Disappointing news that ethical bank, Triodos, have closed their social enterprise venture capital fund after spending two years failing to find social enterprises to invest in it. In a general sense, I’m a big supporter of equity investment in social enterprises and think it’s potentially a far better, more sustainable, way of getting new social enterprises up and running than many of the current commonly used financial instruments.
I’m less clear on the likely role of venture capital in backing social enterprises as, to the extent that I understand these things, I’ve always understood venture capital to be about taking high risks in the hope of potentially high returns. Most social enterprises I’ve come across – even the successful ones – offer fairly high risks and, even if they succeed, deliver relatively low (financial) returns. That raises the potentially complicated question of whether you can have a business that offers high financial returns to investors while also being a social enterprise. I think the lobby’s answer is broadly “no”.
That question, though, is currently less important that the one that’s sidestepped by Triodos Managing Director Charles Middleton’s suggestion that a key reason why his bank couldn’t find a home for their cash, in addition to entrepreneurs unwillingness to relinquish control of their businesses, was because: “We come across this persistent theme of investment readiness being an issue”.
Readers of the Social Enterprise Coalition‘s thorough and useful State of Social Enterprise survey may have noticed that – depending on overlap between legal forms – as few as 7% and at the very most 27% of current social enterprises are set up in a way that would enable them to accept venture capital.
Even if the higher figure is correct, a large percentage of those are CIC CLSs who could accept venture capital in theory but would be unlikely to be structurally able to offer the necesssary level of return in practice that would enable a venture capital fund to sell their stake in the future. After that, once you knock out very early stage businesses, businesses run people who clearly don’t know what they’re doing and businesses run by people who are ethically opposed to large percentages of their profits being returned to a venture capital fund rather than being invested in helping their beneficiaries there’s not many social enterprises who actually make it to the venture capital start line where their investment readiness or otherwise would become an issue.
So, the market for social enterprise equity investment is very small and the market for social enterprise venture capital is even smaller. Sadly, the restrictions on profit distribution demanded by the Social Enterprise Mark make significant growth in both these markets less likely and – if the Mark is successful – would make it virtually impossible for a company to be both an officially recognised social enterprise and the recipient of venture capital. Given the current set-up of most social enterprises this is not the biggest issue currently facing the lobby but if they’re genuinely interested in social enterprises becoming serious players in the world of mainstream business, it’s one they might want to consider.
Tridos have tried to do something positive and it hasn’t worked. Let’s hope this is because this fund was ahead of its time rather than being a project whose time will never come.