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.
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.
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