“Investment readiness is often widely understood as a state, which comprises a number of key characteristics, much like business readiness or market readiness. But what it means to be investment ready will vary from one investee to another and is determined to a significant degree by the eye of the beholder – in this case the investor.”
As mentioned previously, we’ve recently seen the publication two key reports on the future of the UK’s hype-ridden social investment ‘sector’. The above quote is from the second of these, Investment Readiness in the UK, a report from Clearly So and New Philanthropy Capital, commissioned by The Big Lottery Fund.
Investment readiness is currently, in theory at least, the big issue facing UK social investment. Up until the creation of Big Society Capital, the government-backed wholesale finance institution, most of those involved in social investment insisted the key problem was lack of money to support their work. Now that lots of money is available, social investment intermediaries need better excuses for the lack of investment taking place, while the government – which is relying on social investment to somehow plug the gaps created by its record cuts to public services – is getting worried. The drive for investment readiness is the result.
The key question about investment readiness is whether it’s a tautology, a euphemism or both. In the tautology corner, there’s the argument that, as the above quote from Investment Readiness in the UK suggests, the only objective measurement of investment readiness is whether or not someone offers you an investment.
In the euphemism corner, the drive for investment readiness is based on the assumption that most social ventures could reach the point where they would be were ‘ready’ to receive investment if they made a series of changes to the way they operate (probably with the state-funded assistance of social investment intermediary). Clearly there are at least two categories of social venture: (a) those that can get an offer of investment and (b) those that might get an offer of investment if they were better able to demonstrate their business model and the ability of their management team to make effective use of an investment. What the investment readiness agenda euphemistically ignores – while there’s an acceptance that some organisations will continue to rely on grant and donations the implication is that they’re marginal to the debate – are the categories (c) not a commercial business and (d) just commercial enough to survive but not commercial enough to take on and pay back an investment (with interest) from profits.
Despite the clear problems with term, Investment Readiness in the UK makes a significant contribution to the debates around social investment by examining the views of investors, intermediaries and investees and assessing the mismatches between them. It’s particularly interesting because the investee element is based on a relatively large sample, 1255 organisations from what the authors describe as the voluntary, community and social enterprise (VCSE) sector.
The authors identify six key mismatches between the views of investors and intermediaries, and the views of investees (VCSE organisations who want some money). These are summarised below with a couple of my comments in italics:
- Does the revenue model the stack up? – unsurprisingly, investees are more likely to think it does
- Lack of appropriate financial acumen (amongst investees) – investees are more likely think they have it, investors are more likely to think they don’t
- Investor readiness for investing in social returns – so far, most social investors aren’t especially interested in demonstrable social returns other than the fact that they are investing in a VCSE organisation
- Lack of diagnostic tools, lack of clear referral process – ‘Investors describe how they are inundated with unsuitable propositions.’ – it’s difficult to see how this could be prevented, surely investors could solve this problem by using their contacts and expertise to identify investments they do want to make and, like publishers, getting enthusiastic interns to read through the slush pile of unsolicited applications for any gems they might have missed
- Awareness raising and presentation of information on social investment – There’s plenty of information promoting financial products to VCSE organisations, not much on how to decide which of these products might be best for you. This is a case of market failure, possibly based on the fact that no one has identified a sustainable business model for providing objective information about the suitability of different types of finance. As Alanis Morissette said, it’s like 10,000 spoons when all you need is a knife.
- Support for investors to create and broker deals – investors find social investing complicated and time-consuming. There are no specialists to help. If this is the case, what intermediaries are for/doing?
While it’s useful to know that all these mismatches exist, my hunch is that only 1-3 are critically important to the future of VCSE organisations in the UK and the people they exist to serve. A big problem with 1 and 2 – revenue model and financial acumen – is that there’s at least two obvious reasons why these mismatches might be occurring aside from investors just being wrong but where investment readiness support will be useless.
One is that the investee has a passionate commitment to positive social change but doesn’t really know what they’re doing – in which case, it’s difficult to imagine the sort of investment readiness support which would lead to the organisation getting investment with them running it.
Another is that the investee has identified (something at least very close to) the most commercially sustainable model for delivering the kind of products or services that they provide but this still doesn’t make the organisation profitable enough to give the investor confidence that they’ll be able to invest and make a return. Bizarrely, this is currently the situation (quite openly) faced by CDFIs, themselves part of the social investment intermediary community and some of the people responsible for making social investments (using other people’s money). CDFIs’ answer is not that they need some investment readiness training – possibly from themselves – but that they need a subsidy provided by a government loan guarantee scheme. Ben Hughes, boss of umbrella body CDFA, explains: “It is wrong to suggest CDFIs should cover all their costs through charges and fees…”
Under mismatch 3, as well as the as-yet-underdeveloped interest amongst investors for specific social returns (which might be help to offset reduced financial returns), there’s the additional mismatch – previously highlighted in The First Billion – between the products VCSE organisations want and the products on offer: “This mismatch is further evidenced by the type of capital demanded by and offered to the sector. Our survey respondents predominantly seek risk capital on sub-commercial terms of between the £10,000 and £100,000 range. However, if what is on offer from investors is larger asset-backed capital on near commercial terms, there is a market failure, captured in the typical exchange between investors and potential investees who accuse each other of “not understanding the social enterprise model” or “not being investment ready.”
Investees responses are indicate that, like CDFIs, 49% of the VCSE organisations currently looking for finance are interested in a ‘mixed funding product’. Mixed funding products are usually products that include a grant element along with a repayable loan, such as those provided by Futurebuilders and Adventure Capital Fund. Unfortunately, only 7% of those organisations who managed to get investment received mixed funding products.
As a snapshot of the current state of UK social investment, Investment Readiness in the UK is as good as gets. It shows us an embryonic sector where there’s a growing supply of money and boundless supplies of (hopefully partially justified) optimism but, as the authors’ rightly highlight, key mismatches between supply and demand. The report provides some useful insights into tackling those mismatches that might be alliviated through skills training and information but, understandably based on its remit, leaves the more important wider questions about how we how we meet social needs in an age austerity and smaller government unanswered.