Tag Archives: social investment

12 SIBs of Christmas – The 1st Annual World Leading Social Impact Bond Quiz

Social Impact Bonds are a world leading financial instrument launched here in the UK in 2010. Since then we have continued to lead the world in launching them.

Earlier this year, then Cabinet Office minister, Rob Wilson noted that: “Social impact bonds are barely mentioned in the media today” before explaining: “In a few years time they will be the most talked about funding mechanism for government social projects. I will be talking about them a lot.

This is inspiring stuff but as social entrepreneurs we are often reminded of Gandhi’s tip that we should ‘be the change we want to see the world’. There is a small but genuine danger that, for all his gravitas, Rob Wilson may not be able to bring about this change on his own. The 1st Annual World Leading Social Impact Bond Quiz is my small contribution towards our collective impactful effort.

The answers will posted on here sometime next week. If you want to email your answers to me – david (at) socialspider (dot) com – I will compare them to a historical set of answers to a different quiz and decide whether I think you’ve won.

Existential question:

1. Social impact bonds all involve some form of payment by results contract – which (one or more) of the following other characteristics also applies to all social impact bonds launched across the globe before June 2016:

(a) Use of a Special Purpose Vehicle

(b) At least partially financed by socially motivated outside investment

(c) Investors have capital at risk

(d) Described as “A social impact bond”

(e) Presence of a counterfactual measure

(f) Service delivered by a charity, social enterprise or other non-profit

Leading the world:

2. What percentage of all social impact bonds in the whole world (as of June 2016) have been partially commissioned by the UK’s former Secretary of State for Work & Pensions, Iain Duncan Smith: 

(a) 23%

(b) 5%

(c) 12%

(d) 7%

3. Featured on the rate card for a UK social impact bond programme: “Improved attitude towards school – £700” is a proxy for which social outcome:

(a) Increased educational attainment

(b) Improved employability

(c) Reduced risk of committing crime

(d) The success of the UK social investment market

4. Launched in 2014, the Fair Chance Fund was a £15 million scheme to fund social impact bonds to tackle youth homelessness. What nickname was the fund given by investors and charities who were interested in applying but did not want to use the UK government’s preferred special purpose vehicle-based social impact bond model?

(a) Negligible Chance Fund

(b) Reasonable Chance Fund

(c) Cat In Hell’s Chance Fund  

(d) Fat Chance Fund

Saving the world:

5. In 2014, New York Times columnist, Nicholas Kristof appeared to suggest that a major international emergency could be tackled using by social impact bonds. Was it:  

(a) Russia’s action in Crimea

(b) the ebola outbreak

(c) global emissions of CO2

(d) the Greek government debt crisis

6. (Based on publically available data) which of these activities has not yet been the focus of a social impact bond or equivalent financial instrument – or an initiative to create one:

(a) saving the rhino

(b) reducing costs of road trauma

(c) tackling noise pollution

(d) teaching coding to primary school children

(e) improving building & fire safety in garment factories

Guess the investor:

Based on these innovative visual clues, identify the investors in social impact bonds in either the UK or the US:

7.

investor1

8. investor2

9.

investor3

Talking about them a lot:

10.  Which US Senator, talking about social impact bonds in a 2015 congressional hearing, exclaimed: “I don’t get this at all… I think this is an admission that government isn’t doing what it’s supposed to do. This strikes me as a fancy way of contracting out”:

(a) Joni Ernst

(b) Michael Bennett

(c) Angus King

(d) Ben Sasse

11.  Which UK civil society leader, speaking to a House of Lords committee in 2016, claimed: “The challenge has been the hyperbole around social impact bonds, which have got a disproportionate amount of resources… The government has developed this totem, the social impact bond, and is dedicated to achieving success with it.”

(a)Big Society Capital boss, Cliff Prior

(b) Social Enterprise UK CEO, Peter Holbrook

(c) Esmee Fairbairn Foundation CEO, Caroline Mason

(d) NCVO Chief Executive, Sir Stuart Etherington

12. In March 2015, which then UK cabinet minister hailed “the first trillion” of potential global impact investment:

(a) Nick Clegg

(b) Chris Grayling

(c) Theresa May

(d) Iain Duncan Smith

Merry Christmas and here’s to another year of talking a lot about social impact bonds.

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Nearest cash points

It is likely that mainstream banks are lending far more money to social enterprises and charities than the ‘social investment market’. That’s the headline news from The Forest For The Trees, a new report I’ve co-authored with Dan Gregory for the bank, RBS.

The report explains that RBS has around £250 million in lending outstanding to the social sector and, if replicated across all banks, this would amount to total lending of over £3 billion. There’s also a huge level of overdraft finance available to social enterprises and charities from mainstream banks: nearly £100 million from RBS alone, £1.2 billion is replicated across all banks.

These are big numbers and it’s big news, not least because it’s the first time (to our knowledge) that a bank has provided this kind of information on its lending to the sector. While the past six years have seen rapid scaling in the rhetoric and survey-based branches of the social investment report industry, generation of meaningful data has been stuck firmly in the start-up phase.

Much of the new data in our report was generated by matching a database of nearly 200,000 social organisations (charities, CICs, CLGs and Community Benefit Societies) with RBS’s customer database. Around 16,000 (8%) of those organisations were active RBS customers and our report provides information about lending to and saving by those customers.

Size matters 

The volume of lending is significant compared to the ‘social investment market’ as encapsulated by social investment wholesaler, Big Society Capital‘s report The size and composition of social investment in the UK, published in March this year. That report reveals total outstanding social investment of £1.5 billion, however this includes £427 million of investment in ‘Profit with Purpose’* organisations and equity investment as well as lending.

Potentially more significant, though, is the fact that the average size of loans from RBS (around £350,000) is significantly small than the average size of investment within the ‘social investment market’ (over £600,000). This is important because a key reason (possibly *the* key reason) why social investment has been enthusiastically promoted by the UK’s sector leaders, and both trumpeted and subsidised by our politicians, is that it’s meant to fill a gap.

Research research from NCVO Understanding the capacity and need to take on investment within the social sector notes that, in terms of investment needs of different groups of charities: “the highest average loan amount by sector is £116,000” while Social Enterprise UK’s most recent State of Social Enterprise survey suggests the median amount of funding or finance sought by social enterprises was just £60,000.

While the exact figures vary from survey to survey, the broad picture is remarkably consistent. As Social Investment Business chief executive, Jonathan Jenkins, noted in March:

Find the gap 

Our report suggests that claims such as charity-focused bank, CAF’s suggestion that: “many commercial or high street lender simply don’t have the appetite for lending to charities” should be treated with caution. Mainstream banks lend vast amounts of money to charities and social enterprises and there’s no evidence that they are disproportionately unlikely to lend to the sector.

That matters but it unequivocally does not mean that the problem of providing appropriate finance for charities and social enterprises has been solved. As the report of The Alternative Commission of Social Investment (most of which Dan and I wrote) noted last year: “There may be some unmet demand in certain segments of the market, such as for cheap, risky, long term growth finance in the tens – but not hundreds – of thousands.

While mainstream banks may be doing more than many of us previously thought to provide small amounts of relatively risky short term finance in the form of overdrafts, there is no evidence that they’re providing unsecured, long term growth finance on any significant scale. If you need an extra £5,000 or £10,000 for a month or two because you’re waiting for a big customer to pay up, your bank may be able to help. If you want to spend £15,000 – £50,000  on trying something new (or offering more of an existing service) – and you’re not likely to earn the money back for a year or two – an overdraft isn’t the right option.

This is a gap that social investment could fill. Unfortunately, Big Society Capital-backed social investors (the artists formerly known as SIFIs) are not currently filling it – and, based on the type of finance available to them, they are not able to. While Access may be part of the response to that problem, there is a need for wider consideration of what publicly supported social investment is actually for.

What happens next?

 

Our report provides nine recommendations split between: ‘social sector organisations’, ‘banks’ and ‘policymakers and social investment experts’.  These include:

Social sector organisations seeking investment should understand that there are a range of routes to finance – some of which may be labelled ‘social investment’, some of which may not.

RBS and other banks should continue to explore new ways to make affordable finance available to social sector organisations including: direct lending, investment in SIFIs, and/or community lenders (including credit unions), referrals and facilitating individual investment.

and

Social investment policymakers and experts more clearly understand and articulate how their services and products are meeting unmet needs of social sector organisations.

 

There’s a potential next phase of work on access to finance for charities and social enterprises (which may or may not be carried out by us) to get a clear picture of which providers are best placed to fulfill which functions:

  • Are there some functions – for example, loans of £25,000 or less – where government could provide subsidies/guarantees to mainstream lenders (both banks and peer-to-peer platforms) to enable them to lend to more social organisations?
  • Could mainstream banks play a bigger role in providing finance for Credit Unions and SIFIs to enable them to lend/invest more?
  • Are there ways that mainstream banks could provide opportunities for individual customers to invest in charities and social enterprises?
  • In what circumstances is it really important that an organisation is able to take on investment from an investor who is specifically socially motivated?

The Forest For The Trees is hopefully the beginning of a useful discussion about the role of mainstream banks in supporting positive social change. It would be great to see more banks following RBS’s lead in making their data available and supporting this kind of research – and it’s vitally important that social investment leaders consider more clearly the gaps they are seeking to fill and the reasons why they are best placed to fill them.

 

*While readers of previous post my be aware of my views on the issue, in this instance I am not making a point either way about the status of ‘Profit with Purpose’ organisations as ‘social enterprises’ or ‘social businesses’. I have separated this figure because as Companies Limited By Shares (CLSs), these organisations are not included in the charity and social enterprise database we used to generate data from RBS.

 

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Learning from experience – part one

In a comment on my previous blog on the pipeline of bad ideas in social enterprise, Nick Temple offers a partial defence of the actions of social entrepreneurship support organisations, noting that their work often involves supporting ‘biographical social entrepreneurs’ – people for whom a social entrepreneurship is a response to personal experience.

In another recent blog, Tackling Heropreneurship, Daniela Papi-Thornton of Skoll Centre, makes some points similar to mine but also bemoans the fact that she has: “watched more and more students focus their ventures on problems they haven’t lived, such as building an app for African farmers when the founding team has neither farmed nor been to Africa“.

They’re not wrong. There is no question that personal experience is important in social enterprise. The challenge is to understand how and why it’s important. The post is part of a series of (at least) two and the other one will be more positive!

How does it feel?

Nick makes the point that the fact that biographical social entrepreneurs have: ‘experienced the problem they are/were trying to solve… in theory at least, gives them some understanding of the problem’.

At a basic level, this is self-evidently correct.

If you are (or have previously been) long-term unemployed you know how it feels to be long-term unemployed – in the sense that you know what long-term unemployment feels like for you.

If you have a diagnosis of a mental health condition, you know what it’s like for you to live with that condition.

In both of these examples (and many others) people with experience are experts in their own experience but there are at least two fundamental questions that this experience  does not (in itself) answer:

  1. To what extent does someone’s specific personal experience enable them to usefully understand a wider social problem beyond that specific personal experience?
  2. In the event that the answer is ‘to a great extent’ – to what extent does that understanding enable them to use their understanding to solve a problem for enough paying customers (including grant funders and donors) to create a viable business?

In terms of question 1, there are many factors that determine whether someone’s experiences enable them to understand other people’s experiences and the practical challenges flowing from them.

One is where that specific experience sits within that individual’s wider life experience: Has the long-term unemployed person (Nigel/Nigella) ever had a job? Are they unable to get a job at all – or unable to get a job in their chosen profession? Do they have dependents?

Another is where Nigel/Nigella’s experience sits within a wider social and economic context: Is the problem that Nigel/Nigella is unable to get one of the jobs that are available in their local area? Or are there no jobs in the local area to apply for?

The point is not that one experience of any of the possible permutations is more valid or real than another but that the relevance of those experiences to the creation of a social enterprise to ‘solve the problem’ will vary greatly.

More bluntly (and this may seem obvious but experience from the world of social entrepreneurship support suggests it isn’t) the fact that Nigel/Nigella has failed to get a job over a long period of time – either at all, in a particular industry or based on a series of specific challenges – doesn’t (in itself) qualify them to help other people get jobs.

Nigel/Nigella’s experience of failing to get a job may give them a strong desire to start a social enterprises to tackle unemployment, along with some ideas about services that might be helpful. It doesn’t (in itself) mean that those services are likely to work.

In other cases, the specific nature of someone’s experience may mean they just don’t know how that experience feels for someone else.

This is my truth, don’t tell me yours

Once again this maybe be because of their personal situation. So while that fact that Oliver/Olivia’s diagnosis with a mental health condition was followed by immediate specialist treatment at a private hospital doesn’t make their experience of that condition any less real, it does limit their ability to immediately understand the situation of someone who is currently waiting 18 months for an NHS appointment to help them live with the same condition.

In other instances, one person’s experience may make them less rather more able to empathise with other people who experience a similar situation in a different way.

For example, Oliver/Olivia may have found that, for them, medication is not helpful but the combination of meditation and exercise enables them to manage their condition successfully.

That perspective is valid and relevant but, if setting up a social enterprise with a general aim of helping people live with their condition, it needs to be understood as an individual experience – which may or may not be other people’s experience too.

A big danger for ‘biographical entrepreneurs’ is that they risk not being able to distinguish between their individual personal experience and ‘THE TRUTH’ about a social problem – and their social enterprise ends up as a mission to impose their truth on other people (and prevents them for understanding whether/why other people might need/use a product or service they offer).

While question 1 break down into lots of other (more complicated) questions, it’s ultimately the easier one to answer. You can use your personal experience as the impetus to develop a broader understanding of a social problem beyond your personal experience if you want to.

Sounds great, who’s paying?

What it comes to question 2, the answer is shorter but the problem is bigger.

In his latest book, The Frugal Innovator, Charles Leadbeater notes that: “An innovation is only successful if it can answer several questions and risks: will the technology and the product work?; will consumers want it?; can it be made reliably at scale and can a business make money from it? An innovation can fail at each of these stages.

Experience-based understanding of ‘the problem’ might in some circumstances enable a social entrepreneur to answer one or both Leadbetter’s first two questions but it’s highly unlikely to provide answers for the third and fourth ones.

Nigel/Nigella’s personal experience might provide the starting point for a great idea for a service that will help long term unemployed people get a job but it’s unlikely to be a significant factor in whether their social enterprise can generate income as a Work Programme sub-contractor.

Oliver/Olivia’s personal experience might enable them to come up with a great scheme that supports those who want to manage their mental health condition through meditation and exercise to do so, it won’t help them work out what combination of grant-funding, NHS contracts and self-funding payments is necessary to make the numbers add up.

The mistake that social entrepreneurship supporters have often made – either explicitly or through omission –  is to assume that personal experience of a social problem inherently represents meaningful research into the market conditions for solutions to that problem. It doesn’t.

None of this is intended to suggest that being a ‘biographical social entrepreneur’ is a bad thing but we need to think more carefully about what it takes to get from the impetus to solve a problem based on personal experience to a viable social enterprise.

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What’s Next For Big Society Capital?

“… With new CEO, Cliff Prior, poised to take up his role in March 2016 and growing interest in setting up similar institutions elsewhere in the world, it is worth considering the extent to which this principle is currently being fulfilled. As it stands, to what extent is it accurate to describe BSC as a wholesaler? … ” – My blog as part of the Flip Finance ‘What’s next for Big Society Capital?’ series.

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Another year over and is social enterprise really the answer?

As 2015 draws to a close in a haze of turkey and prosecco, it’s a good time to revisit some of the social enterprise world’s oldest chestnuts and see what they’ve been pickled in this year.

Old Chestnut One – Now that grants (and grant-style block contracts) really are disappearing, is social enterprise really the answer?

Those of us old enough to have been around in the glory days* of New Labour will remember that social enterprise was once the answer to the end of grant-funding. Fortunately, in the 2001-2011 that was a fairly easy role to fill because grant funding wasn’t actually ending.

According to NCVO, grant funding by government to the voluntary sector peaked at £6 billion in 2003/4 before falling to £2.2 billion by 2012/13 – but in many local areas the end of grants just meant a switch to models of commissioning that, though more bureaucratic, were ultimately broadly similar to grants.

Now public funding for local organisations to do some good stuff in their local area – however labelled – is disappearing fast. Contract income reached a high of £12.1 billion in 2009/10 and but was already down £11.1 billion in 2012/13.

At a local level in Waltham Forest (where my social enterprise, Social Spider CIC, is based) local charities (excluding housing providers) saw a 34% drop in income between 2010-11 and 2014-15. And with remaining council contracts coming up for renewal in December 2015 and March 2016, that picture is about to get much worse.

The grim reality is that the story that copiously grant-funded social enterprise advisers spent the 2005-2012 period telling charity leaders about grant funding is finally true. State support for the voluntary sector is on the same trajectory as Dunwich but (with apologies to both present and former residents of Dunwich) leaving a slightly bigger social and economic absence in its wake. So this should be the point where social enterprise steps in to fill the gap with some ‘sustainable’ revenue streams.

According to Social Enterprise UK’s 2015 State of Social Enterprise report, Leading the World in Social Enterprise: “27% of social enterprises have the public sector as their main source of income, an increase on 2013 and 2011” – but are social enterprise doing something different and more viable than what conventional charities are doing, or is just that the ones that are keeping going are taking a bigger percentage of an ever smaller pot?

As public sector outsourcing collapses, is social enterprise really the answer?

The decline in government contract income for the voluntary sector outlined above is just one relatively minor act of violence perpetrated against the deeply unwell horse of public service reform in the UK.

Left-wing critics of public service outsourcing have spent much of the past 20 years tugging at their beards and scuffing their sandals in despair at the thought of private companies generating huge profits at the expense of the poor. Unfortunately, if you’re one of those who thought that was bad, you might not be much keener on the new, updated version – private companies failing to generate huge profits at the expense of the poor.

A quick case study is offered by Serco: everything was going swimmingly in 2010, the seas of surplus were becoming choppier by 2012, and by 2015 that whole, humoungous contract-guzzling oil tanker of privatisation was seemingly headed for disaster. Tune in this year for the next hilarious episode.

Some might regard the news that Serco along with outsourcers A4e (amongst others) are handing back contracts as good news but is it really? Serco, A4e and colleagues are really good at slashing costs to a minimum to deliver contracts while making a profit. If they’ve slashed everything in sight and the numbers still don’t add up, what does that mean for those of us who want to deliver added value?

In some sectors, such as social care, the problems are particularly stark, even with some extra money on the horizon.

The winners of Big Society Capital’s Business Impact Challenge – charity, Catch 22, in partnership with construction company, Interserve and investment managers, Club Finance – will receive up £5 million worth of investment to:  “create an independent vehicle that enables community organisations, charities and social enterprises to deliver public services at scale.”

Will what could be tagged a ‘social Serco’ succeed where Serco is now struggling? Good luck!

As social investors continue to ask ‘what can we spend all this government money on?’, is social enterprise really the answer?

The run up to Christmas saw afore-mentioned social investment wholesaler, Big Society Capital, publish its first set of ‘deal-level data’ – that is information about where their money’s gone (along with deals made or arranged by two organisations – Charity Bank and Clearly So – that they’ve invested in directly).

Elsewhere, Pioneers Post‘s Quarterly Dealflow Update, does what that title suggests for the wider social investment market (or those bits of it willing and able to report the flow of the deals).

2015 also saw Engaged X publish The Social Investment Market Through a Data Lens before being forced to pivot away from overall analysis of the social investment market, apparently because no one would pay them to continue to do it.

The social investment market is, for better or worse (or possibly mixture of both), finally making the leap from rhetoric to reality. The headline news is that – even leaving aside social impact bonds – there’s now lots going on in the social investment market. As the Access Growth Fund starts to invest its fabled ‘blended capital’ next year, even more will start happening.

One way or another, by this time next year we’ll have a clearer (if still not fully developed) picture of the extent to which a ‘social investment market’ is an idea with a long term future and, if it is, what that means for social enterprises. And both social enterprises and social investors will have better idea of where they fit into a landscape where, in the vast majority of cases, the government money is not coming back.

 

*delete the word ‘glory’ or not according to preference

 

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Private view

Following years spent endlessly reprising the Godot role on the UK’s social business stage, B Corps have finally arrived. You could be a B Corp in the UK before but B Lab UK has now been launched to ‘support a community of UK-based B Corps’ and, as of last week’s launch, that community consisted of 62 ‘founder members’.

If you’re one of those ‘general public’ types who’s never engaged in a passionate debate about what a social enterprise is, or whether ‘social enterprise’ is really the right combination of words to describe what some people choose to call a social enterprise, you might not appreciate just how big a deal this is. It’s a big deal.

That’s not to say it’s immediately clear exactly why it’s a big deal.

A reminder, in case you’ve somehow how missed it, that a B Corps is a: “for-profit business that has social and/or environmental outcomes as part of its mission. They are certified by the nonprofit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency.

It’s not about the 1% – not even close

Founded by three longtime friends, two of whom previously ran a successful basketball footwear company, the US B Lab opened for business in 2006. Nine years on there are 1400 of them, 65% of which are based in the US. So, just over 900 US businesses have gone through the process of being certified as a B Corp. As there are around 28 million small businesses in the US,  approximately 0.003% of US small businesses have joined the B Corp movement*.

This is not to say the remaining 99.997% are necessarily entirely uninterested. It’s not easy to become a B Corp. Whether or not B Lab’s ‘B Impact Assessment’ is a set of ‘rigorous standards of social and environmental performance, accountability, and transparency’ that I (or you) personally support, the process is definitely serious.

The fact that you don’t just pay your money and get your certificate means B Corp status means something. Unfortunately, it currently means something primarily to a tiny minority of people who are very interested.

The B Corp movement’s lack of traction, so far, with American businesspeople has been inversely proportional to its popularity with politicians, philanthropic foundations and extraordinarily rich people who believe that business should be nicer.

The most recent flurry of high profile support came last year, when Jeff Skoll gave them loads of cash as part of his popular award-scheme. Then, a few months later, New York Times columnist David Brooks compared the B Corp model to a combination of John Lennon and Paul McCartney because (it makes perfect/some sense if you read the full article) they are “seeking to reinvent both capitalism and do-gooder-ism, and living in the contradiction between these traditions.”

Since then, registrations have been growing comparatively fast but from an extraordinarily low base. There is ongoing talk that Unilever, who own hippy ice-cream brand (and B Corp), Ben & Jerry’s might be the first big corporate to sign up. That would be a big deal.

There’s no business like business

At this point, rather than speculate on whether the B Corp movement will succeed in the UK, it’s worth considering whether or not we (in the social enterprise movement) want it to.

For me, that depends on what they’re trying to do and the messages so far are mixed. ‘Business’ in general is a far bigger bit of the economy than ‘social enterprise/social business/the social economy’ (delete according to taste). While it doesn’t rival B Corps for comparative obscurity, as discussed previously the UK’s social enterprise movement – which has been around a bit longer – currently encompasses somewhere (quite vaguely) between 1% and 2% of the economy.

So, if the aim of B Corps is to get more new and existing private businesses to focus on social and environmental goals then that’s an equivocal win. B Lab UK will have the challenge of making the case UK businesspeople that B Corp certification (and membership of the movement) gives them something they need. That might not be easy but it’s a laudable aim.

And there is  a potential gap. ‘For-profit’ business people are our friends, families and, in some cases, ourselves for part of the working week – they’re as likely as anyone else to care about doing good – but in the vast majority of cases they’re not choosing to turn their newsagents, hair salons or haulage companies into Community Interest Companies (despite the option being available since 2005).

If the major (or a significant) way to ensure UK business does more good is for more businesses to change their entire conception of themselves (I’m not personally convinced it is) then it’s currently not really happening.  Last week I was asked to name examples of existing private companies who’ve converted to a CIC structure. I came up with one but there wasn’t a list on the tip of my tongue. Employee ownership is, my anecdotal knowledge suggests, doing slightly better but not by much.

This is not a criticism of existing social organisational structures and/or registration models but there’s a gap in the market there for B Corps to change mainstream business and their challenge is to find out if there’s a market in the gap.

Mark my words: the social economy will eat itself

The late Mandy Rice-Davies successfully anticipated a significant percentage of everything that’s been said by anyone since 1963 and there would’ve been nothing to surprise her in the reaction to the B Lab UK launch on the traditional wing of the UK social enterprise establishment.

In a storming blog on the Social Enterprise Mark website, Mark boss Lucy Findlay – who knows a thing or two about trying to sell people kitemarks – was quick to assert the primacy of her niche offering over the one proffered by B Lab UK. She reminded readers that: “The Social Enterprise Mark CIC is the ONLY** UK and international certification authority that independently guarantees that a business operates as a social enterprise, with the central aim of using income and profits to maximise their positive social and/or environmental impact, which takes precedent over more standard business models, which are typically driven by a requirements to maximise personal profits for owners and shareholders.”

As a CIC director, I get those guarantees for £15 per year from the government to enough of an extent to satisfy myself and any of my customers who are interested, so I see no clear need to pay ‘from just £350+VAT’ to have it guaranteed again by the Mark’s independent committee.

Producer interests aside, though, Lucy is making a broader point that many (probably most) in the social enterprise movement would support in asserting the importance of clear limits on profit distribution and the use of some sort of ‘social’ ownership model (however broadly defined).

While B Lab UK have certainly given the matter a lot of thought before coming up with their ‘Legal Test’ for UK B Corps, the whole point of the certification from the point of view of many supporters of ‘Profit with Purpose‘ (PwP), is that it is actively open to businesses that can distribute profits and utilise assets for private gain.

Despite some cordial interactions with Unltd‘s policy team, my general outlook on PwP (have they considered a sponsorship deal with PwC?) are largely unchanged from this post in January.

I’m less worried than others in the movement about the general public being confused by competing labels.  I’m not convinced there’s a big market of consumers who want to buy from a social enterprise but don’t want to buy from a private but ethical and socially-focused business. And, at the point of buying a product or service, I’d generally put myself in that category of ‘socially conscious’ customers who are equally happy to consider buying from either.

In terms of the challenge of actually getting to point of selling stuff, though, most ‘social organisations’ do face distinct, additional challenges and have opportunities to access various forms of funding, investment and other support as a result. For example, charities and social enterprises seeking provide back-to-work services face major barriers to competing with private sector competitors like founding B Corp, Ingeus UK (now owned by the Arizona-based Providence Service Corporation).

If B Corp certification was ultimately used to enable private businesses to take advantage of the relatively small range of benefits – whether grants, tax breaks or ‘social’ procurement# – currently on offer to ‘social organisations’ that would have a significant, negative impact on the existing social economy.

Support for clearly social models ownership and/or either no distribution private profit, or strictly limited private profit distribution, is a baggy set of strong principles with a messy coherence that quite a lot of people strongly believe in. Most of us don’t think it’s the only way to do business (or the best way in all circumstances) but we believe in the social economy as part of a wider civil society as distinct from private business.

Ultimately, that means that if the launch of B Lab UK leads to a battle with the private sector for our limited resources – rather than an attempt to create a broader social pot – then that would be (a) sad and (b) a battle that many of us would be up for.

My investor’s got some money and no clear strong beliefs

And then, after all that, there’s the Pandora’s Cath Kidston bag that is the UK social investment market. Social investment leaders are all over B Lab UK and it’s not just because meetings with US B Corps people are the only chances they get to go to meetings and act smug about their market penetration.

As if transforming the capitalist system wasn’t enough to be getting on with, B Corps have also been lined up for the considerably more implausible task of making UK social investment work based on its current model.

As it is, while some of social investment wholesaler, Big Society Capital‘s (BSC) £600million (ultimately maybe more) pot is being shovelled into chunky property deals (some with a clear social purpose, some appearing to be more in the ‘investment spring water with a twist of social’ category) and some is (rightly, for now) being subsidised by the Big Lottery Fund,  if their furious lobbying on behalf of Social Impact Bond industry doesn’t pay off soon, BSC have a real problem getting rid of their money.

(While the specific analysis of their performance is a different post), I’m not arguing they’re doing catastrophically badly now but I am arguing that we are not seeing the level of growth in demand for the types of finance they offer (at the cost intermediaries investing non-Access-backed funds are able to offer it) for BSC to get all their money out to what most within civil society would regard as ‘social organisations’.

Writing for Pioneers Post, Pauline Hinchion of Scottish Community Re:investment Trust, an organisation with more ‘traditional’ approach to social investment, argues that: “it would appear that the focus for social investment is shifting from the ‘not for profit’ third sector to the hybrid ‘profit with purpose’ business sector.

Before adding that: “if social investment capital is flowing to hybrids, where is the third sector to get money to drive forward its agenda, particularly against a backdrop of austerity and cut backs?

In the PwP corner, Unltd boss Cliff Prior told Third Sector last year that: “if you can make that system work you can get social ventures that need capital investment to grow much more quickly because you can use the investment market.

He added: “There are some areas where that is really important, either because it’s an emergency or because there are fully commercial competitors; if they get to the market first, it’s lost to social benefit. If the social venture gets to market first, it stays social – that’s a good thing.

Exit music for a Social Investment Finance Intermediary (SIFI)

One side fears what the other side hopes for but they’re united by being wrong. The fallacy is embraced by both is that, if UK social investment unequivocally embraced ‘impact investment’ in for-profit businesses there would suddenly (or even over a period of 10 years) be a host of grasping, private profit hungry Companies Limited by Shares (AKA exciting, innovative PwP businesses) queuing up to get their hands on all that lovely money.

On Linked-In, another Scotland-based figure who I respect, Les Huckfield, speculated that the rise of B Corps could see Virgin’s Richard Branson turning up to get a slice of BSC pie. It’s a shame to spray dry powder on the fires of righteous anger but it’s difficult to imagine the circumstances in which a guy who’s got enough spare cash to be racing hot air balloons and trying to fly to space will need a tiny specialist social investment organisations to loan him £250,000 at 8% (bigger loans and mostly higher interest rates are available) or to take an equity stake in his new business along with a seat on his board.

But social investment leaders and PwP supporters are equally convinced by (a variation on) this nightmare/dream scenario.  Their assumption is that a significant increase in numbers of B Corps/PwP businesses etc. that can take on equity investment will make it far easier for them to get their cash out of the door.

Unless, I’m missing something this belief is apparently premised on the notion that having a ‘for-profit’ structure either automatically (or, at least, more likely than not) changes the market situation in which you’re operating.

It may simplistic but, in social investment world simplicity is often necessary: a companies doesn’t go from being a couple of Harvard students rating some girls to a multi-billion dollar empire primarily because it’s structurally possible for them to sell shares to investors. The opposite would definite be a barrier but, as success factors go, that one’s quite a way down the list.

If social investment backed-B Corps are genuinely socially focused, and creating new products and services to tackle social problems by operating in under-developed or non-existent markets (or if they’re competing in mainstream markets carrying additional ‘social’ costs) they’ll struggle to make the sorts of profits that will provide BSC-backed SIFIs with the returns they need.

Having argued ferociously about the connection between structures and principles, we ultimately end up with same old problem that, irrespective of how businesses are structured, successful socially-focused business will not provide the big profits that will offset the losses from the others, and those that have the potential to do so will mostly be able to get cheaper, less demanding money elsewhere.

There definitely is a clearer exit route for a SIFI (or other investor) that buys some shares in a CLS structured B Corp than one than buys a quasi-equity stake in CIC Limited by Guarantee in the hope that at some point someone will invent a Social Stock Exchange where they could sell it. A profitable exit from investment in a B Corp is technically much easier.

But social investor enthusiasm for PwP (and, as part of that, B Corp) seems to be based ‘technically much easier’ and ‘highly likely’ being essentially the same thing.  It seems unlikely that, in terms of social investment by SIFIs (it may be different for individuals) this optimism will survive many encounters with social entrepreneurs seeking investment in their risky, innovative B Corps.

The mostly likely result of the shift towards PwP in social investment is that, at least in terms of SIFI finance, we end up with a range of new, more frustrating approaches to slicing and dicing the wrong money – when what both socially structured and ‘for-profit’ social entrepreneurs need is a bigger change of overall strategy.

 

 

*As with social enterprises in the UK, it’s easier to compare numbers against figures for small businesses, while acknowledging that not all B Corps/social enterprises are small

**Lucy’s bolding and capitalisation

#’Social Investment’ is an issue its own

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Great and small

Here we are again. Two year’s on from The People’s Business, the new Social Enterprise UK (SEUK) state of social enterprise survey is called ‘Leading the world in Social Enterprise‘.

While the UK government’s hyper-enthusiasm for its own work on social investment might cause some in the social sectors to raise a weary eyebrow at the mention of ‘leading the world’, the social enterprise movement is hopefully on firmer ground.

Either way, SEUK certainly does lead the world in writing engaging reports about social enterprise and this year’s is definitely worth a look. There’s loads in there but I want to pick up on two recurring questions: ‘are social enterprises *outperforming their mainstream counterparts*?’ and ‘is social investment useful for most social enterprises?’

Social Enterprise vs SMEs

I’m picking up on this issue it’s the hook that’s been used for the promotion of the report.

The opening paragraph announcing the report on SEUK’s website says: “Research from the State of Social Enterprise survey 2015 shows how social enterprises are outperforming their mainstream SME counterparts in nearly every area of business: turnover growth, workforce growth, job creation, innovation, business optimism, and start-up rates.

As the membership body for social enterprises, it’s SEUK’s job to be positive. I’m not suggesting their positivity about the performance of UK social enterprises is unwarranted in a general sense – this is the best data we have about social enterprises in the UK and it shows social enterprises are doing well: increasing turnover, growing their work forces and creating new products and services.

Where it gets problematic is when we attempt to compare the performance of social enterprises and ‘mainstream SMEs‘. What does ‘social enterprises outperforming their mainstream SME counterpartsactually mean?

To take ‘innovation’ as individual example. The report claims: “The number of social enterprises introducing a new product or service in the last 12 months has increased to 59%. Among SMEs it has fallen to 38%.”

How useful is it to attempt to judge whether the social enterprise I manage in my day job, Social Spider CIC, is more innovative than our neighbouring SMEs such as ‘Delight Kebab & Cafe’ or ‘DR Patel Newsagents’?

We created a new mental health blogging platform in 2013-14, if Delight continued to offer similar things with chips and DR Patel streamlined the range of confectionary available in their shop is social enterprise winning?

Even when businesses do similar things, comparisons don’t really work. Another social enterprise I help to run, WFWellComm CIC publishes a community newspaper, Waltham Forest Echo. A similar local SME is Citizen Media Ltd, which publishes Hackney Citizen.

Over the past two years, WFWellComm CIC has grown its turnover, increased the size of its workforce, created new jobs, launched a major new product, believed (correctly) that its income would increase over the next year and been a start-up. Six ticks but that’s happened primarily because we’re a new organisation that’s launched a newspaper.

During that time, Citizen Media Ltd has continued to publish a newspaper.  As their newspaper is published monthly and ours has been bi-monthly, they’ve produced twice as many editions as us but, in the event they’ve done so with a slightly reduced turnover compared to previous years and a stable staff team, while feeling pessimistic, we would’ve ‘outperformed’ them on all six counts.

Our social enterprises have done well and we’re proud of that. It doesn’t tell us anything much about the performance of other businesses operating in different markets or at different stages of development.

The leads into the wider unanswered question of whether social enterprises collectively are outperforming SMEs collectively. The report states, “Government statistics identify around 70,000 social enterprises in the UK, contributing £24 billion (24,000,000,000) to the economy and employing nearly a million people”. By this reckoining the ‘social enterprise pot’  amounts to 1.5% of the £1.6 Trillion (1,600,000,000,000) combined turnover of all SMEs.

The state of social enterprise survey is not designed to produce an overall cumulative figure for social enterprise turnover and doesn’t claim to do so. It tells us that 52% of social enterprises increased their turnover, compared to 40% of SMEs but there’s no way of knowing whether social enterprises’ cumulative turnover is growing or shrinking as proportion of SME turnover – in that ‘battle’ 1 medium enterprise increasing its turnover by a £1million would beat 99 average-sized social enterprises increasing their turnover by £10,000.

Small comfort

What we do know if that the median turnover of survey respondents is down to £151,000 compared to £187,000 in 2013 – which, in itself, was a drop from £240,000 in 2011. Blogging following the previous report launch, I thought that turnover drop was a big worry.

In this report, there’s a breakdown of median turnover by age of enterprise and this suggests a more complex situation. While the median turnover of organisations aged 3 years or younger has dropped from £44k to £36k, all other categories – 4-5 years, 6-10 years and 11 years+ – have seen a median increase.

The report claims that: “the growing proportion of start-ups could explain the drop in median overall turnover. This explanation is made more likely when 2015 data is compared to 2013. This shows that in all age-bands barring that of start-ups, the median turnover has, in fact, increased – and that the high proportion of start-ups arguably masks a success story of older social enterprises increasing their scale.

This seems like broadly good news with a necessary note of caution being that, while it seems that older social enterprises that continue to exist may be ‘increasing their scale’, we don’t know whether there’s been an increase or decrease in social enterprises who’ve gone out of business altogether.

My overall impressions of the current situation are:

  • Large (apparently growing) numbers of people continue to start social enterprises
  • There are thousands – although it’s not clear how many thousands – of ‘established social enterprises’ that have been around a while and have found a ‘sustainable model’ that works for them
  • There is no clear indication of a breakthrough – with significant numbers of social enterprises becoming medium-sized businesses (let alone big businesses)

Social investment – just what we need in 100 years time

In terms of the question ‘is social investment useful for most social enterprises?’, the new report offers a very similar answer to the previous one. The median amount of finance sought by social enterprises has increased slightly £58k in 2013 to £60k this year.

Reflecting on the ongoing, much discussed, gap between demand and supply, the report explains that: “As was noted in the 2013 survey as well, this is out of kilter with much of the social investment market pursuing larger deals. As the proportion of younger, smaller organisations continues to grow, it raises the question of how well aligned some of the financial and investment structures put in place to support social enterprise are with the realities of the sector itself.

The last available average figure for investments offered by the UK social investment market is £264k so, if we temporarily ignore inflation and extrapolate wildly from a £2k change with many possible explanations, the average level of investment demanded by social enterprises is on course to match the every level of investment offered by social investors in approximately 100 years’ time.

Fortunately, while the situation on the demand side of the market hasn’t changed much over the past two years, the supply side of social investment is hopefully in the process of changing considerably. The arrival on the scene of social investment wholesaler, Big Society Capital, in 2012 did not have any direct impact on the availability of the kind of finance most social enterprises were seeking (then and are seeking now) but it did create a climate where the absence of that finance could not easily be ignored for (too) long.

As a result Access: The Foundation for Social Investment, for example, is now poised to have a significant impact, while Power to Change will also play a major role in providing grant finance (along with a smaller one in ‘social investment’).

So, while the answer to that question of whether most social investment is useful to social enterprises remains: ‘not yet, in most cases’ greater relevance is within reach.

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