All aboard the social bus

30 November 2007

Phil Hope, the Minister for the Third Sector, was on a bus tour recently trumpeting the benefits of social enterprise for the public good. But who's funding these organisations - and why?

Thursday 15th November was Social Enterprise Day in the UK, part of an Enterprise Week which saw over 5,000 events taking place around the country. The enthusiasm with which the Day was greeted both in the press and on the streets shows just how far social entrepreneurs - who work in an entrepreneurial manner, but for public or social good, rather than to make money - have come.

Once the refuge of do-gooders and philanthropists, the awareness - and most importantly the effects - of social enterprise today are felt everywhere. As Oli Barrett, head of business advisor Connected Capital, commented: 'If entrepreneurship is the new rock and roll, does that make social enterprise the new easy listening? Or perhaps it's more pop than ever?'

And so, exactly one year after the government's Action Plan for Social Enterprise was created, Social Enterprise Day featured a bus tour with the government minister and members of the Social Enterprise Coalition dispensing advice and chocolate (fair trade of course) to budding entrepreneurs looking for the best way to create projects and businesses that benefit society.

In another fixture, UnLtd handed out a £5,000 prize to the best 'Make Your Mark in 60 Seconds' social business idea - a Culture Cafe for disadvantaged people in Liverpool. The funding was significant because until recently financing hasn't always been easy to come by.

That's changing thanks to new kinds of investors and a whole range of government schemes. But one of the fundamental funding issues is the inherent contradiction for investors. If the primary driver for a social entrepreneur is their impact on society, not the profitability of their initiative, does that make profit something to shun - or at least invest back in the business? And if so, what kind of investment opportunity can the company provide?

Profits not problems

Nick Temple is network director of The School for Social Entrepreneurs (SSE), which provides a year-long practical course for budding entrepreneurs from six locations around the UK. Set up in 1997 by the philanthropist Lord Young, the School has put more than 300 students on the road to social good and project success - its research shows fellows are one and half times more likely to be operational after eight years than the average small business.

Temple denies profit is a problem for social enterprise. 'We don't think profit is a dirty word. Not at all. Whatever legal status you have, whether you are a charity, a co-operative or a company limited by shares, you still need to manage your finances. If you're a charity, a profit is simply called a surplus and it's put in the reserves. It's what you do with the profit that might be different, such as investing it back in the business or taking a lower dividend.'

Different legal structures can certainly help ease concerns over profits. Sue Riddlestone is managing director of Bioregional Minimills, winner of the best invention category at the Observer's Ethical Awards and a g2i company. Minimills was spun out of the Bioregional Development group, a not-for-profit incubator for sustainability companies where Riddlestone is also a director. Five such commercial ventures have so far been created.

Riddlestone explains why The Bioregional Development Group is a not-for-profit: 'If you want to carry out research and you're a charity then there are many more grants, supports and benefits to developing things in that way. We also wanted to be able to carry out education and there's definitely a role for a charity to research, develop and come up with solutions in the sustainability area. Then the idea is to see them float off as businesses or be taken on by other companies.'

In fact, Temple points out there are many different models for how a social enterprise idea is taken forward - from small concerns with a local impact to Fair Trade companies that have a product to sell nationally or service providers that can contract out their ethical services to other companies. 'There's a whole range of structural options. And they operate at a different scale, so the majority are small but some might be larger. We've even seen companies set up as limited companies that covenant their profits back to a charity.'

Commercial concerns

Temple's SSE tends to help companies at start-up phase, and most get off the ground with grants or friends and family funding. But those social businesses that need further funding at a later stage sometimes suffer from limited commercial awareness and their different priorities. 'I would say at the moment social entrepreneurs are limited commercially,' concedes Temple, 'because they are primarily looking to solve a social problem and they are probably not from a traditional business background. So they do need support and help in terms of getting investment ready.'

That was certainly the case for Riddlestone, who recently raised £400,000 from a business angel after going through the g2i investment readiness programme. 'I've spent a lot of time raising grants, but it's actually quite hard to raise [investment finance]. So it's been an education for me, understanding what people want, what they are looking for, the whole difference between business angels, venture capital firms and government backed schemes. I feel I've learnt a lot.'

Investors are also coming round to a new way of thinking about social investment, with the emphasis on 'blended returns' that take in both financial and social return on investment. Venture philanthropy institutions like Venturesome and The Impetus Trust are pioneering different models for what they look for in a business - and of course there are still wealthy individuals who want to feel they're giving something back with their investment. 'There's more and more work on measuring the social impact of investments,' says Temple. 'For example, we've discovered that on average every SSE fellow creates three jobs, so you can monetise our social impact based on the investment we put in and the social return.'

Increasingly too, experiences are being shared. Traditional investors are learning from the social enterprise community about corporate social responsibility, while their social colleagues are better understanding sound investment principles. If the wild enthusiasm from the public and student community can be aligned more closely with the sources of finance, this is likely to become an increasingly important sector of British enterprise.

By David Longworth, Webster Buchanan Research