You’re gonna have to serve somebody

Can Cook director, Robbie Davison, quotes Bob Dylan in his timely report, Does Social Finance Understand Social Need, published last week. The report gives a practitioner’s view of the current state of the market for specialist social finance (also known as impact investment and social investment).

2012 was a strange year for the social investment sector. On the one hand, there was the triumphant unveiling of Big Society Capital (BSC). At the launch event for Big Society Capital, the prime minister, David Cameron explained that: “While direct grants from government might be going down, the money available to charities and social enterprises is actually going up.  We are moving from the old stop-start hand-to-mouth way the social sector was funded, towards something new, and, I believe, very exciting.

On the other hand there was the growing atmosphere of discontent and anger within the social enterprise and voluntary sectors about the direction that this bigger, shinier social investment market appeared to be taking.

Davison explains part of the problem in the background section of his report: “The UK Voluntary and Community Sector (VCS) will lose around £911million in public funding a year by 2015-16. Cumulatively, the sector stands to lose £2.8billion over the spending review period (2011- 2016). Current estimates reckon that there will be a replacement investment of £500m and this investment will be almost entirely loans.

Social investment organisations as a whole, and Big Society Capital in particular, have struggled to counter repeated attempts from government ministers, from the Prime Minister downwards, to imply that a bigger social investment market will directly ameliorate the effects of massive public sector cuts.

While these communications failures may be relatively easy to address, the key message of Davison’s report is that it’s the overall approach of the government-backed social investment sector, led by Big Society Capital, which is not fit for purpose.

For Davison, a social investment (or impact investment) market should be about: “Stepping back, then stepping in where there is societal market failure. Impact investment should be looking for solutions that overcome the deficiencies of the norm and take on the challenge of supporting services that wish to expand by providing solutions to societal need.

He makes the distinction between ‘buyers’ – investors primarily looking for an opportunity to buy an investment that will generate a return – and ‘builders’ explaining that: “The term ‘builder’ refers to a process of investment that is knowledgeable in its understanding of the problems and is patient in the reclaim of any investment. As builders, investors acknowledge that building takes time and is an episodic process that will understandably feature peaks and troughs in performance. During troughs, builder investors work with the investee to design the appropriate programme of support to enable their enterprise to cope and, later, prosper.

He adds: “Crucially, these types of investors are aware of the right time to dismantle their growth capital ‘scaffolding’ in order to demonstrate that they have helped build an enterprise that can stand on its own. In a market focused on tackling need, these lenders are the real change-makers. Right now, there is a chronic shortage of builder investors.

From his perspective as an experienced social entrepreneur who has received social investment he explains: “Today, the narrative is one of ‘social investment’ which looks top-down from the point of the investor, wherein, the debate has shifted from a focus on market failure addressing unmet need, to a leap of faith in social investment/finance becoming a good thing per se.

Despite the success of programmes such as Unltd’s Big Venture Challenge, in demonstrating a positive role for grants in de-risking private investment in social enterprises, there is a growing orthodoxy amongst some in the social investment sector that grants are bad because they ‘distort the market’ for investment.

This position appears to ignore the question of whether a market that fails to respond to social need is really best left undistorted but Davison’s report offers a pragmatic explanation for why grants are an important part of the social investment package: “For a multitude of reasons, larger organisations trading within the sector often have access to income streams that are out of reach to those smaller enterprises servicing the lives of the poor.

He adds: “In the face of growing need, it is therefore appropriate for these particular enterprises to fight for the continued injection of grant as both necessary capital for start-up and growth.

In his 2011 e-book, Betterness: Economics for Humans, the author and economist, Umair Haque, describes some of the problems of the global financial sector: “The role of the financial sector is to allocate the many kinds of capital, not to produce them. The producers of capital are fighting tooth and nail for a smaller and smaller share of the pie.“*

He continues: “Such an economy is unsustainable in the deepest sense of the word: the incentives to produce capital are drying up, and that is why little or nothing is being added back to the buckets. Today’s economy rewards people for merely allocating existing capital. That’s not a recipe for prosperity; it’s simply a game of musical chairs.

The key point of investment is what happens as a result of that investment (the impact). That’s not just true for social enterprises and charities, and specialist social investment, it’s equally important in the world of conventional commercial business.

While Haque is not commenting specifically on the market for social investment, and clearly the UK’s social investment has the potential to develop into a positive alternative to the situation he describes, there’s a big danger that we could end up with a social investment market that simply transfers the failed, rent-seeking behaviour of commercial financial markets into the social sector.

If conventional financial markets have failed/are failing because they’ve become focused on rewarding those who slice and dice capital rather than produce it, the last thing we want is a social investment equivalent – delivering investment to the low-risk organisations best able to interact with investors, while failing to develop pragmatic and/or innovative models for investing in organisations tackling the greatest social needs.

The answer to these challenges is clearly not to reject idea of social investment. In a thoughtful post on the Third Sector website earlier this month, Social Enterprise UK‘s Nick Temple recognises that social investment: “is officially taking on Marmite status: you either believe it will revolutionise the social sector (and the investment industry) by leveraging billions of pounds, or you think it is the worst and most inappropriate thing since Rylan on The X Factor.”

He suggests that: “Among all the talk of investment-readiness (a leading contender for the most over-used term of the year) and investment returns, we should be thinking much more about investment relevance: how social finance fits into the current context and situation of the third sector and, in turn, its relevance to each individual organisation.

In the recommendations at the end of his report, Davison calls for the creation of a Compact/Alliance of Big Society Capital, social investors and social enterprise practitioners. It’s a conversation worth starting as soon as possible.

*Words in bold are italicised in the original document but bolded here due to my convention of italicising all quotes.


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5 responses to “You’re gonna have to serve somebody

  1. Indeed David,

    From the perspective of one who stands firmly within the needs based approach let me introduce you to “economics for humanity” which derives fron the 1996 P-CED paper and illustrated by these statement from it:

    “12. Positing numbers as real entities, and basing economics on that unproved and unprovable hypothesis, risks disposing of real entities (human beings) in favor of imaginary entities (numbers.) The only variable needed for that to happen is unscrupulous human beings.

    13. Human-based – that is, people-centered – economics is the only valid measure of economics.

    14. Manipulation of numbers, represented by currency/money, allows writing “new” money as needed. There is no tangible asset, or anchor. There are only numbers, managed by whomever might maneuver into position to do so. Economics came to be based on numbers, rather than real human beings.

    15. On that basis, capitalism trumped people and therefore trumped democracy. Democracy is about people, who since Descartes are considered necessarily real, rather than numbers which are not necessarily real. An imaginary construct, numbers, rule a real construct, people. That arrangement allows for disposal of real human beings, in the name of the imaginary construct.

    16. Capitalism nevertheless remains the most powerful economic system ever devised. The problem is not with the construct. The problem is with the output of the construct, wherein imaginary constructs – numbers, and currencies represented symbolically by numbers – are left to control real human beings to the material benefit of relatively few people and to the exclusion of many others. Classical capitalism has reached equilibrium in this regard. However, and consequently, many and growing numbers of human beings are excluded in the realm of finite resources hoarded by those most adept with manipulating numbers/currencies.”

    The term “economics for humanity” and advocacy for a needs based strategy will be found here on our website as it was in 2008. .

    Our 2004 business plan set out a mechanism for funding social enterprise in the UK on a national scale and this paragraph is from it:

    “The emerging Information Age will provide an unprecedented opportunity for outreach and communication at local community levels by way of the Internet. Given the opportunity to communicate and research global resources, communities will become able to assess their own needs, identify resources to meet those needs, and procure those resources. In that sense, the information economy can work to the advantage of impoverished people in a way never before possible.”


    • The Robbie Davision report is very insightful and mirrors a discussion being held on the Social Enterprise Mark page.
      It feels like we are reaching a bit of a watershed moment. Who is the social investment market for? If we are not careful the social impact ‘market’ will become an industry in itself and end up disadvantaging the social enterprise sector by imposing more costs and imposing inappropriate measures that miss the point about investing in helping solutions that address need. The corportate sector will also wipe the floor with us as they have the resources to invest in £20k social impact measurement tools to carry out contracts with access to the commercial and social investment market as backing. Menawhile social enterprises are trying to address social need in an holistic way that is unattractive to the conventional financial sector – and increasingly the social financial sector because they are not conventionally bankable.


  2. I’ve described above a proposal for placing funding where it’s most needed in the hands of grass roots organisations. We get a little more specific in 2006 with a strategy for international action against poverty, which says:

    “Project funding should be placed as a social-benefit fund under oversight of an independent board of directors, particularly including representatives from grassroots level Ukraine citizens action groups, networks, and human rights leaders.

    This program provides for near-term social relief for Ukraine’s neediest citizens, most particularly children who normally have least possible influence and no public voice. Over a few years time, the net cost financially is zero. Every component is designed to become financially solvent, through mechanisms of cost-savings and shared revenue with other components. One component, Internet, provides essential communications infrastructure as well as a cash surplus to be used to offset any lingering costs of other components such as childcare, and otherwise goes to a permanent social benefit fund under oversight of the aforementioned independent, citizens-based non-government board of directors.

    Any number of other social enterprises can be created. Furthermore, any number of existing for-profit enterprises are entirely free to contribute any percentage of profits they wish to increase the proposed initial $1.5 billion social investment fund. If for example the total fund comes to $3 billion, that amount would generate at least $300 million per year in a hryvnia deposit accounts at any one of several major Ukrainian banks, to provide ongoing funding to continue to create and expand social enterprises.

    This strategy places adequate funding for social benefit under control and management independent of government and the very obvious vicissitudes and conflicts inherent therein.

    This is a long-term permanently sustainable program, the basis for “people-centered” economic development. Core focus is always on people and their needs, with neediest people having first priority – as contrasted with the eternal chase for financial profit and numbers where people, social benefit, and human well-being are often and routinely overlooked or ignored altogether. This is in keeping with the fundamental objectives of Marshall Plan: policy aimed at hunger, poverty, desperation and chaos. This is a bottom-up approach, starting with Ukraine’s poorest and most desperate citizens, rather than a “top-down” approach that might not ever benefit them. They cannot wait, particularly children. Impedance by anyone or any group of people constitutes precisely what the original Marshall Plan was dedicated to opposing. Those who suffer most, and those in greatest need, must be helped first — not secondarily, along the way or by the way. ”

    The concept of a Social Innovation Fund will re-surface in the United States in the wake of the 2008 economic crisis.

    In 2010 with the revelation that there was an estimated $120 billion available for social invesment in US bank accounts, Myoo Create ran a competition for ideas to unlock this impact investment. The winning entry was a replica of the 2006 strategy paper:

    Lesson learned: There is little point in any disccussion because financiers won’t help and social innovation pundits will suffocate us with their opinions.


  3. Pingback: Helping the least needy? | Beanbags and Bullsh!t

  4. Pingback: Sense of relief | Beanbags and Bullsh!t

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