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Reinventing finance for social enterprise

Social entrepreneur and Nesta Trustee, Liam Black, argues that we need to rethink how business can be competitive and profitable in economic and social terms.

Scaling up can be a struggle for businesses of all kinds, not just social enterprises. But according to Liam Black - a social entrepreneur who has led some of the UK's most successful social enterprises - it needs to be a high priority for enterprises which have the explicit purpose of making a difference on social issues.

"Very few social enterprises have got to a national scale and had a major impact," explains Liam. "Some argue that small is beautiful, but I think there's a moral obligation for serious social entrepreneurs to get to scale and really make a difference in their chosen area."

Securing finance

Liam highlights the lack of good finance options for social enterprises as the biggest barrier to growth: "Using your profits to grow means growing very slowly - grants from foundations are difficult to obtain and banks are often too risk-averse for many social enterprises."

Private companies have a clear pathway of finding investors, growing the company and generating profit that keeps those investors happy. But in most non-profit structures it's illegal to pay a dividend or give equity stakes. This has made it very difficult for them to attract investment.

"As it stands, the legislation controlling non-profit organisations puts a brake on investment and growth," says Liam. "The hunt is on for a new organisational and constitutional model that will prepare social enterprises for investment, enabling them to grow and enhance their impact while keeping their values intact."

Developing the market

In November 2008 Bridges Ventures launched its Social Entrepreneurs Fund, which has so far raised £4.25 million for investment in scalable social enterprises. In April 2009 Big Issue Invest - the investment arm of the Big Issue - launched a £10 million fund that will invest in social enterprises.

Both of these funds take a more sophisticated view of what constitutes a good return, by considering the social return alongside the financial. They also show a willingness to take risks in order to stimulate growth in the social enterprise sector.

However, the social investment community still has a long way to go until it becomes as mature and nuanced as the mainstream investment community. In particular, Liam argues that we need to get much better at articulating and verifying what social impact is: "If an investor is prepared to put money into your social enterprise and offset some of their financial return, you need to be able to explain exactly what the social return will look like."

Preparing for investment

As well as securing capital to grow the enterprise and building the right team to achieve growth, social enterprises that are focused on a particular locality can face challenges when it comes to replicating their work. Different political structures and funding mixes mean that what works in one area won't necessarily work in another.

"Social enterprises that start in one city are rarely able to move successfully into others - the Big Issue is the one outstanding exception," says Liam.

"Before they can be considered ready for investment, social entrepreneurs need to spend time analysing the factors that can be replicated. They also need to examine their governance and management structures. Most social enterprises will need much more robust systems in place if they are to grow successfully."

Building partnerships

One way in which social enterprises can get smarter about how they grow and become more robust is through forming joint ventures and partnerships with other businesses. "There's a lot that social enterprises can learn from the private sector. For example, the best private sector companies are very good at engaging their employees, building loyalty and nurturing a strong values-based ethos," explains Liam.

"In my experience, private firms can also gain a huge amount from working with their social counterparts. I set up Wavelength to encourage cross-pollination between the two sectors - and I've found that both sides are extremely eager to learn, exchange ideas and form partnerships."

A radical overhaul

Liam's view is that everyone with a stake in enterprise must play their part in radically rethinking how business can be competitive and profitable in economic and social terms. "I'd like to see BERR [The Department for Business, Enterprise & Regulatory Reform] take an expanded view of what business is and what value is.

I'd like to see the Social Enterprise Coalition engage with the private sector much more than it does at the moment. I'd also like to see organisations like Nesta do more to blend their social activities with their investment portfolios and put greater emphasis on delivering mixed returns."

Although the recession is certainly adding to the problems of social enterprises that are trying to grow and secure funding for the future, Liam believes that the testing times may help the market to mature.

"There's been a lot of hyperbole talked about social enterprise in the last few years and a lot of people have been keen to jump on the bandwagon. The recession will see off this hyperbole and may help to create a more efficient system. Those enterprises that survive will come out strong and go on to achieve long-term impact."

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Sarah McGeehan

Sarah McGeehan

Sarah McGeehan

Head of Social Finance

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