Tag Archives: Social Enterprise

Snapshots of the innovation landscape

There haven’t been many times in recent years when I’ve been reading a report on social innovation or social enterprise and I’ve found myself thinking:  ‘the author of this section has missed Social Impact Bonds and they’re genuinely relevant to this discussion’.

If European social innovation research collaboration, Tepsie‘s report Building the Social Innovation Ecosystem in Europe achieved nothing else, that would be quite a feat. Fortunately, given that there’s 105 pages of it, it does achieve some other things, too.

While the one they’ve gone for is snappier, a more accurate title for the report would ‘Describing the possible component parts of a Social Innovation Ecosystem in Europe should one come to exist’. The bulk of the report is made up of snapshots of the landscape of interventions emerging to support social innovation in different parts of the world, written by social innovation academics from around Europe.

Where’s the innovation?

Keen to avoid a social innovation definition debate, the authors make clear that they’re: “particularly interested in socially innovative organisations that emerge from civil society and the third sector, including social enterprises, co-operatives and mutuals.”

The problem with the choice to focus on socially innovative organisations rather than socially innovative activity (wherever located)  is that while some subsections – such as the one on ‘prizes for social innovation’ – are about support for innovative activity which may ultimately lead to the creation of organisations, most of the subsections focus on resources, organisations and networks that support new or growing social sector/civil society organisations in a general sense.

In many subsections, the specific relationship between this support and those organisations actually having and successfully executing any new ideas or models is either not explained at all or explained through gratuitous speculation such as this on crowdfunding: “A fourth advantage particularly for social innovators is that it pays for them to be really innovative: Whereas they often do not fit into more traditional funding schemes just because they are ‘too innovative’, they are likely to attract crowdfunding more easily by being innovative, if they succeed in making innovation comprehensible and convincing to ‘the crowd’

The report divides the ‘Social Innovation Ecosystem’ into three main sections:

  • Enhancing the supply of innovative goods and services
  • Enhancing the demand for innovative goods and services
  • Intermediaries: transferring knowledge about social innovation

There’s over 60 pages on ‘Enhancing the Supply’, divided between different types of: ‘Financial Support’, ‘Non Financial Resources’ and initiatives developing ‘Skills for Innovation’, 15 pages on the different ways of ‘Enhancing demand for innovative goods and services’ and 12 pages on ‘Intermediaries’, looking at networks and evidence.

The subsections are written by different researchers from Tepsie’s partner institutions and, perhaps unsurprisingly, they’re a real mixed bag. The intended model (demonstrated by the good ones) is: explain what the activity is (for example, ‘crowdfunding’), explain what it’s got to do with socially innovative organisations, give some examples of some current approaches including interviews with people involved and provide ‘reflections’ on what this means for the social innovation eco-system.

Ventures needs grants because ventures need grants

It’s a model that works particularly badly for the subsections on Financial Support. Gunnar Glänzel of University of Heidelberg  is the co-author of a very good paper I’ve read on social investment in Germany but he gets lost somewhere between writing superfluous beginners guides and complicated specialist analysis of topics that (on this evidence) he’s not really a specialist in. As a result, the first three sub-sections here on ‘Grants for early stage development’, ‘Crowdfunding’ (see above) and ‘Loans’ are stews of confusion peppered with blindingly obvious filler.

For example: “The rationale behind early-stage grants is that social innovators who are about to set up ventures are in need of relatively small amounts of money at low or no cost” and “As long as an idea remains just an idea, it continues to have two major drawbacks: First, it does not make any difference in the world; and second, it does not generate any job opportunities for anyone.

Particularly baffling is the subsection on loans which is apparently aimed at someone who needs to read a 500-word description of what a loan is beginning: “A loan is a form of funding where a lender provides money (the principal) to a borrower on pre-defined terms concerning the repayment of these funds” but can understand the idea of ‘mezzanine’ capital with no explanation at all.

As if this lurch from spoon-feeding to jargonitis wasn’t enough, the mezzanine is reached in an interview with Charity Bank.  Charity Bank are really good but they’re virtually the only organisation offering loans to UK social organisations who don’t claim to be particularly interested in social innovation. Sure enough, Glänzel also interviews Triodos before noting: “It needs to be pointed out that both examples refer to banks that make loans to organisations that should not be seen as social innovators.

Fortunately, other sections are much better. The subsection on ‘Mentors and Coaching’ by Jeremy Millard of The Danish Technological Institute includes an interview with Servane Mouazan of Ogunte and is a really good summary of what the point of those activities is – something which many social enterprise support agencies that refer social entrepreneurs to coaches and mentors could do with explaining better. It’s less good as explaining why socially innovative organisations need different mentoring or coaching to anyone else but there may not be a reason.

Does anyone actually want to buy this stuff?

While it’s worth dipping into the ‘Supply’ section to read about the different types of support available to socially innovative organisations around the world, the most interesting thinking in the report is in the demand section.

To begin with, it’s great that the section exists at all. It’s no great revelation that there’s loads of support for people looking to bringing socially innovative organisations ‘to market’ but there’s currently very limited understanding of what or where the markets for their social innovations are.

Millard’s subsection on Campaigning and Advocacy looks at the role of socially innovative organisation in simultaneously campaigning for and delivering social change. In the case of the first example, The Ghana Friendship Groups, the organisation literally does both things itself, pushing the Ghanaian authorities to provide children with the formal education they’re legally entitled to by delivering preparatory courses for children so they’re ready to enter the education system and training local ‘barefoot’ teachers, while simultaneously campaigning for politicians to fulfill they’re responsibilities and securing outside funding from Danish aid agencies.  The other example is used is Social Enterprise UK and their work on boosting the market for social enterprise (which is apparently assumed to lead to a bigger market for social innovation) both through public campaigns and with engaging with politicians on initiatives such as the Social Value Act.

This subsection loses its way in the ‘reflections’ which ends up as a discussion of the pros and cons of campaigning rather than reflections on the interaction between campaigning and social innovation. For some social organisations campaigning may be the best way of creating a market for an innovation which they themselves can deliver. Hearing loss charity, the RNID’s work both demanding that the NHS provide digital hearing aids then working with them to make it happen is a good example.

The Young Foundation’s Rachel Schon does an extraordinarily good job of providing a high level overview of the fiendishly complicated topic of the place of social innovation in ‘Commissioning and Procurement’ explaining the problems of big contracts suited to big providers, risk aversion and excessive monitoring of processes rather than outcomes.

Impossible to tackle in the three pages of the subsection but important to the paper overall is the question whether governments actually want to buy social innovation and, if so, how they go about doing so.

(Possibly the only situation ever where) Social Impact Bonds get less coverage than they deserve 

Unfortunately, the snapshots of the landscape format, while probably the most logical one for a report by multiple contributors based in various different countries, is a particularly bad one for considering how different organisations and initiatives function within an ecosystem.

The relationship between the different components of ‘An Ecosystem For Innovative Social Purpose Organisations’ is outlined in a diagram on page 11 but never explicitly mentioned again after that. As a result, the ‘supply’ section creates the impression of a ‘Social Innovation Ecosystem’ as a building constructed entirely from scaffolding that socially innovative organisations may or may not choose to visit to get what they need to succeed.

Some critics of social enterprise support and government funding for it might feel that impression is accurate but, either way, this non-engagement means failing to examine approaches that either consciously link together different forms of support or promote social innovation on both the supply and demand side.

To take two UK examples, not because I think they’re likely to be the most important ones in the world but because they’re the ones I know about: the UK’s social investment ‘pipeline’ and Social Impact Bonds.

For the last two years, the UK government has – it believes – been promoting social innovation through a social investment pipeline that begins with a socially innovative idea being supported by an accelerator funded through the Social Incubator Fund, moves on to ‘investment readiness support’ through Big Potential or the Investment and Contract Readiness Fund, and ultimately ends up with innovation social ventures received massive investments from Big Society Capital-backed social investment funds to scale up their services and sell them to public sector commissioners.

This pipeline may not work (or even meaningfully exists in a practical sense) but it’s a good example of several parts of s social innovation ecosystem that have (in theory) been designed to fit together and deliver some end products – and it would be useful to consider whether it’s a good idea and whether there’s comparable stuff going on elsewhere on Europe (or elsewhere in the world).

The hyperbolic promotion of Social Impact Bonds (SIBs) in the UK has been so successful  that, despite the fact that the first SIB only published its first (half-decent but hardly breathtaking) results last week, they’re already being promoted as a key solution to the challenges facing whole countries.

It makes sense for serious social innovation researchers to be sceptical about the marauding progress of the SIBs bandwagon but that doesn’t negate the relevance of what they’re attempting to do. SIBs are:

(a) a form of theoretically commercial finance specifically designed to fund social innovation

(b) a model of funding with a built-in relationship between financial return and social outcomes

(c) a model of funding social innovation that’s received a phenomenal level of government support

Even more critically, though, they attempt to tackle the conundrum that governments are the most likely customers for many new approaches to doing social good but governments can’t risk spending (large amounts of) money on services that haven’t yet been proven to work.

Who pays and why?

Ultimately, socially innovative organisations don’t (or shouldn’t) exist primarily in a social innovation ecosystem. The ecosystems socially innovative organisations need to find their places within are their local communities, or the national or international communities of interest that want to see a solution to particular social problem.

The effectiveness of the growing range of supply side support for socially innovative organisations is based entirely on whether there’s ultimately anyone who wants to pay for what’s supplied. Ironically, given that grant-funded activity is often seen as an outdated alternative to socially enterprising approaches, Julia Unwin’s The Grantmaking Tango is one of the few UK publications I’m aware of that looks at a market for social goods provided by social organisations (grant-funding)  and considers how that market affects the business models of the social organisations that deliver those social goods.

It would be really useful for UK or European researchers to do something similar, the Social Innovation Shuffle (?), that looks at the different markets for social innovative end products -governments in particular but also grant-funders, private sector businesses and individual consumers- and how a social innovation ecosystem could most usefully interact with them. This report makes a good start by telling us more about what’s currently out there.

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Going large

You don’t need to go beyond the executive summary of Making It BigNesta‘s new report on ‘Strategies for Social Social Innovations’ to see just how confused the UK’s leading thinkers are about the subject.

In sentence two we’re told ‘Many social innovations have become part our daily lives – think pre-school education, first aid, e-petitions‘ while in sentence three we’re told that ‘In the developing world, organisations like BRAC and Pratham are approaching transformative scale, starting to solve the social problems they set out to tackle.

From this we can deduce that social innovation could be a new branch of an existing sector, an essential basic service or a new method of communicating your views to people in power. On the other hand, it could be a large NGO that provides huge range of different services designed to help poor people.

It may be that it’s not useful to define ‘social innovation’ beyond the suggestion that it’s something with a social aim that seems to work but what about ‘scale’? According to Making it Big: ‘Social innovations can be said to have scaled when their impact grows to meet the level of need‘.

On that basis, pre-school education and first aid are a long way off reaching (worldwide) scale while many would argue that e-petitions reached scale some time before the first one was set up (apologies to radical hippies and Shoreditch libertarians who oppose both pre-school education and first aid but love e-petitions).

No more heroes

Making It Big isn’t a bad report – it’s a good report that reflects a confused situation. As Nesta boss Geoff Mulgan reflected at the recent launch event, 10 years ago the dominant view in (newly emerging) social innovation policy circles was that the UK would see an explosion of Ashoka-model, Richard Branson-style heroic social entrepreneurs.

(He didn’t add that) a few years before that Charles Leadbeater’s The Rise of the Social Entrepreneur had seemed to herald the approach of a disparate army of new social leaders who, between them, would replace outdated public services aided only by five disgruntled local people, a 30 minute crash course on how to do proper business from a kid on KPMG’s graduate scheme and their terrifyingly passionate personality.

It wasn’t a good idea but it was an intellectually coherent one. Unsurprisingly, it hasn’t worked. No heroic social entrepreneurs at all have solved a global social problem (or even replaced a relatively small existing public service) by scaling up themselves and doing their passion. The heroic social entrepreneur model has now become so discredited that at this year’s Skoll World Forum many of the world’s leading heroic social entrepreneurs were refusing to associate themselves with (the heroic image of) themselves.

In the UK, it just quietly didn’t happen. So Making it Big successfully reflects a landscape where we know being a great person and really meaning it is not enough. It does a good job of outlining different potential routes to scale: influence and advise, build a delivery network, form strategic partnerships and grow an organisation to deliver.

Do more vs. doing more good

It’s useful to look at scaling social innovation from two angles simultaneously. One is operational scale. Are you doing the thing you do either in the most efficient way you can or delivering it at the most efficient volume possible? Any of the available routes might be the best one to reach that point.

Have you reached the point where you’re doing something to the greatest possible extent that your skills, the resources available to you allow and the markets – in the broadest sense of the term – you operate within allow you to and are you able to keep on doing it?

Then the social impact question might – at that optimum operational level – does the social bit still work. Do the social returns diminish, why and by how much? Does the service that worked brilliantly for people in Norfolk, work just as well for people in Wales – and does it still work as well for people in Norfolk now you’re trying to deliver it in Wales, too?

Unfortunately, the trade-off between operational and social will probably involve taking a position on some difficult questions. Do you want to make your social good available to the biggest possible number of people or the people who need it most? Clearly, both but what if you have to make a choice?

What if the best way to make your social innovation simple enough for millions of people to use is to make it in a way that means particular groups of people can’t use it? What if ensuring your social innovation fits the market for helping for a particular group of people means you have to design it in a way that means it will never have a wider application?

It’s too much to demand that social innovations need to have entirely solved social problems to have been regarded as having scaled but how do we work out which scale model we should be aiming for if we want to achieve the best possible of operational effectiveness and social impact.

Markets don’t care about your social innovation

What remains under-addressed – both in Making it Big and in current UK social innovation debates in general – is the trade off between (scaling) social innovation as a technical process and social change as a battle for resources.

In Section 4, we’re told by Ted talk hero, Simon Sinek, that “people don’t buy what you do; they buy why you do it” and therefore you need a ‘clear vision’ to scale up. The may be a great piece of advice in some contexts but it’s problematic in many of the social sectors.

In the social sectors people often buy what you do – in terms of giving up their time to engage with it – because they’re desperate, lonely, bored, or a combination of all three. That’s also true in purely commercial sectors but, in social sectors, the fact that your service is being used is (hopefully) not enough.

In conventional economic terms, many of the people who most need many social innovations don’t buy anything because they don’t have the power to do so. On the other hand, the people who do have the power – the people who might actually pay for the scaling of your innovation – buy whatever the hell they want irrespective of what you do or why you do it.

Breaking into many major social markets isn’t really about you and your social innovation at all. Do you have a scalable model for helping people back to work in the UK? Would unemployed people like to use it? Frankly, who cares? The Department of Work and Pensions aren’t going to pay for it through their lowest common denominator Work Programme scheme.

Unfortunately, there’s not much room in the think pods at Nesta for discussions that acknowledge the fact that some people have more power than other people, and research that considers how that affects both the kind of social innovations that emerge, and the projects, products and businesses that succeed.

Without that, some good stuff will happen but the broad state of confusion the social innovation world will continue.

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How do we build markets when customers don’t pay?

Despite its popularity with politicians (or perhaps partly because of it) public service marketization is rarely discussed in a practical useful way…. ” – the first in a new monthly series of blogs I’m writing for Pioneers Post on social innovation and public service reform. Next two are on: ‘Who pays when the state can’t?’ and ‘Do all public services have to be delivered by professionals?’

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Social Enterprise: What’s love got to do with it?

Is love an essential requirement for a successful social enterprise? Or is it actually a by-product, the mechanism or even the result of one?

In recent months, my social enterprise, Social Spider CIC, has been working with Intentionality CIC on Social Enterprise: What’s love got to do with it? – a report on the role of love in social enterprise. The report is available to download here. It would be great to hear what you think.

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Sustainable business models: Avoiding an ‘annual cycle of finger-crossing’

Popular grant funding body, Big Lottery Fund, have set up a website, Your Voice Our Vision, to stimulate discussion about how they’re going to spend £4billion between 2015 and 2021. They’ve been asking various people to chip in with blog posts on how they view the current and future funding situation for civil society/the voluntary sector/VCSEs (delete or replace entirely according to preference). Here’s my contribution:

… As Managing Director of a small social enterprise and, until recently, vice chair of my local CVS, I’ve observed many different attempts to answer the question of what to do when the money runs out. Understandably given the pressure of the situation, many of them aren’t very well thought through...” – full blog here.

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Time to get the builders in?

There’s no shortage of challenges for leading figures in UK social investment and even the good news isn’t always quite as good as seems. For example, those investors and intermediaries who hope the social investment market will (at some point) be catapulted to relevance by a massive increase in the numbers of social ventures delivering public services will have been delighted by last week’s credulity-busting claims*, in research from Northampton University, that social ventures have been less likely to ‘cease operating’ over the past 30 years than PLCs listed in the FTSE100.

Unfortunately, even if you’re prepared to swallow the ideas that: (a) this is true and (b) this revelation will somehow make public sector commissioners more keen to give contracts to charities and social enterprises, the researchers also expect you to stomach the idea (see page 24) that the 100th biggest ‘Third Sector Organisation’ in the UK in terms of trading income is an organisation, Oasis Charitable Trust, that’s currently doing just £234,000 worth of business.

Given that, as we’ve been told, the model of social investment supported by wholesale finance institution, Big Society Capital, only works without subsidy for deals worth £250,000 or more, and (unless you’re a dot com start-up) you generally need to be doing a lot more than £234,000 worth of trading to take on a £250,000 investment, this would suggest there’s far fewer than 100 organisations in the UK currently in a position to take on unsubsidised social investment.

That’s fewer than 100 organisations that are literally big enough to take on these investments. That’s before you even begin to consider whether they’re actually profitable businesses that would be able to repay an investment. By the end of 2013, Big Society Capital’s cash had been drawn down by 57 frontline organisations with only £13.1million of a projected £600million pot spent in the process.

The situation can’t really be quite that bad (can it???). I’m pretty sure there are more than 100 charities and social enterprises in the UK with a trading income of more than £234,000 – I’d be amazed if there weren’t at least 500 – but there clearly aren’t so many more that University of Northampton’s finest were able to identify them. Even if my anecdote and gut feeling based optimism is correct, that’s still nowhere near 1% of all UK social ventures/third sector organisations/VCSEs/social sector organisations (delete according to taste).

Against this backdrop of staggering mismatches between what 99%+ of charities and social enterprises need, and what (the most prominent element of) the UK social investment is able to offer, Robbie Davison and Helen Heap’s work on developing the idea of ‘Builder Capital’ is particularly timely.

Davison, of Liverpool-based social enterprise, Can Cook, has been a long-term critic of ‘Social Finance’ in the UK and published ‘Does Social Finance Understand Social Need?‘ (the answer was ‘no’) in January 2013 before teaming up with Heap, then working for charity, Tomorrow’s People, to publish ‘Can Social Finance Meet Social Need?‘ in June 2013.

Once again, the answer was ‘no’ and in their new book, The Investable Social Entrepreneur, Davison and Heap, reiterate their critique of the current ‘social finance’ market: “Social Finance, as it is currently arranged, is mostly about not losing money – avoidance of risk in order to protect existing assets. It is nothing more than debt finance and debt finance alone will not address social need anytime soon; it’s the wrong type of short-term money trying to attach itself to problems that take a long time to solve.

They then outline their solution, a new form of social investment known as ‘Builder Capital’. Builder Capital basically involves a social investor putting between £250,000 and £2million into a social enterprise on the basis that they’ll receive no financial return at all for the first seven years. From then on, assuming the business succeeds, they receive a set percentage of the enterprise’s revenues every year until year 20 – resulting in anything from simple repayment of capital to a 5% annual return (depending on the percentage agreed).

The plus side of this approach is that it’s a model for social investment that genuinely offers social enterprises something that isn’t on offer from either grant funders or mainstream finance providers. Grant funders might offer social enterprises money that doesn’t need to be paid back but they’re unlikely to give them 7-years’ worth to spend on developing a business – rather than delivering a monitored set of outcomes. Mainstream finance providers (and most providers in the current social investment market) might offer a social enterprise a mortgage or other forms of loan finance but only if the enterprise can begin to repay the money immediately at commercial rates, which makes it very difficult to both build a sustainable enterprise and meet social needs not already met by mainstream business or the public sector in the process.

The obvious downside to Builder Capital is that it doesn’t currently exist, with an apparent lack of investors keen to put large amounts of money into social enterprises on the basis that they may get it back, eventually, over a 20-year period, being the biggest problem. Davison and Heap are clearly aware of this problem and are planning to do something about it. They’re running a series of events to discuss how to make Builder Capital a reality, starting with this one in London on July 10th. After these discussions, the plan is to establish a ‘Builder Capital Hub’ that will bring together investors, entrepreneurs, customers and beneficiaries with the ultimate aim of ‘developing and growing a market for Builder Capital that we estimate could soon reach a size of around £50million per year‘.

Given that the latest available figures (albeit, figures from a couple of years ago) tell us that the entire market for all social investments other than secured loans was worth £19.8million per year, this seems relatively ambitious but whether or not they achieve that target, Davison and Heap’s work on Builder Capital is an important step towards to making social investment more relevant to ambitious charities and social enterprises with the potential to grow into sustainable businesses meeting social needs.

 

*The claims are true, as long as you’re prepared to accept that a PLCs merging with another company is the same as ceasing to exist. 50 companies from the 1984 FTSE are not in the 2014 because they’ve been acquired. Examples include popular pharmacy group, Boots, which is now part of Alliance Boots. Alliance Boots had a total turnover of £25.7Billion in 2013/14. Only 3 companies that were in the 1984 FTSE100 have gone bankrupt.

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Five questions about social investment tax relief

This month’s budget saw the announcement that the UK social investment industry’s favourite policy innovation, Social Investment Tax Relief (SITR), will be set an 30% when it comes into force on April 6th.

SITR is particularly notable because as well as providing relief to investors buying shares in (some) social organisations that are able to offer them,  it also provides relief on (unsecured) loans – meaning that organisations without share capital (including charities and CICs limited-by-guarantee) can benefit.

Welcoming the news, Big Society Capital boss, Nick O’Donohoe told Civil Society: “Now is the time for investors to seize this opportunity to invest for social good and benefit from tax relief that is equivalent to existing schemes.”

Elsewhere, Nesta’s Matt Mead, writing for The Guardian‘s Social Enterprise Network explained that SITR: “might not sound exciting but it has the potential to be a major landmark for investment in social impact organisations.

Are they right? Will SITR precipitate an avalanche of investment in social organisations? Will the government really end up spending its £10 million estimate (on over £33 million worth of investments) on the first year’s worth of SITR.

Frankly, no one’s got the foggiest idea but here’s five questions worth considering:

1. Is SITR a good use of public money? Tax relief involves the government agreeing not take some money from people in tax to encourage them to spend their money in ways that the government thinks are good. In the case of SITR, the government thinks social investment is a good thing and it hopes providing tax relief will lead to more of it.

The National Audit Office reports that the current cost to the state of tax reliefs that have similar goals to government spending programmes (known as ‘tax expenditures) is £101 billion per year. Given that the UK’s entire annual tax revenue is £476 billion, that’s a lot of money.

The cost of SITR is estimated to be £10 million in 2014/15 rising to £35 million in 2018/19 so, based on the overall picture, it won’t make much difference to annual tax revenues. Some in the social enterprise world might argue that it would be more helpful if the government just gave £10million to social enterprises, rather than giving money back to people who invest in social enterprise. There are (at least) two arguments against doing this:

  1. As a result of the government giving back 30% to investors, social enterprises get both that 30% and an additional 70%, so they end up with more than 3 times as money
  2. The introduction of SITR may not cause an overall increase in levels of investment but, in some cases, money that would otherwise have been invested in private businesses may be invested in social enterprises instead

On balance, as the sums involved are relatively small in a general sense but potentially big in terms of the UK social investment market, SITR seems like a good use of public money if: (a) you support social investment and (b) it works.

The added bonus is that if it doesn’t work (and no one makes any eligible social investments) it won’t be spent.

2. Will SITR make High Net Worth Individuals (HNWIs) more likely to invest in companies they can’t own? From the government’s point of view, SITR is primarily focused on generating more investments from rich people. According to the published guidance: “Investors are expected to be similar to those investing in the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT). Compared to the self-assessment population, those investors tend to be male, located in the south of England and have higher overall income levels.

Initiatives like Clearly Social Angels, suggest that there are definitely some well off business people who want to make investments that enable them to make (some) money while also making the world a better place, and there’s evidence from Unltd Big Venture Challenge programme that growing numbers are investing in ‘for-profit’ social businesses which use a convention company limited-by-shares structure. What’s less clear is whether many of these investors will want to invest companies which don’t sell shares and can’t give them a stake in the company in exchange for their money. Is it desirable (or even possible) to be an angel investor without being a shareholder? Assuming the answer’s ‘no’ or ‘not really’, what sort of offers will eligible social enterprises be making to HNWIs?

An additional barrier to investment from HNWIs in the short term is that, prior to a government application to the EU for State Aid approval, only investments up to €200,000 are eligible for relief.

3. Will there be any opportunities for people who aren’t really rich to make eligible investments? Significant numbers of people who are not especially wealthy are already receiving tax relief on investments in co-operatives through existing tax reliefs. Both the EIS and the Seed Enterprise Investment Scheme (SEIS), which offer similar levels of relief to (or in the case of SEIS higher than) SITR have been used by organisations involved in the Community Shares programme.

It’s possible that the potential offer to less wealthy people – invest £500 or so that you can afford to lose in a business that you think’s really good, and if you’re lucky, you might get some or all of it back – could be less confusing than the offer to HNWIs. It’s crowdfunding with additional benefits but (from the social enterprise’s point of view) additional responsibilities to the crowd of funders. What’s not clear is how many social enterprises will be willing and able to make that kind of offer.

4. Do significant numbers of social organisations actually want investment from individuals? SITR has been introduced at the end of a lengthy campaign but that campaign has been led by leading figures in the world of social investment and (some) social enterprise umbrella bosses. I can count on the fingers of one finger, the number of social entrepreneurs (who don’t work in social investment) who’ve ever talked to me about tax relief.

There’s no evidence that large numbers of social organisations (I’m not currently aware of a single anecdote, although I’m sure must one or two) have been deterred from selling shares (if they’re able to) or seeking unsecured loans from individuals because they were unable to offer tax relief on those investments.

In the case of  loans in particular, the fact that organisations haven’t considered this option before doesn’t mean they won’t do so in the future – particularly if crowdfunding websites such as Buzzbnk are able to help them do so – but it’s anyone guess how many will. It could be 5000, it could be 5. The Bonk of Pants offer is an example of the kind of offer that has been made without tax relief that may be easier to do now SITR is in place.

5. Is tax relief on debt on a good idea? The really (potentially) innovative element of SITR is the fact that relief is available on unsecured debt. The thinking is that behind the policy is that unsecured debt is as near as organisations without share capital can get to selling equity. This may be true but that doesn’t mean that it gets very near.

As mentioned above, in a situation where an individual is making a large personal investment, an unsecured loan lacks the key benefit provided by an equity stake of enabling the investor to take part ownership of the organisation. In the case of charities in particular, there’s no obvious way to fudge that issue – investors can’t be made trustees of a charity in return for their investment without creating a (pretty serious) conflict of interest.

At least equally importantly, an unsecured loan also fails to provide investors with an asset that they can sell on to somebody else. Quasi equity loans – where investors are repaid a proportion of an organisation’s revenues (or profits) rather than a set monthly amount – have clear advantages for organisations but they don’t solve the problem that there’s no obvious way an investor can make a big profit on an investment in an organisation without share capital (even if it that organisation is really successful).

In a situation where a commercially-minded investor thinks there’s a good chance that they won’t get their money back, it’s not clear that SITR at 30% does enough to derisk their investment to make a deal significantly more appealing (particularly given that the same level of relief is available on investments in private businesses that do have those additional benefits).

In situations where organisations are looking to take on a loan on the basis that they have clear revenue streams and a track record of profitability, it’s not clear what loans from individuals receiving SITR will add to the existing market for loans from Social Investment Finance Intermediaries (SIFIs)The latest available figures (for 2011-12) show a total value of unsecured loans deals in the social investment market of £10.5 million (plus £0.3 million in quasi-equity deals).

The key reason why unsecured loans with SITR might work is if there’s a significant market of both HNWIs and groups of less-HNWIs who are looking for opportunities that inhabit a grey area between an investment and a donation. This market doesn’t exist yet but the success of SITR (and, to an extent, the whole idea of social investment in charities and other ‘not-for-profit’ organisations) is based on the belief that it can be created. From April 6th onwards, we’ll see if that belief is correct.

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