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1 SOCIAL ENTERPRISE Does SOCIAL FINANCE understand SOCIAL NEED? Robbie Davison January 2013

2 Foreword As the Director of a social enterprise that has previously had, is currently in receipt of, and is looking for further social finance, I understand implicitly the constraints of the social finance market. This paper examines the current social finance market set against the backdrop of a growing need to tackle some of the more pressing social issues within an austere economic climate. Throughout, it adopts a practitioner s perspective, taken as the Social Enterprise sector adjusts to new forms of finance in order to, firstly, survive and secondly expand, with a view to continue tackling social need. The content is arranged as a mixture of occupational observation, a literature review considering academic papers, sector specific documents and a range of practice-based viewpoints. Questions are raised, a few opinions expressed, concluding with a list of potential solutions that are intended to offer pointers for improvement and discussion. I m hoping it will stir-up a lively and important dialogue about Social Finance and its partnership with Social Enterprise Feel free to join in! 2

3 Abstract This is a position paper featuring some of the pressing issues that communitybased social enterprises face today. The title of the paper Does Social Finance understand Social Need? is intended to frame a lively and growing debate that now exists within the social enterprise movement a debate that is becoming increasingly polarized around the question of whether the current social finance model fits the needs of the community-based social enterprise marketplace. This paper notes that there are roughly 30 Social Finance intermediaries in the arena. As part of the writing process, I have met, negotiated with and loaned from a third of these organisations. Any views formed are positioned to represent a social enterprise sector that is, at origin, community based and trading within an annual turnover of no more than 500k and, in the majority of cases, less so. Little reflection is given to public sector spin outs. These are viewed to be trading in a different or even artificial environment that is for consideration outside the scope of this paper. Much has already been written from the social finance perspective what is proposed/ intended, as they the social financiers release their products for the benefit of social impact. Hardly anything exists to position what it is like to be a social enterprise trying to secure finance in the current marketplace. This paper takes a step or two towards redressing the balance. 3

4 Glossary The following definitions contextualize the topics of this paper: Social need: This paper prefers to use the description of need as opposed to impact. Need 1, by definition, requires something because it is essential or very important. Need focused work, requires product/service solutions - it is outcome based. Whereas impact can require nothing more than contact and/or advice it is in general terms, output based. The former sets out to solve problems, the latter to fix. Social Finance (Investment): Social investment is the provision of finance to organisations with the explicit expectation of both a social and financial return. In the context of this paper, it also includes patient capital and the provision of grant. Social Financiers/Intermediaries: Organisations (other than banks) that provide loans and/or grant directly to social enterprises. Social Enterprise: A business that trades with the aim of tackling social problems by improving communities, people s life chances and or the environment. It has a clear sense of its mission and how activity addresses a particular need 2 People matter. Social Entrepreneurship: The product of individuals/organisations that deliver innovative market orientated approaches underpinned by a passion for social equity and environmental sustainability 3. 1 Dictionary Definition. 2 The Ambitious Social Entrepreneur, 2012 Clearly So. 3 Social Entrepreneurship: Business with a Conscience, 2012 4

5 Background Community-based activism, traditionally the fertile inspiration for social entrepreneurship, often acts as the catalyst for what has been historically recognized as true social enterprise. Recently in this space, so much has changed and it s changed quickly. The UK Voluntary and Community Sector (VCS) will lose around 911million in public funding a year by Cumulatively, the sector stands to lose 2.8billion over the spending review period ( ). 4 Current estimates reckon that there will be a replacement investment of 500m 5 and this investment will be almost entirely loans.6 Dominated by these cuts, the sector is now driven by new rules of engagement largely dictated by how to find new markets and how to raise the loan capital necessary to reach those markets. The days of the local project set up to address the local problem are disappearing; there must now be growth and there must be scale. And no more, the first offer of grant to start up and more grant to keep going which was the route of many of those existing social enterprises that are today lauded as local/ national successes. The new rules seemingly advise that grant should be viewed as a thing of the past and loan finance is the order of the day. Positioned behind terms such as Investment Ready, Return on Investment and First Loss, this financial project appears to be establishing a top-down approach, with lending mechanisms drawn instinctively from other financial sectors, at odds with large swathes of the social enterprise movement. In this climate, the social enterprise sector is required to make a seismic shift to engage with financiers; the sector must learn and understand a new investment dialect. Social enterprise practitioners are being asked to consider finance above need. Additionally, there is a case for claiming that social financiers are prohibitively leveraging that need. To be clear, finance is important, very important. But, the way in which this finance is offered and whom it sets out to serve is of equal importance here. Especially if the Social Finance brand is to move beyond being just another SME lender and add anything of value to a marketplace, where tackling need is to remain the core priority for the social enterprise movement. Reading papers such as Investing for the Good of Society, 7 you get a feel for the insular horse trading that exists within the social finance market. Throughout this particular paper, finance is the explicit driver with need the nice to have rather than investors wanting to use their money for good with a return on their investment. This 4 Counting the Cuts, 2011 NCVO. 5 Investment Readiness in the UK, 2012 The Big Lottery. 6 Note: Figure excludes Lottery Funds. 7 Investing for the Good of Society, 2011 Nesta. 5

6 reads of a future where Investors seem to require intermediaries to coax and convince them to invest for good, which in itself determines a set of conditions that could fail to move the social aspect of the debate forward. The social enterprise sector therefore faces some significant challenges, none more so than how to attract the necessary finance under the right terms, thereby continuing to exist as a movement, in touch with its roots whilst facing up to growing need. Defining need To have real knowledge, one must understand the essence of things and not only their manifestations. - Daniel Barenboim Roll back a decade and the world was a very different place. Businesses were booming, public institutions had overflowing budgets, third sector organisations had access to lottery money and other funds and communities were recipients of such funds. Each of these sectors stood independently on their own feet, paying little or no regard to each other there was no need to. 8 One of the most pressing questions now facing a developed country like the UK is how to put our considerable resources to work in innovative ways to address major social challenges. From social exclusion to long term ill health, demographic change to climate change, these social challenges are increasing. However, the ability of our public services and civic society to respond is too often constrained by straitened public finances or by institutional inertia. 9 National evidence suggests that the biggest impacts from Government enforced cuts will be felt in the most disadvantaged local authorities. 10 In many inner cities and among certain communities of interest, the UK already has endemic need that is both fiscally and socially damaging. Looking ahead, we know that total welfare cuts could reach 28billion by The need of those most marginalized will, without doubt, continue to grow. For the purpose of this paper, two areas of national concern are selected below as relevant examples of need that show little evidence of diminishing. Both are significantly detrimental to the wealth (social and economic) of our communities. 8 Social Impact Metrics, Ta eed, O., Northampton Business School. 9 Investing for the Good of Society, Westlake S, Nesta. 10 Serving Deprived Communities in a Recession, Hastings A et al, 2012 JRF. 11 New Economic Foundation, Penny J., 2012 (untitled). 6

7 Prisons and Prisoners: Over 86,000 prisoners are housed in our prisons 12 As many as 75% of young offenders re-offend within 1 year 13 and; Re-offending costs 11billion annually 14 Young people: Over 1million young people are unemployed Young people now compete for every service/retail sector job. 16 The scarring effects of youth unemployment at its current levels will ratchet up further future costs of 2.9billion per year for the exchequer (equivalent to the entire annual budget for Jobcentre Plus) and 6.3billion per annum for the economy in lost output. 17 Our prisons are full. Our young people are facing the prospect of becoming a lost generation at considerable human and economic cost to the nation. Returning to the earlier definition of need the treatment of each area requires action that is essential and/or very important. In social planning terms, both areas are classic Wicked Problems and where such problems exist, it is recognized that linear solutions tend to fail. This is because the information needed to understand the problem in the first place depends on the individual/group s understanding of it. 18 In circumstances of high need, it is often the Government and its change agent intermediaries who set about understanding the problem, thereafter administering a set of impacts largely bound by a formulaic criteria featuring primary drivers of costand risk-aversion. The example of prisons/young people, indicate that these formulas achieve impact only around the points of security and containment, and remain largely binary 19 in their delivery. 12 Transitions, 2011 RSA. 13 Rehabilitation Green Paper, HM Government. 14, A Good Job Is Hard to Find, 16 The challenges for disadvantaged young people seeking work, 2012, Tunstall et al- Joseph Rowntree Foundation. 17 Youth Unemployment: The Crisis We Can t Afford ACEVO. 18 Dilemmas in a General Theory of Planning Rittel & Webber Proquest. 19 Note: Binary, Rehabilitation example: It is an either or approach if someone offends they go to jail, if they don t there is little or no help available. It does not cater for rehabilitation. There are current and growing instances of this approach to service provision. 7

8 Add into the equation the resource demands for rehabilitation and the creation of real jobs, what becomes starkly apparent from the figures is that new routes to change are required and these routes require innovation, investment and risk. Within the preceding two examples, so much money lies dormant or even dead as they remain treated as part of macro-based, negative internalized economies that are, in themselves, only industries of control. For service providers, there is big money to be made here just by maintaining the status quo. Take a step back to view the needs from a micro solution-focused approach and it becomes evident that there is an opportunity to break through this pejorative cycle of finance-sapping, societal decay. This is where impact investing is supposed to play a big part - 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. This is the marketplace of community based social enterprise and its targeted micro services; The very same marketplace with which social finance struggles to engage and has, thus far, struggled in its current form, to make any meaningful contribution towards. Micro Solutions and Market Failure Solutions for ex-offenders and unemployed young people are currently sought through macro structural programmes, such as the Work Programme, Apprenticeships or even the scandal-ridden Workfare. In these environments, as the above figures indicate, the correct change/improvement seems to be unobtainable at this time. So where will the change come from? One approach is to source and support solutions that are born out of implicit knowledge of the problems; those solutions that are micro in start-up/design and are more able to later gather traction to become more potent macro alternatives. These are the routes that social entrepreneurs and their community-based social enterprises strive to provide. Social entrepreneurship was manifested primarily at community level; As such, it was positioned as closer to the field of traditional community development than as originating innovation within the mainstream voluntary or public sectors. 20 It is known that most entrepreneurship involves the inheritance of routines and knowledge from past experience 21 and sometimes enterprises take their lead from those who have experienced the need first-hand. These individuals nearly always set about 20 Social Entrepreneurship in the UK: From Rhetoric to Reality? Grenier, P., 2009 Emerald. 21 Financing Social Enterprise Social Bricolage or Evolutionary Entrepreneurialism. Sunley, P. and Pinch, S Emerald. 8

9 challenging the conventional with their ideas and service interventions. These innovators rarely tend to be linear in their solutions but in finance terms they are generally marginalized as a reflexive action 22 as there is a start-up/ growth cost and they are invariably new to market. This points to a deficiency in risk capital and the very place social finance intermediaries talk up and walk away from in equal measure, possibly in relation to the earlier comment about market failure. Overcoming market failure is risky and expensive, requires research and development, innovation, and generally provides low returns on investment. 23 This is the very space that the social enterprise sector is looking to operate in, although the social finance market seems to be looking in the opposite direction! Instead, social financiers seem to be casting out their nets to capture dead certs, disaggregating need into impact and consciously choosing to show lending on its own balance sheet that is of minimal or no risk. This presents a displaced picture of finance versus need; a picture that is at odds with the assumptions that most social enterprise practitioners have about the purpose of social finance. This picture also appears to have the social financiers conceiving new products in a vacuum. Wherein they negotiate with each other and seemingly launch product after product that is counter-intuitive to the needs of the social enterprise marketplace. Social Finance buying not building Nearly 10 years ago the seminal paper Financing Social Enterprise, A Special Report was published, to start a discourse on how social enterprises could be funded. Many of the issues listed within the paper still exist today. At that time, the term social finance had no foothold whatsoever. Moving on to as little as five years ago, most who operated within the social enterprise sector still had no awareness whatsoever of this entity called social finance. Back then there was just talk of grants and the occasional reference to contracts and in finance terms to borrowing. At the time of writing, performing a Google search for the term Social Finance produces 877,000,000 results; More than the cumulative total result for searches on the UK s three main political parties. Further still, following the index contained within the Clearly So paper, The Ambitious Social Entrepreneur and 30 investors/intermediaries 24 are listed as being in the social finance space. As both a programme and a brand, Social Finance is starting to stick. Those who have entered the marketplace as traders, 22 Innovation Comes From the Edges, 2012, Hershaw 23 The Trouble With Impact Investing p3. Starr K Stanford Innovation 24 Note: The total omits finance from business angels and similar. The total also does not include trusts, foundations and the Big Lottery who should also be considered as trading in the social finance marketplace. 9

10 have quickly changed the intention of the market and the directional flow of the money. Just a few years ago, social enterprise access to finance was bottom-up from the needs of the sector. 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. 25 Nevertheless, Big Society Capital still claim that there are two compelling reasons for social organisations to use social investment: 1. Social investors have a superior understanding of social business models and; 2. They are able to take risks on innovations with primarily social, rather than financial, returns. 26 These may be compelling reasons to seek social investment, but if enterprises approach an intermediary from this school of top-down lending with anything less than a substantive proposition (asset or contract linked), or, should you be new to the market, then the actions of the intermediary will likely tell a different tale altogether. Navigating this world between activist and entrepreneur, or profit and non-profit, can be difficult especially in terms of finding funding. 27 Experienced social enterprise practitioners know that those social investment goals, that are independent of social enterprise goals, put an undue burden on the entrepreneur and actually lesson the ability to advance the social goal. 28 Conceptually, the worlds of Social Finance and Social Enterprise are supposed to be inextricably linked with missions, aims and vision all aligned. However, take the practice of what enterprise actually means; something that is difficult or entrepreneurial (in other words risky) and most lenders remove their option to lend. This means, that start-up for-profit social entrepreneurs have a hard time getting funded at all, whilst impact investors pile onto a very few enterprises that seem like safe bets. 29 This renders social financiers as no different to a traditional SME type lender, preferring to become short-term buyers in a lower impact market that is already positioned towards the top of the service pyramid. This method of financing generates conflict, as the market requires lenders who see themselves as builders making long-term investments for the future. Builders who take risks to support and strengthen the base of the pyramid, using their lending model to tackle deep-rooted social need. 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 25 Common Capital: Telling Tales of Social Investment, Common Capital, 26 The First Billion, 2012, Boston Consulting Group, Big Society Capital. 27 Social Entrepreneurship: Between Business and Activism, 2012, Brister, M. - CIPE. 28 The Social Enterprise Ecosystem, 2012, Wright S - Social Capital Markets, 29 The Trouble With Impact Investing Part3, 2012, Starr K, Stanford Innovation. 10

11 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. 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. 30 Right now, there is a chronic shortage of builder investors. The Role of Intermediaries and the deal flow Risk literacy and risk awareness are where we need to get to - not just risk v risk aversion. - POPSE The Government s stated objective is to grow the social investment market and make it easier for social entrepreneurs to access capital. 31 There are numerous routes by which finance flows into the systems of the intermediaries. One such route and a major player contributing to the UK s financial growth of these intermediaries is the Government itself, arranging and circulating the funds contained within Big Society Capital (BSC). Increasing numbers of intermediaries are now turning towards the opportunities BSC presents, positioning some or all of their products to suit. Thus, it would be fair to hope that the next few years may bring easier access to capital for social enterprises. There are, however, a number of blockages that will need to be removed or managed before this improvement becomes apparent. In recent years, many of the funders who have entered the burgeoning field of social entrepreneurship have come from a background of commercial finance, and naturally they favour definitions of finance focusing on the social ventures ability to repay investments. 32 Yet most social enterprises are not seeking conventional business loans or equity finance because they have instead adapted to working in resource poor environments. 33 As funders, intermediaries continue to trade as if these resource-poor environments do not apply; as though all social enterprises can be moulded to fit some sort of loan criteria or thereby accept that there may be no funds available to them. This hardline environment adds little to the finance/need conundrum and sees social finance intermediaries serve the marketplace as would a bank. It also smacks of joining with those regenerators past and present whose proposition is, We know this will be useful to you 34 furthering the done to you, done for you approach. 30 Building Is Not Buying, 2011, Overholser GM - The Non-Profit Finance Fund. 31 Growing the Social Investment Market (update), HM Government, 32 Define Social Entrepreneurs by their Impact, Not their Income Strategy. Forbes Financing Social Enterprise Social Bricolage or Evolutionary Entrepreneurship, 2012, Sunley P, Pinch S. Emerald. 34 Imagine Trying to Get a Loan Without a Financial Identity, 2012, Chhabra E, Stanford Social Review. 11

12 Intermediaries claim that being investment ready is a problem for the social enterprise sector, but exactly what it means to be investment ready will vary from one investee to another as, to a significant degree, this is determined by the eye of the beholder. 35 There is no discernable consistency to follow or uphold. Interestingly, even the cash/asset rich world of social housing finds the assessment process and terms of social investment punitive, preferring to put their business with traditional banks. 36 Conversely, intermediaries tend to want to see that social enterprises have been declined funding through their bank/s before any approach to the intermediary is made. The social enterprise will then be looking for a financier that understands the conditions of their previous decline and is able to step in with alternative and considerate methods of assessment, understanding the trading predicaments and enabling a deal to flow. Unfortunately, the type of lending that understands is in very short supply, although financiers would have you believe there are adequate products already available. The main range of financial products currently offered by UK intermediaries is depicted in Figure 1 below. FIGURE 1: Buyer-Builder Finance Template (Adapted from the Shared Impact Diagram) Investment Readiness in the UK Clearly So/Big Lottery. 36 Ignorance prevents housing providers from claiming social investment. Cook, B., 2012 The Guardian. 37 Next Generation Social Impact, 2012, Cheng P - Shared Impact. 12

13 The risk line, sitting across the centre of the table is symbolic of the tension at the heart of the social finance/social enterprise debate in the UK. It is accepted that whilst most of the lending administered by intermediaries occurs above the risk line (as buyers), what social enterprises actually require are those products listed below the risk line (builders). This position is divisive and causes both ideological and strategic tensions; on one side intermediaries, focusing on buying impact, try to protect their capital and their own business model, whilst on the other side, social enterprises find themselves prevented from accessing a lending environment that was supposedly conceived for them. Taking this thread further still, Figure 2 portrays how the separation between impact/value and need plays out from the perspectives of cost and operation; those funding products above the line, being cheaper to implement, process and are project orientated. Products below the line are those programmes financed to service need, are the more enterprising and, as such, are likely to cost more. FIGURE 2: Impact / Value & Need (Author s own diagram) 13

14 Assessment forms the greater part of the intermediary/social enterprise dynamic, with enterprises needing to perform to criteria that varies widely between lenders. Often the lender s assessment process is solely subjective according to their own investment panel, regardless of whether their officers have passed the application through duediligence or not. This leaves the enterprise exposed to months of work towards an application that can simply be rejected with little or no explanation for this refusal. One particular practitioner recently described this application/rejection process as little more than a beauty parade if your face fits and you are in the right place, you have a chance of the money. 38 This is unfortunately the experience of scores of good enterprises that are made to continually tread the fine line between trading on minimal resources vs demonstrating ambition. In this climate, it can be argued that regardless of the finance process being competitive and intermediary resources limited, as is often the claim, what would best serve all concerned would be to create financial arrangements based on building relationships. This would mean less of the existing approaches that see financiers gatekeeping, sometimes adopting adversarial positions which are akin to this is our money, come and try and get it. This negotiating space is wasteful for all concerned and fails to release the money with the necessary poise. Moreover, it sometimes reflects on intermediaries as being avaricious in their quest for returns, detached from the real programme of need and often self-serving. Grant is Good and Nearly Always Necessary Services for the poor become poor services and the bureaucracy treats the unemployed [or under-employed] with an insouciant incompetence it would never dare to inflict on the middle classes. 39 This describes in part what many community based social enterprises respond to, taking a lead in places of dysfunction, driving up the quality of service and cutting out bureaucracy, but they still need to break into the existing service delivery model - and to do so requires careful and considered investment. 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. For those smaller enterprises, income from tenders/contracts (that have real income attached), Payment by Results or the larger investment pots from social financiers, remain only on their wish list. 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. 38 Note: Taken from a discussion of social enterprise practitioners at a gathering in London October Children Go Hungry for Want of Tory Compassion, 2012, Cohen N., The Observer. 14

15 The grant-giving scene servicing the third/social enterprise sector has remained consistent for a decade or so. In the past, these sources have underpinned the start up and development of many of the most successful social enterprises. It is fair to say that some of these enterprises would not be trading today had grant not kick-started their business or even saved them at critical times during their evolution. In this cash strapped climate, these key sources of grant face their own challenges and, as 2013 approaches, one of these sources (local authorities) may no longer be relied upon as grant makers. The three main grant sources shape up as follows: - Local Authorities: Traditionally a big source of grant making, now depleted and unreliable as a source of grant. - Big Lottery: Still a large grant giver but looking to be part of new products that are loan-based in output. - Trusts and Foundations: Providers of grant both large and small but some are being encouraged to diversify into loan-based products. Facing up to a diminishing supply of income options, there are a number of other developments in the social enterprise income paradigm 1. Social entrepreneurship is being conceived as an inherent part of the normative shift that argues that non-profit organisations should take a more market-based approach to acquire funding Integral to this shift, social enterprises are finding [in the wider social finance space] that the role and impact of grants is being questioned. 3. Social enterprises are being forced to succumb to unrealistic expectations imposed upon their revenue models and above all else; 4. Impact investing is creating the illusion that traditional business models can solve big problems in places where poor governance and huge market failures are the rule 41 - This is just not the case. It is to be conceded that 100% grant-based funding is, and should be, a thing of the past. 100% grant is a falsehood that serves to undermine the credibility of the sector and is ultimately bad for business. Though, reducing grant in any deal to beyond an 80:20 loan/grant split or to offer just loan only, is equally detrimental. This too falls into the bad business category. Figure 3 is able to demonstrate how grant can make a difference in de-risking investment to the benefit of all stakeholders, offering stronger guarantees to the investor and greater operational surety to the investee. With investment models available and with some financiers already proving that a grant+loan approach can pay dividends, it is strange that many of the majority of UK s social financiers seem set 40 Social Entrepreneurship: Critique and the Radical Enactment of the Social. Day, P., Steyaert, C Emerald. 41 The Trouble with Impact Investing P2, Hattendorf, L Stanford Social Innovation. 15

16 on driving grant out of the market without any proven rationale or explanation as to why. Current indicators given later in this paper show that there is a much bigger requirement by the market for unsecured lending options, or finance into the system that is able to add patient capacity into service delivery. As part of this requirement for a significant change to the supply of funds, grant should play a pivotal role and be included as a pre-requisite to a social finance market, if the intention is to treat need. FIGURE 3: Risk-weighted returns (with / without Grant) Author s own diagram; Information taken from Lighting the Touchpaper (2012). Measuring impact: Who is measuring what and why? The barrier to change is not too little caring; It is too much complexity. - Bill Gates The world of non-profit organisations/social enterprise, philanthropy and now [social finance] has been preoccupied with two powerful mantras in recent years. Since the early 1990s, the refrain of accountability has been ascendant, with demands from funders, taxpayers and clients for social enterprises to be more transparent about their 16

17 fundraising, spending, how they are governed, and what they have achieved with the resources entrusted to them. 42 As both social investment/impact investment and impact measurement continue to grow in prominence, the challenge for their proponents is to come up with convincing, evidence-based explanations of what they're for and - most importantly - what positive social impact they deliver compared to other methods of investment and evaluation. 43 With the language of impact measurement and social metrics pervading social enterprise, what specifically does it all mean to a social enterprise looking for finance? In the absence of any consistent train of thought as to how measurement is viewed by financiers, how can a social enterprise bogged down by the day job, possibly know what all this measuring entails and it is therefore right to question whether any of it adds value? At the sharp end of looking for finance, social enterprises receive rejection letters from financiers, even though they remain convinced of producing a water-tight, fundable application. Financiers letters are typically bereft of any viable reason as to why their proposal has been given a no, citing only a lack of some sort of impact in their model. For the applicant this is a major source of anxiety as often a great deal of work has gone into presenting the case and on a closer inspection many of the refusals are heavily subjective according to a lack of knowledge and/or transparency of the prospective financier. 44 Next, take a look at how measurement has been rolled out in certain circumstances and there is a thread of inconsistency and disengagement from within the social finance sector itself. The recent publication of the Social Enterprise Investment Fund (SEIF) Evaluation tells an interesting story on a number of levels and is concise about how SEIF s push for SROI was adopted (or not) once the money was awarded. The evaluation notes the attitude of social enterprises towards measurement and their approach/comments included: - Organisations interest fizzled out, felt they were too small to use it, saw it as a luxury and did not use at all because of its complexity In effect, they ignored it. All this measurement activity is aptly described by one practitioner as impact buying. He goes on to state that, Funding those measurement investments makes solutions more expensive and less sustainable. 46 The cause to create a workable impact model is a noble one and by attempting to create one, a number of intermediaries at both the entry finance end and the exit 42 The Limits of Non-Profit Impact, 2010, Ebrahim A, Kasturi Rangan V - Harvard Business School. 43 Poised for Impact, 2012, Floyd D, Beanbags and Bullshit. 44 Note: The Author has a number of refusal letters/appeals that indicate this approach and can identify numerous social enterprises who have faced the same responses. 45 Social Enterprise Investment Fund Evaluation, 2012, Third Sector Research Centre. 46 Social Entrepreneurship & Social Innovation: Not the Same Thing, 2012, Wilcox D, CSR Wire. 17

18 outcome end 47 have tried to create metrics that can both assess and measure what has and will be achieved and the resulting work is of high quality. But take a look for interpretation, implementation and take-up and these models as well as others, are not being widely adopted because they are deemed too complex or too expensive to administer. In the social finance industry, where being cost effective is relative and often subjective according to the interests of the investor, there is again no industry standard to follow. One social financier can ask for a 20k upfront fee to establish the social enterprise as being Impact/investment ready. Then, consider the monitoring process itself; for example, using SROI, researchers have found that a small impact measurement project could cost a social enterprise between 12-15k, with larger ones rising to 40k. 48 Applying these figures to any assessment of cost-benefit and it s clear that only the larger organisations can afford to pay. Whilst in some isolated instances, this may well be money well spent, these processes being expensive see none of the cost met by the social financiers even though it is the financiers who are often the instigators for requesting the information in the first place! The introduction of social value into the competition/delivery environment may in the distant future settle in, making costly measurement processes worthwhile. In the meantime, it s worth considering how anti-competitive this process, of gathering the associated data for these metrics, actually is. Imagine for example, being a private sector company watching its social enterprise competitor become bogged down with measuring whilst they get on with earning/growth. You can almost feel their joy, incidentally, it s already happening in the marketplace. Income is the primary concern of social enterprise right now and every measurement requested should have a direct value attached to it. If financiers require measuring, it should be the financiers who carry out the initial work of developing an industry standard model. The financiers should also be able to place a value that the applicant can refer to and make sense of. To clarify, social enterprise measurement, at both entry and exit, requires a purpose and a competitive fit. 47 Note: Look for The Good Analyst, Investing for Good or SROI Toolkit, NEF. 48 The Ambitions and Challenges of SROI, 2010, Arvidson M et al, Third Sector Research Centre. 18

19 So Is Social Finance more about Finance than Need? Change Begets Change As Much As Repetition Reinforces Repetition. - Bill Drayton Innovation comes from the edges, so it comes as no surprise that innovators are found at the margins. 49 This is real social enterprise, identifying complete market failure and devising solutions to address it. Read most of the glossy criteria produced by social financiers advertising/presenting their products and the words innovation, risk and scale are regularly and positively promoted. Arrive at the point where these topics are discussed during an application assessment and the reverse becomes the norm often this contributes to the confused discourse that is current across the social finance/social enterprise product. In trying to get investment out and accepting that the purpose of social financiers is largely to fund social enterprises, then they are, by-and-large, enterprise support agencies; they remain amongst the most un-enterprising agencies around. 50 Also, whilst there are exceptions, the social investment sector as a whole, doesn t actually offer the things social enterprises require expertise, riskier money, and cheaper finance and it s not even clear that most investors and intermediaries have even got to the point of aspiring to do so. 51 Returning to the SEIF Evaluation, it offers another stark indicator of how difficult it is to get money from a funder, even when that money was intended for shaping a market and taking risks. Of all applicants into the fund, 73% were unsuccessful. 52 One example of the 73% was an organization being held in the due-diligence phase of their application to SEIF for 6 months, only for the panel to refuse the investment on the basis of the applicant not meeting the fund criteria. 53 The high percentage of refusals and the preceding example indicates something fundamentally wrong in the investor/investee relationship. Up until now, social lenders have been disinclined to invest heavily without security. The First Billion found that in 2012, 84% of social investment was secured lending, dominated by social banks whose responsibility to depositors forced them to take low risk positions. This compares with an estimate for the nature of true demand that suggests by 2015 an entirely upside-down 54 need for primarily unsecured forms of finance will be required. 55 (See Figure 4 overleaf) 49 Innovation Comes From the Edges, 2012, Hershaw E, Skoll World Forum. 50 A Pop Up Social Enterprise Think Tank, POPSE. 51 Social Capital Part1, 2012, Floyd D - Beanbags and Bullshit. 52 Social Enterprise Investment Fund Evaluation, 2012, Third Sector Research Centre. 53 Note: Author s own experience of the SEIF Fund. 54 Quote from Paul Halfpenny, Social Entrepreneur. 55 The First Billion, 2012, Boston Consulting Group, Big Society Capital. 19

20 The social finance market would benefit from a mechanism that all key stakeholders sign up to. For example, a product with agreed and adjoining targets to demonstrate that it wants, and can make, the transition from a market that predominately buys to one that builds. Looking at the measures that appear in Figure 4, the market seems at best, a work in progress. FIGURE 4: Supply vs Demand Adapted from The First Billion (2012).56 If social finance is to choose this stated direction, Figure 4 allows for another two years to pass for social financiers to comply and get their lending house in order. There is obviously a complexity in the financiers complying, none more so than take a look at current intermediaries existing product portfolio and what becomes starkly apparent is that they have considerable change to make in order to achieve any sort of transition/ compliance. Furthermore, it is not even clear that the financiers own business models will allow them to make the shift required so what happens next? What is becoming apparent is that rather than working harder or working in a different manner to shape the market to fit true social enterprise, the favoured adjustments are to encourage and possibly disjoint the social lending environment by inviting private sector into the social lending space. 56 The First Billion: A Forecast of Social Investment Demand, 2012, Brown A., Swersky A., BCG/BSC. 20

21 One idea has surfaced from the main player, The Big Society Capital. Their First Billion paper talks of there already being five forms of investment being open to businesses with only two of them available to social enterprises, the rest being finance available to the private sector. Yet, their idea advocates permitting private sector businesses in as long as they state their social impact intentions. Add to this idea the latest call for business ideas from UNLTD and their Big Venture Fund, who state: Match funding of between 25,000 and 100,000 is available from Big Venture Challenge if a co-investor is prepared to invest an equal of greater amount during the 12 month award period. The organisations can take on any legal form acceptable under UK law, they can be for profit or not for profit but they must be relentlessly focused on sustainable, scalable, disruptive social impact. 57 The UNLTD call may well be a genuine approach to encourage social enterprise to take on more commercial legal forms able to accommodate different types of investment this is needed. What both ideas have in common though, is the opening of doors to businesses that are, in the first instance from the private sector. This is in not social enterprise. So, here we have a social finance market that is not yet able to service its intended marketplace, but it s largest wholesaler - along with one of the key intermediaries to that marketplace - seemingly prepared to channel vital funds out of a sector into businesses with no previous experience of tackling need. It appears that those who are charged with creating this new financial supply chain are already choosing to rearrange how social enterprise is defined and, more importantly, how it is delivered. In this context, the aims of Figure 4: 2015 look even further away than ever. This paper is clear: There is a significant difference between adding impact and treating need. Whilst there can be arguments both in support of and against this stance, what is clear is that everything will be judged on results and its here we start to make credible distinctions. One observer makes a pertinent point: Investments that provide a big return don t count: the market will take care of those, and we don t need conferences to get people to put money in. 58 In addition, financiers with a narrow focus on the simple numbers (people advised, temporary jobs, volunteers created etc) will serve only to distort delivery, in favour of the low hanging fruit. 59 This will be no accurate measure of what is going on 57 Note: Taken from Big Venture Challenge Promotional - released November Trouble With Impact Investing p1, 2012, Starr K - Stanford Innovation. 59 Social Investment In Scotland, 2012, SENSCOT. 21

22 regarding deep-rooted need. Services that target impact will be nothing more than a sticking plaster over an increasingly deep wound. If this is what social finance thinks its role is, then, it is already fulfilling it. But if need is the focus, it has a considerable road yet to travel and this practitioner could find little evidence of a want or wherewithal to try and tackle need. The existing social finance conditions seem just too set and/or profitable, even detached, for the current array of intermediaries to want to change. It is fair for the social finance market to claim that the conditions they trade in, created by an era of austerity, are not those they can be blamed for. The market is an ever-changing landscape that everyone is adapting to. However, it is fair to raise a concern about how the social finance market is adapting and positioning its products to address the market it now serves and understands. Attend any gathering of social enterprise practitioners and it becomes quickly apparent that the majority of practitioners feel that the raft of products being offered do not place the appropriate emphasis on releasing money on the correct terms and into front line need. Social Financiers have complete responsibility for the terms upon which they receive funds into the marketplace. Additionally, in their negotiations, they need to safeguard against a future array of prohibitive terms that are currently passed on to social enterprises. Too often the complaint from social financiers is that they only administer terms they themselves have to adhere to. This will not be good enough going forward. If the marketplace can t afford to pay for the product, what is the point of the finance in the first place? Lower interest rates and longer repayment terms are the changes that matter. At a Big Society Capital sponsored seminar in November 2012, 60 their own representative acknowledged that the large and current gap is targeted working capital available to social enterprises for the purpose of taking risks. This, together with the removal of short-term repayment levies placed on loans, are probably the most important issues faced by community-based social enterprises searching for investment. There needs to be a number of social financiers championing these important changes and attempting to do so at a reasonable scale. Only when this sort of finance appears on the market, and financiers choose to take responsibility for this change at scale, can the social finance sector credibly say it is moving more towards supporting real social enterprise and societal need. 60 Note: Taken from Big Society Capital Seminar, Warrington 8 th November

23 Concluding thoughts: Adding to the earlier examples of young people and prisons, according to the Joseph Rowntree Foundation, there are now 6.5 million unemployed or under-employed people, all looking for work that does not exist. 61 Foodbanks are popping up all over our communities and we learn that children are stealing to eat. 62 In this eco-system, we tend to rely upon charities to pick up the pieces of failing communities and provide an extra safety net to those most vulnerable. Back in 2007, charities with incomes of less than 1m (per annum) showed an overall surplus of 325m for the financial year. 63 In 2011, those charities reported total combined deficits of 306m. It s clear from these figures how quickly and how deeply the economics of decline have eroded the safety net underpinning our society. As a consequence, the UK s deficit laden economy is having a swift and devastating effect on charities have closed since the last election 64 and according to new research, two out of five charities face imminent closure, with many set to disappear as early as 2013 unless things improve. 65 What is apparent is that need and its feeder - poverty, may well expand exponentially over the next couple of years. The rhetoric of the [coalitions] political campaign is misleading; subversively leading us to believe we must to choose between Government or business to provide a way out of this economic hole, as if those are the only two routes we have open to us. A large proportion of social financiers would also have us think the same but there are other routes available to us. One of the most interesting stories in social change today is how much creative problem-solving is emerging from citizens scattered far and wide. Citizens taking it upon themselves to fix things and who, in many cases, are outperforming traditional organizations or making systems work better. 66 These citizens [social entrepreneurs] are invariably risk takers and able to demonstrate improvement through innovation. Except what they do is often lost in translation when, as community based social entrepreneurs, they present their case for start-up/ development finance It is here that social financiers appear uninterested. 61 Against George Osborne's war on the poor and the vile stupidity of his 'workers vs shirkers' narrative, 2012, Jones. O. The Independent. 62 We re Dealing with a Crisis: Starving Children Stealing to Survive, 2012 The Mirror. 63 Small and medium-sized charities had 306m deficit in 2011, 2012, 64 Training Restaurant Hoxton Apprentice Seeks Buyer after Charities Collapse, 2012, Smithers R, The Guardian. 65 One out of six charities say they may have to close in 2013, 2012, Doward J The Guardian. 66 The Rise of the Social Entrepreneur, 2012, Bornstein D - NY Times. 23

24 Worth considering are views expressed by two experienced practitioners in the USA: 1: Everything that non-profits have be trying to fix for the past 30 years have become worse and it has more to do with the position of capital within the relationship between those who need help and those who can help. 67 2: Succeeding in business is very difficult. Succeeding in a business with an integrated social mission doubly so. Despite the occasional success story, social entrepreneurs and social financiers will have to get used to thinner profit margins that will, generally speaking have an inverse relationship to social impact. 68 These aforementioned issues capture, in essence, the nature of this paper and mirror the UK social finance predicament. Social enterprise capital is still positioned incorrectly and tackling need is difficult and is not to be confused with straight commercial approaches to providing public services, cheaper than the mainstream market can cater for. What is integral to achieving change is targeted investment capital that can build, is patient and realistic about the returns. The issues are complex and it is to be accepted that few solutions that meet the fundamental needs of the poor will get you your money back. 69 Although, the UK approach to social finance attempts to extract a return from every deal, systematically leveraging need, which, in the longer term, is untenable. Then there are the added risks from the social enterprise perspective. The climate of loan only, quick return capital is threatening for social entrepreneurs. It may force them to abandon lower-revenue strategies that could lead to higher impact and is dangerous because it locks out social entrepreneurs working on particularly tough problems with very early markets that are years or decades away from generating returns. 70 There are [and should be] moral objections to marketising social need. In the end, the question of markets is a question of how we want to live together. Do we want a society where everything is for sale, or are there certain moral and civic goods that markets don t honour money can t buy, 71 and that force large numbers of people outside of the scope of services that can truly help, moreover cure need. The fixation with the return on investment, with interest, within 5 years (or less) constrains the negotiations that take place between the enterprises and intermediaries. This approach is just not feasible and should not be deemed so when dealing with need. Although there are some intermediaries who will have you think that the quick returns route is the only option. This presents a clear rupture in the link 67 Lessons from SOCAP. 2012, Zweynerf A MYFI. 68 Five Predications for the Future of Social Entrepreneurship, 2012, Malinsky E - Forbes. 69 The Trouble with Impact Investing Part , Starr K., Stanford Innovation, 70 Define Social Entrepreneurs by Their Impact not Their Income Strategy, 71 Social Investment In Scotland, 2012, SENSCOT. 24

25 joining the investor to the investee the money into the system is proving too expensive and the returns are too short term. Then there are the business models of many good social enterprises deemed not investment ready because they just can t get the income in quick enough to cover the necessary repayments. This is one of the main reasons so many good bids are refused and why investments seem inaccessible. The problem of lending is compounded, as intermediaries are risk adverse. These intermediaries have no intention in ever treating need and are the classic low hanging fruit gatherers, who like nothing more than to finance services locked into a fatal embrace which assumes a delivery model akin to an already existing public sector service. 72 There are lots of these types of intermediaries about and this sort of approach could be aptly described as a race to the bottom, which could ultimately deliver no long-term gains for either social finance or the social enterprise movement. As David Floyd recently wrote in his frequently insightful and always contemporaneous Blog, Beanbags and Bullshit, If social investment is going to reshape the social enterprise world in its image, the process is unlikely to be pretty. It is important for social entrepreneurs/ social enterprises to stay resilient in the face of increasing and sometimes unforgiving circumstances, in which some of the current social financiers are playing their part. If the objective therefore, is for social enterprise services to target need at the bottom of the pyramid, then entrepreneurs need to think hard about the kind of capital they require, given their mission, stage and scale of their enterprise. 73 Faced with inevitable funder pressure, social enterprises need to further consider whether or not any compromise they make negotiating funds changes the integrity of their programme and be brave enough to say no if it does. Many social enterprises are finding this sort of decision difficult in the current climate. Community based social enterprise has shown itself to be able to rise to difficult challenges before, but that was at a time when there was a fair supply of investment available. Right now, this is not the case, as such many good enterprises will cease to exist and those who have strong business propositions will likely be overlooked in favour of those larger capital rich organisations that choose only to people traffic 74 and move need around, being more focused on guaranteeing investors their share of returns. 72 Fatal Embrace, 2012, Floyd D - Beanbags and Bullshit Blog. 73 The Trouble with Impact Investing P2, 2012, Hattendorf L - Stanford Innovation. 74 Note: In this context the term relates to large organisations creating swathes of training/volunteering placements without ever providing equal amounts of jobs moving the problem on rather than sourcing/creating a solution. 25

26 Using the words of Bob Dylan, You re gonna have to serve somebody and it is about who it serves that social finance has some decisions to make. Should social finance wholeheartedly point towards and serve those who are putting money into the social finance system (Government, Philanthropists etc)? Or does social finance primarily represent the needs of the social enterprise market and the terms the market requires to function and grow? From this viewpoint it feels like the former. Reintroducing an earlier point. The area of discussion propagated by social financiers claims that social enterprises fail to understand how difficult it is to get money into the system in the first place. This maybe true, however there is implicit understanding of how difficult it is to get the same money out into a trading space that is able to make a difference. It is incumbent upon all those who have an interest to challenge the blockages wherever they may appear. If these blockages are from the Government, big business or philanthropists asking too much in return for their money wanting it back too quickly - then social financiers must challenge and exact change at the start of the supply chain. If those blockages are social financiers wanting to enforce particular conditions that are simply impossible to sustain, then social enterprises must challenge, or even refuse, these terms. Social financiers should thus accept the challenge as positive and progressive. Unfortunately, these challenges are either sadly lacking in the current supply dialogue or, in the case of many social enterprises, are misunderstood (or worse, ignored) by social financiers at the point of challenge. This has to change and change quickly if the whole social finance programme is to become a credible force able to service the social enterprise market. Let s hope there is enough intelligence and humility to accommodate and negotiate the overall challenge these next few years will present. A Few Solutions... The Intermediary and the Social Enterprise: - Doing a Deal - It s a Relationship Stupid. One researcher said, If you are part of the problem, you cannot be part of the solution. 75 As this paper indicates, there are plenty of social enterprise case studies to draw upon of intermediaries keeping applicants in due diligence processes for months, only to refuse the finance. This approach is unnecessary and has a significant human, service and relationship cost which has to be covered, almost entirely, by the applicant. Investors claim that they have limited resources available and thus applications are made in a 75 Beyond the Big Society, 2012, The Royal Society for the Arts. 26

27 competitive environment, but should this be the case and is this the best way to do business? Each stakeholder in the investment chain has an interest in removing the adversarial competition that is often in-built to the application processes. There is a commonality in both parties being candid, cordial and informed about what is possible. Thereafter both parties can build relationships that are predicated on serving each other s interests and not just stipulating or passing funder tests. Protecting grants, tackling need: - It s About Market Failure First, Enterprise Comes Later on the 80:20 factor. Social enterprise rising out of previous market failure takes time to build and the enterprise element of delivery also takes a considerable amount of time, patience and luck to find strong income streams. This is exactly the time when there is a benefit to all parties that educated grant-giving should be seen as a positive tool towards facilitating success. A fair rule of thumb should be, if you want to be an intermediary in the social finance world your lending model should contain grant or routes to including it. Any discussion about grant is always contentious but experienced social enterprise practitioners who are in the need game, understand the importance and difference grant makes. The ratio of grant involved can differ to suit individual circumstances. As mentioned earlier in this paper, 100% is rightly a thing of the past so how about starting the bidding at an 80:20 split the 20 being the grant element. Agreeing this could really add value to the wider social finance/social enterprise relationship and would go some way to moving the sector forwards, towards outcome/need focused work. The Right Measurement Model: Could One Size Fit All? Whether at the point of application or later when programmes are in full swing, many a social enterprise gathering will sit and ponder, why are the models so complex? Who is actually benefiting from all the current models? One approach expressed a few years ago seems like a good place to start: 1. Does the project have measurable and proven impacts? [with no more than 5 areas to be considered] 2. Are the impacts cost-effective? 27

28 3. Will the impacts be sustained? 4. Can the model be scaled and replicated? 76 One final thought would be to leave the smaller operations, namely those that have a turnover of under 500k, alone to get on with running their business without interference impact measurement should be optional in this situation. Supporting Micro Social Enterprises to scale: - New is not better, it s often just new and big is often just simply big. A great deal of the funding sits trying to prime small new start-up enterprises or servicing the bigger deals hooked up to existing public sector contracts. At the newer end, the funds tend to be too small to matter and much of what is funded is simply new, with little guarantee that it will work and take hold. At the opposite end, hardly any of these bigger deals are enterprising, they are more akin with adopting the earlier description of the fatal embrace and consistent with moving the issues around, shaving off bits of cost here and there, trying to make sure this same contract is won again the next time around these are both buying markets. The market needs an intermediary strong enough to negotiate with Government/ Investors in terms of need and the longer-term project. Which amongst the existing intermediaries will stand up as the Builders of the market; able to inject the risk capital into those enterprises currently trading, has a track record and the micro solutions that can scale? There is a big gap in the market here and, if managed well, could be a part of the market that becomes, in the longer term, very productive in terms of servicing need and generating returns. Social Finance that Understands both Societal & Social Enterprise Need: - Setting and signing up to Targets: A Compact/Alliance for Social Financiers and Social Enterprises a place to challenge and change. In the Coalition Governments own publication, it describes social finance as a market lacking transparency, there is only a limited amount of information about the social investment market. This is a symptom of market dysfunction. 77 No self-regulation here then! With this market dysfunction already internally identified as a problem, why does there appear to be no improvement on the horizon? 76 Real Good, not Feel Good: A brief guide to high-impact philanthropy. (updated 2009) Fisher, MJ., Starr, K. 77 Growing the Social Investment Market, HM Government. 28

29 In the past, Compacts or Alliances have been set up to try and ensure compliance to change and improvement, so why have similar not yet been set up for social finance? For example, the creation of a Compact/Alliance could include: - Big Society Capital, - Some of those Social Financiers they invest into, - Social enterprise practitioner s chosen by the regional networks... This, or similar, would ensure there is a knowledgeable discourse shaping the delivery and future of social finance. To make any Compact/Alliance work, it will require legitimacy and resources. Resourced well, this compact/alliance could become the ideal place to target need, challenge issues, change the method of delivery and improve outcomes. After all, isn t this exactly what the Social Enterprise-Social Finance arrangement is all about?

30 About the Author Robbie Davison is the Director at Can Cook CIC and a Board Member of both Social Enterprise North West (SENW), Social Enterprise Network (SEN - Merseyside) and Open Culture. Robbie is a practitioner, with 24 years experience in developing and leading Social Enterprises. You can contact him via at Share your comments on our blog go to For more information about Can Cook, please 30


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