Keep your hair on! Don't mess with social enterprise
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Social entrepreneur James Perry thinks an asset lock cuts off social enterprises from potentially lucrative investors. But the answer isn’t to introduce mission locks or other tweaks to the social enterprise model, says investment advisor Niamh Goggin. Instead, she says, we need a whole new type of business structure.
I found James Perry’s recent Pioneers Post article on the difficulty of obtaining investment in social enterprise (while hanging on to his hair) both fascinating and confusing.
It was fascinating because I love to hear about how entrepreneurs, social or otherwise, start and grow their businesses.
It was confusing because James seemed to be making the case simultaneously for and against venture capital investment in social enterprise.
James is clear about the problem. He said his business ‘needed venture capital but our social goals didn’t’.
Venture capitalists invest in early-stage businesses in the expectation of being able to sell on after a few years, making a multiple of the value of their early investment. Some of their investments fail, some make modest returns, but the expectation is that enough of these high-risk investments make super-returns so that the overall return on the portfolio is high.
If James had attracted venture funds, he would have had to sacrifice the opportunity to focus on both his social and financial goals. Yet his conclusion is that the asset lock present in many social enterprises, (preventing profits from being distributed to owners, shareholders and investors), acts as a Berlin Wall, cutting social enterprise off from the capital markets.
Most profitable social enterprises probably access finance through the mainstream retail banks and face the same problems in the current market as other small and medium-sized businesses. They are not suitable candidates for venture capital – not because of the asset lock, but because they don’t have the ambition or capacity to grow at a rate that would attract venture investment.
Start-up and micro-social enterprises do struggle to obtain seed-corn finance but, again, it is unlikely that many of them need or want venture investment. There are few social finance organisations that provide funding for start-ups (Key Fund in the north of England being a notable exception) but this is largely because investors have found it very difficult to cover their costs in this market.
However, I have to admit that James’ article forced me to think more clearly about my own views on profit-maximising investment in social enterprises.
I came into social finance from the third sector and carry the inheritance of ideas focusing on social mission. Charities and, in more recent years, social enterprises, have slowly built up a very valuable resource of trust with the general public. There is a substantial risk that trust would be damaged by perceptions that investors are extracting super-profits from social ills.
So how can we attract investment to help ambitious organisations to scale up without damaging the social enterprise brand?
There is no single answer to that question. We need to build the social investment market, to bring in investors who want a combination of social and financial return, as organisations including Bridges Ventures, Big Issue Invest and Charity Bank are already doing. We need more informed grant and social investment funding from charitable trusts and from government.
But where does that leave the next generation of James Perrys?
I see social enterprise as hybrid organisations – combining elements of the third sector and the public and private sectors, but with their (and my) roots firmly in the third sector. (There’s an interesting piece to read about this, if you want to explore it in more depth: Chapter 3 ‘Towards a theory of hybrid organisations’ from Hybrid Organisations and the Third Sector: Challenges for Practice, Theory and Policy, ed. David Billis, Palgrave Macmillan, 2010.)
But I think that the next generation of James Perrys will work across the boundaries of the private, public and third sectors, but they will have their roots in and primary adherence to the private sector.
Perhaps we need another organisational structure (‘oh no,’ I hear you cry!). In the US, a ‘benefit corporation’ is a hybrid business model, a for-profit business that is set up to deliver ‘a material positive impact on society and the environment’. Benefit corporations report to shareholders through an annual benefit report, on stated goals relating to financial, social and environmental aims. There are different standards for reporting but many benefit corporations use the certification provided by B-Lab. (See the B Lab website for more.)
I cannot support the new concepts of ‘trust engines’, mission lock or social value policies substituting for the asset lock in social enterprises. This is because I have a strong belief in the drive, ingenuity and skill of private investors to extract maximum profitability from their investments.
Let’s keep social enterprises as non-profit-distributing and support James and those who will come after him to move towards a UK version of benefit corporations that are for-profit, plus social impact.
What do you think? Is an asset lock a help or hindrance? Should we introduce benefit corporations in the UK? Let us know via @PioneersPost