What are the biggest challenges facing a new social enterprise during its first two years?

Starting a social enterprise is an exciting yet challenging venture. The mission to address social or environmental issues while ensuring financial sustainability often brings together a unique set of obstacles. While the first few years are crucial for laying a strong foundation, they can also be some of the most difficult. From balancing social impact with financial viability to managing growth, new social enterprises face an array of challenges. In this blog, we’ll explore some of the most significant hurdles new social enterprises encounter during their first two years and how to navigate them.

1. Balancing Social Impact and Financial Sustainability

For a social enterprise, one of the primary challenges is striking the right balance between achieving social impact and ensuring financial sustainability. Unlike traditional businesses that primarily focus on profit, social enterprises need to prioritise their mission while still generating enough revenue to cover operating costs and reinvest in growth.

In the early stages, this can be especially tough. Social enterprises often rely on grants, donations, or impact investment, but these sources of funding may not always be reliable or sufficient. At the same time, growing a customer base or developing a sustainable business model takes time, making it difficult to maintain a positive cash flow.

How to Overcome This Challenge:

• Focus on creating a clear value proposition that resonates with both social mission and market demand.

• Develop diversified revenue streams to reduce dependence on one funding source.

• Monitor cash flow carefully and prioritise spending on activities that directly contribute to the enterprise's mission and growth.

2. Building a Strong and Committed Team

A social enterprise requires more than just a great idea — it needs a dedicated team to execute that vision. In the early stages, building a strong and committed team can be challenging, especially if financial resources are limited and the enterprise cannot offer competitive salaries or benefits.

Employees in a social enterprise are often driven by the mission, but they also need to be skilled and capable of wearing multiple hats. This can lead to burnout, especially in the early years when everyone is stretched thin, and roles are constantly evolving.

How to Overcome This Challenge:

• Attract team members who are passionate about the cause and align with the values of the enterprise.

• Foster a supportive and flexible work environment to encourage long-term commitment.

• Offer non-monetary incentives such as professional development opportunities, flexible working hours, or a positive organisational culture.

3. Securing Funding and Investment

Financing is one of the most significant hurdles for any new enterprise, but it can be particularly complex for social enterprises. Many traditional investors are focused solely on financial returns, whereas social enterprises require investors who are aligned with both financial and social objectives.

Additionally, securing grants or impact investment can be a lengthy and competitive process. The challenge lies in demonstrating that the enterprise is both financially viable and capable of generating meaningful social impact.

How to Overcome This Challenge:

• Build a solid, transparent business plan that clearly outlines both the financial and social objectives of the enterprise.

• Seek out investors who specialise in social impact or venture philanthropy.

• Use storytelling to communicate the mission and impact of the enterprise effectively.

• Consider applying for social impact grants, crowdfunding, or exploring hybrid funding models.

4. Navigating Market Fit and Customer Adoption

In the early stages, understanding the market fit for a product or service can be an elusive but critical task. Social enterprises often operate in niche markets or address issues that may not have immediate commercial appeal. Convincing customers or clients to embrace a new, socially-minded product or service can be difficult, particularly if there’s competition from established, for-profit businesses.

For many social enterprises, customer education is a key part of the process. Potential customers need to understand why the social mission matters and how the product or service aligns with their values.

How to Overcome This Challenge:

• Focus on customer education and outreach to build awareness about the social problem being addressed and how your enterprise contributes to the solution.

• Start by targeting early adopters who are passionate about social impact and are willing to support new models.

• Use feedback loops to constantly refine the product or service based on real customer needs.

• Leverage partnerships with other organisations to increase visibility and credibility.

5. Managing Growth and Scaling Responsibly

As a social enterprise grows, the desire to scale quickly is natural, but doing so without compromising the social mission or quality of service can be challenging. Rapid growth can strain resources, challenge existing operational structures, and dilute the impact the enterprise originally sought to achieve.

Scaling too quickly without adequate infrastructure in place can lead to burnout, operational inefficiencies, and loss of focus on the core mission.

How to Overcome This Challenge:

• Take a measured approach to growth. Focus on scaling sustainably rather than rapidly.

• Invest in building strong internal systems and processes that support efficient operations.

• Maintain a clear, consistent focus on the social mission while adapting to growth challenges.

• Be mindful of the importance of maintaining the enterprise’s values and culture as it expands.

6. Dealing with Regulatory and Legal Complexities

Social enterprises often operate in sectors that are subject to regulations and compliance requirements, which can vary depending on the country or region. Navigating the legal landscape — especially when it comes to tax, employment laws, and social impact reporting — can be daunting.

Understanding the regulations that apply to the social enterprise’s business model, structure, and fundraising can be complex, especially when laws are continually evolving.

How to Overcome This Challenge:

• Consult with legal and financial advisors who specialise in social enterprise to ensure compliance.

• Stay informed about relevant regulations and be proactive in addressing potential legal risks.

• Consider working with a mentor or joining a network of other social enterprises to learn from their experiences.

7. Measuring and Communicating Social Impact

Social impact measurement is an essential part of any social enterprise. In the early years, it can be difficult to develop and implement robust systems for tracking and demonstrating impact, especially when resources are limited.

Moreover, measuring impact in a meaningful way that resonates with stakeholders is critical to maintaining credibility and attracting funding.

How to Overcome This Challenge:

• Establish clear metrics for measuring social impact early on.

• Use frameworks like the Theory of Change or Social Return on Investment (SROI) to quantify impact.

• Be transparent in communicating results and share both successes and challenges.

• Continuously refine impact measurement methods based on feedback and outcomes.

Conclusion

The first two years of a social enterprise can be some of the most challenging but also the most rewarding. While there are obstacles to overcome, they also present valuable opportunities for learning and growth. By maintaining a clear mission, securing the right funding, building a strong team, and balancing social impact with financial sustainability, social enterprises can weather these challenges and build a strong foundation for long-term success.

Ultimately, the journey may be tough, but the rewards of creating lasting social change make it all worthwhile.