Small and medium social enterprises play a critical role in the development of a nation’s economy. They create and provide jobs, especially when the government lacks them (Ayandibu & Houghton 2017; Hillary 2017). Because SMSEs employ the citizens in developing countries such as South Africa, they assist in reducing crime rates (Ayandibu & Houghton 2017). Small and medium social enterprises are a source of entrepreneurial and innovative spirit and exploit individual creative efforts. They create competition and are the starting point for future businesses (Choi et al. 2018; Lee et al. 2016).

Small and medium social enterprises are mainly challenged by financial insecurity and a high likelihood of failure. Small and medium social enterprise sustainability is affected by exposure to higher levels of risk, due to economic instability and many size-related factors (Davies et al. 2019). These factors include access to funding, access to customers and markets, retention of knowledgeable and competent staff, influence over communities, research and development, access to technology, and the productivity and quality of their value-added outputs (Jackson et al. 2018). To respond to these challenges, scholars (Davies et al. 2019; Hillary 2017; Jackson et al. 2018) and practitioners suggest the identification of a funding model for SMSEs and increased involvement of stakeholders within the enterprises.

The funding model is used by SMSEs to fund their enterprises to achieve their social mission. The literature mentions various funding models for SMSEs, including grants and donations from public and private institutions, self-funding, family support, stakeholders, bank credit and investment companies (Bengo & Arena 2019; Guo & Peng 2020). However, the majority of SMSEs rely on grants and public funding (Bugg-Levine, Kogut & Kulatilaka 2012). The business operation of their enterprises mainly depends on funding from traditional donors such as philanthropic foundations and private and government institutions (Davies et al. 2019) to achieve their social mission. Small and medium social enterprises are heavily engaged in the community, creating strong relationships with different groups of stakeholders (Mair & Marti 2006). These relationships can create opportunities to legitimise SMSEs (Teasdale 2010). However, recently, scholars have highlighted that a funding model that depends on grants and public funding is not convenient in the long run, for three main reasons (Bengo & Arena 2019; Lyon & Owen 2019). Firstly, donor and public administration spending capacity has been limited due to the debt crisis, putting SMSEs under pressure to find funding (Lyon & Owen 2019). Secondly, traditional funding sources generally focus on specific projects with a limited budget and time horizon (Chong & Kleemann 2011). Thus, SMSEs with innovation capacity and scaling strategies that require more sustainable funding cannot be supported over a longer time with such grants (Bengo & Arena 2019). Finally, the decision to depend on non-commercial financial sources can lead to a problem of ‘grant dependency’ (Bugg-Levine et al. 2012).

Scholars have called for SMSEs to diversify their funding sources to survive in a competitive business environment, to sustain their business and to scale up (Arena et al. 2018; Nicholls 2009). However, despite the call of scholars and practitioners for SMSEs to diversify their funding sources through accessing credit and other commercial finance, they rely heavily on public grants and self-funding. Furthermore, SMSEs are expected to indicate their social performance and impact within the community for the banking and investment communities to release the requested funds (Christlieb 2012; Crucke & Decramer 2016). However, SMSEs with few resources experience difficulty in measuring their social value and impact as there are no unified measurement frameworks (Florman et al. 2016).

Small and medium social enterprises encounter several challenges and barriers in obtaining funds to administer and run their activities. Firstly, SMSEs share similar problems with SMEs because of certain inherent characteristics of many small-sized organisations. They generally have a low-level structure, with the lack of a formal organisational structure and inexperienced accounting, management and control systems (Bull 2007; Costa & Pesci 2016; Margaretha & Supartika 2016). They are well known for lacking financial resources (Bengo & Arena 2019). Secondly, SMSEs lack collateral and tangible assets that financial investment communities can use to provide credit (Bengo & Arena 2019). This problem amplifies the correlation between firm size and the probability of bankruptcy (Arena et al. 2018; Arias & Arango-Botero 2019).

Furthermore, investment communities, such as banks, have little knowledge of the characteristics of social business organisations in terms of their business model, organisational structure and governance (Álvarez Jaramillo et al. 2019; Choi et al. 2018). Because the investment communities are less aware of a business model that generates both social and financial returns, they are resistant, and very careful, to invest in SMSEs (Arena et al. 2018). Thus, there is a need to investigate the funding model of SMSEs.

To address the research aim of investigating the funding model of SMSEs, the study adopted a qualitative research design. Qualitative research is a social action method that expresses how people interpret and make sense of their experiences to understand individual social realities (Mohajan 2018). Based on the aim and objectives of the study, qualitative research is appropriate for this study. The empirical analysis was based on the case study of 10 KZN SMSEs participating in the champions’ programme of the local economic development (LED) project at the University of KwaZulu-Natal (UKZN) from 2016 to 2019. Yin (2017) suggested that the case study approach is the most appropriate if the researcher wants to understand the situation in depth. Furthermore, a case study allowed the researcher to obtain deep and detailed qualitative data by getting closer to the phenomenon.

The number of participants (the size and composition of the sample) in qualitative research depends on the problem under study (Patton 2015; Subedi 2021). In qualitative study, the researcher needs and judgement play a major role in constituting how many samples are required and who can participate as a sample in a particular study (Creswell & Poth 2016; Patton 2015; Subedi 2021). The sample was homogenous in terms of the enterprises’ scale and the way of funding their enterprises. Creswell and Poth (2016:155) stated that it is essential that all participants have (similar lived) experience of the phenomenon being studied. However, the selected SMSEs perform various community services and have different legal forms of registration, based on South African business registration. Prior thematic saturation and the inductive thematic saturation point were reached after seven SMSEs. This study adopted a simple method to assess and report saturation in qualitative research developed by Guest, Namey and Chen (2020).

In detail, social enterprise 1 and social enterprise 7 are enterprises engaged in agricultural sector with the mission of equipping people with better planting practices and cultivating environment-friendly and self-creating businesses and better income. To extend the analysis, we include social enterprises (social enterprise 2 and social enterprise 4) that strive to assist young children coming from rural, disadvantaged backgrounds by empowering them with education and to train ex-offenders and substance abusers on finding a job, returning to school and help establish businesses to live a better life, respectively. Table 1 shows the selected SMSEs and their main activities.

The study’s target population includes 54 SMSEs identified in the champions’ programme of the LED project at the UKZN from 2016 to 2019.

The International Labour Organization (ILO) study in South Africa highlighted that social and solidarity organisations including social enterprises are developmental in their approach working across sectors that range from education to healthcare (ILO 2021). The majority (55%) of ILO study participants responded that their organisation focuses on delivering community services in the education of skill and training sector in South Africa. However, there are no data or information specifically about SMSEs delivering community services in the skills and training sectors in South Africa, specifically in KZN. Therefore, it was impossible to determine the industry’s size. The researchers purposively focused on SMSEs identified and registered for the LED’s programme for UKZN by the eThekwini Municipality’s LED department. Purposive sampling allowed the researcher to choose cases that exemplified the features or procedures the research is concerned about (Chimhundu 2018). This type of sampling suits a qualitative case study because it allows the researchers to pursue categories where ‘the process being studied is most likely to occur’ (Denzin & Lincoln 1998:202). Selecting cases purposively makes the research ‘a piece of information’ – a rich case study to explore specified research issues (Saunders, Lewis & Thornhill 2009:142).

Purposive sampling was employed to select the participants in the study. It was used to reach out to expert participants who have gained the necessary knowledge in the area. In South Africa, social enterprises are a catalyst for the country’s economic development. Most SEs in South Africa are small and medium in scale (Gordon Institute of Business Science [GIBS] Study 2018). Furthermore, many SMSEs in South Africa conduct training and skills development in the education sector (GIBS Study 2018). Thus, to achieve the aim of the study, 10 SMSEs in the education, agriculture and tourism sectors that provide training and skills transfer as their main activities, based in KwaZulu-Natal, were selected purposively. The inclusion criteria were that SMSEs should play a crucial role in providing solutions to societal problems at the individual and community levels; 60% of their operations should be local community-based; and they should be conveniently accessible to the study. Furthermore, the SMSEs should prioritise social and environmental missions. They should be self-identified as SMSEs and based on the study area. Additionally, the SMSEs should have had prior experience in monitoring and in evaluating performance assessments. They must have been operating for more than 3 years. They had to be registered with the champions’ programme supported by the LED project at UKZN.

The researcher chose in-depth interviews and documentation because of their combined capability to fully understand this study’s evidence requirements.

The in-depth interviews for this study enable the researcher to gather ‘a rich set of data’ (Saunders et al. 2009:215) on the funding model of SMSEs in KZN. The interview created an opportunity to fully understand the primary and initial funding and the funding model adopted and the reasons for the decisions taken by the SMSEs’ managers, founders and/or executive directors, and their reactions to performance and its impact on their business. Furthermore, the interview method allowed flexible and responsive interaction between the interviewer and interviewees (Saunders et al. 2009).

A total of seven interviews were conducted. As the data collection technique for the interview, the study used an interview protocol and/or checklist. The list of points for discussion in the checklist was based on the specific research issues and subsequent data needs (Adhabi & Anozie 2017). The interview protocol included topics for discussion, rather than a set of questions. In this study, the interview protocol acted as a guide. All interview items were appropriate for the founders, managers and/or executive directors of the SMSEs, so developing multiple interview protocols was not necessary.

Each interview lasted between 40 min and 60 min. All interviews were recorded and transcribed. The interviews focused on the three elements: the primary funding of SMSEs, the initial funding and the revenue-generating activities of SMSEs.

NVivo software was used to analyse the data. Initially, the research questions were imported to NVivo for easy reference. Summaries were written after careful reading of each transcript. A research journal was created to write up the key issues from the interviews. Responses from the interviews were coded from the research journal and were related to the study research questions. The qualitative data were analysed by revealing themes using numerous coding procedures to extract relevant meanings and themes from the abundant text. The researcher started with open coding to determine major categories that guided further exploration. The advantage of qualitative data is that it allowed the researchers to explore themes, patterns and interrelationships within the data and understand the phenomenon of performance measurement.

This study achieved validity through a comprehensive literature review on SMSEs and funding model for SMSEs, focusing mainly on the initial source of funding, the primary source of funding and revenue-generating activities of SMSEs. After completing the literature review, an interview guide was developed. The items in the interview guide were subjected to item judgement by experts. The experts consulted were the researcher’s supervisor at the UKZN and lecturers and scholars in the African Network of Social Entrepreneurship Scholars (ANSES). A panel of experts or fellow researchers can evaluate the clarity and purpose of a research instrument, thereby ensuring its validity (Creswell & Poth 2016).

Applying multiple methods, such as observation, interviews and recordings, will lead to more valid and reliable, and a varied construction of, reality (Bashir et al. 2008). Patton (2002:205) recommended triangulation, stating, ‘Triangulation strengthens a study by combining methods’. This study used triangulation in the data collection and analysis to ensure reliability.

A case study will be more relevant if more researcher’s questions investigate and explain some current circumstances (e.g. ‘how’ and ‘why’ some social phenomenon works) (Yin 2017). This study aimed at investigating the funding model of SMSEs. A case study approach is appropriate for this study for several reasons. Firstly, it helps in investigating the funding model with in-depth and rich descriptions, explorations and an understanding of the initial and primary source of funding currently used by SMSEs. To review this process intensely, three research questions using ‘how’ and ‘what’ were proposed. Secondly, a case study can tackle ‘how’ and ‘what’ questions (Yin 2013). These questions helped the researcher provide a descriptive and exploratory interpretation of the phenomena through social interactions, experiences and the actions of SMSEs and how they gave meaning to funding source. To this extent, it required the researcher to pay attention to the situations in which these elements occurred. Furthermore, a case study allowed the researcher to obtain deep and detailed qualitative data by getting closer to the phenomenon.

The UKZN code of ethics for conducting research was used by the researcher to compile an application for ethical approval. The College of Humanities Ethical Committee in UKZN granted the ethics approval for this research with a reference number of HSSREC/00001005/2020. Furthermore, voluntary participation of participants is supported by participant’s written signature on the informed consent form. The anonymity of the participant social enterprises is ensured.

Participating social enterprises were asked to describe their initial source of funding. Table 2 shows that the initial funding (startup capital) for most of the enterprises emanated from self-financing or ‘self-funding’, in the words of interviewees, from the personal savings of the founder(s), family support, member contributions or other forms of income, such as rewards. For example, the founder of one of the enterprises (social enterprise 4) reported that the initial funding of the enterprise came from the reward obtained by winning a startup business competition. The founder used the prize money to start the enterprise. For another enterprise, the initial funding used to establish the enterprise originated from more than one source: social enterprise 6 was initially funded from two sources, with financial injections from the revenues (40%) of a commercial venture called TN Development Project Management and Training (TN Pty. Ltd.) that the same founder had established, and from a public entity (the Municipality of eThekwini’s Maritime Cluster), which provided a grant of R70 000.00.

Additionally, in social enterprise 6, member contributions added to the funding mix as each member had contributed R200.00 towards the initial funding of the enterprise. According to an interviewee, the member contribution policy is ‘to show others that a business must start by investing yourself in it before someone else invests’. It is worth noting that the funding from TN Pty. Ltd. (40% of its annual revenues) was maintained as an annual source of funding for social enterprise 6 as its social branch. This funding model, wherein a profit-making enterprise is the initial source, or becomes the primary source, of funding for the social enterprise (of NPO spectrum) and is initiated by the same founder(s), is common among the participating social enterprises in this study. For social enterprise 2, the interviewee stated that:

Furthermore, social enterprise 4 interviewee indicated that:

There is a unique self-funding model where, as seen in Table 2, the social enterprises are funded through the profit-making SMEs linked to them, through income-generating activities, or from membership fees. Four of the seven participant social enterprises are connected to profit-oriented small business ventures created by the same founder(s), which became the primary source of funding. The profit-making enterprises inject a considerable percentage of their annual revenue into their respective non-profit social enterprises. For example, 20% of the profit generated by Mankho Events is injected annually to sponsor its social enterprise (social enterprise 2). Similarly, social enterprise 6 obtains 40% (R50 000.00 in 2020) of the annual revenues generated by TN Pty. Ltd.

In some cases, there was no clear delineation between the non-profit and profit-making enterprises connected to it in terms of funding. For example, the primary funding source for social enterprise 3 is a profit-making company named CC Pty. Ltd. The latter generates its revenues through consulting services to:

It is unclear what percentage of the revenue is injected into social enterprise 3. The same applies to social enterprise 4, whose primary funding source is revenue generated from its profit-making entity known as IS Pty. Ltd.

Some social enterprises reported additional funding sources, such as external fundraising. For example, social enterprise 5 secured a relief fund from the Department of Arts and Culture in Mpumalanga in 2019 and collected membership fees. Similarly, in addition to revenue injected from its profit-making organisation, social enterprise 6 obtained a grant of R70 000.00 from the Municipality of eThekwini’s Maritime Cluster to implement an aquaculture project.

In addition, income-generating activities such as consulting services rendered to other organisations, and sales, constitute an important primary funding source. This, for example, is the case for social enterprise 1, whose only funding is obtained through providing consulting services to other organisations. Currently, the enterprise has signed a lease agreement with traditional authorities to provide land to plant and cultivate crops such as cauliflower, lettuce, spinach and beetroots.

The revenue generation activities reported by each participating social enterprise are summarised in Table 3. Social enterprises have different income-generating activities. However, in most cases, there was no clear separation between the income-generating activities of the social enterprises and their non-profit-making branches. This is because the former, as indicated earlier, constitute an important primary source of funding for the latter.

Consultancy is the predominant income-generating activity. At least four enterprises offer consultancy services to clients in their respective domains. For example, CC Pty. Ltd, the profit-making entity of social enterprise 3, offers consulting services to various clients, including commercial ventures (Mr. Price, ABSA, etc.) and government entities. Other enterprises, by contrast, rely on the production and sales of goods and services as their income-making activities. This is the case for social enterprise 4, whose profit-making entity manufactures and sells welded products, such as food trailers, gates, burglar bars, camping stoves, among others.

The case study approach in qualitative research design might result in a lack of rigour. According to Yin (2017), the most common concern in case study research is that researchers fail to follow a scientific procedure in conducting the research. They may display negligent behaviour or allow ambiguous evidence to impact the direction of findings and conclusions (Stake 1995; Yin 2017). Researchers in case studies are expected to avoid such actions. The critical point in conducting case study research is the importance of thorough preparation and planning, merged with the development of an organised implementation structure (Harrison et al. 2017; Merriam & Tisdell 2009; Yin 2017). Aligning the philosophy and methodology with the research purpose and methods employed underpins a rigorous research process (Surmiak 2018).

The qualitative research design and purposive sampling techniques decrease the generalisability of the study. However, various authors and researchers try to explain the issue of generalisation in case study research. For instance, Yin (2017) contended that analytic generalisation is the appropriate method for generating theory from the case study. He meant that a previously developed theory is used as a template to compare the case study’s empirical results. If two or more cases are shown to support the same theory, replication may be claimed (Yin 2017:31). Furthermore, Stake (2006) highlighted that, in doing case study research, the goal of the researcher will be to expand and generalise theories (analytical generalisation) and not to extrapolate probabilities (statistical inferences). To ensure the transferability of qualitative case study research, researchers must apply purposive sampling and replication logic in multiple case studies seeking analytical generalisation. Additionally, in data analysis, researchers must compare evidence with the existing literature to reveal commonalities and conflict areas and then promote generalisation across cases (Chimhundu 2018; Yin 2003).