Could encouraging early stage entrepreneurs with ethical business ideas to go for growth deliver a generation of scalable social enterprises? Growing Business looks at how an investment readiness programme helped one such business raise £1.35m
Where’s the next generation of social businesses that can boast comparable scale to Fifteen and the Big Issue?” asks Jonathan Jenkins. The director of ventures at UnLtd, a charity that supports social entrepreneurs, is frustrated by the lack of scalable social enterprises in the UK, and believes that access to finance is one of the issues holding his sector back.

Willing investors are out there, but they’ve been having a hard time identifying (and defining) social businesses that are scalable and capable of successfully pitching for investment. And, while the availability of funding for social entrepreneurs is improving, Jenkins says there’s also a seed funding gap, which is why UnLtd is looking to match ambitious social entrepreneurs with early stage investors.

Jenkins is currently responsible for UnLtd Advantage, an investment-readiness programme backed by NESTA, Esmée Fairbairn, Deutsche Bank and Lovells, which he hopes will encourage and enable social enterprises to access the investment to grow. “The programme will act as a broker between businesses and investors, with the aim of making the flow of money more efficient,” he says.

UnLtd Advantage launched in September last year, promising to give social entrepreneurs a thorough commercial critique of their business model, an assessment of their social impact and how they’re measuring it, and a perspective on their management and corporate governance structures. Making social entrepreneurs think in a more commercial manner will be crucial to its success.

“First impressions count,” says Jenkins. “Enthusiasm combined with naivety, unrealistic budgets and forecasts, and holes in the business plan are not enough. These are sophisticated investors and they want credible numbers to work with.”

Feilden days

Jamie Feilden, a former history teacher who’s just raised £1.35m in debt finance to address the kind of social exclusion issues he witnessed while teaching in a Croydon school, was the first entrepreneur to experience the Advantage process. Selected for the Teach First scheme, which offers the UK’s top graduates the chance to work in challenging schools for two years after just six weeks’ intensive training, Feilden says he quickly “observed significant problems and really poor behaviour”. In contrast with his own rural upbringing, he says he was also struck by a lack of access to, and understanding of, the countryside.

On a whim, he took some lambs into the playground, and was amazed to see students with poor attendance turning up early, improvements in relationships and empathy, and fewer fights. When he went one step further and brought challenging students to work on his family’s farm in Bath, he saw the idea’s potential for social impact. Every year, around 8,600 young people are permanently excluded, and with the cost of a school exclusion estimated to be £300,000, the potential for local authorities to save money was clear. The students Feilden wanted to support were those identified as ‘at risk of exclusion’, a group also in serious danger of ending up in the criminal justice system.

As a winner of UnLtd’s Level2 competition, which gave development grants to entrepreneurs trying to bring about social change, Feilden had his salary paid while he developed the project. He went full time with Jamie’s Farm in September 2008, and launched as a charity last year. The latest statistics, based on 350 young people who visited the project, reveal that on their return to school, staff reported that 91% of the students were involved in fewer ‘behavioural incidents’, 83% of the ‘school refusers’ showed decreased truancy rates and 94% had an ‘increased motivation to learn’.

Feilden was charging £800 a child for a visit, with 75% of the cost met by schools and the majority of the gap filled by donations. The social impact was demonstrable, but Feilden wanted to grow, and to do this he needed larger premises. He spoke to Jenkins, telling him that he’d found an “incredible farm” and was looking to put a funding deal together. Impressed by a quickly established business model, measured social impact and Feilden’s sheer ambition, Jenkins saw a perfect first candidate for the new Advantage programme.

Ambitious for impact

Jo Hill, head of UnLtd Advantage, agreed, and says Feilden was almost the ideal entrepreneur to launch the programme with. “He’s very robust in measuring social impact and he’s ambitious,” she comments. “He’s great at sales, influencing people and getting supporters on board, so he’s a strong face of the business. It’s reassuring when someone has those skills.”

UnLtd’s job boiled down to making sure that Feilden’s proposition was realistic before introducing him to lenders, including getting the sales targets required to provide enough income to pay off the loan.

“Going through a grilling from Jonathan,” says Feilden, “who has a background in finance [and is a former OFEX chief executive], was useful. It brought a sense of realism to things, but didn’t make me give up hope. My initial hunch that it was a goer was right, but the plan needed more thought and a certain way of presenting it that would allow it to happen.”

He reduced the level of fundraising in the business plan, increasing the reliance on revenues generated from schools. He also adjusted his pricing and developed different packages and products. A sounding board while preparing to pitch for funding is undoubtedly useful, but Jenkins insists Advantage “isn’t just about polishing a business plan and doing a PowerPoint presentation”. Introductions are also crucial.

Focused plan

After two months of “stress testing” the financial model, Feilden was chomping at the bit for a promised formal introduction to ethical bank Triodos. To his frustration, UnLtd put the brakes on. “We believe we know our social investors well enough to introduce a company at the right time. Introductions that are either premature or too late are equally unattractive,” says Jenkins.

Hill agrees, adding: “We felt he needed to go through the business model in more detail. Taking on a loan like that is a big commitment. It was really to make sure he was comfortable and that he felt it was realistic before he walked into the meeting with the investor.”

Feilden puts his irritation at the delay down to “impatience” in retrospect, and the timing seemed to do the trick. “The business had been around for about a year and had some evidence that it had done what it had set out to do,” says David Lamb, relationship manager at Triodos. “It has a credible plan with realistic numbers.” Lamb also says the UnLtd “vetting” acted as a stamp of approval. “If UnLtd didn’t think it would fly, they wouldn’t pass it to us,” he says. “You’ve got that comfort and confidence that someone has independently verified what the numbers are showing.”

Lamb says Feilden’s focused plan had the advantage of showing a “good mix of management skills and financial breakdown”. “You often see a 100-page business plan with only two or three pages that would be of no interest to someone looking at it from a financial point of view,” he explains. “There’s a lot of repetition and not enough time spent finding out about the people they’re approaching and what they might be looking for.”

Triodos was the largest of a consortium of eight lenders that agreed to lend Jamie’s Farm  (which had a turnover of £200,000 last year) a total of £1.35m. And with planning permission for the new premises granted, Feilden is convinced his venture can scale effectively.
 
“This year, turnover will be £350,000, in 2011 it will be £500,000,” he says. “We’re looking to impact 20% more children every year for the next three years.” It will also begin to offer professional development to teachers and there are plans to open a venue in London to extend its reach in the capital. “We’re ambitious with numbers and with our overall social impact,” Feilden insists.

Hill is also sanguine, but cautions that the model still has to be proven on a larger scale for the recent investment to be seen as a lasting success. “It needs to really hone the model – the Jamie’s Farm formula – to be considered a beacon of good practice. There are always ways to scale if he can prove it works and show how much money can be saved by preventing people from being excluded,” she says. “He’s tested it with decent numbers, but it’s still small scale. Once a few thousand people have been through the programme, there’ll be a body of evidence to prove it works. Then he can show it to local authorities, work with others to roll it out, or he may want to franchise it.”

Hidden Advantage

Feilden is already setting the bar high for future beneficiaries of Advantage, but Jenkins and Hill are convinced there are plenty more ambitious entrepreneurs who could qualify for UnLtd support and wider funding without even realising they’re running social enterprises.
 
“I think there are a lot of hidden social entrepreneurs out there, driven by the desire to make a difference,” says Hill. “They might not fit the typical stereotype of a charity or community interest company, but their business creates enormous public benefit.”

As well as those businesses that already see themselves as part of the social enterprise community (the government defines a social enterprise as a company that reinvests its surplus to pursue social goals, does not pay a dividend to shareholders and has a sales revenue stream that is compromised of more than 25% of total revenues) Jenkins believes there are mainstream businesses that have core social values. The entrepreneurs behind these companies often don’t realise there’s support and finance available to them because of what they’re doing. These are the businesses UnLtd is targeting.
 
“Some people think that to be a real social enterprise, you have to be structured in a certain way, with a limit on dividends or an asset lock so you are restricted from making a personal profit,” says Hill. “I would argue that the important thing is to focus on social impact, not restrictive legal structures – that’s what gives this sector credibility.”

For the sector to grow and support genuinely scalable businesses, more people need to accept that profit can be a good thing for social businesses, she believes.
“If you’re having a social impact but making a profit, as long as you’re transparent about what you’re doing, it’s fantastic,” says Hill.

“It’s your customers who decide if you’re a social enterprise. Transparency is the key, so it’s clear to them how a business upholds, protects and measures the social purpose.”

If you’re interested in investing in social entrepreneurs or would like to apply for the investment readiness programme, visit www.unltd.org.uk/advantage