Social enterprises bigger and growing more slowly, profits dwarfed by subsidies

Social enterprises are getting bigger, they’re growing more slowly than last year and they still receive eight times as much income in grants and donations as they generate in profits. Those are the three key messages from this RBS SE100 index.

The SE100  is a list of the top 100 fasted growing established social enterprises – those that have been trading for three years or more – with separate awards for those organisations that are best at demonstrating social impact and newcomers trading for less than three years. It’s generated from a self-selecting but pretty big, in depth, sample of UK social enterprises, carried out behalf of Matter & Co, formerly publishers of Social Enterprise magazine, now running new social innovation website, Pioneers Post.

365 organisations participated in the survey this year, an 11% drop compared last year’s 409. It’s difficult to say conclusively whether or not this means there are fewer social enterprises operating in the UK than there were this time last year but it does suggest that there’s been a drop in the number of social enterprises who identify positively with the social enterprise movement to the extent that they want to participate in this kind of survey.

More important is the drop in the average % growth amongst the SE100, down 31% from last year’s 91% to 60%. This isn’t actually bad news at all because the total turnover of this year’s SE100 is £319.4million, an 85% increase on last year’s £172.5million. It only seems like bad news because, in previous years, a lot has been made of the massive increases in turnover generated by some extremely small companies. If the SE100 are delivering positive social change, and the organisations on the list that I know definitely are, then £319.4 million worth of positive social change seems better than £172.5million worth.

Interestingly, though, with this year’s total income amongst participants in down at £778 million compared to last year’s £844million, the average turnover of participants who didn’t make the top 100 has dropped from £2.17 million in 2011 to £1.73 in 2012, a drop of over 20%. That suggests that while larger social enterprises are weathering the current economic storm – and possibly benefitting from opportunities to secure newly avaiable public sector contracts – things aren’t going quite so well for social enterprises lower down the food chain.

The most shocking figures, though, relate to a situation that hasn’t got worse but has become far more relevant based on the changes to the ways social enterprises are funded. This year, enterprises participating in the survey generated total profits of £19million between them on a turnover £778 million: “with average income from trading (as opposed to grants or fundraising) at 80%.

This seemingly means that SE100 participants collectively received grants and donations worth £155.6million. That’s more than 8 times their total profits of £19million. So, for every ONE POUND PROFIT that social enterprises currently generate to reinvest in the community, they’re current receiving EIGHT POUNDS IN SUBSIDIES. That may even be a conservative estimate of the total subsidy because it’s not clear whether the £19million profit figure was arrived at by subtracting participants’ overall losses from total profits to get the total, or by adding together the profits of all participants who made a profit and ignoring the losses.

It’s important to recognise that this doesn’t mean that they aren’t some social enterprises that are making real profits and receiving no subsidy at all. There are. Unfortunately, though, if the SE100 is anything to go by there aren’t very many. It’s also important to recognise that many of the grants that social enterprises aren’t subsidies in the way that privatised rail companies receive subsidies. Many of the grants that social enterprises receive are funding for them to do work, with delivery-related strings attached that make them remarkably similar to contracts for all purposes other than taxation.

Even so, if I were a leading figure in the world of social investment, the stats wouldn’t fill me with confidence about my chances supporting the development of a £1billion+ industry of investment in social ventures generating enough profit to repay investments with interest while generating a social outcome. Based on our current position, the most likely scenarios would seem to be:

(a) we don’t see the development of £1billion+ social investment industry.

(b) we see a new set of social enterprises/social businesses/social ventures (delete as appropriate) emerging over the next five years that operate in a very different way to the ones we have now.

(c) we see lots of social investment being repaid based on either direct or indirect subsidy from grants and donations.

Scenario (a) doesn’t really matter either way to anyone who isn’t a cabinet office minister or an employee of Big Society Capital. (b) + (c) both have serious implications (not necessarily wholly negative) for the social enterprise movement and civil society in a broader sense. If social investment is going to reshape the social enterprise world in its image, the process is unlikely to be pretty.

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15 Comments

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15 responses to “Social enterprises bigger and growing more slowly, profits dwarfed by subsidies

  1. David, There’s an American maxim I learned in recent years – “You can recognise a pioneer by the arrow in his back”

    Back in September 2008, I had an email exchange with Christiana Giotis id SE Magazine and described our self-sustaining social enterprise model and how it derived from a paper on a new kind of capitalism At the time an economic crisis was unravelling. A blog on their mag was offered but never came to anything,

    Just today I learned that Obama’s assistant Jonathan Greenblatt was at Good Deals 2012 , congratulating UK social enterprise.for leading the way

    He signalled the intention for a bottom up strategy, which was familiar territory:.

    http://economics4humanity.wordpress.com/2012/12/05/smart-aid/

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  2. This morning I remembered something which came from the presentation given to the Economics for Ecology conference in Sumy two years ago.

    “Among three main areas of economics, the financial sphere remains dominant over social economics and environmental economics. The reason for this is very simple: in order for any system of economics to be sustainable over time, it must first be financially sustainable. If a system costs more than it produces, it requires infinite inputs over time. Infinite inputs are not available in a finite world, and we live in a finite world. If we pursue a system that costs more than it produces financially, it must and will necessarily collapse. But now, the financial system itself is broken: it costs far more than it produces.”

    http://www.p-ced.com/1/projects/ukraine/sumy/iscs2010/

    By that measure, could we also conclude that social investment is also broken in that it costs far more than it produces and will collapse?

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  3. Pingback: You thought Salesforce were done with Social Enterprise « Economics for Humanity

  4. Hi David, really interesting blog. We’ve just released a research paper looking at equity from private Angel investors as an alternative source of growth capital for social enterprises: http://unltd.org.uk/wp-content/uploads/2012/11/Findings-Paper-6-Attracting-Early-Stage-Social-Investment-2012.pdf. The SE100

    Do you know anything about the methodology for this

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  5. *[computer crashed before I could finish]

    The SE100 findings are interesting but the level of subsidy required is concerning, and in relation to the paper I just referenced makes the whole conversation difficult – if social enterprises can’t return financially (although we’ve seen evidence they can) then there’s little point looking at this particular source.

    Also, do you know anything about the methodology SE100 used? It seems like anyone can enter it, meaning comparing year-to-year (when the samples comprise of completely different orgs) is not always the most reliable indiciator of change.

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  6. Beanbags admin

    Hi Stephen,

    SE100 is a self-selecting sample. Assuming the process is still the same as when we entered, organisations fill in a survey and supply relevant supporting documents, and the organisers follow up if any information is unclear.

    It clearly doesn’t enable a reliable comparison of what’s happening to particular organisations – or defined groups of organisations – from year to year. It enables us to compare the organisations that chose to enter a competition measuring the growth & social impact of social enterprises in one year, with the organisations that chose to enter that competition in another year.

    In terms of the subsidy stuff, I’m not suggesting these figures show that it’s not possible for social enterprises to take on investment and provide a financial return.

    There’s plenty of reason why social enterprises might not record an end of year profit that don’t add up to long-term unviability – including choosing to spend what would otherwise be surplus/profit on delivering additional social value before the end of the year, and being early stage businesses that aren’t yet generating profits but could do in future.

    There’s also the point that this is an average figure and within that there will be many social enterprises who receive far more than 20% of their income in grants and donations, and therefore many who receive far less.

    But the overall profit figure doesn’t suggest there are large numbers who are profitable. What’s not clear is whether this is because most social enterprises are trying to be profitable and failing, or because most social enterprises operate on business models that aren’t designed to generate profits beyond breaking even (with the help of grants and donations).

    I’m not sure which answer I’d find more worrying if I worked in social investment.

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  7. David, I’m reminded that two years ago when the Social Capital Markets conference took place in California, there was a report circulating which indicated $120 billion of potential social invesment sitting in the bank accounts of ordinary Americans. There were several conversations about ‘unlocking the $120 billion.’ It just didn’t seem to happen.

    As Stephen’s report indicates, top of the list for would be angel investors is a financial return on their investment

    In his most recent pitch on alternative finance to the Schumacher Society, Chris Cook’ presentation on the Guarantee Society and Capital Partnership approach has a title which says it local and clearly – Banking on Ourselves. I understand theres’ a narrative to follow,

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  8. I consider the premise of this article to be totally wrong. If an economic activity of a social enterprise is going to be profitable it can be funded by private sector profit seeking investors … but social enterprise, is, at its core, about doing something that has value. It has little with making profit … it is all about social valuadd.

    So the question needs to be how much has been the social valuadd relative to the subsidy. Quite often something that cannot be profitable can have a huge valuadd … but not always.

    The follow up question is then how to measure social valuadd … and at the moment this is deemed to be difficult if not impossible, and I would argue, this is because nobody with the appropriate skills has really tried to do what is needed. This is what the TrueValueMetrics initiative has set out to do, and I believe it is going to be done.

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  9. Beanbags admin

    You could well be right that the premise that (significant numbers of) social enterprises can take (and repay) investments from profit seeking investors is wrong.

    I think it’s too soon to say but it’s not a position that I’m advocating, it’s a UK government policy that I’m reporting on.

    You’re certainly right that there’s a follow-up question about how to measure ‘social valuadd’ or ‘social impact’ as it’s more commonly described. That question doesn’t relate to justifying subsidy, it’s also potentially important for social enterprises that are profitable to help them gain investment, generate new business and/or just as a tool to improve what they do.

    There’s plenty of people having a go. The SROI Network being one group of people (though obviously not the only one).

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  10. Here’s something to keep your eye on, with another re-think of capitalism.

    http://karlhrichter.com/2012/12/12/worlds-first-financial-index-for-impact-investing-unveiled/

    Going back over the past few years of discussion it’s been interesting to see how one document on investment for social return seems to have introduced ideas which keep cropping up in other articles and campaigns.

    What’s patently obvious however is that in spite of all these consultancies and advisories there is no inclination to take it into a real life deployment or attribute the original source.

    http://economics4humanity.wordpress.com/2012/12/11/the-marshall-plan-as-a-meme/

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  11. Karl Wilding

    Interesting blog David. Comparison year on year is pretty tricky with this method as you’ve pointed out – so I wonder if its better to look at a year in its own right. As such, I thought the point about the scale of subsidy required was interesting, mainly because it highlights we have to be realistic that all social sector organisations will need some form of capital that offers no/little financial return. So scaling up social enterprises similarly implies more public spending. Which is arguably no different than, say, the defence industry. I wonder what the MoD thinks of PbR etc?

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    • Karl, Considering the following suggestion for seeding social innovation was made 16 years ago, I suspect we’re still handing out fish:

      ‘There is an old saying: give a man a fish and he can eat for one day. Teach him to fish and he can eat for a lifetime. Giving people enough to live today may be enough for today, but it is not enough for tomorrow. Helping and teaching people to make a living, sustain themselves and their families, is in fact the only long-term solution to the problem of poverty. Further, for the first phase of economic development or economic recovery of any location, it is also possible to create an ongoing source of the critical funding needed to get the job done. Capitalism and market economy comprise the best economic engine ever invented. Assisting poor communities in developing their own markets is now meeting growing acceptance as the best way to go to alleviate poverty. The profit motive, integral to capitalism and market economics, is the driving force for successful economies around the world.

      In all cases, a certain amount of outside funding is needed to get things started. I proposed a strategy for this starting phase: at least one enterprise in a community, the function of which is to provide profit to be used in the community to grow more businesses. Most of the net profit from this community-funding enterprise would be placed into a community development fund such as a credit union. The balance of profit is invested into the business for growth. The community fund is then used by people who have most need, rather than the conventional practice of returning the money to the pockets of only a few people. Those few people tend to become wealthy to the point that they do not actually need more money, while many people in any given community probably do need the money. In this regard, this strategy of directing profits for use by people who have the greatest need might be called “social capitalism.”’

      The extract above is from a paper calling for a “smart aid” solution to prevent terrorism in a peaceful Muslim community. The argument for the investing in the lower cost and greater return of peace is consistent.

      http://economics4humanity.wordpress.com/2012/12/05/smart-aid/

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  12. Beanbags admin

    Hi Karl,

    I think you’re broadly right that this data ‘highlights we have to be realistic that all social sector organisations will need some form of capital that offers no/little financial return.’

    It most instances there are negative financial implications involved in taking a socially enterprising approach rather than a purely commercial one.

    There are exceptions – I think The Big Issue would sell fewer copies if it was a newsstand current affairs magazine, rather than a magazine sold directly by homesless people – but they’re the exceptions that prove the rule.

    Unfortunately, the premise of the social investment market that’s currently being developed is that we’re both wrong – and the only major financial drawbacks of socially enterprising models are that social entrepreneurs lack the business skills to become investment ready and high street banks don’t understand social enterprise.

    This is a different question from whether there are organisations which are conventional businesses that turn a profit, deliver financial returns and deliver social good in the process. Clearly there are but most of them aren’t self-styled social enterprises and even those that are don’t need a bespoke social investment market to provide them with finance – unless social investors can prove to these businesses that they offer something better than what’s on offer on the high street.

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  13. Pingback: Social investors can lend to anyone they like as long as they don’t need the money | Beanbags and Bullsh!t

  14. Pingback: A long time in social investment | Beanbags and Bullsh!t

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