Angels: social enterprise needs you

Finding funding can be one of the key catalysts for growth for any business. But social enterprises face particular challenges. We need angels, says Jonathan Jenkins

Jonathan Jenkins

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The social investment market is proving to be a particularly dynamic place in which to operate. Its current stage of evolution is coinciding with a backdrop of state austerity, economic fragility and (hopefully) the pinnacle of social need.

Unlike the traditional financial markets, social investment has not been left freely to mature in response to market forces. Instead, with good intentions, the market has been pumped full of steroids, a few cans of Red Bull and a dash of Pro Plus, with the intention of finding a short-term silver bullet to the nation’s woes.

The missing middle

The result, not surprisingly, is a distorted marketplace, which is extremely advanced in some respects (such as the work of the Sir Ronald Cohen-backed Social Finance on social impact bonds and unclaimed assets to seed a Big Society Bank), but in others it is well behind the curve, in particular the “missing middle”.

Example 1: if your social venture is looking for some initial, most likely grant, funding up to £50,000 or so, there are a fair number of opportunities open to you. UnLtd, for example, funds around 1,200 social entrepreneurs per year in the £2,000-£20,000 range. When other funders are taken into consideration, there must easily be 1,500 start-up/early stage social ventures receiving funding on an annual basis.

Example 2: if you are looking for scalable debt/equity investment of £250,000 or above, there are funds available (eg Bridges Ventures, Big Issues Invest). The total number of deals at this level, I would suggest, is fewer than half a dozen per year. There is no lack of applicants for these funds, but there is a clear lack of investment-ready, credible applications. As Sarah McGeehan at Young Foundation says: “There has been an exciting surge in the availability of growth funding for scalable, ambitious social enterprises. But for many businesses, the path to scale and growth is less clear.”

The market goes from funding more than 1,500 start-ups to supporting fewer than six at scale. While you could try to argue that the social enterprise sector gives light of day to too many start-ups, this is tempered by the stats that more than 235,000 people want to start a social venture in any given year (GEM 2008). Therefore, less than 1% of those motivated to start a social venture actually do so.

If anything, should Big Society get grass roots traction, this market imbalance may only get worse.

Elephant in the room

We have a social investment marketplace where it is relatively easy to start up a social venture, and possible to grow it to scale once you’ve achieved an investable level of maturity. The elephant in the room is the rather obvious and sizeable gap in equity and venture philanthropy funding between around £50,000 and £250,000 – the well documented “missing middle”.

So what are the key problems preventing investment in this space?

Cost: institutional money (the formal social investment funds) can’t operate at this level due to the pure economics of transaction costs.

Pricing: on many of these transactions, if you commercially price the risk, the numbers simply don’t work for equity investment. Even if the transaction costs were lowered, standard pricing models wouldn’t work. Cashflow often is not stable enough for debt investment.

Confusion: over financial versus social return models, blended models and the language employed by the social enterprise sector.

Unrealistic expectations about financial returns: the number of opportunities for a genuine social and commercial rate financial return is limited.

Exit: very few social ventures would agree to pre-determined exits (trade sale, flotation) for equity investors.

Enter the angels

These limitations are not about to change; these are structural issues with the marketplace. So rather than try to shoe-horn current opportunities into formal traditional methodology, we need something else. Private money needs to come into this space. This can involve individual pricing of risk and expected return, personalised due diligence and a more open attitude towards exit strategy. We need angels. The sector is crying out for them. Fortunately, nature abhors a vacuum. A number of pioneers have stepped forward:

Coutts Bank has launched its Social Enterprise Advisory service connecting its clients with mentoring, and possibly investing, opportunities. Andrew Haigh, head of Coutts’ Entrepreneurs Client Group, says: “Social enterprise resonates well with our entrepreneurial client base. Our clients have had their business success, and social enterprise is a fantastic opportunity for them to use their skills and experience in a philanthropic way. I think we will see successful entrepreneurs become less interested in simply writing out cheques to charities, rather we will see more supporting social enterprises to achieve scale, be it through mentoring or business angel funding.”

VCap has launched an incubator and seed fund to make equity investments of £50,000 to £150,000 in social businesses. Stephen Rockman, founder of Vcap, says: “We’re bridging one part of this funding gap by providing hands-on equity investment to social entrepreneurs building scalable businesses. Our investment model is designed to generate a commercial return without compromising social impact.”

Resonance and ClearlySo are both already running early-stage social investment angel networks.

British Venture Capital Association already has a social enterprise committee in place, in response to its membership.

Venturesome, part of the Charities Aid Foundation, has been one of the leading practitioners of the UK social investment market, doing more than 250 deals since 2002 by using a range of non-grant financial mechanisms, such as unsecured debt, underwriting, quasi-equity and equity.