That shrinking feeling

Social enterprises are out-performing mainstream SMEs. That’s the headline message from The People’s Business, the latest Social Enterprise UK (SEUK) state of social enterprise report, which was launched earlier this month.

The People’s Business, like its predecessor Fightback Britain, is a serious piece of work that, while understandably accentuating the positive, provides lots of meaningful data on the experiences of social enterprise in the UK.

It clearly reveals that social enterprises are doing some things better than mainstream businesses. For example, social enterprises are far more likely than mainstream SMEs to be led by women or people from a Black and Minority Ethnic (BAME) background. Equally impressive is that “38% of all social enterprises work in the most deprived 20% of communities in the UK, compared to 12% of traditional SMEs.

Unfortunately, while I’m sure this won’t stop stop sector leaders using the line in their speeches, there’s nothing in The People’s Business to suggest that social enterprises are actually out-performing mainstream SMEs based on any directly comparable measure of economic performance.

Making a start

One of the of the key findings of the report is the fact: “results show a dramatic increase in the proportion of start-ups, with 29% of all social enterprises trading for three years or less – compared with 19% in the 2011 survey.

Coupled with the fact that: “When this start-up figure is amended to be comparable to SMEs (27%) it is well over twice the proportion of start-up small and medium sized enterprises (SMEs) reported in the most recent 2012 Small Business Survey (11%)“.

So surveyed social enterprises are more likely to be start-ups than mainstream SMEs. Two key worries here are:

(a) We currently have no meaningful way of measuring how many social enterprises there are in total in the UK and The People’s Business doesn’t claim to do so. So it’s not possible to determine to what extent the increase in the proportion of newer social enterprises is based on older social enterprises going out of business and

(b) While it’s good news if we do have growing numbers of people choosing to start social enterprises, that doesn’t tell us anything about the overall strength of social enterprises collectively (the social economy*) compared to the mainstream economy.

Growing pains

There’s similar problems when it comes to interpreting the figures on turnover. The People’s Business states that: “when compared with SMEs, 38% of social enterprises saw an increase in turnover compared with 29% of SMEs, and 22% of social enterprises experienced a decrease compared with 31% of SMEs. This means that, proportionally, almost a third more social enterprises grew based on turnover last year when compared with SMEs.”

The fact that 38% of social enterprises surveyed have increase their turnover and therefore delivered more social good for the people they exist to serve is a significant achievement in the current economic climate.

What these figures don’t tell us is that the social economy is growing in proportion to the mainstream economy because we don’t know how much turnover is involved. 38% of (mostly) small social enterprises increasing their turnover by a small amount each could be doing a lot less new business in proportion to 29% of SMEs increasing their the turnover by a larger average amount.

Shrinking

In fact, the report reveals that average social enterprise turnover has dropped significantly since 2011: The median turnover of social enterprises has decreased since the 2011 survey, from £240,000 in 2011 to £187,000” – a drop of 22%. 

While, on the other hand: “The mean turnover of SMEs also fell by 11% during a comparable period“.

While the percentages for increased turnover might lead us to over-estimate how well things are going, these average turnover figures could equally lead us to over-estimate how bad the situation is, because it’s not possible to make a direct comparison between median figures for social enterprises turnover and mean figures for SME turnover. 

While these figures don’t tell us that social enterprises are doing twice as badly as SMEs, they do tell us is that, if your social enterprise is turning over £187,001, it’s in the top 50% of UK social enterprises in terms of turnover. That’s worrying in a general sense and particularly worrying because it’s so much worse than the situation 2 years ago.

Social investment in irrelevance shock

The report also reiterates the point that, whatever else it might be for, the UK social investment industry is not designed to meet the needs of the UK’s existing social enterprises. In terms of the sort of finance social enterprises were looking for: “The most frequent amount sought (25%), ranged between £10,000 and £50,000. The median amount sought by all social enterprises was £58,000, lower than the 2011 median of £100,000.

The amounts received were lower: “Perhaps unsurprisingly, this meant that the median amount of finance received in 2013 (£30,000) was also half of the 2011 median of £60,000.

The report’s authors note that: “the median amount applied for is lower than the minimum investment thresholds of many of the specialist social investment or finance intermediaries. This supports other research identifying the need for smaller-scale, patient, risky, unsecured lending for social enterprises.

Indeed it does but as explained here, while there’s plenty of scope to do social investment better, what social enterprises and trading charities need most is not finance but customers.

No money, big problems

On this basis, it’s a concern that, as in 2011, social enterprises surveyed continue to believe that their biggest barrier to sustainability is lack of finance: “When compared with SMEs the percentage of social enterprises that state access to finance as the top barrier is slightly higher [compared to 2011] at 40%, a stark contrast with the 7% of SMEs that state obtaining finance as the main obstacle. In fact, obtaining finance is only the 6th biggest barrier to SMEs.

While this may be partly explained by respondents (quite sensibly) thinking their business might be more sustainable if someone just gave them lots of money and then gave them some more, it’s also a damning indictment of the baleful effect of the social investment hype industry on social enterprise approaches to business.

Far from encouraging social enterprises to become more businesslike, the arrival on the social enterprise scene of hordes of sharp-suited geniuses brandishing amazing financial instruments has in fact encouraged social entrepreneurs to believe that their ultimate goal is scale-up and become investment ready – when what most business turning over under £200,000 (most social enterprises) really need to do is work out who their customers are and sell them more stuff.

That’s not easy. In the current economic climate it’s not easy at all, and it’s particularly difficult when you’re the kind of business for whom just selling stuff is not enough – when you’re trying to develop commercial models in the face not just of market failure but often in situations where the institutions set up to tackle market failure have failed too.

The fact that: “63% of respondents [expect] their turnover to increase in the next two to three years – compared to 57% two years ago. Only 37% of SMEs expect their turnover to grow” – suggests that social entrepreneurs continue to strongly out-perform mainstream business owners when it comes to optimism. There’s plenty of reasons to be optimistic – the Social Value Act  may be one of them – but it’s important to understand that there’s tough times ahead.

*the description ‘the social economy’ can be used in various ways and I accept that this is only one of them

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8 Comments

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8 responses to “That shrinking feeling

  1. Alisdair Cameron

    Growing numbers of people choosing to start social enterprises could conceivably be, at least in part, a consequence of cuts and lay-offs in the statutory public sector. I’d argue that a decent number of those who’d worked maybe in the NHS or in Local authorities may have heightened social consciences/stronger belief in social models/worked in fields that align with social enterprise.
    So, the number of SE start-ups might point to “illness” in other parts of the economy, as opposed to particular “health” in this part.

  2. Beanbags admin

    Yes. While this data doesn’t really tell us definitively whether growing numbers of people are starting social enterprises – it could be that there’s proportionately more start-ups because older social enterprises are closing – I think there’s a good chance that numbers are growing.

    There’s definitely been a growth in public sector ‘mutuals’ – although these amount to a relatively small number of relatively large (particularly when compared to the median turnover of £187,000) organisations.

    I agree that it seems likely former public sector workers might start social enterprises. I’ve definitely heard it being talked about by the organisations making people redundant. It will be interesting to see if examples emerge and how successful they are.

  3. David,
    In the quest for more accurate data on social enterprises, do have a butchers at this: http://opencorporates.com/companies/gb . Go to the filter by company type and enjoy!! I discovered this terrific website through the Open Data Initiative.

    Here are some basic stats by some rough calculatiions (if you take this data as red)..
    – there are 96,526 socents in UK currently in existence that are CICs, CLGs, IPSs only.
    – 202,484 socents in UK have been created (52.4% of which are no longer in existence)
    – 10,654 CICs have been created (72.9% of which are still trading)
    – 181,729 CLGs have been created (69% of which are still trading)
    – 10,071 IPS have ben created (99% of which are still trading – this can’t be right!! but that’s what it says)
    – 3952 socents (CICs and CLGs) are in “Active Proposal to Strike off” i.e. they have not been trading for 3 months and will be shut down unless they rise out of the ashes.
    – 36 socents (CICs and CLGs) are currently in Administration
    – Taking the administration figure and those not trading together, 4% of socents are at deaths door (3988 out of 96526)

    I encourage you, in the time you probably don’t have, to look at the figures in sub sectors. I’m only just starting to browse through these and have already found gems such as:

    There have been 14 CIC recycling companies. None of whom are still trading, sadly.

    Over a 1000 CIC Education companies have been set-up. By far the largest concentration of CICs, and 90% of them are still going.

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  5. Beanbags admin

    Thanks. Really interesting.

    Unfortunately, doesn’t solve the definition problem because there’s not widespread acceptance that all CLGs are social enterprises. And there’s some conjecture about whether all CICs are.

    And, equally, not widespread agreement that all CLSs aren’t.

    But a really useful resource in a general sense.

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  7. Excellent blog.

    Having grown up in a household that viewed social enterprise as practically the only way of doing business, it was dismaying to eventually discover how small the sector is. The data continually bares this out.

    Comparatively speaking, even Big Society Capital’s cash is a pretty poxy amount – last year housing associations alone raised £8bn on the bonds market.

    Looking at the data, you can understand why there have been so few investments done – if all £600m of BSC’s dosh was put through social enterprises that turned over £187,000, they’d be lucky to get any money back.

    And considering they have to deliver “commercial” rates of return, that’s not going to work (in terms of what they charge per deal, apparently its negotiated on a case by case deal – could be 3%, could be less, could be more)

    So it is a structural problem – but not helped by the gap between the reality, and the language/mission outlined in all of the BSC strategy docs and website. Sample quote on homepage: ‘Social investment empowers social entrepreneurs to help those whom our society leaves behind’. But only those with decent cash flow, profit and a chunky asset for collateral.

    (And, to be fair, we should probably accept some cop regarding Pioneers Post and Good Deals. I think we try to balance optimism/enthusiasm with realism – but please pull us up if this isn’t the case)

    As you point out, all social investors and intermediaries are intelligent people with strong social consciences. They are in it for the long haul, to build a flourishing social investment marketplace over the next 20 years. That is bold and laudable objective but it does little to support struggling social enterprises in the here and now.

    I am optimistic – it is still early days, and I think there will be new products soon that are targeted at the needs of social enterprises.

    We have an excellent two-parter on the site next week from Henry Palmer, on the cost of money. Definitely the best “proper journalism” on the subject that I’ve read.

    Matt
    @blackmatty
    @pioneerspost
    http://www.pioneerspost.com
    http://www.good-dealsuk.com

  8. Beanbags admin

    Hi Matt,

    Thanks for this. Mostly agree. I think, though, that we’re reaching the point where need to unpick the relationship between social investment and social enterprises.

    The government backed-rhetorical position we’re currently encouraged to believe – which the emergence of social investment has intensified – is that all social enterprises are on a journey from innovative start-up to either (a) commercially viable scaled-up solution to a social problem or (b) cuddly Serco-lite social provider of outsourced public services.

    A typical social enterprise is far more likely to be (c) on a journey from nice idea to very small business providing enjoyable but dismally paid work for three or four people for as long as they can bear it (or the multiple tiny income streams can generate just about enough income to balance the books) – while hopefully providing work experience, training opportunities and other social benefits for other people in the local area.

    The UK social investment market is currently (attempting to) develop products to support (a) and (b). I share your belief that it may get better at that over the next 20 years. I’m not yet convinced that doing so will prove to be the most practically useful approach to meeting social need but I do accept the honorable intentions of those involved.

    Either way, Big Society Capital-led social investment’s only relationship to organisations in category (c) – most social enterprises – is to lead them on wild investment readiness goose chases, and to serve as an excuse for the fact that other funding is no longer available.

    To avoid social investment and social investors becoming far more unpopular with most social entrepreneurs than even I – as a persistent critic – believe they deserve to be, we need to decouple the discussion about developing the social investment market (and the, in some cases, overlapping private sector impact investment market) from discussion about how (or even if) we support existing UK social enterprises (and a wider social economy).

    Clearly that discussion overlaps in places but the main focus for the current model of social investment isn’t (really) supporting social enterprises and the best source of help and support for most social enterprises is not the current model of social investment or the pipeline schemes attached to it.

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