Yearly Archives: 2012

Angel Investors, Government Policy, High Impact Businesses, Impact Investing

Social Enterprise (SE) Tax Incentives must benefit SEs, Not the Rich

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In 2010, I wrote a piece in this magazine arguing against tax incentives for the social enterprise (SE) sector, saying they were ineffective, complex and unfair—I have also added elsewhere that they are distortive.  Such advice seems to be falling on deaf ears.  Our sector, and impact investment generally, is very much in favour, and this Government is committed to further encouragement through fiscal incentives.

Despite the fact that ClearlySo may be a beneficiary of state largesse I remain opposed to it. Hyping the sector further could actually delay its necessary path to sustainability. Supporting a sector already predicted to grow at 35%+ per annum by BCG and others is unnecessary, wasteful and likely to have unintended consequences.

In the likely event that my advice is ignored, I urge the Government to target the incentives on social entrepreneurs rather than impact investors, for three reasons. First, it is social enterprise, and the positive social outcomes they generate that we seek to encourage, rather than impact investment, which is a means to an end. Government incentives should be targeted at intended beneficiaries of any programme, and the best chance of doing this is to directly incentivise SEs.

One problem in adopting my approach is that there is no single category of social enterprise. However, CICs, Industrial and Provident Societies and co-operatives could be suitable beneficiaries. Another approach could be to reward the desired social impact itself. In this way many social businesses, structured as limited companies (not as CICs, etc.), could also benefit from the scheme.  I appreciate this approach involves complexities but they are not insurmountable. Government would identify those outcomes it seeks to support and the credits could reflect anticipated savings in public services budgets commensurate with the outcome achieved. This is similar in concept to “payment by results” structures, but might cost less to implement.

The second attractive aspect of this proposal is that, if done cleverly, it could enable capital markets to amplify the impact of such subsidies/credits. Imagine if Government announced credits to reward the generation of certain easily identifiable social benefits and made it clear that more would be forthcoming.  The capital markets would favour social businesses and enterprises which generate these social impacts and incorporate estimates about future policy changes, thereby lowering the cost of capital to many SEs. Even today, capital markets value social impact, for example, in anticipating punitive charges on polluters. My approach would use the capital markets to work also when positive externalities are generated.

The third argument against incentives for impact investment is that they would only benefit the rich, as they alone have meaningful savings to benefit from fiscal incentives. A recent report by Lloyds Bank reported that 30% of UK households have no savings and a further 19% have savings of under £1,500. That’s half the population unable to benefit from these incentives.

I am as keen as any practitioner to help ensure the social sector grows faster, but we need to be careful for what we wish for, aware of practical issues around implementation and mindful that this is not the time to be creating loopholes for the well-off.

First Published in Third Sector in November 2012.

High Impact Businesses, Impact Investing, Institutional Investors, Social Economy

Large corporates and social enterprise: one step forward two steps backwards

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Recently my ClearlySo colleague Jonny Kates tweeted about a blog I had posted last August about corporate capital and its potential to play a vital role in the funding of social enterprises. I was genuinely excited about this possible influx and how it could amplify the efforts of Government, Big Society Capital, social business angels and financial institutions. Not only do corporations have abundant financial resources but there is much more they had to offer the nascent social economy.

Considerable progress has been made as multinationals have offered sponsorship, mentoring and free or low-cost resources. ClearlySo has itself been a beneficiary of such corporate generosity and I would mention the names of these firms specifically would it not seem exceedingly cheesy and self-serving. Nevertheless I cannot help but feel that, on balance, the progress has been disappointing, particularly amongst those leading corporations which seemed most ready, willing and able to engage.

The best-known setback, which was nearly a disaster, involved the US software services group Salesforce, which sought to trademark the term “social enterprise”. Eventually, to its credit, Salesforce relented, but not before causing considerable confusion and ill-will.  This whole episode, which ClearlySo covered extensively on its blog, was especially surprising because Salesforce had previously seemed so willing to positively connect with the sector.

The main disappointment, however, stems from the simple lack of investment capital or substantial commercial flows into the sector from large corporations. I struggle to think of any notable developments along these lines and feel a great opportunity is being missed.  From this criticism, I exclude financial institutions, where solid progress is being made.  (I invite readers to challenge me with examples of significant flows of corporate capital–in fact I would love to be proven wrong).

Large corporations repeatedly state intentions to engage with the social enterprise sector, but despite the good intentions, they generally lead nowhere and unfortunately absorb much of the meagre resources of social enterprises which could be utilised more productively elsewhere. I suspect that, on balance, large corporations have been a net user of, rather than a contributor to, the resource base of the social enterprise sector.

It is not all the fault of these multinationals. As we warned last August, corporations move slowly and deliberately. But our sector has failed to be sufficiently creative and resourceful in capitalising on the good intentions of the many employees of the world’s largest companies. Somehow we have been unable to identify a sufficiently critical client need or, as I have pointed out in a recent ClearlySo blog post, charge appropriately for the services we do render.

Perhaps this will just take time–more time than most of us anticipated. But it is time for corporates to step up to the plate!

First Published in Third Sector in September 2012.

3D Investing, Impact Investing, Social Economy

The senseless and destructive aversion to investing in successful social enterprises

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In a recent piece written for Social Edge, I commented on our destructive obsession with new and cool social enterprises.  Preferring these to the more established, but perhaps less exciting, existing businesses, makes no sense.  New ideas are like new love—marvellous as a fantasy, but requiring the test of time to assess durability.  Yet the social investment sector has a new/cool bias, which we have encountered regularly.

Perhaps an even greater threat to the eventual success of the sector is the hesitancy to back social enterprises which have achieved scale and profitability.  In a recent case, we at ClearlySo were asked to raise capital for a successful social enterprise.  It (let’s call it XYZ) is a sector leader and has the capacity to access conventional finance.  It’s commitment to growing the sector and other factors have led it to prefer to raise funding in the social investment space.  Yet some investors, especially foundations, seem reluctant because XYZ “could raise conventional finance”.  Their implied preference, therefore, is to conserve capital for those who lack this conventional market access.

On the surface this seems reasonable.  By concentrating social investment on those firms which cannot access conventional markets, foundations ensure a flow to new firms which are not conventionally backable.  Their scarce capital available for social investment is thus allocated to those firms which have no other choice.

But what are the implications of this?  It means that foundations will, by definition, back the less successful ventures and will likely suffer worse investment performance as a result (furthering the over-investment in the new and cool referred to above).  I contend that this will also put them off committing greater resources to social investment as their Trustees will have relatively depressing track records to assess when considering whether or not to enlarge their commitments.  It is no wonder, therefore, that with the notable but single exception of Panahpur, there is no UK foundation wholly committed to social investment.

What social investment does take place at UK foundations is done, for the most part, with specifically dedicated smaller pools run away from their main funds.  Esmee Fairbairn and Lankelly Chase have been leaders in this regard.  But the mainstream endowment funds of charitable foundations are still almost exclusively invested in conventional financial instruments.  Thus they are unlikely to invest in XYZ, because it is a new type of company, even though it might offer the same returns as conventional financial assets AND helps fulfil the charitable objects of the foundation.

Where should successful social enterprises like XYZ go for funding?  There is interest amongst conventional investors, but what are the long term consequences of forcing successful social enterprises out of the social investment market in this way?  Do we not run the risk that their objectives migrate in a non-social direction as they are jettisoned out of the social investment sector?

Would we not be better off to keep them in the sector and use these higher quality investment opportunities to attract larger pools of conventional capital?  In this way we could bring more money into the social investment sector, which puts a priority on social impact.  Surely this is preferable to casting out those we wish to establish as benchmarks, or credentials for our emergent sector.

First Published in Third Sector in June 2016.

Angel Investors, High Impact Businesses, Social Economy, Social Entrepreneurship

Our Destructive Obsession with New/Cool Social Enterprises

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Recently ClearlySo was asked to raise capital for a business we know well.  It has been going for over a decade, is well-established in its marketplace, and sells products people like at affordable prices which generate a satisfactory gross margin.  The firm has over £1 million in sales, operates at breakeven and achieves considerable social impact; but the road to get there has been long and difficult.  The lessons have come painfully, yet the CEO has matured greatly, he has built a strong Board with an effective Chairman, and with a bit more capital they could thrive.  Sadly, investor’s initial reactions are somewhat unenthusiastic—I won’t say too due to client confidentiality.

At the same time other newer companies we help easily grab investors’ attention—though they lack many of the key ingredients to success.  A charismatic founder might be in place, but there is no battle-tested team or Board.  A breath-taking PowerPoint presentation has been assembled, but the route to market is unclear, and the business plan, though replete with colourful graphics is bereft of anything which resembles hard evidence.  There is sometimes no product or even a prototype—just the best of intentions and glorious aspirations.

The social enterprise sector must allow for innovation—for where else can the experimentation take place in solving social problems, but things are way out of balance.  In my judgement investors and governments are obsessively fascinated with cool early stage ideas.  We can dream together with the entrepreneur about what might be but forget that things almost never work out as well as planned.

This is all charming in a way, like the romantic notions of a new love, but it has damaging consequences.  Entrepreneurs and their teams have slaved away, experience is gained, customers won, networks established—but as targets are inevitably missed, and reality bumps romantic illusions aside, investor fatigue sets in, funding is challenging to secure and the enterprise collapses.  From a social impact standpoint it is a disaster.  A ten year old business has done the hardest thing—survived—but it never achieves scale, as the dollars move on to the next new thing.  From the financial perspective the unsuccessful investment sours investors on this and potentially other deals.

I think we need to focus more on teams and enterprises that have withstood the test of time and remember that most new businesses fail.  The best indicator of future longevity is years of survival—especially crisis filled years like these.  Maybe we also need:

  • A fund which only invests in firms after year 3 or 5?
  • Mentoring programmes which have a similar focus?
  • A ban on start-up investment in the social enterprise sector (that is not a serious proposal, just checking if you are still reading)
  • Government to shift investment to social enterprises which surpass a certain size or longevity threshold?

I also think we have to stop being so impressed with what sounds cool.  It’s great for cocktail parties but will not help us get the sector to scale.

First published in The Social Edge in May 2012

High Impact Businesses, Impact Investing, Innovation, Social Economy

Crowdfunding gaining traction in the UK and USA

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In the USA, the “Jumpstart Our Business Start-ups (JOBS)” Bill was passed in the Congress, the acronym of which cleverly links liberalisation of capital markets with boosting jobs growth.  Significantly the act is designed to give a boost to IPO activity, the issue of new shares onto the stock market, which has been a traditional source of funding for young companies.  This market has been dormant of late and the JOBS Act is designed to make this easier by releasing young companies from some of the many regulatory burdens in place in the USA—thereby freeing them to raise equity capital more easily.  The theory is that with more capital will lead to more business activity and jobs will follow.  With banks also under pressure to boost capital ratios, and the dampening effect this has had on lending, equity funding can be an important alternative to support economic activity.  Online crowdfunding platforms are expected to make substantial use of this newer, freer regime.

In the UK, crowdfunding has also been growing in popularity.  According to the BBC, Exeter-based Crowdcube has raised over £2.5m to fund UK businesses – including itself. The link to jobs has also been noted.  The company says that these investments have led to the creation of 320 jobs.  In addition to job creation, crowdfunding has played an important role in filling some of the gaps created by the drastic reductions in UK public spending.  One example of this is a recent endeavour by Spacehive, the new community development crowdfunding platform, which helped a community centre in Wales secure desperately needed top-up funding to begin construction on a community centre in Glyncoch.  Had they been unable to use Spacehive for the final £30-40k, a project which took years to design, develop and fund-raise for, would have been abandoned (the deadline for full funding was 31 March, 2012).  Spacehive helped Glyncoch raise the needed final sums, with the assistance of well-followed Tweeters such as Stephen Frye.

Crowdcube and Spacehive are not alone.  There are many others in development, and a few more which already exist like Buzzbnk, which helps connects people and projects online.  One of the newer crowdfunding platforms, supporters are also able to use the site to offer non-financial forms of assistance to the causes they support.  Of course, the dominant “granddaddy” site of this type is Justgiving, which recently sent customers an announcement that over £1 billion has been raised via the website for UK charities.  Justgiving expanded early into the US market and is now extending its reach into other geographies.

The bottom line is that crowdfunding is a hot new area, and that the UK, with its relatively liberal legal and regulatory structure and many creative and successful crowdfunding endeavours is a leader in this area.  If you have not explored how to use crowdfunding to achieve your aims, it’s time to start!

First Published in Third Sector in April 2012.

High Impact Businesses, Social Economy

A new fundraising strategy: Winning social enterprise competitions

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Recently I had the privilege to attend as a judge of the Global Social Venture Competition (GSVC).  Each March for the last ten years a semi-finals is held at the London Business School.  It feels like I have been a judge forever—and the competition and the competitors get better and better each year.

During the competition I overheard one judge say to another, about a particular competitor, “Oh yeah, XYZ has made a living out of winning social enterprise competitions”. It was said as a gentle putdown, though it felt to me like a rather commendable and positive strategy. The firm involved did not require substantial amounts of capital and “picking up” the odd £10,000-£20,000 or so seemed to keep things ticking over.

This approach will not satisfy the requirements of most social enterprises, but as an element of a fundraising strategy it seems to offer substantial benefits. First, all the firms competing on the day, and in other competitions, have the opportunity to hear the other presentations as well as to receive valuable feedback. Second, all the competitors gain access to a varied group of experts–who in turn provide valuable resources directly and make connections with others who may add value.  Third, there are normally prizes awarded. In the case of the GSVC, there will be $50,000 worth of awards to the winners.

In my view, such competitions also serve a very useful purpose in that they help social entrepreneurs to practice and refine their pitches in a relatively safe environment. The GSVC is generally focused on the business plans of students who have recently received their business degrees. Otherwise I would consider making such events mandatory for all social businesses and enterprises ClearlySo eventually introduces to angel investors. Such competitions are just a fantastic way to get practice.

And who was the winner this year? An excellent and interesting business from Lithuania called Sveikas Vaikas (the English name is “InBelly”—do not ask me if it means the same thing!) which seeks to do for additive free food what the Soil Association and the Fair Trade Foundation have done for organic food and fairly traded goods, respectively. The entrepreneur who pitched at the event, called Kristina Saudargaite, was simply outstanding.

First Published in Third Sector in March 2015.

3D Investing, Impact Investing, Institutional Investors, Social Economy

False Economy: A Depressing Triple Entendre

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Defenders of unfettered free market capitalism, as it has been practiced for the past three decades, are diminishing in number.  The model has been proven to be utterly unsustainable–a false economy.

A growing number of observers believe something new is emerging–a more social economy, where social, ethical, environmental and financial objectives are balanced.  This is no longer just the belief of ardent zealots, but the mainstream sees this as a viable concept for economic organisation.

Governments across the political spectrum are embracing social enterprise, and, encouragingly, the corporate sector is as well. We at ClearlySo work with over 100 corporations and dozens of governmental counter-parties with an expressed interest in helping the social enterprise and investment sector to flourish. Their intentions are noble and the folks involved tend to be sincere–but in our judgement the good work is frequently offset by two categories of flawed approaches.

One is to bury the sector in grants.  Free stuff is great but it creates a false economy, giving the impression of a sector heading towards or already achieving sustainability (because of all the buzz and activity).  In this way we begin to kid ourselves–were the grants to cease the sector would simply evaporate, with few exceptions.

The other approach is to seek to ‘work with’ the sector on a commercial basis.  This approach would appear to have intellectual merit as corporations and government agents buy services from the sector and arguably are bringing it into the normal market economy.  However, the sector’s immaturity and the absence of normal market disciplines caused by grant-dependency, often causes social enterprises desperate for work to offer products and services at low prices, often below cost.

This situation is helpful for cash-strapped governments and profit-oriented mainstream firms.  They take advantage of competition in the sector to force prices to an unsustainable level.  “Socent XYZ will do it for free”, those social enterprises trying to become sustainable are told, or “this is the most we can pay…..due to budgets, etc.”

All this is also a false economy, especially for governments who subsidise a sector through one set of actions and then under-pay for services with another.  Far better to pay a fair price, which they certainly do with large private sector firms selling to the public sector.  Corporations looking for (and are getting!!) bargains from the social enterprise sector would appear to be indirect beneficiaries of governmental grants to the sector, as well as the below market wages of their dedicated staff and the free work of their volunteers.

  • Can this possibly be right?
  • Do many of you out there in the social enterprise world experience such behaviour?
  • Is there a justification for corporations and governments to pay a premium to social entrepreneurs for the products and services they offer, or does this continue to falsify the social economy?

First published in The Social Edge in March 2012

High Impact Businesses, Impact Investing, Innovation

Health service can be the “big opportunity” for social investment

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Social investment has appeared poised for rapid expansion for some time now, but if it is to fully realise sustained long term growth, it must find a way of tapping into the vast reserves of capital sitting with institutional investors.

That is easier said than done as our report last year into investor perspectives on social enterprise financing illustrated (written by Katie Hill). It revealed that they would be more likely to become involved with social investment if it could offer larger sized opportunities. However, developments in the health sector suggest it might be about to provide the kind of opportunity they are looking for.

This Government seems intent on seeing more services taken on by social, mutual, cooperative and community-owned enterprises. As well as existing organisations it is encouraging that front line staff are beginning to form themselves into new social enterprises. Prime examples include Central Surrey Health, one of the first and most celebrated of the spinouts, and City Health Care Partnership, based in Hull, which became an employee-owned mutual in 2010. We’re also seeing new social businesses supplying innovative services, such as Patients Know Best which provides an advanced software system which gives patients control of their own data.

These organisations, and others like them, offer an innovative way to answer the seemingly unsolvable conundrum of retaining key services while delivering the cost savings the Government feels are necessary. However, they face a daunting challenge in competing in the corporate environment and proving their worth to commissioners. Last year Central Surrey Health failed in its first competitive tender – outbid by the much better funded Assure Medical medical. While it was just one example, it illustrates the anxiety we see among many new spin outs as to the long term future.

If they are to thrive they will need two things: capital and also new skills. The challenge of pioneering a new social enterprise is a world removed from working with the NHS. At ClearlySo, therefore, we’re helping with seminars outlining some of the main obstacles – such as VAT and accounting considerations or how they do make that leap beyond that initial contract and compete with the private sector.

We see this area as being crucial in the social investment sphere. Not only is there undeniable need both for the capital and expertise individual investors can offer, there is also a real potential for growth with the Government eager to encourage those organisations which offer social value – rather than just the best price – to take on these services. If we can support the growth of these new spinouts this really could be the big opportunity potential social investors have been looking for.

First Published in Third Sector in February 2012.

Impact Investing

SRI cut backs – what is the message for social investment?

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Before Christmas, the Financial Times reported on an announcement from Henderson Global that its socially responsible investment (SRI) team is likely to leave the company. It was the latest in a series of similar developments which had seen many others such as JP Morgan and UBS Securities making cuts to their social and environmental teams.

The most instinctive response is to view this news as a sign of an industry losing faith with socially responsible investing. However, I’d suggest there are several other ways to look at it.

One alternative would be that, such is the mainstreaming of the SRI sector, it is not, as some predicted, becoming an asset class in itself. Rather, we are seeing principals of SRI increasingly being adopted across the board. Recent research from Ecclesiastical Investment Management (also reported in FT) suggests the majority of investors would consider SRI if their financial advisor discussed it with them. The figures suggest interest in these products and ethical issues continues to grow hinting at the emergence of what I’ve previously referred to as 3D investing. In this environment investment decisions will be made, not just on risk versus reward, but also on a third pillar – social impact. If this is the case and social concerns are playing a larger part in mainstream investment then I’d argue this is something we should welcome.

However, one might also suggest it says a great deal about how some SRI fund managers have been screening potential investments. On closer inspection, the portfolios of many differ little from what we might see in conventional funds. It is an issue which Barchester Green has been highlighting for some time now with its Heroes and Villains of ethical investment report. In its latest, released late last year, it drew attention to the presence of companies such as BP, Rio Tinto and Glaxo in a number of ‘ethical’ labelled funds. I am certain the managers of these funds might have arguments for their presence, but it hardly seems much effort has gone into the screening process.

Seen in this light, Henderson may have taken the decision that it is not necessary to have separate teams for SRI and conventional investments. This is not to criticise the performance of the team at Henderson – indeed they have been one of the best of the sector as you can see by their presence on Barchester’s ‘heroes’ list, and we have found them to be one of the best, in our own interactions with them.

However, it does serve as a warning to SRI teams elsewhere. The onus is being placed very firmly on them to prove their value-added; and this is not just about financial performance but the uniqueness of their social impact generated. Just as the best fund managers in the mainstream world are those who do things a little differently, so should SRI teams, going the extra mile in ensuring their choices satisfy the mix of risk, return and social impact required in the world of 3D investing.

First Published in Third Sector in January 2012.