The government has just published a review into future of the UK news industry. Here’s my thoughts on how social enterprise can be (a big part of) that future.
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You’ve got a great idea for a social venture. You don’t have lots of savings and your friends and family are not wealthy. You look for grant funding but social enterprise support providers are only offering £5,000 and your venture will cost a lot more than that to launch. If only the government was doing something to help…
my new post for Pioneers Post on SITR.
Charities and social enterprises need risk finance but struggle to find it. Many individual investors are keen to invest into organisations that create positive change but are put off by the financial risk involved.
Both these statements are widely assumed to be true within the social investment sector so when the UK government launched Social Investment Tax Relief (SITR) in 2014 there were high expectations that it would have a significant impact…
Read my new report on SITR for Social Investment Business to find out what happened next.
One of the most interesting developments in social sector funding in 2018 was Big Lottery Fund’s launch of its new £15 million Digital Fund. Unsurprisingly, the fund was very popular receiving 1210 applications (potentially requesting over £600 million in funding).
What’s unusual about the fund is that it offers grants that are (in grant fund terms) unusually large. While a decent-sized smattering of organisations do receive grants of £500,000+ over 3 years – for example, through the Arts Council’s National Portfolio or Big Lottery’s Reaching Communities – it’s extremely rare to see an open call for applications of this size for business development activity. In fact, I’m not aware of it ever happening at all.
There are some fairly obvious reasons why there aren’t large numbers of state and philanthropic funder providing this kind of money but their collective failure to do so renders a significant chunk of social enterprise support activity farcical and essentially pointless (at least, in terms of achieving its stated aim).
There are numerous programmes with the stated aim of supporting social ventures to ‘scale up’, including some run by School for Social Entrepreneurs (SSE) and Unltd which have supported 100s of organisations over the past five years. But it’s hard to see any connection between support to ‘scale up’ and any social ventures* actually scaling up in the sense of becoming household names or significant players in the specific markets that they operate in. That’s not because ‘scale up’ support isn’t any good, it’s because the task is too difficult.
Building the future
There are large (in the sense of exceeding the ‘Small’ business turnover of €10 million per year ) and successful social enterprises in the UK but the vast majority of them are businesses either managing property and/or delivering outsourced public services or regulated former public services**.
They’ve either been literally given a start – housing associations being given property, spin-outs leaving the public sector with at least one large contract – or they’ve received a jumpstart to the business through winning their first large public or regulated contract.
This distinction is not intended to suggest that these social enterprises lack merit or that their success as businesses is not real or hard won. The ones in the latter category have succeeded in a market just as much as any private competitor seeking to operate in their sector. And many in the former category (such as NHS spin outs) have succeeded despite significant inherent disadvantages compared to private rivals.
So scaling up a social enterprise property-based, public or regulated markets is really difficult but, based on the current funding and investment landscape, scaling up a consumer-focused and/or product-based social enterprise is virtually impossible.
The Big Issue issue
The Big Issue is well known as a social enterprise success story. It is less well known as an organisation that, nine months after its launch in 1991, was losing £25,000 a month on the way to spending £500,000 of The Body Shop’s (soft investment) money over 3 years (over £1million today when adjusted for inflation).
The number of consumer-focused social enterprises that have had a similar impact (in the sense of the impression made on the public consciousness) to The Big Issue over past 27 years is eerily similar to the number who’ve received £1 million worth of philanthropic risk finance.
Some might suggest Cafedirect, founded (again in 1991) by four large established organisations including Oxfam and Traidcraft.
Those worrying that these ventures became successful by jumping through a magic window that was only open in 1991 might be slightly reassured by Divine Chocolate, who launched in 1998 but they did (of course) receive investment from The Body Shop.
This is not very complicated stuff. If you’re launching a business in a sector where there are significant upfront costs involved in getting your business to market or where significant short term losses are necessary to work out whether or not the business could be viable in the long term, you need to be able to spend lots of money. And if you’re operating this business in an explicitly social way, you’re unlikely to be able offer investors returns that come anywhere near justifying their risk. You need a grant or an investment that’s soft enough to almost be a grant.
Who wants to be a social entrepreneur (at scale)?
So, based on the UK’s current social venture funding landscape, your ability to have a chance of meaningfully scaling up a (trading) social venture that’s not focused on managing property or contracting with public or publicly regulated sectors can effectively be determined by this short questionnaire:
1. Are you a multi-millionaire? Yes/No
2. Do you know a multi-millionaire (or two) who will give you some money – and not worry about whether they get any of it back? Yes/No
Answering ‘No’ to both of these questions does not mean that your social venture will be a failure but it does mean there’s a low, hard ceiling to what it’s logically possible for you to achieve.
The 120 participants in Unltd’s Big Venture Challenge raised a combined £13 million of investment and grant funding between them, an average of £108,000 each. That’s serious money and may enable some of the ventures involved to scale up to a sustainable level but it’s highly unlikely to be enough to enable any that want to become really big to find out whether they’re able to.
This is terrible, what can we do?
There’s three things that I’m definitely not saying here:
(i) ‘Scaling up’ should be the aim for all or most social ventures – it obviously shouldn’t: we need a funding landscape that supports social ventures to find the right level to achieve the most socially useful outcomes they can achieve
(ii) We need to give 100s of social ventures £500,000 grants every year – (while respecting everyone’s passion and good intentions) there are always going to be a relatively small number worth giving this kind of funding to
(iii) No one apart from me has spotted this – at different ends of philosophical spectrum, Profit-with-Purpose and Builder Capital, are (while also having wider relevance) responses to the same broad problem.
And three things that I am saying:
(a) It is possible and desirable for more social ventures operating in consumer markets to scale up – if we develop the funding landscape that gives them a genuine chance
(b) There are enough existing social enterprises (and other social ventures) that are good enough to give at least 20 an average of £500,000 in business development funding, every year for five years – and making this kind of funding available may encourage the development of more, better ones
(c) Spending £10 million a year for five years on funding 100 social ventures to have a genuine shot a scaling up would be a really good way for some combination of government and philanthropic funders to use some of their money (even if only one venture per year managed to scale up in sustainable way).
The Big Lottery Digital Fund is good news in the specific area of social tech but the wider social economy needs similar initiatives – whether that’s a general fund or some sector specific ones.
Based on our current set up, whether or not the next Big Issue is out there, we’re never going to find out.
*For the purposes of this post I’m using the term ‘social venture’ to refer to social enterprises, trading charities and companies with a ‘for profit’ structure whose social focuses means they are not able to offer early stage investors a risk-adjusted return
**Long established co-ops
Like many social entrepreneurs I like a good conference, so it was disappointing not to make it to last week’s Social Enterprise World Forum (SEWF2018) in Edinburgh.
Amongst the passionate discussions partially recorded on Twitter was a debate with the title: ‘The myth of sustainability is damaging the social enterprise sector’ with School for Social Entrepreneurs’ CEO Alistair Wilson amongst those drawing attention to the potential damage.
Whether or not it’s damaging in itself, the sustainability of the debate about social enterprise sustainability is unquestionable. Here I am in 2013 tackling the myth that ‘trading income is more sustainable than grants and donations’ with the aid of some llamas.
I haven’t substantially change my opinion on these issues since 2013 but – based on a model I learnt from some of the world’s most successful private sector businesses – I’ve decided to make one new argument and minor updates to the others and sell it to you again:
Sustainability is the means not the end. All organisations run the inherit risk of conflict between their desire to continue to exist and their desire to achieve an outcome.
For private sector businesses, the theory is easy. Is your restaurant losing money? Change your business model – increase prices, cut wages/staff, use cheaper ingredients, call in Gordon Ramsay to swear at you for a few hours.
After that, if you the combination of you and Gordon haven’t managed to stop your restaurant losing money you should close it. There are plenty of good reasons why many people don’t do that but the theory isn’t complicated.
It is more complicated for social enterprises because they’re (hopefully) organisations that exist to do something other than keep going and make money. There’s two different spectrums:
Going bust – surviving – thriving
No social impact/Negative social impact – some positive social impact – as much social impact as possible
Ideally, we’d all like our social enterprises to be a thriving fully commercial operations achieving as much social impact as possible but, particular for those of us who have started businesses in situations of market failure, that doesn’t happen very often.
As a social entrepreneur you have to understand how your desire for sustainability interacts with your desire for social impact.
If you’re setting up a social enterprise to provide secure long-term housing, your social impact depends on finding a business model that enables you to continue to exist for decades rather than for a couple of really good years.
If you’re setting a social enterprise that raises awareness of problems in the fashion industry through film and drama you might be better off finding a model than enables you to be brilliant for 2 years (taking money from funders and supporters who agree with what you’re saying) rather than shit for 20 years (taking money from anyone who might pay you to make a film or put on a play about fashion).
Advocates of social enterprise (and charity) sustainability understandably make the argument that you can’t do any good if don’t exist but that isn’t – in itself – an argument for your continued existence.
Finding the right business model for your social enterprise is also about finding the right lifespan for it. (As long as you don’t leave big unpaid debts) shutting down after doing lots of good in a relatively short space of time might be less of a failure than keeping going while achieving nothing much.
Sustainability means finding the best way to generate income from the value you create. Tautologies are best preceded with an advance warning but one that is useful but underused is: the most sustainable business model is the one that you’re best able to sustain.
Susan Aktemel, speaking in last week’s SEWF2018 debate, made a good argument against using grant funding as a major part of long-term social enterprise (or charity) business plan.
Much of the UK’s current grant funding sector was shaped at a time when it might have been possible to scale up a social enterprise or charity (to the level of mid-large local organisation) by moving along a grant funding pipeline: Unltd/Award for All > Esmee Fairbairn/Comic Relief > Reaching Communities > Ongoing grant from local council/other local contracts.
I’m not sure how well (if at all) the grant funding world has dealt with the fact that (in most areas) the council’s pot of gold at the end of the rainbow is now just a pot of tears – but Aktemel and others are right to argue that no one starting a new social organisation now (particularly at a local level) can seriously hope to keep it going for 5 years+ (with a turnover of £100,000+) primarily using grant funding.
But, while the social entrepreneurs who warn you against trying to exist on grants alone are correct, this knowledge tells you nothing whatsoever about whether it will be possible to sustain your social enterprise through trading.
The universal principle of social enterprise sustainability (as with any other business) is that you have to create value and get someone to pay you for it – and keep on paying you for it.
The Llama example still works but if you prefer a shorter one – if you run a social enterprise cafe that creates two kinds of value: (a) some tea and cake that people want to buy and (b) training and support to help people get back into the job market: there’s no reason to assume that charging high prices to customers for (a) will be the most sustainable way of covering the cost of (b).
Whether it’s public sector agencies, grant funders or donors (or some combination of all them) if you want to provide (b), the most sustainable model will be a model that involves someone paying you something because you do (b).
The most sustainable proportion of income available from any given source depends mostly on the market you operate in and the gap you’re seeking to fill in that market.
News journalism is an industry where trading income (from print newspaper sales and advertising) is in sharp decline but what is effectively donation income, from membership schemes, is growing rapidly – with The Guardian now boasting over 500,000 paying supporters.
It’s unlikely that many local newspapers will be able generate as much of their income from supporter donations as The Guardian but the success of The Bristol Cable‘s membership model suggests there is a genuine ‘market’ of at least some people who value local news to the extent that they’re prepared to pay for it to exist.
The challenge is to find the mix of advertisers, members, supporters and potentially online subscribers that fits together to make both a commercially viable organisation and (for social entrepreneurs) a socially useful one.
There’s no one, single answer for all local social enterprise newspapers so it’s hardly surprising that, at the level of ‘the social enterprise sector’, none of the abstract answers to the (ongoing, important) questions about sustainability are particularly useful.
You need to work out what you’re trying to do, who might pay you to do it and how you’ll get them to pay you to do it (and keep paying you to do it).
Once you’ve got that sorted, all you have to do is do it.
The Social Investment Intelligence Network (SIIN) is a new project that we (Social Spider CIC) are working on with our regular co-researcher, Dan Gregory.
It’s a new initiative funded by The Connect Fund that brings together a group of charity and social enterprise leaders from around the country – to provide their informed perspectives on the social investment market and discuss how the market could work better for their organisations and others in their regions and sectors.
Our first report (available online here) provides a general overview of panelists’ experiences of seeking social investment (and the funding formerly known as ‘investment readiness’ support) alongside other forms of finance.
Future reports will take a more in depth look at particular challenges or themes within the social investment market. It would be great to know what you make of the first report and to hear any ideas you have about future topics.
There’s been plenty going on in social investment and the wider social economy in recent months that’s been worthy of a blog (or several), with big charities in crisis and the concept of ‘investment readiness’ consigned to the pipeline of oblivion.
As it is, due to a mixture of (mostly) exciting social investment work and (some) equally exciting community media work, I haven’t been doing much blogging – but I have written some posts for our clients which I thought you might be interested in:
Risk Finance: past, present and future – the first in a series of blogs for Access: The Foundation for Social Investment as part of a project alternative models of unsecured finance for charities and social enterprises.
Risk Finance: what’s happening beyond the UK – the second post in the Access series: the UK may be leading the world in social investment but there’s lots of going on elsewhere, too – with plenty of ideas we can learn from.
Prominent social/impact investment leader, Sir Ronald Cohen, was recently in South Korea to launch a new National Advisory Board on Impact Investing. I interviewed him for Pioneers Post to find out more.