Under scrutiny: Cliff Prior on profit with purpose
CEO of the UK's leading social entrepreneurs' network Cliff Prior talks exclusively to Pioneers Post about the direction the social economy is heading in following accusations that the network has drifted away from its founding principles.
Earlier this year, UK-based social enterprise membership organisations CAN and Senscot terminated their relationship with UnLtd over their views on the administration of the Millennium Awards Trust (MAT) £100m funding that was endowed to them in 2002.
In a joint statement CAN and Senscot accused UnLtd of drifting away from the founding principles of the Trust funding used to set UnLtd up, which they claim stated that the objective of the National Lottery money was to “fund ordinary citizens – to pursue their own ideas for public benefit – creating a new pipeline of grassroots social innovators”.
Grants to private, for-profit enterprises were to be rare exceptions according to CAN and Senscot, but they said this has not been the case. They stated: “While using the £100m endowment, UnLtd has developed into one of the UK’s leading advocates against the regulation of social enterprise and for the inclusion of private profit companies in the sector.”
They also accused UnLtd's "private-profit" social sector vision of being "fundamentally damaging" to public perceptions of civil society.
Following on from this controversy, in September this year the G8 Impact Investment Taskforce Mission Alignment Working Group – chaired by Cliff Prior – released its report on profit with purpose ventures, which were described as ‘fully profit distributing businesses with a long-term commitment to prioritise, deliver and report on their social impact’.
Cliff Prior. Photo credit: UnLtd
Pioneers Post: How did the concept of profit with purpose businesses emerge?
Cliff Prior: People are creating companies limited by shares, ordinary businesses, to achieve a social mission. Recent small business surveys seem to indicate that there are 70,000 companies limited by shares which have a “good fit” with a social enterprise definition. It starts with their initiative – it’s not us saying you should do this.
PP: How do these businesses compare to the more traditional social enterprise model?
CP: Social enterprise is starting to get a discernable brand identity with the public. They are trading organisations which achieve social benefit and reinvest most of the profits – we’re very careful not to dilute that brand because it has a very distinct place. That’s why we apply different titles. We’re not saying this is a part of social enterprise. It’s not – it is a different thing.
Putting theory into practise
Elvis and Kresse is a social venture that reclaims ‘heroic materials’, for example the London Fire Brigade’s decommissioned hoses, and transforms them into premium value consumer goods. First and foremost they are a business but through generating profit they also create social value – 50% of their profits are donated to charitied associated with the wastes they reclaim.
They were founded in 2005 through their private efforts and finances – no grants or public funds were involved. Although they were aware of other legal structures, the Elvis and Kresse founders chose to make the business a company limited by shares.
In February 2012, UnLtd awarded Elvis and Kresse a £20,000 Fast Growth Award funded by the Millennium Awards Trust. The company used the funds to employ a worker skilled at using machines to sew the hose products so that it could keep up with demand for its products.
One of the key challenges is the pipeline challenge – social investors saying there isn’t enough pipeline to invest in.
PP: What key challenges does the social investment market face and how do profit with purpose businesses fit into this?
CP: One of the key challenges is the pipeline challenge – social investors saying there isn’t enough pipeline to invest in.
With the advent of Big Society Capital, if you’re at the stage where you can absorb a million in social investment there is a system for you. But if you’re at that very early stage when what you really need is that first £50,000 it’s much more difficult.
The reason being that it’s just very high risk. If you look at loans for example, you’re looking at extremely high interest rates to cover the risk. The way you could do it is through equity because your successes have a chance of covering the ones that don’t work out.
Impact investment innovation
UnLtd is running a number of innovations to resolve barriers to social entrepreneurs starting well and thriving. Access to high risk equity funding into profit with purpose businesses is one of the ways in which UnLtd is trying to support these organisations stuck in the ‘valley of death’ of very early investment.
Globally, the momentum of the social economy is evident but there are a variety of legal structures and different attitudes towards how it should or should not be designed.
In the US, the Benefit Corporation system resembles the proposed profit with purpose model. It takes into account company intents and duties – making sure that if a social object is in the company articles, there is a duty on directors to strive to achieve it.
PP: What are the cultural aversions to welcoming profit with purpose modelled businesses into the social economy?
Some people simply don’t believe that profit and purpose mix.
CP: There are countries where there is no way you can do social enterprise and where there’s no legal form for it. You just have to form a company and be social on your own sense of what is right. There are countries where there is lots of regulation. You have countries that are absolutely against the idea of mixing profit and purpose and countries that are absolutely of the mind set – ‘Why on earth wouldn’t you’.
Some people simply don’t believe that profit and purpose mix. That’s much harder to address because it is almost an article of faith.
The cultural take is so profound – embedded in how people see the world, how people trust. Senscot come from a very principled position on this, one I respect but not one I agree with as I believe we should start with the social entrepreneurs and what they are doing.
We still see social entrepreneurs who want to create private companies limited by shares in Scotland but generally the public opinion is less favourable to this concept in Scotland than it would be in England.
PP: Another of the initiatives UnLtd is working on is a joint venture with Telefónica, one of the world's largest private telecommunication companies in the world. Wayra UnLtd is a partnership between UnLtd and Telefónica's global tech start-up accelerator programme Wayra. It is 50% funded by the UK government, which raises this issue of whether public money is being used to fund private profit. How do you respond to these concerns?
CP: There is corporate money going into Wayra Unltd and there is government money going in. The aim is to incubate very early stage social entrepreneurs and their teams to get started on creating social benefit in a sustainable way.
Is public money being privately profited? To be clear – loads of public money goes into business start-up. That’s not unusual and has helped achieve a huge boom to the British economy. We wouldn’t be as far out of the recession as we are now without it.
This particular money is for achieving social impact. So is there some private benefit? Yes, because if private investors invest in these social ventures and they succeed, then they get some return. If they don’t succeed then they lose their money. They do it at risk. This is very early stage as well so the risks are very high – that is true of all the social incubator funds. The aim is to ‘hot house’ some really high potential social ventures to achieve impact at scale, quickly.
PP: When it comes to trust, the key question is how can we trust private companies that claim to be social to remain social?
CP: Mission drift is the biggest risk but mechanisms are being designed to hold the social mission in even through changes in leadership or ownership.
Our board feel it is our duty to take the sort of risks that other people can’t.
For me, companies can do social good just by deciding to do so and that’s lovely, but for it to become part of the social economy, I would want it to commit to that social good for the long term – change the company articles, make sure there’s a duty on them to pursue it, make sure you’re reporting to an accredited standard.
People feel more confident when they see things in reality, when something has been around the block and they trust it. I can remember articles in the social press 10-15 years ago saying the same thing about social enterprises that are now being said about this profit with purpose business.
We see this as an experiment, an innovation. If we can crack this problem of people not getting through the ‘valley of death’ – the first risk investment – it would open up so much more social benefit.
We are very lucky to be able to deploy the Millennium Awards Trust – our board feel it is our duty to take the sort of risks that other people can’t with a view to the biggest social return. This means testing them out, being really rigorous about the testing and then if it doesn’t work let people know it doesn’t work so nobody else wastes their money.
But if it does work then we'll be adding value. I think this one is going to work simply because if you’ve got the best part of 100,000 people a year actually doing this now, some of it is going to be really good.
Photo credit: NASA Goddard Space Flight Centre