Social Enterprises – the growth quandary
16 June 2011 | By Cause4 staff
In February 2011 Government launched Growing the Social Investment Market: A vision and strategy - a six-point framework starting with ‘enabling’ actions and leading to more direct intervention including consideration of tax incentives to encourage social investment. It is clearly positive to encourage a thriving social investment market where social ventures can find access to the capital they need to grow, together with a strategy to make it happen. The report outlines that philanthropists can help by seeing social investment as a “core proposition in their portfolios and not just as a marginal product”. However, with truly scalable social enterprises ‘as rare as hens teeth’ – is this really the right approach from Government?
Cause4 believes that the answer to the problems of scale revolves around looking at the two types of investment available to social enterprises:
Finance-first investment, which places significant focus on ‘reasonable financial returns as well as social returns,’ for investors. Examples of such funding include the Bridges Ventures and Big Issue Invest.
Impact-first investment, which has ‘social impact as its core focus, recognising the trade-off required between social impact and pricing for financial risk.’ Examples include investment from trusts and foundations and philanthropists who often do not expect to see a major financial return on their investments.
At present there seems to be a cultural aversion to taking on non-grant investment. Most social enterprises are more than happy to search for funding from impact-first investors, with a full understanding that taking such investment is a low-risk strategy.
However, as this funding comes under increasing pressure social enterprises are struggling to access sufficient capital for expansion. With a squeeze on invested funds from charitable foundations, we also think that it is short sighted to believe that charitable foundations will take advantage of the new guidance from the Charity Commission allowing them to invest for social return and take “a more ambitious approach to social investment”.
With the introduction of the Big Society Bank it is essential that the initiative helps improve the supply of finance and acts as a driving force for the whole social investment market. The strategy gives examples of the three main types of investment proposed for the Bank including funds for front-line social ventures, funds for social venture intermediaries and funds to develop new investment vehicles such as Social Impact Bonds and building market infrastructure. The social investment market will be watching closely to see the social impact of the bank, its investment and most importantly its influence on the speed of social enterprise growth.
If organisations can gain a newfound confidence to consider finance-first investment then we will see a wave of bigger and better social enterprises coming through in the next few years. The impact on society at large of this can, we envisage, only be positive.