What’s Next For Big Society Capital?

“… With new CEO, Cliff Prior, poised to take up his role in March 2016 and growing interest in setting up similar institutions elsewhere in the world, it is worth considering the extent to which this principle is currently being fulfilled. As it stands, to what extent is it accurate to describe BSC as a wholesaler? … ” – My blog as part of the Flip Finance ‘What’s next for Big Society Capital?’ series.

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The search for scale

A guest post from Dan Gregory.

For a few weeks now, an exchange I read on social media has been nagging away at me.

Venerable Australian academic and social innovation expert Nicholas Gruen was quoted at a conference saying that “No country has significantly scaled a piece of social innovation”. Then US social impact investment expert Steve Goldberg heartily seconded this, saying that “Social innovation has not scaled.  Full stop.”

At the time I thought this was just a bit strange. I wondered for a moment how schools and hospitals fitted into Nicholas and Steve’s worldview but didn’t think much more of it. Perhaps something was just lost in translation. But the thought still nagged me.

Then David (who is kindly hosting this blog as, unlike me, he knows how to enable comments on WordPress) mentioned he had seen the same exchange. Then this week I discovered my proposal to be part of the Maintainers Conference was successful. For more on the conference see here

My proposal is focused on how charities, voluntary and community groups and social enterprises across the UK undertake essential maintenance work every day, sometimes ignored and forgotten. Yet meanwhile, the Government and many funders and financiers tend to get rather more excited about innovation and the digital, creative, incubator-based social ventures which all sound very exciting and promise radical change and transformation. The UK seems to be in the midst of a pandemic of disruptive social innovation hubs, accelerators and incubators. This seems to me like a sort of fetishisation of innovation.

This prompted me to wonder – is my confusion at Nicholas’s and Steve’s comments linked to these two very different perspectives?  Perhaps the quiet work of suburban or rural community-based charities is being ignored? Perhaps what happened 100 years ago when social action led to the birth of the welfare state is just all a bit boring and far away? Perhaps it’s just not interesting to Steve and Nicholas? Does a passion for a narrower, more instrumentalized version of social innovation today distract us from the wider, more organic role of social action and social enterprise in shaping markets and the state over the long term? Urban tech disruption hubs are cool and exciting, right? Right?

Perhaps always looking forward for the next exciting innovation explains Steve’s and Nicholas’s blindspot for how schools, hospitals, food banks, homeless shelters, charity shops, recycling projects, credit unions, citizens’ advice bureaux, fundraising marathons, bike workshops, co-operatives, unions, libraries and babysitting circles have reached such a scale today to become part of the very furniture of our lives. Perhaps scale is boring?!

Or are Steve and Nicholas right that social innovation has really never scaled? Is the blindspot mine? What am I missing? Steve? Nicholas? Help!

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Another year over and is social enterprise really the answer?

As 2015 draws to a close in a haze of turkey and prosecco, it’s a good time to revisit some of the social enterprise world’s oldest chestnuts and see what they’ve been pickled in this year.

Old Chestnut One – Now that grants (and grant-style block contracts) really are disappearing, is social enterprise really the answer?

Those of us old enough to have been around in the glory days* of New Labour will remember that social enterprise was once the answer to the end of grant-funding. Fortunately, in the 2001-2011 that was a fairly easy role to fill because grant funding wasn’t actually ending.

According to NCVO, grant funding by government to the voluntary sector peaked at £6 billion in 2003/4 before falling to £2.2 billion by 2012/13 – but in many local areas the end of grants just meant a switch to models of commissioning that, though more bureaucratic, were ultimately broadly similar to grants.

Now public funding for local organisations to do some good stuff in their local area – however labelled – is disappearing fast. Contract income reached a high of £12.1 billion in 2009/10 and but was already down £11.1 billion in 2012/13.

At a local level in Waltham Forest (where my social enterprise, Social Spider CIC, is based) local charities (excluding housing providers) saw a 34% drop in income between 2010-11 and 2014-15. And with remaining council contracts coming up for renewal in December 2015 and March 2016, that picture is about to get much worse.

The grim reality is that the story that copiously grant-funded social enterprise advisers spent the 2005-2012 period telling charity leaders about grant funding is finally true. State support for the voluntary sector is on the same trajectory as Dunwich but (with apologies to both present and former residents of Dunwich) leaving a slightly bigger social and economic absence in its wake. So this should be the point where social enterprise steps in to fill the gap with some ‘sustainable’ revenue streams.

According to Social Enterprise UK’s 2015 State of Social Enterprise report, Leading the World in Social Enterprise: “27% of social enterprises have the public sector as their main source of income, an increase on 2013 and 2011” – but are social enterprise doing something different and more viable than what conventional charities are doing, or is just that the ones that are keeping going are taking a bigger percentage of an ever smaller pot?

As public sector outsourcing collapses, is social enterprise really the answer?

The decline in government contract income for the voluntary sector outlined above is just one relatively minor act of violence perpetrated against the deeply unwell horse of public service reform in the UK.

Left-wing critics of public service outsourcing have spent much of the past 20 years tugging at their beards and scuffing their sandals in despair at the thought of private companies generating huge profits at the expense of the poor. Unfortunately, if you’re one of those who thought that was bad, you might not be much keener on the new, updated version – private companies failing to generate huge profits at the expense of the poor.

A quick case study is offered by Serco: everything was going swimmingly in 2010, the seas of surplus were becoming choppier by 2012, and by 2015 that whole, humoungous contract-guzzling oil tanker of privatisation was seemingly headed for disaster. Tune in this year for the next hilarious episode.

Some might regard the news that Serco along with outsourcers A4e (amongst others) are handing back contracts as good news but is it really? Serco, A4e and colleagues are really good at slashing costs to a minimum to deliver contracts while making a profit. If they’ve slashed everything in sight and the numbers still don’t add up, what does that mean for those of us who want to deliver added value?

In some sectors, such as social care, the problems are particularly stark, even with some extra money on the horizon.

The winners of Big Society Capital’s Business Impact Challenge – charity, Catch 22, in partnership with construction company, Interserve and investment managers, Club Finance – will receive up £5 million worth of investment to:  “create an independent vehicle that enables community organisations, charities and social enterprises to deliver public services at scale.”

Will what could be tagged a ‘social Serco’ succeed where Serco is now struggling? Good luck!

As social investors continue to ask ‘what can we spend all this government money on?’, is social enterprise really the answer?

The run up to Christmas saw afore-mentioned social investment wholesaler, Big Society Capital, publish its first set of ‘deal-level data’ – that is information about where their money’s gone (along with deals made or arranged by two organisations – Charity Bank and Clearly So – that they’ve invested in directly).

Elsewhere, Pioneers Post‘s Quarterly Dealflow Update, does what that title suggests for the wider social investment market (or those bits of it willing and able to report the flow of the deals).

2015 also saw Engaged X publish The Social Investment Market Through a Data Lens before being forced to pivot away from overall analysis of the social investment market, apparently because no one would pay them to continue to do it.

The social investment market is, for better or worse (or possibly mixture of both), finally making the leap from rhetoric to reality. The headline news is that – even leaving aside social impact bonds – there’s now lots going on in the social investment market. As the Access Growth Fund starts to invest its fabled ‘blended capital’ next year, even more will start happening.

One way or another, by this time next year we’ll have a clearer (if still not fully developed) picture of the extent to which a ‘social investment market’ is an idea with a long term future and, if it is, what that means for social enterprises. And both social enterprises and social investors will have better idea of where they fit into a landscape where, in the vast majority of cases, the government money is not coming back.

 

*delete the word ‘glory’ or not according to preference

 

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Mainstream believers

With another year coming to an end, it’s time to consider our new year’s resolutions and for much of the social enterprise/social entrepreneurship movement, the new year will herald a commitment to join the mainstream (whatever that means).

At this autumn’s Emerge Conference, Pamela Hartigan, director of the Skoll Centre for (er… ) Social Entrepreneurship led the charge to ditch ‘social entrepreneurship’ entirely. Pioneers Post reports Hartigan expounding the view that to use the terms such as ‘social enterprise’ and ‘social entrepreneurship’ is to: “continue to dichotomise the commercial and the social spheres” when really: “all commercial ventures have to be accountable for the social and environmental impacts they are having and all social ventures have to be financially sustainable in some way.

Readers who are not immediately clear as to why the latter statement tells us anything much one way or another about whether we shouldn’t or shouldn’t run social enterprises, or call ourselves social entrepreneurs, may find a (slightly) clearer take in Hartigan’s blog length explanation of her position – written for Oxfam last year.

Hartigan explains that: “I do believe that transformational systems change will never be achieved on a massive scale by non-profit organizations or even by well-meaning ‘hybrids’.  I very much believe that the way forward is through business.

It’s hardly an unarguable fact that a business, whether self-defining as non-profit/’social’ or not, is necessarily the most effective vehicle for social transformation in any given situation – particularly where the alternatives include some or all of campaigning, legislation and individual or collective behaviour change – but assuming we accept that the biggest social problems do need a business-led solution we’re still left with the question of what ‘the way forward’ might be.

Less profit on purpose 

The answer, apparently, is the concept of ‘reasonable profits’. As Hartigan outlines: “The key to sustainable capitalism is reasonable profits as opposed to maximizing profits.  In the current system, a segment of society is trying to maximize profits without concern for the impact on the well being of the society as a whole, while another segment of social organizations have to deal with the fall out.

It’s pretty abstract stuff and it’s anyone’s guess what the wider social impact of ‘reasonable profits’ (however defined) might be in any given industry. Should (not)social entrepreneurs doing their (not)social entrepreneurship within mainstream businesses turn their sword of reasonableness primarily on gross profit or net profit? Does transformation come through selling people stuff reasonably cheap or paying reasonable wages?

Whatever Hartigan’s vision for good business actually means, none of it gives an inkling of what Hartigan would actually like social entrepreneurs and/or people running social enterprises to do (even if they broadly agree with her analysis).

For example, one of my social enterprise roles is as publisher of a local community newspaper. I’m under no illusions about the fact that I have less power to deliver transformational social change in this role than if I were the boss of News Corporation. As soon as I get the News Corporation job, I’ll be happy to try to put a reasonable profits policy in place. But does Hartigan mean that, right now, I should stop running our social enterprise newspaper – making some positive impact in one area of east London – and concentrate full time on persuading Rupert Murdoch to give me the top job?

Unltd abstraction 

Fortunately, not everyone in the social entrepreneurship support industry has given up on the idea of social entrepreneurship entirely. Over at Unltd (The Foundation for Social Entrepreneurs), they’ve launched a new strategy: ‘Going Mainstream: how can social entrepreneurship break through?

Unfortunately, the publication is a ‘strategy’ only in a broad sense. The conceptualisation and analysis of the problem – the question of why social entrepreneurship is not mainstream already – is apparently restricted to the results of a recent survey of (433) social entrepreneurs that revealed strong support for some abstract statements:

  • 96% Social entrepreneurs have huge potential to do good
  • 94% Social entrepreneurs need to be taken seriously as businesses
  • 87% Social entrepreneurship needs to be better understood

The challenges preventing these abstract desires becoming reality are (according to the 389 social entrepreneurs who answered that part of the survey):

  • 71% Finding sustainable revenue streams
  • 71% Making a living from a social venture
  • 60% Getting access to the right kind of finance
  • 59% Finding routes in to sell to the public sector
  • 52% Getting access to the right talent and skills

It is interesting that most social entrepreneurs can’t sell stuff and (as a result) can’t make a living from what they’re doing. It’s also interesting that Unltd haven’t done any research to try and find out why (or, if they have, don’t mention it) – particularly as in recent years they apparently have had plenty of time and resources to promote the decidedly niche ‘profit-with-purpose‘ model.

The apparent absence of any analysis or understanding of how social entrepreneurs opinions and experiences relate to what’s actually happening in the markets they’re seeking to enter is a significant barrier to any attempts Unltd might make to come up with practical ideas for change.

The right platitudes 

On that basis, it’s no surprise that what follows is a cheap buffet of universal support organisation platitudes – Realising Potential; Connecting To Great Support; Maximising Impact –  offering no meaningful indication as to how Unltd post-2016 will be different to Unltd pre-2016.

The sad thing is that while the leaders of world and UK social entrepreneurship wallow in waffle, the questions about the role of social entrepreneurs – from those working as part of unregistered, volunteer-led groups in rural church halls to those with big jobs at big companies – remain largely unanswered.

In the UK, despite huge resources going into support organisations, we don’t know enough about what kind of support social entrepreneurs need:

  • to enter public service markets
  • to provide service fillings gaps left by public sector cuts
  • to create social enterprises to succeed in mainstream markets
  • to work within mainstream businesses to create transformational change

And, with a few honourable exceptions, we’re not very good at using what do know to inform what support organisations actually do. Time to stop waffling and get on with it.

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Private view

Following years spent endlessly reprising the Godot role on the UK’s social business stage, B Corps have finally arrived. You could be a B Corp in the UK before but B Lab UK has now been launched to ‘support a community of UK-based B Corps’ and, as of last week’s launch, that community consisted of 62 ‘founder members’.

If you’re one of those ‘general public’ types who’s never engaged in a passionate debate about what a social enterprise is, or whether ‘social enterprise’ is really the right combination of words to describe what some people choose to call a social enterprise, you might not appreciate just how big a deal this is. It’s a big deal.

That’s not to say it’s immediately clear exactly why it’s a big deal.

A reminder, in case you’ve somehow how missed it, that a B Corps is a: “for-profit business that has social and/or environmental outcomes as part of its mission. They are certified by the nonprofit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency.

It’s not about the 1% – not even close

Founded by three longtime friends, two of whom previously ran a successful basketball footwear company, the US B Lab opened for business in 2006. Nine years on there are 1400 of them, 65% of which are based in the US. So, just over 900 US businesses have gone through the process of being certified as a B Corp. As there are around 28 million small businesses in the US,  approximately 0.003% of US small businesses have joined the B Corp movement*.

This is not to say the remaining 99.997% are necessarily entirely uninterested. It’s not easy to become a B Corp. Whether or not B Lab’s ‘B Impact Assessment’ is a set of ‘rigorous standards of social and environmental performance, accountability, and transparency’ that I (or you) personally support, the process is definitely serious.

The fact that you don’t just pay your money and get your certificate means B Corp status means something. Unfortunately, it currently means something primarily to a tiny minority of people who are very interested.

The B Corp movement’s lack of traction, so far, with American businesspeople has been inversely proportional to its popularity with politicians, philanthropic foundations and extraordinarily rich people who believe that business should be nicer.

The most recent flurry of high profile support came last year, when Jeff Skoll gave them loads of cash as part of his popular award-scheme. Then, a few months later, New York Times columnist David Brooks compared the B Corp model to a combination of John Lennon and Paul McCartney because (it makes perfect/some sense if you read the full article) they are “seeking to reinvent both capitalism and do-gooder-ism, and living in the contradiction between these traditions.”

Since then, registrations have been growing comparatively fast but from an extraordinarily low base. There is ongoing talk that Unilever, who own hippy ice-cream brand (and B Corp), Ben & Jerry’s might be the first big corporate to sign up. That would be a big deal.

There’s no business like business

At this point, rather than speculate on whether the B Corp movement will succeed in the UK, it’s worth considering whether or not we (in the social enterprise movement) want it to.

For me, that depends on what they’re trying to do and the messages so far are mixed. ‘Business’ in general is a far bigger bit of the economy than ‘social enterprise/social business/the social economy’ (delete according to taste). While it doesn’t rival B Corps for comparative obscurity, as discussed previously the UK’s social enterprise movement – which has been around a bit longer – currently encompasses somewhere (quite vaguely) between 1% and 2% of the economy.

So, if the aim of B Corps is to get more new and existing private businesses to focus on social and environmental goals then that’s an equivocal win. B Lab UK will have the challenge of making the case UK businesspeople that B Corp certification (and membership of the movement) gives them something they need. That might not be easy but it’s a laudable aim.

And there is  a potential gap. ‘For-profit’ business people are our friends, families and, in some cases, ourselves for part of the working week – they’re as likely as anyone else to care about doing good – but in the vast majority of cases they’re not choosing to turn their newsagents, hair salons or haulage companies into Community Interest Companies (despite the option being available since 2005).

If the major (or a significant) way to ensure UK business does more good is for more businesses to change their entire conception of themselves (I’m not personally convinced it is) then it’s currently not really happening.  Last week I was asked to name examples of existing private companies who’ve converted to a CIC structure. I came up with one but there wasn’t a list on the tip of my tongue. Employee ownership is, my anecdotal knowledge suggests, doing slightly better but not by much.

This is not a criticism of existing social organisational structures and/or registration models but there’s a gap in the market there for B Corps to change mainstream business and their challenge is to find out if there’s a market in the gap.

Mark my words: the social economy will eat itself

The late Mandy Rice-Davies successfully anticipated a significant percentage of everything that’s been said by anyone since 1963 and there would’ve been nothing to surprise her in the reaction to the B Lab UK launch on the traditional wing of the UK social enterprise establishment.

In a storming blog on the Social Enterprise Mark website, Mark boss Lucy Findlay – who knows a thing or two about trying to sell people kitemarks – was quick to assert the primacy of her niche offering over the one proffered by B Lab UK. She reminded readers that: “The Social Enterprise Mark CIC is the ONLY** UK and international certification authority that independently guarantees that a business operates as a social enterprise, with the central aim of using income and profits to maximise their positive social and/or environmental impact, which takes precedent over more standard business models, which are typically driven by a requirements to maximise personal profits for owners and shareholders.”

As a CIC director, I get those guarantees for £15 per year from the government to enough of an extent to satisfy myself and any of my customers who are interested, so I see no clear need to pay ‘from just £350+VAT’ to have it guaranteed again by the Mark’s independent committee.

Producer interests aside, though, Lucy is making a broader point that many (probably most) in the social enterprise movement would support in asserting the importance of clear limits on profit distribution and the use of some sort of ‘social’ ownership model (however broadly defined).

While B Lab UK have certainly given the matter a lot of thought before coming up with their ‘Legal Test’ for UK B Corps, the whole point of the certification from the point of view of many supporters of ‘Profit with Purpose‘ (PwP), is that it is actively open to businesses that can distribute profits and utilise assets for private gain.

Despite some cordial interactions with Unltd‘s policy team, my general outlook on PwP (have they considered a sponsorship deal with PwC?) are largely unchanged from this post in January.

I’m less worried than others in the movement about the general public being confused by competing labels.  I’m not convinced there’s a big market of consumers who want to buy from a social enterprise but don’t want to buy from a private but ethical and socially-focused business. And, at the point of buying a product or service, I’d generally put myself in that category of ‘socially conscious’ customers who are equally happy to consider buying from either.

In terms of the challenge of actually getting to point of selling stuff, though, most ‘social organisations’ do face distinct, additional challenges and have opportunities to access various forms of funding, investment and other support as a result. For example, charities and social enterprises seeking provide back-to-work services face major barriers to competing with private sector competitors like founding B Corp, Ingeus UK (now owned by the Arizona-based Providence Service Corporation).

If B Corp certification was ultimately used to enable private businesses to take advantage of the relatively small range of benefits – whether grants, tax breaks or ‘social’ procurement# – currently on offer to ‘social organisations’ that would have a significant, negative impact on the existing social economy.

Support for clearly social models ownership and/or either no distribution private profit, or strictly limited private profit distribution, is a baggy set of strong principles with a messy coherence that quite a lot of people strongly believe in. Most of us don’t think it’s the only way to do business (or the best way in all circumstances) but we believe in the social economy as part of a wider civil society as distinct from private business.

Ultimately, that means that if the launch of B Lab UK leads to a battle with the private sector for our limited resources – rather than an attempt to create a broader social pot – then that would be (a) sad and (b) a battle that many of us would be up for.

My investor’s got some money and no clear strong beliefs

And then, after all that, there’s the Pandora’s Cath Kidston bag that is the UK social investment market. Social investment leaders are all over B Lab UK and it’s not just because meetings with US B Corps people are the only chances they get to go to meetings and act smug about their market penetration.

As if transforming the capitalist system wasn’t enough to be getting on with, B Corps have also been lined up for the considerably more implausible task of making UK social investment work based on its current model.

As it is, while some of social investment wholesaler, Big Society Capital‘s (BSC) £600million (ultimately maybe more) pot is being shovelled into chunky property deals (some with a clear social purpose, some appearing to be more in the ‘investment spring water with a twist of social’ category) and some is (rightly, for now) being subsidised by the Big Lottery Fund,  if their furious lobbying on behalf of Social Impact Bond industry doesn’t pay off soon, BSC have a real problem getting rid of their money.

(While the specific analysis of their performance is a different post), I’m not arguing they’re doing catastrophically badly now but I am arguing that we are not seeing the level of growth in demand for the types of finance they offer (at the cost intermediaries investing non-Access-backed funds are able to offer it) for BSC to get all their money out to what most within civil society would regard as ‘social organisations’.

Writing for Pioneers Post, Pauline Hinchion of Scottish Community Re:investment Trust, an organisation with more ‘traditional’ approach to social investment, argues that: “it would appear that the focus for social investment is shifting from the ‘not for profit’ third sector to the hybrid ‘profit with purpose’ business sector.

Before adding that: “if social investment capital is flowing to hybrids, where is the third sector to get money to drive forward its agenda, particularly against a backdrop of austerity and cut backs?

In the PwP corner, Unltd boss Cliff Prior told Third Sector last year that: “if you can make that system work you can get social ventures that need capital investment to grow much more quickly because you can use the investment market.

He added: “There are some areas where that is really important, either because it’s an emergency or because there are fully commercial competitors; if they get to the market first, it’s lost to social benefit. If the social venture gets to market first, it stays social – that’s a good thing.

Exit music for a Social Investment Finance Intermediary (SIFI)

One side fears what the other side hopes for but they’re united by being wrong. The fallacy is embraced by both is that, if UK social investment unequivocally embraced ‘impact investment’ in for-profit businesses there would suddenly (or even over a period of 10 years) be a host of grasping, private profit hungry Companies Limited by Shares (AKA exciting, innovative PwP businesses) queuing up to get their hands on all that lovely money.

On Linked-In, another Scotland-based figure who I respect, Les Huckfield, speculated that the rise of B Corps could see Virgin’s Richard Branson turning up to get a slice of BSC pie. It’s a shame to spray dry powder on the fires of righteous anger but it’s difficult to imagine the circumstances in which a guy who’s got enough spare cash to be racing hot air balloons and trying to fly to space will need a tiny specialist social investment organisations to loan him £250,000 at 8% (bigger loans and mostly higher interest rates are available) or to take an equity stake in his new business along with a seat on his board.

But social investment leaders and PwP supporters are equally convinced by (a variation on) this nightmare/dream scenario.  Their assumption is that a significant increase in numbers of B Corps/PwP businesses etc. that can take on equity investment will make it far easier for them to get their cash out of the door.

Unless, I’m missing something this belief is apparently premised on the notion that having a ‘for-profit’ structure either automatically (or, at least, more likely than not) changes the market situation in which you’re operating.

It may simplistic but, in social investment world simplicity is often necessary: a companies doesn’t go from being a couple of Harvard students rating some girls to a multi-billion dollar empire primarily because it’s structurally possible for them to sell shares to investors. The opposite would definite be a barrier but, as success factors go, that one’s quite a way down the list.

If social investment backed-B Corps are genuinely socially focused, and creating new products and services to tackle social problems by operating in under-developed or non-existent markets (or if they’re competing in mainstream markets carrying additional ‘social’ costs) they’ll struggle to make the sorts of profits that will provide BSC-backed SIFIs with the returns they need.

Having argued ferociously about the connection between structures and principles, we ultimately end up with same old problem that, irrespective of how businesses are structured, successful socially-focused business will not provide the big profits that will offset the losses from the others, and those that have the potential to do so will mostly be able to get cheaper, less demanding money elsewhere.

There definitely is a clearer exit route for a SIFI (or other investor) that buys some shares in a CLS structured B Corp than one than buys a quasi-equity stake in CIC Limited by Guarantee in the hope that at some point someone will invent a Social Stock Exchange where they could sell it. A profitable exit from investment in a B Corp is technically much easier.

But social investor enthusiasm for PwP (and, as part of that, B Corp) seems to be based ‘technically much easier’ and ‘highly likely’ being essentially the same thing.  It seems unlikely that, in terms of social investment by SIFIs (it may be different for individuals) this optimism will survive many encounters with social entrepreneurs seeking investment in their risky, innovative B Corps.

The mostly likely result of the shift towards PwP in social investment is that, at least in terms of SIFI finance, we end up with a range of new, more frustrating approaches to slicing and dicing the wrong money – when what both socially structured and ‘for-profit’ social entrepreneurs need is a bigger change of overall strategy.

 

 

*As with social enterprises in the UK, it’s easier to compare numbers against figures for small businesses, while acknowledging that not all B Corps/social enterprises are small

**Lucy’s bolding and capitalisation

#’Social Investment’ is an issue its own

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Great and small

Here we are again. Two year’s on from The People’s Business, the new Social Enterprise UK (SEUK) state of social enterprise survey is called ‘Leading the world in Social Enterprise‘.

While the UK government’s hyper-enthusiasm for its own work on social investment might cause some in the social sectors to raise a weary eyebrow at the mention of ‘leading the world’, the social enterprise movement is hopefully on firmer ground.

Either way, SEUK certainly does lead the world in writing engaging reports about social enterprise and this year’s is definitely worth a look. There’s loads in there but I want to pick up on two recurring questions: ‘are social enterprises *outperforming their mainstream counterparts*?’ and ‘is social investment useful for most social enterprises?’

Social Enterprise vs SMEs

I’m picking up on this issue it’s the hook that’s been used for the promotion of the report.

The opening paragraph announcing the report on SEUK’s website says: “Research from the State of Social Enterprise survey 2015 shows how social enterprises are outperforming their mainstream SME counterparts in nearly every area of business: turnover growth, workforce growth, job creation, innovation, business optimism, and start-up rates.

As the membership body for social enterprises, it’s SEUK’s job to be positive. I’m not suggesting their positivity about the performance of UK social enterprises is unwarranted in a general sense – this is the best data we have about social enterprises in the UK and it shows social enterprises are doing well: increasing turnover, growing their work forces and creating new products and services.

Where it gets problematic is when we attempt to compare the performance of social enterprises and ‘mainstream SMEs‘. What does ‘social enterprises outperforming their mainstream SME counterpartsactually mean?

To take ‘innovation’ as individual example. The report claims: “The number of social enterprises introducing a new product or service in the last 12 months has increased to 59%. Among SMEs it has fallen to 38%.”

How useful is it to attempt to judge whether the social enterprise I manage in my day job, Social Spider CIC, is more innovative than our neighbouring SMEs such as ‘Delight Kebab & Cafe’ or ‘DR Patel Newsagents’?

We created a new mental health blogging platform in 2013-14, if Delight continued to offer similar things with chips and DR Patel streamlined the range of confectionary available in their shop is social enterprise winning?

Even when businesses do similar things, comparisons don’t really work. Another social enterprise I help to run, WFWellComm CIC publishes a community newspaper, Waltham Forest Echo. A similar local SME is Citizen Media Ltd, which publishes Hackney Citizen.

Over the past two years, WFWellComm CIC has grown its turnover, increased the size of its workforce, created new jobs, launched a major new product, believed (correctly) that its income would increase over the next year and been a start-up. Six ticks but that’s happened primarily because we’re a new organisation that’s launched a newspaper.

During that time, Citizen Media Ltd has continued to publish a newspaper.  As their newspaper is published monthly and ours has been bi-monthly, they’ve produced twice as many editions as us but, in the event they’ve done so with a slightly reduced turnover compared to previous years and a stable staff team, while feeling pessimistic, we would’ve ‘outperformed’ them on all six counts.

Our social enterprises have done well and we’re proud of that. It doesn’t tell us anything much about the performance of other businesses operating in different markets or at different stages of development.

The leads into the wider unanswered question of whether social enterprises collectively are outperforming SMEs collectively. The report states, “Government statistics identify around 70,000 social enterprises in the UK, contributing £24 billion (24,000,000,000) to the economy and employing nearly a million people”. By this reckoining the ‘social enterprise pot’  amounts to 1.5% of the £1.6 Trillion (1,600,000,000,000) combined turnover of all SMEs.

The state of social enterprise survey is not designed to produce an overall cumulative figure for social enterprise turnover and doesn’t claim to do so. It tells us that 52% of social enterprises increased their turnover, compared to 40% of SMEs but there’s no way of knowing whether social enterprises’ cumulative turnover is growing or shrinking as proportion of SME turnover – in that ‘battle’ 1 medium enterprise increasing its turnover by a £1million would beat 99 average-sized social enterprises increasing their turnover by £10,000.

Small comfort

What we do know if that the median turnover of survey respondents is down to £151,000 compared to £187,000 in 2013 – which, in itself, was a drop from £240,000 in 2011. Blogging following the previous report launch, I thought that turnover drop was a big worry.

In this report, there’s a breakdown of median turnover by age of enterprise and this suggests a more complex situation. While the median turnover of organisations aged 3 years or younger has dropped from £44k to £36k, all other categories – 4-5 years, 6-10 years and 11 years+ – have seen a median increase.

The report claims that: “the growing proportion of start-ups could explain the drop in median overall turnover. This explanation is made more likely when 2015 data is compared to 2013. This shows that in all age-bands barring that of start-ups, the median turnover has, in fact, increased – and that the high proportion of start-ups arguably masks a success story of older social enterprises increasing their scale.

This seems like broadly good news with a necessary note of caution being that, while it seems that older social enterprises that continue to exist may be ‘increasing their scale’, we don’t know whether there’s been an increase or decrease in social enterprises who’ve gone out of business altogether.

My overall impressions of the current situation are:

  • Large (apparently growing) numbers of people continue to start social enterprises
  • There are thousands – although it’s not clear how many thousands – of ‘established social enterprises’ that have been around a while and have found a ‘sustainable model’ that works for them
  • There is no clear indication of a breakthrough – with significant numbers of social enterprises becoming medium-sized businesses (let alone big businesses)

Social investment – just what we need in 100 years time

In terms of the question ‘is social investment useful for most social enterprises?’, the new report offers a very similar answer to the previous one. The median amount of finance sought by social enterprises has increased slightly £58k in 2013 to £60k this year.

Reflecting on the ongoing, much discussed, gap between demand and supply, the report explains that: “As was noted in the 2013 survey as well, this is out of kilter with much of the social investment market pursuing larger deals. As the proportion of younger, smaller organisations continues to grow, it raises the question of how well aligned some of the financial and investment structures put in place to support social enterprise are with the realities of the sector itself.

The last available average figure for investments offered by the UK social investment market is £264k so, if we temporarily ignore inflation and extrapolate wildly from a £2k change with many possible explanations, the average level of investment demanded by social enterprises is on course to match the every level of investment offered by social investors in approximately 100 years’ time.

Fortunately, while the situation on the demand side of the market hasn’t changed much over the past two years, the supply side of social investment is hopefully in the process of changing considerably. The arrival on the scene of social investment wholesaler, Big Society Capital, in 2012 did not have any direct impact on the availability of the kind of finance most social enterprises were seeking (then and are seeking now) but it did create a climate where the absence of that finance could not easily be ignored for (too) long.

As a result Access: The Foundation for Social Investment, for example, is now poised to have a significant impact, while Power to Change will also play a major role in providing grant finance (along with a smaller one in ‘social investment’).

So, while the answer to that question of whether most social investment is useful to social enterprises remains: ‘not yet, in most cases’ greater relevance is within reach.

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Crunch time

The publication in June of The Social Investment Market Through a Data Lens was a big event. It was the first significant step towards advocates for and sceptics about social investment in the UK bringing down the gavel on their seemingly endless auction of rhetoric on the potential of the market and beginning to discuss some facts.

The picture the initial Engaged X data – of 426 closed deals completed by 3 social investment finance intermediaries (SIFIs) – provides is nowhere near complete but it does, at least, finally tell us something.

On the plus side, most social sector organisations (72%) who were lent money paid it back. This is important because it proves, fairly decisively, that there is a market for finance for ‘unbankable’* social sector organisations that is not grants. This does not mean that social investment is replacing – or is likely to replace – grants but it does mean that the doubters who claimed social organisations ‘just want free money’ were not entirely correct.

At 28%, the default rate for the sample is comparable with small businesses receiving state guaranteed loans through the government’s Enterprise Finance Guarantee (EFG) scheme. While limited data means we have to be cautious, those who argue that a business having social aims does not make an investment inherently more risky than when that business is simply ‘small’ may be on to something.

The total financial return of the sample is negative 9.2%. The clear positive of that is that a substantial amount of capital deployed for social use has been repaid and can be deployed again. It’s also notable that, as Engaged X’s Karl Richter points out in his blog, the sampled market was improving over time. So while the return on investments made from 2002-2008 was negative 17.50%, the return on investments made from 2009-2013 was a more palatable negative 3.37%.

In an asset class of our own 

This suggests that ‘unbankable’ social investment could be (and may already be) an efficient way of recycling some money located in existing social pots. It doesn’t suggest there’s any realistic prospect that direct investments into ‘unbankable’ charities and social enterprises are ever going to be the vehicles for the 7% annual return with limited risk investments that Sir Ronald Cohen and others have been confidently dangling in front of business leaders in Davos for past five years.

This small dataset doesn’t, in itself, prove that ‘social investment as an asset class’ dream is dead but it’s a further the reiteration of the fact that the dream is about something quite different to direct investment into ‘unbankable’ charities and social enterprises.

For those in the social investment market that are interested in mainstream social organisations, the big challenge now is around subsidy. The Engaged X data reinforces the position – now often stated by outgoing BSC chief executive, Nick O’Donohoe – that ‘Most social investment requires subsidy, and subsidy should not be a dirty word‘.

Grants for us, loans for you

On the one hand there’s the subsidy needed to cover the money that funds are losing. In this sample, that’s an apparently quite manageable and, based on EFG figures not untypical, 9.2%.

On the other hand, there’s the costs of running the SIFIs, both in terms of setting up deals and in terms of providing the wide range of ‘additional support’ that most, for better or worse, claim to provide. For most SIFIs, it seems likely that the second hand is the one with the most money in it.

Unfortunately, Engaged X have no data on this so we don’t know how much it cost the SIFIs providing data to lose 9.2% of their capital. They note that: “All returns are gross and are not net of costs. Management costs may appear on face value to be disproportionately high when reviewed against the investment size, but the anecdotal evidence suggests this highly engaged approach is key to being a successful social investor.

As noted in an earlier blog, the 2011 Young Foundation report, Lighting the Touchpaper, reported that: “The vast majority of SIFIs are currently operating at a loss… This operating gap is usually made up by grants. Once portfolio losses are taken into account, the ‘sustainability gap’ for most SIFIs is even larger.

Unfortunately, discussions about subsidy in UK social investment have, so far, mostly been conducted with all participants blushing and covering most of their mouth with their hand. While the presence of subsidy is often acknowledged and passionately justified in the abstract, there are not (to my knowledge) any SIFIs openly saying: “It costs us x to run x fund and, as a result of this subsidy, the social benefit is x”.

It’s a position located half way between bullshit and denial, that serves everyone badly including SIFIs themselves but, it’s important to acknowledge, it’s not a situation that SIFIs are entirely responsible for. Many SIFIs do good work that many social entrepreneurs may agree should be subsidised but the way the market has evolved mean even the clearest subsidy models are currently fairly opaque.

One positive hoped for outcome from the launch of Access – The Foundation Social Investment’s growth fund – where BSC capital is subsidised with BIG Lottery grant – is that SIFIs will be applying for funding through a mechanism where they will have to be clear about how their losses and/or processes are being subsidised and (hopefully) about the social impact they are claiming to deliver as a result.

Only then can we seriously begin to address the question of whether, and in what circumstances, it’s worth it.

*The report states: “The data sample analysed a high-risk portion of the market by definition. Many of the SIFIs implemented a policy for only considering investment applications for organisations that had been refused finance from mainstream or retail providers.”

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