This week’s episode of Dragons Den – my second favourite TV show after Mary Queen of Shops – saw another social enterprise pitch elicit a mixture rage and confusion in the BBC’s lair of venture capitalism. The Dragons generally say no to social enterprise but the reasons for this week’s rejection were more interesting than previous snubs.
Sculptor Richard Austin was asking for an equity investment in a private company selling his ‘Sculpta-face kits’ which would put its profits into a sister-organisation, a CIC delivering sculpture workshops for community groups and disadvantaged people. Social Enterprise magazine reports that:
“… the Dragons became heated when they heard his idea, saying there was a conflict of interest. Duncan Bannatyne became so angry he stormed out of the room and Peter Jones said the private company would ‘exploit’ the social enterprise. Only Deborah Meaden said Austin had made the right move, but declined to invest. Austin left the den with nothing.”
Explaining his reasoning, Austin said:
“Funding workshop leaders was difficult, so I was advised to retail the kit. Because the CIC is not for profit, I was advised to set up another company, the profits of which would filter into the CIC. I’m just a sculptor. If someone gives me business advice, I take it.”
Mr Austin’s experience reinforces my longheld view that rather than taking generalist business advice – particularly state-funded generalist business advice – at face value, we should instead ask these advisers a slightly adapted version of a series of questions famously asked by Tony Benn of powerful people: What practically relevant experience have you got? Where did you get it from? In whose interests do you exercise it? To whom are you accountable? And how can we get rid of you?
There is a vaguely logical general case for the hybrid business structure that Mr Austin was advised to put in place – a social entrepreneur needs equity finance to fund their trading activity and doesn’t want to set up a charity to spend the profits because the need for a volunteer board would compromise their independence so sets up a CIC Limited-by-Guarantee to spend the trading profits (that aren’t paid to investors) and to bid for small grants.
Where the logic break’s down is where you apply it to the situation that Mr Austin is in and the actual approach that he wants to take.
1. Mr Austin apparently doesn’t want to apply for grants and as there’s no tax benefits to running a CIC it’s not clear how it’s practically useful to him
But more importantly:
2. The whole issue of a for-profit company working closely with a not-for-profit company is very different when the two companies are very small businesses run by the same person.
To avoid the possibility of the problem that Peter Jones and Duncan Bannatyne alluded to – of a failing for-profit business being propped up by a not-for-profit CIC – the for-profit business would ideally need to be wholly owned by the CIC meaning it couldn’t sell equity. This ownership wouldn’t prevent the CIC propping up the failing business but it would prevent private investors benefiting from that propping up.
The alternative, if the for-profit company wasn’t wholly owned by the CIC, would be for it to either be entirely operationally independent from it or – at a great hassle and expense – for the financial and staffing relationships between the two to be outlined and managed in meticulous detail to make sure that the CIC was never using grant funded staff, premises or equipment to support the work of the for-profit company (without being directly reimbursed for doing so).
Both these approaches are fairly pointless though when the end result is money going into a CIC which is not applying for grants. The CIC serves no practical or financial purpose. Mr Austin would be far better off just running one company limited-by-shares and doing all his work through that. Of course, The CIC Association (of which I’m a member) would point out that only single structure that would allow an entrepreneur to both sell equity and enjoy the (very limited) benefits of CIC status is CIC Limited by Shares.
There’s often good reasons for larger organisations to set-up different trading, social enterprise and charitable arms but, at a turnover in the 10s of £1000s, the only obvious reasons for it that I can think for anyone advising the approach that Mr Austin has taken is that the adviser finds the idea of hybrid business structures really exciting or there’s been a major misunderstanding.
By far the easiest approach for entrepreneurs in Mr Austin’s position (both in terms of running the business and explaining it to other people) is to jump one way or the other. Entrepreneurs should either put all their activities into a straight for-profit company or all the activities in a not-for-profit – at least until there’s enough activity two form two operationally independent businesses (even then, I’m not sure it’s really necessary to do so but it is worth considering).
At the relatively early stage of a business journey, faffing around with structural complications at best creates a waste of time and energy that could be spent on delivering social change and at worst – as Peter Jones and Duncan Bannatyne suggest rightly suggest – creates a framework for propping up a failing for business for-profit with grant funding.
None of this detracts from the good work that Richard Austin does but it does show the need for competent specialist business advice for social entrepreneurs.