Jonathan Jenkins, director of ventures at UnLtd, a charity that supports social entrepreneurs, explains why he’s leading an investment-readiness scheme, which he hopes will transform social enterprise deal flow.
In these pages last year, Sir Ronald Cohen said: “Private enterprise will find a new area of opportunity in social investment, and great companies are going to be judged on their engagement with social initiatives.”
As the founder of European venture capital, he knows a thing or two about backing winners and anticipating new industries. Yet for all the massive growth in interest in social enterprise, cross-party political support and a host of financiers eager to back ethical businesses, when we talk about success stories in this sector, we’re still citing the Big Issue and Fifteen as the leading examples. These are great social enterprises, but where’s the next generation of social business that can boast comparable scale? Where’s a more recent social organisation that’s quickly gone from nothing to a significant size? There aren’t many out there that have grabbed mainstream attention as these guys have.
There’s a lot of debate around the varying definitions of social enterprise. I’d lose the will to live if we tried to find a unifying classification, but the fact is that certain commercial people have a gut reaction that a so-called ‘social’ business is probably one that doesn’t work on a commercial basis, and, therefore, needs bailing out. That’s certainly not the case, but it’s true to say that the market is crying out for sound commercial businesses that have a central degree of social mission. Frankly, we can’t access enough of them.
The numerous social investors that are out there – Cohen’s social and environmental investment company Bridges, for example, as well as Triodos, Venturesome and Big Issue Invest – say that money is available, but there’s a shortage of quality deal flow. Since there’s no dearth of interest in social entrepreneurship, the issue must partly be investment-readiness. I strongly believe that there are companies out there doing what we would classify as social enterprise, but they don’t realise that they fall squarely in the territory of some of the social investment that’s available.
As director of ventures at UnLtd, a charity that supports social entrepreneurs, it’s my mission to make these companies aware that, in these times when money is tight, there’s funding available to them specifically because of what they’re doing.
Social scale
Jonathan Bland, the outgoing chief executive of industry body the Social Enterprise Coalition, says we’re entering “a critical moment for social enterprise”. He adds that we need “deeper knowledge about different business models and investment mechanisms” and to “do more to encourage cooperation among different types of social enterprises and with private businesses”.
One of the issues is that there’s historically been a lot of grant support available. To move from this into a more commercial income-based investment form is a cultural change for many. The result is that a lot of the emerging social ventures are very localised. There are numerous successful small community-based structures that find it hard to scale up to the stage that would make it viable for external investors to get returns.
This sector needs to display a lot of innovation if it’s to access and grow a new generation of socially driven, for-profit businesses. At UnLtd, we’ll be playing our part through UnLtd Advantage, which I’m hoping to establish as the premier investment-readiness programme in the UK’s social enterprise sector. We’re actively seeking social entrepreneurs who have scalable, cash-generative businesses with good management in place, and are looking for at least £250,000 in non-grant (ie debt or equity) investment.
Regardless of whether an applicant is successful in getting investment, we’ll give entrepreneurs a thorough critique of their business model from a purely commercial point of view, as well as an assessment of their social impact and the techniques they’ve got in place for measuring this. We’ll also give them a view on their management set up, their corporate governance structure and everything else that you’d expect from a normal investment-readiness provider.
If the programme is successful, we’ll be helping social investors identify profitable opportunities more effectively, and building a more efficient capital market for the sector as a whole.
Reaching out
If we’re going to achieve our goals, this can’t just be about polishing a business plan and doing a PowerPoint presentation. That’s consultancy, not investment-readiness. We believe we know our social investors well enough to introduce a company to them at the right time (introductions that are premature or too late are equally unattractive). We bring our knowledge, understanding and connections with a growing band of social investors, and we’re looking at models that ensure we’re ‘success fee’ based. There are no upfront corporate finance charges, so our incentives are
aligned with those of the entrepreneurs that we’re looking to fund.
As well as finding social businesses with the potential for achieving significant scale and matching them with investors, one of my main aims for the programme is to make it stand alone as a viable financial business within itself. Investment-readiness for social enterprises needs to be able to function independently, as it does in the commercial world.
We’re talking with funding organisations that aren’t dissimilar from those that operate in the private sector, so I’m sure this doesn’t need to be a grant-sponsored model. A move away from grants across the sector as a whole will help deliver the right kind of social investment opportunities – those with the genuine returns from scalable businesses that Sir Ronald Cohen was talking about. Of course, this will take time. In the meantime, we’ve got the benefit of five years of funding from NESTA, Esmée Fairbairn, Deutsche Bank and Lovells, which gives us the opportunity to try different charging models and achieve a viable business.
As a former OFEX (now PLUS) chief executive, I’ve come into the social enterprise world from the outside. The single overwhelming thing that I’ve noticed is that we’re all fishing in the same pool of potential deal flow. Historically, as you would expect from an emerging market, it has been concentrating on organic growth. But we’re trying to reach out.
For people who think that social enterprise is ‘fluffy and tree hugging’, we’re trying to say there are investors out there looking for good businesses that have social missions, and there’s a whole raft of support and finance for these guys, which they may not be aware of.
There’s enough money and opportunities for investment out there, so now it’s just a case of going outside of the existing social enterprise world to those who don’t even know it exists.
For more information...
If you're interested in investing in social entrepreneurs or would like to apply for the invetsment-readiness programme, visit
www.unltd.org.uk/advantage
A bank for social enterprise?
Jonathan Jenkins takes a look at the potential effects of the proposed social investment bank, Social Finance, and considers what the future holds for social businesses
"The idea of a social investment bank, which plans to distribute funds from dormant bank accounts, is a great idea in principle, but we need to be cautious about its exact role. A recent government consultation revealed dramatically varying expectations of what the function of a bank for social enterprise should be. Clearly, it could provide an important new source of finance for the sector, but should it also promote sustainable investment, leverage outside capital for investment, or develop new financial products for the sector? What about a combination of these?
"At UnLtd, we’re very supportive of the proposed investment bank, as long as it doesn’t distort the existing marketplace. There’s already a nascent market. It has been growing for a number of years, and incudes some key players. A sudden drop of government money might distort it. But the bank does have to be different, risk-taking and of a significant size to be sustainable for a length of time. It also has to be independent of existing players, and a genuine wholesaler, not a retailer. There’s a role for a wholesale bank to underwrite social impact bonds. That would be 10 times more exciting than another social enterprise lender or private equity provider. There are very good guys out there doing this already, so why do we need more?
"Speaking generally, we need some leadership from government to make social investment more attractive. We need tax incentives (although in the current climate, I can’t see us getting them), and some work on legal structures would also be useful. The CIC (community interest company) model isn’t attractive to investors. There’s an asset lock and a dividend cap, which is 5% above the base rate, so the maximum equity return means the risk you take just isn’t worth it.
"You hear a lot about enterprise 2.0 and charity 2.0, but the real shift will come when consumers are only using value-driven enterprises. When they make a complete shift, there will be lasting structural change. That will only happen when the funding and legislative environment exists to allow scalable social enterprises to be influential."