UK’s social startup rate confounds expectations in gruelling year for business

This year has been an exceptionally tough one for many business owners, but it has not dampened interest among those wanting to set up a social startup, new figures suggest.

One in seven existing community interest companies was founded since the Covid-19 outbreak, with over 3,000 more CICs in October than at the beginning of March 2020. 

As of 1 October 2020, there were 21,834 registered CICs in the UK, according to the CIC Regulator. There were 18,671 on 2 March

While the seven-month rise does not indicate a Covid-prompted spike – last year saw similar levels, with 5,106 new registrations during the entire 2019/20 financial year – some say the sustained growth is encouraging. 

We can definitely say with some confidence that this is a strong growth rate

Director of external affairs at membership body Social Enterprise UK, Andrew O’Brien, said 3,000 was a “significant amount” for a year that had seen “Covid and recession and depression”. 

“We can definitely say with some confidence that this is a strong growth rate,” he said. The number of new CICs showed that people were still interested in exploring social enterprise and prepared to take risks, even during the economic downturn, he added.

 

The community interest company is a type of company specifically created in 2005 as a vehicle for social enterprise. A CIC is set up for specified community benefit purposes and it is legally obliged to pursue this mission. It cannot be privatised or distribute capital value. To encourage socially focused investment it can distribute some, but not all, of its surpluses. CICs have to register with the government's CIC regulator when they are set up and report to that regulator every year, to show that they have been pursuing their community interest. 

Source: GetLegal  

 

Not yet trading

Current registrations far outweigh early expectations of CICs, a legal form first created in 2005. At the time, it was anticipated that around 200 would be created each year.

But it is unclear how many of the newest CICs are successfully trading and would therefore meet the Social Enterprise UK definition of a social enterprise (generating 50% or more of their income through trade). One newly-formed CIC that Pioneers Post spoke to in May, for instance, said that it relied entirely on donations. 

The CIC Regulator – the government body that decides whether an organisation is eligible to become, or continue to be, a CIC – was not able to share data on how widespread this was. Asked about their requirements, a spokesperson said that CICs were “encouraged” to trade rather than rely on funding, but that there was “no requirement for them to do so”.

 

Tip of the iceberg

CICs represent only about one-fifth of the estimated 100,000 UK social enterprises, which may also be set up as traditional companies, charities, cooperatives or sole traders, among others.

Social Enterprise UK does not have data on new startups among other legal forms, but O’Brien believes interest in setting up CICs is “the tip of the iceberg” and that broader interest will become evident in the coming years. 

Almost 300 social enterprises have joined Social Enterprise UK as members since Covid-19 struck. Comparable figures for 2019 were not available, but O’Brien said membership was continuing to grow, indicating a “resilient sector”.

 

 

Interest in starting a co-operative appears to be similarly robust.  One hundred and thirty-eight new UK co-ops were registered in 2020, according to network body Co-operatives UK (which looked at all co-ops, not just those it had registered itself), compared with 198 for the 12 months of 2019. The figures suggest a slight slowing, since the end of the year is typically quieter in terms of new registrations, said Wendy Carter, head of communications. But the slowdown was much smaller than expected, she added. Continued interest in starting a co-op may be partly driven by people using additional free time under lockdown to fulfil long-held ambitions. 

 

Closures: a murky picture 

The CIC Regulator was not able to share figures for the number of CIC closures this year.

Its Twitter feed indicates that some at least are either closing or switching to other legal forms, with 21,867 on the register on 2 October and 36 fewer (21,831) six days later, on 8 October

Around 150 of Social Enterprise UK's smallest members had dissolved on Companies House in the past year, O'Brien said. It was unclear, however, precisely when they had closed and if closures were Covid-related. The number was “broadly in line with previous years”, he said. 

In April, Social Enterprise UK warned that half the country’s social enterprises could run out of cash by June.

That scenario has not materialised – partly thanks to grants and the government furlough scheme, and partly because the UK economy had opened up faster than initially feared, said O’Brien.

But it may be months or even years before there is a clearer picture of social enterprise closures: companies may have closed but not yet dissolved, for instance. Companies House rule changes, brought in when Covid-19 hit, mean that compulsory dissolutions from 2 April onwards were temporarily paused, so the overall number of dissolutions recorded has been significantly less than usual.

With furlough changing and parts of the country moving towards tighter restrictions, clearly we are at a pivotal moment

In a Social Enterprise UK poll among 263 of its members last month, 1% of respondents said they had shut their business down. However this may underestimate the true figure, since those closing down a business are unlikely to complete surveys. 

“The sector is still in quite vulnerable shape. We’re definitely not out of the woods,” said O’Brien. The ending of the furlough scheme was a particular worry, he added.

Just 83 co-ops have dissolved so far this year, compared with 357 during 2019, according to Co-operatives UK. Emma Laycock, head of advice, said it was difficult to explain this year's low figure but that co-ops which had paused trading may be waiting to see what support was available before making big decisions. Alternatively, they may have been able to adapt their business model and move activities online. “Co-ops are often embedded in their communities, so it may be that they have been able to provide the exact service that their communities needed at this time,” she said. 

Power to Change, which supports and develops community businesses in England, found that four of the 449 community businesses it polled in August were not planning to re-open. The survey took place, however, when there was still a lot of support for businesses, said media relations manager Natasha Ley. “While community businesses have so far remained resilient, with furlough changing and parts of the country moving towards tighter restrictions, clearly we are at a pivotal moment.”

Header image: SanHanzUK, a community interest company set up at the height of the pandemic by teenage sisters Ciara and Seanna Hammil from Kenilworth. The business sells hand sanitiser, with 20% of proceeds going to local food banks and an additional 25% going to frontline workers. 

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