you invest in a company that launched menstrual cups in Korea for the first time, looking at the value of obtaining government permission to launch menstrual cups, this is an activity, not an outcome. Impact is derived through activities.

As shown in the various activities above, we believe that companies can create a good society while solving social problems. A company can make a good service or product and be reborn as a good company in the process. If there are many such companies, an ideal 'company image' will be formed, and this will be the road to a good society. In addition, if the number of companies making products with various values increases, consumers become 'good consumers' by purchasing the product. Consumers who pursue values that are more ethical and gender-sensitive than before will soon become good citizens and, as a result, a good society will be formed.
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