For most of us, the word startup brings a familiar picture to mind: a small team, a new idea, investors, and maybe one day an exit. A social startup takes a lot from that picture but swaps out the goal. Its success is measured by the change it creates in people's lives, not by the company's valuation.
This article is for entrepreneurs who have an innovative idea for a social problem, and for anyone trying to work out whether their venture is a social startup, a social business or a nonprofit. We will go through the definitions, the differences in how success is measured and how money is raised, and the possible legal structures.
What is a social startup?
A social startup is a young venture that offers a new solution to a social or environmental problem and aims to reach many people. It usually has an element of innovation: technology, a working model that has not been tried yet, or a new connection between parties that have never worked together before.
A social startup is not a type of legal entity. It describes an approach. It can operate as a nonprofit, as a company or as a venture inside an existing nonprofit, and what defines it is its goal and the way it works to achieve it.
Social startup, social venture and social entrepreneurship: what is the difference?
- Social entrepreneurship is the whole field: the work of people who identify a social problem and build a response to it.
- A social venture is the initiative itself, of any size and at any stage. A group of neighborhood volunteers and a national program are both social ventures.
- A social startup is a social venture with an emphasis on innovation and growth, sometimes with a technology component.
- A social business is a venture that funds itself mainly by selling a product or service, and invests its income in the social goal.
In practice the terms overlap, and most people use them interchangeably. More important than the label is understanding what your venture is trying to change, and how it will fund itself over time.
How is a social startup similar to a regular startup?
More than you might think. In both cases you start from a real problem of real people, test a solution on a small scale, learn fast and change direction when needed. The questions are similar too: who is the user, why do they need this, and what will happen when we try to grow.
The tools of the startup world work well here too: a simple first version you can test, in-depth conversations with users, and measuring what actually happens. We covered the first steps in more detail in the article How to set up a social venture the right way.
And how is it different? Three key differences
Who pays and who benefits
In a regular startup, the customer who pays is usually also the one who uses the product. In a social startup these are often two different parties. The person who benefits from the service is a youth at risk, an older person living alone or a person with a disability, and the one who pays is a donor, a foundation, a government ministry or a local authority. This gap affects everything: marketing, reporting and the way the service is designed.
What counts as success
A regular startup succeeds when revenue and valuation go up. A social startup succeeds when something changes for the people it was created to help: employment, health, a sense of belonging, access to a service. A venture can grow in the number of participants and still change very little, which is why measurement is more complex here.
What happens to the profits
In a regular startup, the profits belong to the owners and the investors. A nonprofit and a public benefit company are not allowed to distribute profits, and all income goes back to the goal. This difference also determines who can invest in the venture and what they get in return.
How do you measure success in a social startup?
The simple measure is how many people took part. It matters, but it is only the beginning. Donors and foundations want to know what changed for the participants, and how long the change lasts. Three layers worth documenting:
- What you did: how many sessions, trainings or conversations you held.
- Who you reached: how many people, from which population, and how many of them came back.
- What changed: one or two measures that show real change, such as job placement or a drop in feelings of loneliness.
It is worth deciding on these measures as early as the first pilot. We explained how to do this even on a small budget in the article Impact measurement: how to show your venture really works.
Where does the money for a social startup come from?
This is one of the biggest differences. A regular startup usually raises money from investors who receive shares and expect a return. A social startup that operates as a nonprofit or inside a nonprofit cannot offer shares, so the money comes from other sources:
- Donations from individuals and businesses, which are recognized for tax purposes when given to a public institution with Section 46 approval.
- Philanthropic foundations, which look for new solutions with early results. We wrote about them in more detail in the article Philanthropic foundations.
- Calls for proposals and government support, which mainly suit ventures that are already operating and can show a track record.
- Partnerships with companies, in money, knowledge, employee volunteering or services.
- Earned income, from selling a service or product, when the model allows it.
Some social ventures choose the structure of a regular company and raise money from impact investors, investors who are willing to accept a lower return in exchange for a social outcome. This mainly suits a venture with a clear paying customer. We wrote about combining income sources over time in the article A business model for a social venture.
What legal structure does a social startup operate under?
- A nonprofit (amuta): an entity founded by at least two people for a purpose other than distributing profits. It suits a venture that will fund itself mainly through donations and foundations. Section 46 approval is granted only after a period of activity, so it takes time.
- A public benefit company (chalatz): a company whose articles of association set out public purposes only and prohibit the distribution of profits. It mainly suits larger organizations.
- A limited company (Ltd.): allows you to raise money from investors and distribute profits, but donations to it are not recognized for tax purposes.
- A venture inside an existing nonprofit: the venture benefits from a ready-made organizational infrastructure, and can start operating and fundraising right from the beginning.
The choice depends on one key question: who will fund the venture in the coming years. If the answer is donors and foundations, a nonprofit structure is the natural choice. If there is a paying customer and interested investors, a company may be a better fit.
What does a social startup look like in the field?
Several of the ventures operating at Alumot illustrate the approach:
- TovTech: an incubator for training people with disabilities and integrating them into key roles in the tech industry. The venture harnesses artificial intelligence tools to create fair hiring processes based on skills alone.
- Sign Now: enables people with disabilities to communicate with service providers through tailored communication interpreters, in Israel and around the world.
- Boomerang: a social and economic operating system for the longevity economy, designed to turn the knowledge and experience of older adults into a productive asset, together with local authorities.
- ADUP: a venture that connects the advertising industry with the social sector, developing an app that will let users earn money by watching marketing videos and donate it to social organizations.
What they all have in common: a new idea, a defined audience, and the ambition to reach many people.
Three questions before you call your venture a startup
- What is new about it? If someone is already doing the same thing, it may make more sense to join them or work with them.
- Who will pay over time? A first donation is a great start, but it is worth knowing what will fund the venture in its third year.
- Can the solution grow? What has to happen so that what works for you will also work in another city, with another team.
Where does Alumot fit in?
Alumot is the home for social startups. Since 2012 we have set up more than 60 ventures across Israel, and over 10 of them have gone independent as nonprofits. Among the fields we accept: welfare, education, mental health, healthy aging, employment and technologies for social progress.
The venture is established inside Alumot and receives a full organizational, financial and legal framework, with no need to register a nonprofit. This includes receiving tax-deductible donations in Israel and abroad, insurance, and mentoring from volunteers with experience in social entrepreneurship and business development. And if at some point you want to go independent, you can do so at any stage. Full details are on the I Have a Venture page.
Frequently asked questions
What is a social startup, in simple terms?
A young venture that offers a new solution to a social problem and aims to grow and reach many people. Its success is measured by the change it creates, not by profit.
Can a social startup make money?
Yes. Both a nonprofit and a public benefit company can earn money from selling services, as long as the income serves the goal and is not distributed to members or shareholders. A regular company can distribute profits, but donations to it are not recognized for tax purposes.
Do you need technology to be a social startup?
No. The innovation can lie in the working model, in the audience you reach or in connecting different parties. Technology helps you grow fast, but it is not a requirement.
Can a social startup raise money from investors?
If the venture operates as a regular company, yes, and there are investors who specialize in investments with a social purpose. If it operates as a nonprofit or inside a nonprofit, there are no shares to offer, and funding comes from donations, foundations, grants and earned income.
Can I approach Alumot when I only have an idea?
Yes. Alumot accepts entrepreneurs at the idea stage too, without prior fundraising or proof of feasibility, subject to the recommendation of the nonprofit's CEO and the approval of the board.
Do you have an innovative idea for a social problem? Tell us about your venture.