Blame the customer

The pressing, practical question is: do intermediaries exist whose investments in social enterprises and charities yield enough profit that might enable £600m of Big Society Capital to be spread in some sort of equitable way?

So says Daniela Barone Soares, chief executive of venture philanthropy specialists, Impetus Trust, in a thoughtful and sensible piece for The Guardian‘s Social Enterprise Network. Her basic point is that there’s a need for some market research to work out how-on-earth, government-backed wholesale lending institution, Big Society Capital, is going to get rid of £600 million (and have a realistic hope of getting it back). The money has to go through social investment intermediaries and, as Big Society Capital’s own research shows, many of these intermediares have so far found it difficult to invest much money in organisations that don’t have property to borrow against (which would also enable them
to borrow from mainstream banks).

As Barone Soares points out: “Many intermediaries, even the most profitable ones (indeed especially them) attest to the claims of we who work within the sector that ‘investment readiness’ – finding enough organisations to yield social investments – is their number one problem – and Big Society Capital’s biggest potential barrier.

There’s certainly no shortage of social investment specialists talking about investment readiness. It’s the one phrase you’re guaranteed to tick off in any game of social enterprise bullshit bingo but what does it actually mean? Or, at least, what does it mean beyond the obvious ‘is this an organisation that we can confidently provide with an investment right now?’

I don’t have much common ground with most social investment professionals on social enterprise policy – all the ones I’ve met are both pleasant on a personal level and clearly genuine in their desire to deliver positive social change – but I do agree with them that most social enterprise are not ‘invesment ready’. Where I think we disagree is on the reasons why.

The most under-explored reason is that maybe social entrepreneurs don’t want investment – either at all or on the basis that we’re being offered it. It’s true that Social Enterprise UK‘s latest State of Social Enterprise survey, Fightback Britain, reveals that ‘Access to Accessible and Appropriate Finance’ is the biggest problem facing 44% of UK social enterprises, all that reveals conclusively is that this 44% want some money. It doesn’t tell us whether large numbers of social enterprises want to scale up and significantly expand their businesses even if they could get a grant to do so, let alone a loan that would have to be repaid with interest.

The same survey reveals 47% of organisations not even making a profit. In that instance, the quickest way to achieve investment readiness might well be to start a new business doing something else. This is not purely a flippant point. The really is that a significant proportion of social entrepreneurs run businesses who major commercial aspiration is to keep going while achieving positive social change. Not based on some misguided political notion that profit is evil but because the social activity we’ve chosen to carry out means that we don’t have a significant market to sell to. The sensible, purely commercial decison is to stop and get a job. But our choice is to keep going. We really aren’t a few days pro-bono corporate business planning consultancy away from a £multi-million business.

Unfortunately, the (currently dominant) slightly-less-than-market-loans bit of the social investment sector doesn’t engage with the world of social enterprise that we operate in, it orbits it from a geo-stationary position. As a social entrepreneur, I find it slightly galling listening to the endless parade of ex-financial services people turning up on social enterprise stages to ask me when I’m finally going to serve them up a real business to make use of one of their loans. The reality is that social entrepreneurs didn’t ask finance specialists to come into our sector an offer us their investment products, they chose to come and sell us stuff, and in most cases the government paid for them to do so.

It’s ironic that the clearest current example in UK civil society of an organisation receiving significant investment without having to prove its investment readiness is Big Society Capital itself. It has come into existence on the basis of political demand not customer demand. In fact, the demands for social ventures to achieve greater investment readiness coming from Big Society Capital and other social investment intermediaries are a textbook example of the ‘blame the customer’ approach that social enterprises would need ditch if they were to achieve investment readiness.

None of this means that I think social investment is a bad thing. It’s vitally important that profitable, scalable social ventures – such as LEYF and Cool2Care – do get the help and resources they need to grow but establishing and meeting a significantly growing demand for social investment (if, in fact, it exists), is primarily a job for the people offering social investment, not for the social ventures that can’t or don’t want to take it.

 

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11 Comments

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11 responses to “Blame the customer

  1. Claudia

    Great post. thanks David. Just one more example of our twisted world.

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  2. jeffmowatt

    I agree with you on this David,

    As you may recall from past conversation, in 2005 I took up the issue of funding with SEC chair Baroness Thorton, referring to our efforts to stimulate local economies by means of a business model investing surplus into CDFIs.

    It had work for us in Russia with the Tomsk Microfinance Bank which over 5 year led to around 10,000 micro businesses, more than 80% run by women.

    The old chestnut from the social finance world is that social enterprise lacks business plans and needs an intermediary to guild them through. It was rolled out again in one of those non conversational conversations which the Guardian tends to host.

    https://socialenterprise.guardian.co.uk/en/articles/social-enterprise-network/2012/may/22/big-society-capital-money

    My response was to suggest that given the past success of direct investment compared with the untrodden path of financial intermediaries there were no grounds to claim this.

    The inconvenient truth I had to tell, of efforts to leverage social investment for international development was that the bandwagon knos no ethical constraint in passing off someone else’s effort as their own.

    http://economics4humanity.wordpress.com/2012/05/25/the-social-impact-economy-no-equivalent-in-europe-54/

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  3. jeffmowatt

    David I note that from the SE UK newsletter today Peter Holbrook speaks of being “elbowed out of the way” by commercial interests. This takes me back to your post about the ‘Emperor’s new outfit”.

    Rory Ridley-Duff referred recently to a hegemony which prevents authentic social enterprise from moving forward. It was interesting to go back recently to participants in a discussion about ‘Profit for a Purpose’ in 2006 and discover that Laurinda Seabrook, Kim Alter and ourselves had all encountered similar obstacles Kim’s book on Social Enterprise Typology, I realised in hindsight, had been cited in our own proposals.

    http://www.socialedge.org/discussions/business-models/profit-for-a-purpose-september-2006

    Take for example, Deloitte’s social business pioneers. For our application, I sent a description of how sourcing the Tomsk project had led to replication in several other cities. We had the social business model and 13 years as practitioners. What I’d not realised until after was that Deloitte had been in Tomsk before us, and tried to create a similar micro enterprise project. According to locals, most of the funding had been soaked up by their consultancy fees.

    The long and the short of it is, we’ve got to stop trying to paint each other out of the picture, moving from the rhetoric of sharing and co-operating to actually do it.

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  4. Beanbags admin

    Jeff,

    I’m not opposing intermediaries and people helping with business planning (to deliver investment readiness) in themselves. In terms of the latter, I think someone who’s got a business that works in one area or at a particular level of turnover might quite reasonably need some external support to plan how to roll out their business in lots of areas, and/or to lots more customers.

    What I object to is:
    (a) the assertion that corporate finance and consultancy businesses necessarily have the relevant expertise to tell social entrepreneurs how to do that (as a favour, in their spare time, inbetween the real work)

    and (b) far more importantly, the idea that need for this kind of support is the key barrier to significant numbers of social ventures applying for and receiving near market rate loans.

    (a)’s annoying. (b)’s the basis for a serious policy failure.

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    • jeffmowatt

      That’s how I see it too David,

      After all, Deloitte Touche had demonstrated that they weren’t up to the job.
      .
      We’ve been approaching social enterprise with a long history of producing business and strategy plans, as in Tomsk. We weren’t that well connected to be able to source it without a convincing case for investment – $6 million of USAID funds.

      In Crimea where US government had $40 million on the table, it was a dispute over business support services which led to blocking the project.

      P-CED’s proposal called for a one-stop shop for business development services, which had proven so successful in the Tomsk project. A deputy finance minster decided this was a job for his office with a budget 5 times that projected. The project was successfully blocked and he was removed from office within 18 months.

      http://www.p-ced.com/1/projects/ukraine/

      Politically the situation got more “interesting” after we placed a national strategy plan into government channels and a ‘reputed mob boss’ looked set to hijack its purpose. We were able to fend this off with help from local civic activists by publishing online, but that’s not the end of the story.

      Our own politicians had been getting pretty cosy with some of the moguls. With aspirations for EU membership, neither party liked what we were exposing about their childcare system. Blair and Byers were supporting this with Byers serving 6 years on the Yalta European Strategy, a project of the Viktor Pinchuk Foundation.

      It was Akhmetov, the ‘reputed mob boss’ whose foundation was more recently reported several months ago, to have funded an all expenses trip for Lord Mandelson, former EU trade commissioner and God help us, chairing a UK social enterprise summit at the time we were seeking support. With Akhmetov being no stranger to libel tourism, that story was soon airbrushed from Daily Mail archives, it would seem.

      PwC gained the consultancy role when the British Council elbowed us aside, without a plan of their own. Like Deloitte having no experience of social enterprise, they also lacked our local knowledge and track record, but offered the project some gravitas.

      BTW it seems that Vince Cable just latched on to the kind of business support services we were advocating a decade ago..

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  5. Beanbags admin

    Well, I’m not specifically casting aspersions on the abilities of Deloitte. As I understand it, they’re a very successful company. I’m also not opposed in principle to the plethora of CSR+ scale up support packages – I’m just questioning their central importance to delivering positive social change in the UK.

    It’s interesting that this post has been widely read but is short on comments. It concerns me that leading civil society figures with prominent roles in the development of Big Society Capital and the wider social investment market are not able to say either:
    (a) You’re wrong, it is likely that Big Society Capital will be able to put £600million into social ventures through intermediaries at near market rates with a realistic expectation that this money will be paid back or (b) You’re right, there isn’t going to be that level of demand for this kind of finance from social ventures and it’s the products that need to change, not the customers.

    The present route were proceeding down is one where Big Society Capital’s cash does get invested but a lot of it gets invested in businesses with highly dubious claims to be social ventures. My hope is that civil society leaders might find it within themselves to object to that before it happens rather than after it’s happened.

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  6. Matt Black

    Not considering myself a leading civil society figure but happy to dive in!

    There is still a huge chasm between social investors and entrepreneurs. I think both sides need to take responsibility.

    You’re right that social investors came to the space and offered a solution that wasn’t asked for. Paul Cheng made a great point at Oxford Jam earlier this year that social investors secretly all consider themselves social venture capitalists. They’re waiting for some big deal to come along that makes them a killing and delivers big on impact too. As you point out this won’t help the majority of social entrepreneurs looking to social investors to plug funding gaps.

    On the other hand I think there is a lack of business nous amongst many social entrepreneurs that needs to change. One prominent intermediary told me of 100 applications he received, 95 would be atrocious, lacking sales skills, ability to lay out a business model and even basic manners.

    More efficient, effective and better run social enterprises, which you’d assume all this investment readiness training will bring about, can only be a good thing.

    (That 47% of social enterprises aren’t making a profit shouldn’t be a problem by the way- 9/10 UK social investors are operating at a loss! I wonder if BSC will be offering the investors some training too)

    I would also argue that BSC is about something bigger than financing social enterprises – it could fundamentally change how money is used to tackle social problems. The social enterprise sector is a tiny community comprising of tiny businesses. They’re certainly pioneers and part of the solution, but the scale of UK’s problems will require organisations of every type and size to recalibrate to solve them. BSC could play a role in making this happen. Despite Sir Ronnie Cohen’s quote on their homepage, I think BSC will invest outside of the social enterprise community (as we know it) and I don’t think that’s a bad thing.

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    • Beanbags admin

      Well, I see you as a leading civil society commentator! All interesting points. My instinct is that Paul Cheng’s point is right and, along with that, there’s a serious need to face up to the clear differences between social investment and venture capitalism – that venture capitalism involves taking losses or lower returns on parts of your portfolio, covered by massive returns from other parts. There may or may not be socially useful investments that can generate massive returns but, if there are, I wouldn’t expect them to be looking for cash in the social investment market. Why would they?

      In terms of your point on business nous. I don’t think the fact 95% of applications that an intermediary receives have basic flaws means 95% of social entrepreneurs lack basic business skills. I suspect in many cases, the fact that people don’t know what they’re doing is the reason why they’re going to intermediaries for money.

      My hunch is that many people running c.£200,000 turnover social enterprises that are just about breaking even and doing lots of social good don’t think that it’s a good idea to load their organisation with debt in an attempt to scale up and become massive – so don’t apply. The in-built assumption of the ‘investment readiness’ drive is that they’re wrong. I’m not against investment readiness support but I think it should be about helping people who do have a profitable business model to do the planning and remodelling they need to do scale-up (which they’d otherwise have to pay for themselves). If you can’t run a business the problem isn’t that you’re not investment ready, it’s that you can’t run a business.

      I think your final point is a perfectly reasonable argument for the possible need for Big Society Capital. If the key players – particularly the politicians – supporting the project had made the case for that then people could have judged the proposal on its merits. Unfortunately, that’s not the case that the key players have made. To quote Minister for Civil Society, Nick Hurd on launch day: “For many years, charities and social enterprises have been telling government how hard it is to access long-term capital. We have listened and within two years have delivered a new institution that will make it easier.”

      If Big Society Capital is going to be a vehicle for supporting all sorts of organisations – Serco? Tesco? BAE Systems? – to focus on social problems then politicians have to stop describing it as the big thing they’re doing to support charities and social enterprises, and (most) charities and social enterprises have to move on and get on with finding more viable ways to deliver the social change they want to deliver.

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  7. I’m just a humble social entrepreneur from South Yorkshire who was directed to your post because the South Yorkshire Funding Advice Bureau thought it was interesting. I think the nub of the issue is your observation that ‘social investment intermediaries … have so far found it difficult to invest much money in organisations that don’t have property to borrow against (which would also enable them to borrow from mainstream banks).”

    We wanted to borrow the money to purchase our building – where we rent the groundfloor to run a post office and an employment and community learning project – because it has three unoccupied flats above it which we felt sure – on researching the market – could be rented out at a profit to local people in our disadvantaged neighbourhood. Two sets of social investmentment intermediaries got involved in trying to broker a special social invetsment loan for us but we hit the snag that we had no property on which to secure a loan and only one rather shaky longterm contract. Everything else is stop-go funding – whether grants or contracts. They proved no more able, or willing, to arrange loans to us than a commercial outfit and rather less flexible.

    In fact, it was a commercial broker who finally agreed to try to arrange the finance for us, coming up with imaginative and creative proposals that would have suited us perfectly, but then we couldn’t agree terms with the current owner. If a mainstream commercial broker was able to arrange a loan vehicle for us when social investment intermediaries and specialist social investment loan providers couldn’t, whats the point of the specialists?

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    • jeffmowatt

      Neil, It angers me to think that the problem you describe, gaining access to loan capital without collateral was one of key elements of the success story we had to tell almost a decade ago.
      Leveraging investment for a community bank based on the ‘moral collateral’ lending model had been key in the success of the Tomsk Regional Initiative and in 2002 the same conditions were discovered elsewhere in Eastern Europe with UNDP failing to provide the access to capital that poor people needed.

      http://www.iccrimea.org/scholarly/economicdev.html

      The APPGs on micro-finance and social enterprise were my first attempt at an introduction. The former didn’t have time to give us an audience, the latter ignored us, as did the chair of the SEC.

      Here’s something that these ‘specialists’ will probably not know about, It’s an asset based finance approach championed by a former City of London regulator, which he calls Open Capital.

      Here’s an introduction. In later presentations Chris Cook describes how Albion Trust, used this approach to create workspaces for social enterprises by buying an adjoining disused church building.

      .

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  8. Pingback: No social value under the bridge in the Big Society | Beanbags and Bullsh!t

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