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The Investable Social ÂŁntrepreneur Introducing Builder Capital

Robbie Davison & Helen Heap


The Investable Social ÂŁntrepreneur Introducing Builder Capital

Robbie Davison & Helen Heap

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Š Helen Heap and Robbie Davison 2014 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the publishers. Whilst every effort has been made to verify the text and images, the authors cannot accept liability for any omissions or erroneous statements. Design: Mike Carney. www.mikesstudio.co.uk

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The Investable Social Entrepreneur

Contents Introduction

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1. The Social Enterprise and The Social Entrepreneur

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Definition Matters The Social Entrepreneur Checklist What we mean by Social Enterprise

10

2. The Social Entrepreneur’s Story

20

Austerity Matters Setting the scene Why the money doesn’t fit Moving in the right direction

3. The Right Sort of Money

9 11

22 23 28 31 32

What does the right sort of money look like? Introducing Builder Capital Who are the Builder Capitalists? Builder Capital key features

39

4. The Route to Sustainability

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35 36 38

The Builder Capital Route to Sustainability Case Study: Demonstrating the Builder Capital Model

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5. About the Journey

50

42

On Investment Readiness Builder Capital Parameters The Route to Builder Capital

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6. Where We Go Next

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52 53

The Builder Capital Journey 8 Steps to Making Builder Capital a Reality Next steps for us

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Acknowledgements & References

68

62 63

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The Investable Social Entrepreneur

Introduction This book is for anyone who wants to develop a successful social enterprise. It is about social investment. A particular type of social investment that we have called ‘Builder Capital’. This offer of investment does not currently exist but here is a prediction: Builder Capital (or something very much like it) will appear sometime soon. The social enterprise movement needs it and the social investment market needs it too. The ideas we describe here will not apply to every social enterprise nor to every social investor. In fact, we think that initially the numbers of both are likely to be very small. However, one of our aims in writing this is to demonstrate what can be done and to start to develop a market for Builder Capital from small beginnings. Whether or not Builder Capital is right for you we hope that the arguments and analysis presented here will be helpful to all when it comes to understanding what is the most appropriate way of funding social enterprise. What we describe here is a result of our different career experiences. As authors we have practiced on both sides of the social enterprise / investment fence. We have approached the topic of social finance from very different perspectives and yet have both arrived at the same conclusions. Robbie Davison “I have spent over 25 years practicing social enterprise. These past 3 years I’ve been getting to grips with social finance whilst leading a successful social enterprise. This particular period has often been painful and this book, in part, aims to guide away from some of those painful places.” Helen Heap “My experience is as a financial analyst and professional investor in financial markets. Since 2011 I have been focused on understanding the world of social finance – who the operators are, what works, what doesn’t and why. Frustration with the limitations of conventional finance combined with an appreciation of the funding needs of social enterprises have led to the ideas presented here.” Together we have over 50 years’ experience of establishing and leading social enterprise and understanding how money works. We are using this experience to describe a journey that will hopefully assist many more social enterprises to achieve all the great things they set out to do.

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Social enterprise and social finance are distinct by their defining qualities. The former exists to establish alternative, innovative and thorough business solutions for social need. The latter to facilitate, through appropriate funding, all of the aforementioned whilst recycling the money to be able to do it all again. In theory social enterprise and social finance should be a perfect fit, finding each other with ease, sharing experiences and supporting each other’s missions. In practice, social enterprise as defined in this book has a rich narrative from decades of struggle and delivery. By contrast, so far social finance does not hold a coherent social narrative that the social enterprise sector signs up to. Given that the sector is the primary source of trade for social finance that is a big problem. As a result, social enterprise and social finance are uneasy and sometimes opposed bedfellows, looking across at each other, often accusing and mostly dismissing each other. Each claims that the other should shift for things to improve and to allow money to be released for the intended purpose – social change. This book is an attempt to move on. We have abandoned the term ‘finance’ seeing it as a word associated with much of the confusion and negativity that currently exists in the marketplace. We use the term ‘investment’ to refer to the Builder Capital Model we want to create. We set out a course that will enable certain social entrepreneurs to make ready their enterprise for the right investment opportunity for them. We suggest a form of investment that will allow investors to inject their capital into those enterprises creating the best possible social impact whilst managing and mitigating risk. The Builder Capital approach is unapologetically a social first model, wanting to facilitate the link between entrepreneurs making a difference and investors who want to see their money do much more than generate a financial return. The book is set out in 6 sections. First, we explain what we mean by social enterprise. Next we take a look at the reality of the current funding model, from the standpoint of the social enterprise, and say why we think the money that is currently on offer doesn’t fit with what is required. We introduce the idea of Builder Capital, then go on to explain why we believe this is the critical factor for enabling a social enterprise to achieve sustainability. We describe the state of preparedness a social enterprise will need to be in, in order to secure Builder Capital. Finally we set out how we see the Builder Capital investment movement coming together.

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The Investable Social Entrepreneur

1. The Social Enterprise and the Social Entrepreneur

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£ £ £

£

£

£

£ 9


1. The Social Enterprise and The Social Entrepreneur

Social Enterprise is the difference between charity and justice... Robert Egger

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The Investable Social Entrepreneur

Definition Matters Social enterprise is entirely a product of social need: the two are conjoined. Where there is need there is also someone challenged to re-divert that need. Firstly, they will re-divert into something more hopeful and then look to move it on into an arena of opportunity, trade and justice. This is the stuff of the social entrepreneur who utilizes what they know and what they are passionate about to do all that they can to improve their constituency and create a viable business model. In this book there are two definitions we use as specific points of reference: • F  ig. 2 sets out what we mean by the term ‘Social Enterprise’. It’s a definition that locks-in the activity of the social entrepreneur and the social enterprise as an interlinked model. • F  ig.6 illustrates the Builder Capital Model. This model describes how an investment of the right sort of money at the early stages of a social enterprise’s development is crucial in enabling it to deliver social impact from the outset while working towards sustainability and the ability to deliver financial returns to investors. For the purpose of this book, in considering whether the definitions suit you and your enterprise, it helps to remember that each definition is inter-dependent.

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1. The Social Enterprise and The Social Entrepreneur

The Social Entrepreneur Checklist – Being Ready for Builder Capital The following checklist will assist you in determining if the Builder Capital route is an option for you and if you are investable. You will be a ‘Start-off’ entrepreneur and your enterprise will fit most of these points.

Does your social enterprise exist because of a distinct social need / market dysfunction?

Do you know what it will take to develop your enterprise into a self-sustaining trading entity?

Do you operate on behalf of a constituency and do you have deep knowledge of that constituency?

Do you know what you don’t know?

Will your idea / vision significantly improve the circumstances of your constituency? Do you have the track record / experience to lead the development of your enterprise? (this can be defined by 5+ years of experience; the Builder Capital approach is about start-off not start-up) Taking the last point still further, are you a proven leader? Are you also a proven / skilful team builder? Do you have strong networks of contacts among your constituents and market place?

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Can you articulate and subsequently protect your business model under scrutiny, no matter the audience? Does your level of expertise include governance and legal status and are you able to decide the best fit for you and your enterprise? Are you passionate about using your impact to campaign for greater change, perhaps even on a national stage? And last but by no means least: Are you looking for investment of between £250,000 and £2mn?


The Investable Social Entrepreneur

What we mean by Social Enterprise

Fig. 1 Builder Capital Social Enterprise – Start-off not Start-up

Start-up

Description

Risk

Impact

Untested new idea

High

Lower

Extension of existing business model

Lower / Low

Higher / High

(led by new entrepreneur)

Start-off (led by experienced entrepreneur)

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1. The Social Enterprise and The Social Entrepreneur

Market Dysfunction Visit any place where deprivation has taken hold and market dysfunction will become apparent; high unemployment, poor community services, low accountability, low participation, struggling local economy and debt – it’s an exhausting list. This sort of trouble and decay requires people to spot these gaps and choose to do something about it. These entrepreneurial types will possibly have lived and worked in the area, will have felt, witnessed or experienced these problems first-hand, seen the causes, understood the gaps and created the enterprise concept in order to try and improve matters. In a well-resourced economy improvement should be the place of the public sector and maybe that will happen again sometime in the future. But right now, with budget cuts biting hard, a great many markets for vital services are in disarray. Commissioners and procurement officers are trying to square the circle of meeting ever increasing need with rapidly diminishing resources. This is market dysfunction writ large and it is invariably the fertile ground of third sector service delivery / potential. This is never the place of the private sector. Third sector ideas and increased activity appear to address some of the trouble and decay. Unless these ideas are to become something more substantial than charity they require a route to market. The best chance of this happening is when existing organisations with some capacity notice what is needed and are led by someone who has the vision to do something about it. That is, they see the potential of this new market, even if it is years away from maturing. This kind of start-off enterprise will invariably require grant to begin the steady process of breaking new ground and establishing the market in the first place. This is partly what grant is all about. Grant can be a vital part of this process. Attempting to establish a new marketable product out of grant alone however, in the medium / longer term, is difficult, even impossible; it can be counter-productive and runs the risk of embedding your enterprise as nothing more than a community project. If constituencies of need are to be improved we must build a social economy focused upon much more than grant-driven projects. But equally we must recognize that treating market dysfunction with ideas that later become solutions demands grant or some form of risk capital. Call it what you will, it all amounts to the same thing – and this investment injection is nearly always the game-changer. Without grant or genuine risk capital very few of the new ideas will develop into viable trading entities. The strongest route to developing enterprise is to find investment that has the purpose of providing the correct levels of working and risk capital, invested across the all-important early years of enterprise development at rates of return and on time frames that take into account the difficulty of building new markets from scratch.

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The Investable Social Entrepreneur

Fig. 2 Builder Capital Model: The Social Enterprise / Social Entrepreneur Dynamic

As a Social Enterprise

You work to establish enterprise where there is market dysfunction

You develop innovative solutions (effective over efficient)

As a Social Entrepreneur

You work to establish enterprise where there is market dysfunction

You have that innovative idea that creates significant social change

You have a constituency You have explicit knowledge of that constituency

You trade... You know how to trade and have a viable business model You campaign to promote social justice and inform policy

You are passionate about promoting the need you see, the change you make

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1. The Social Enterprise and The Social Entrepreneur

Innovation Innovation, the much loved word of Government, commissioners, financiers and of course social enterprises as they pen their bids as part of their fundraising / investment drive. Too much is made of trying to extract something extra from every initiative and innovation is the parking place of everything that is extra. In social enterprise innovation is integral to delivery because without it what else would define you as unique in comparison with every other service out there? ‘Innovation’ is a word under threat, now continually overused and frequently misused by those who see social enterprise as nothing more than an extended arm of economic innovation / mainstream business. This is how we think of innovation: 1. E  conomic Innovation x Efficiency = Disruption (low context) (Product / Process / Services) 2. S  ocial Innovation x Effectiveness = Sustainability (high context) (People / Productivity) In the economic innovation space it’s about efficiency and efficiency equates to disruptive output. It is low context service delivery (see Fig. 4). It has as its contextual anchor much more for less. It is about protecting incumbent players in markets that already exist – finding new ways to do the same thing. This efficiency course, we maintain, has no place in establishing strong, breakthrough social enterprises.

We don’t innovate for the sake of innovation – we innovate to make things better – to solve the problems that we face. So the number one challenge is to really understand what it is we are trying to achieve… Simon Duffy

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The Investable Social Entrepreneur

We place social innovation at the heart of our Builder Capital model and in doing so, seek to reclaim innovation as the game-changing bedrock of each social enterprise seeking to make a real difference. The social innovation we are talking about is set out in Fig. 3. On the right terms, social innovation does not disregard the importance of efficiency but from the start it does avoid all of the calls of efficiency over effectiveness. Fig. 3 Social Innovation – Effective over Efficient

Effective Social Innovation (sustainable)

xt onte

C High

Ne l a ci So t ntex

Co Low

ed

Economic Innovation (disruptive) Efficient

Social innovation puts people first. This is high context service delivery. It is about creating new economic and social value, often from markets that need to be started and developed where none currently exist. Social innovation focuses on productivity and starts by remembering that innovative social change requires the correct resources at the correct time in order to establish a strong foothold in what are nearly always very difficult market conditions (see Market Dysfunction page 12). Social innovation sets about applying new and or improved methods / services to significantly change people’s lives for the better – services that in the longer-term can be sustained.

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1. The Social Enterprise and The Social Entrepreneur

Fig. 4 High Context versus Low Context

High Context

Low Context

• People • Resource/s • Equality • Opportunity • Inclusive • Responsibility • Micro

• Numbers • Low cost • Unequal • Chance • Unwieldy • Manipulative • Macro

vs

(Lives)

(Process)

Outcome = Solves

Output = Fixes

This brings us on to sustainable innovation. Let’s be clear, there is no point working hard to devise a solution to a previously intractable social problem if you are later going to be convinced by an investor or commissioner that everything can be done cheaper before you have had time to fine tune and prove your concept. Many social entrepreneurs have fallen down earlier than they needed to by chasing any investment or grant to make ends meet, lowering standards as they go and stripping out the innovation that made them special in the first place. Sustainable innovation requires brave entrepreneurs who understand the true and full cost of everything they do; entrepreneurs who are not prepared to become efficient when they have yet to become effective. Social innovation takes years to establish its pattern of outcomes and those true and full costs. This is a necessary journey to take before you, the entrepreneur, can confidently play the maximizing efficiency game – it is what we call the Builder Capital Route to Sustainability. We will explore the Builder Capital Route to Sustainability fully in Chapter 4 of the book.

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The Investable Social Entrepreneur

Constituency Most of the third sector is discussed as being part of a ‘community’ of interest. This may be the community they serve, the community in which they are based, or a bit of both. ‘Community’ is a moveable concept particularly as the enterprise starts to scale-up, therefore social enterprise benefits from retaining a stronger social anchor. This anchor should be strong enough to set it apart from being ‘charitable’ with an explicit reference point to achieving justice for those wrapped up in its mission. As an anchor, the term community alone is not enough. We favour the term constituency. Constituency, by definition, is all about trust, support, a person or body being elected to represent. Social enterprises that have this sense of constituency have a much stronger grasp of their mission. Taking on board the importance of constituency is a powerful and positive shift. Understanding constituency in its truest sense moves the enterprise much closer to its service users / customers. It demands much more in terms of accountability and there is a deeper sense of being responsible to all those who are in the service / supply chain. Thinking in terms of constituency makes service delivery all that much more personal and invites regular reality checks as a process of continuous development. This is integral to ensuring that the enterprise remains grounded and in touch with why it exists in the first place – a factor often forgotten as soon as a social enterprise starts to find some sort of trading ‘success’.

Trade Social enterprise is not charity although many people, sometimes intentionally, confuse the two. Social enterprise is about finding and holding on to customers as quickly as possible. Enterprise demands that a business mentality exists throughout the company from the start. Enterprise is never a ‘project’ and must, at the very least, be visualized as a programme of often complicated activities that are all working to increase trade and satisfy customers. Understanding how to trade well, devising strategy and the right plans to generate the correct level of sales only ever happens with constant practice. It’s a tough climate to operate under because all the time you are still dealing with your constituency of need and all the associated problems that brings. Social enterprise is especially hard where the customer who pays is different from the service user – a common scenario for those dealing with local authorities, the NHS and central government contracts. This effectively means there are two sets of needs to be met for every sale – those of the service user

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1. The Social Enterprise and The Social Entrepreneur

and those of the paying customer; it is the job of the social enterprise to provide products and services that satisfy both, often a very difficult task. No wonder so many start-up social enterprises fail or find the first few years incredibly hard to navigate. It should be a given that if you want to lead a social enterprise you know that it is your primary duty to lead on generating your company’s sales. Knowing how to trade and managing the consequences is arguably the most difficult skill a social entrepreneur has to learn – few are naturals. A successful social entrepreneur will be a leader, seller, marketeer, negotiator, manager and as we point out later, a door-knocking campaigner. All these roles and many more pop up in the world of trading with customers. Leading a social enterprise is a complicated role. Amongst all of the skills you will be required to master we identify three key attributes that every entrepreneur will need: 1. Focus: The leader / entrepreneur must stay solidly focused upon generating new opportunities to trade whilst protecting current sales – nothing matters more in the leadership role. Strong sales drive the independence, capacity and viability of any enterprise and this strength requires an almost single-minded focus. 2. Tenacity: Many entrepreneurial types have great ideas and sit back expecting those ideas alone to generate the sales attention they think their idea deserves. Later, being put-off because this attention does not materialize, these types fall by the wayside. Real entrepreneurs understand that sales / revenue generation is, in part, related to their tenacity. Their ability to drive the enterprise concept into operation, set and deliver the sales strategy and generate strong revenues are all their responsibility. All hurdles have to be overcome and the solutions to constant issues that arise, are all theirs to decide upon. Dilemmas are ever-present and so they should be – it takes the tenacious entrepreneur to understand this and keep pushing the enterprise forward. 3. Resilience: If you are tenacious in the pursuit of your business model you will take knocks. Taking knocks is ever-present. How quickly and clearly you respond will determine the likely success or otherwise of your enterprise. Entrepreneurship (leadership) is a school for ‘hardknocks’. Often lonely, always challenging and requiring so much social and emotional investment. This can be an unforgiving place but full of rewards if you are able to bounce back, time after time. Very few ‘leaders’ ever become good at what they do without this ability to bounce back.

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The Investable Social Entrepreneur

Campaigning Good social enterprises challenge everyone involved. Good social enterprise probes, provokes its public. Good social entrepreneurs understand and facilitate all of these things: they are provocateurs. As provocateurs, they are willing storytellers who always have a powerful perspective of why their idea and service is the right one to counteract what is wrong with the part of the world their social enterprise improves. This is a story they will tell day after day as they convince their ever-growing constituency of the power and impact of their cause. As the main voice, lead thinker and director of all these messages, good entrepreneurs will use and manipulate every medium available to get their message out. One of the benefits of being a social enterprise (as opposed to a charity) is the independent power you have to campaign and, if needs be, become political. Social change is about producing and promoting alternatives and often countering the societal norm. We only have to look at the reaction to the Government’s welfare reforms and the subsequent campaigning by many social welfare entities to understand how important it is to become the informant, a voice and an agitator when policy under-represents, fails or impoverishes people. Social enterprise often sits where failure is apparent; it is a counterculture and counter-cultures, if they are to gain the necessary traction, require the oxygen of publicity just like everything else that influences our lives. This is why campaigning should form part of every social enterprise’s business plan. We have referenced a few times that social enterprise is about delivering justice which means being much more than a service deliverer. A social enterprise actively campaigns to tell the world about what it does and how it does it, establishing a firm picture of its impact in the hearts and minds of others. Sometimes the campaigning platform is political and therefore it can be difficult and at odds with those who may want to exert power over you. This conflict can mean that other stakeholders try to make you change direction or water down your service offer. This can be when the campaigning role is at its most important – your enterprise must stand firm with facts, convincing those others of the truth, protecting the value and impact of your service for the benefit of those who need it – and, who knows, perhaps even influencing policy along the way. A true social entrepreneur wants everything they do to stick, reducing social need as they go. It’s a road full of tales and experiences that could prove vital to many more people than those actually touched first-hand by their individual enterprise. In terms of campaigning, good entrepreneurship is about continually sharing knowledge for the benefit of many.

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The Investable Social Entrepreneur

2. The Social Entrepreneur’s Story Why the money doesn’t fit

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2. The Social Entrepreneur’s Story

Austerity Matters The UK is firmly gripped by austerity. Local Authorities and the public sector in general are being stripped of resources. Half a million people are relying on food hand-outs. There are still 700,000 more people unemployed than there were in 2008 and the new benefit regime is starting to bite with many people being sanctioned because there are no jobs available. Looking a bit deeper, 71% of private businesses employ no staff at all and 1 million young people are unemployed in a job market rife with frozen salaries, zero-hour contracts and part-time work. It is no wonder that 1 in 6 of the young people group now feel they have nothing to live for. The mainstream business offer is not coping and those communities already in the grip of deprivation and everything it brings are experiencing their own expanding version of stagflation. A radically different business offer is necessary for there to be any sort of marked improvement. A few short years ago, had any of the above problem areas appeared, funds would have been available to allow existing charities and social enterprises to step in to tackle the problems, or new ones to start up. Now at the most critical of times austerity has taken hold of the money too. In days gone by the public sector would have had money available and trusts / foundations would have played an able part in the supply of funds; both are now either unable to assist or are already over-stretched. In the 2008–13 period, the prevailing view was that social finance would take up some of the financial strain faced by social enterprises and yet, for all kinds of reasons, this has not been the case. To use the thinking of John Maynard Keynes what we currently have is, “A chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or complete collapse.” This is dangerous, particularly when the economic climate is within the grip of a long-term austere policy. This ‘subnormal’ aspect means that the money social finance is supplying is little more than a drip-feed contained within lending constraints that are at odds with the needs of the social enterprise market. Additionally, there is the worrying prediction that already there is a social investment deficit of over £1bn. As social need continues to increase, so does the increasing risk that through non-lending, or the wrong money being distributed, further damage will be done and any future resolution will do no more than paper over the cracks. For an entrepreneur looking for investment, or a social enterprise ready to take up some of the slack with the next strong business idea, it is easy to

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The Investable Social Entrepreneur

become overwhelmed in this current climate by the apparent lack of change in the social finance offer. There is no risk capital of any meaningful description on offer by social financiers, and the ‘Where to go next?’ and ‘What to do for the best?’ questions are not being sufficiently answered. In short, the social finance model requires a different product, an improved interface and a much more effective administration. Real Investment is required with terms that put the ‘social’ focus first. Investment needs to be able to understand the risks that are to be taken by social enterprises. So far, this sort of investment has yet to materialize though improvements are starting to emerge.

There is no risk capital of any meaningful description on offer by Social Financiers...

Setting the scene We learn from economist John Kay that “successful market economies experiment and discover. Moreover, successful market economies do not predict the future, they explore it.” We know that the social finance market economy we have now lacks experiment, lacks exploration, and by many knowledgeable estimates, is a long way away from reaching its full potential. Social finance, as it is currently arranged, is mostly about not losing money – avoidance of risk in order to protect existing assets. It is nothing more than debt finance and debt finance alone will not address social need anytime soon; it’s the wrong type of short-term money trying to attach itself to problems that take a long time to solve.

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2. The Social Entrepreneur’s Story

This case study offers a glimpse into debt funding from the social enterprise’s viewpoint:

Debt Case Study: Taking on a £50,000 loan – things to think about: Our experience tells us that debt finance should be approached with a serious amount of caution. £50,000 is the region that Social Enterprise UK’s The People’s Business report stated that most social enterprises looking for a loan are considering. This may seem like a small amount to borrow but whilst easy to spend it is hard to pay back so there are a few important things to be aware of.

– Spending the entire amount will probably take a matter of only a few months. – Monthly repayments are required to start as soon as the money lands in your enterprise’s bank account. – Only if you have used the loan to pay for something which generates enough income immediately will you be able to cover all the monthly repayment amount straight away. More often than not new initiatives take time to establish strong sales and so there is likely to be a gap of at least several months before cash coming in as a result of the loan is enough to fully cover the monthly cost of taking it on. – Most loans of this size will carry repayment terms of between 3 and 5 years. Once you sign a loan agreement you are locked into a repayment schedule and you must make those payments every month

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for the entire period of the loan – 60 months for a 5 year loan. – And then there is the terminology – fixed rate, variable rate, 6.5% p.a. (typical 12.4% APR) –which can be very confusing and not always explained in an easily understandable way. – A  s an illustration, monthly repayments on a £50,000 loan over 3 years with a 9% interest rate will come in at just under £1600. That is £1600 to be paid every month for 36 months. – A  s long as this debt sits on your balance sheet, particularly in the first year or so, other potential lenders become more cautious about investing in your enterprise too. – U  nless you have a contract in place that is able to cover the entire repayment cost for the term of the loan you are gambling that your sales revenues will be able to cope with paying off the debt. – I f sales struggle the need to keep up the monthly loan payments remains throughout the period of the loan. This fixed cost burden can reduce your ability to win business against competitors who have more flexibility. It may also require you to make tough choices about staffing levels within your enterprise as costs need to be managed.


The Investable Social Entrepreneur

Society needs more good social enterprises to break through with their strong businesses ideas and the social enterprise sector needs an investment process based on the intellectual capital of both the investor and the enterprise. After plenty of years practice on both sides, we could hope that the social investment journey would now be about relationships rather than competition, support rather than enquiry. Unfortunately competition and enquiry still remain dominant. Searching for investment is a long, often laborious process fraught with unforeseen trap doors. The best ideas can become ‘timed out’ just because of the peculiarities of each investor and their specific but curiously ever-changing approaches to ‘due-diligence’. Funders / investors each set their own individual timetables for application processes but rarely keep to them. Applying for funds becomes a lottery in the amount of time spent, the information the applicant is expected to provide and the clarity of the decision making that eventually ends the process. As previously mentioned, the preferred route for administering investment is the perpetual track of competition and enquiry – it is the route of almost every funder / investor. In the context of wanting to stress that there is another way to invest, it’s worth outlining how these processes typically play out because for most who apply the current process becomes little more than a waste of time and resources from both sides, and it is hardly ever based upon trust.

Searching for investment is a long, often laborious process fraught with unseen trap doors...

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2. The Social Entrepreneur’s Story

Here is an example that typifies how the application process rolls out…

The Scenario: A call for applications is published by some-fund-or-other, featuring a list of general criteria for potential applicants to assess whether they are likely to be ‘considered’. The savvy applicant never takes this as read and calls to speak with the potential investor to clarify specific points. With all criteria ticked, the application process begins. The application form can, in some instances, be a 30-page document full of word-limiting text boxes and demanding financial requirements. These forms can be very tricky for all those other than the experienced fundraiser or well-resourced organisation. These particular types of application forms are mainly there to make it easier for the investor to assess. The specifics: Throughout the application process the applicant was advised that their application was in a competitive environment and should their application be accepted for next-stage consideration this is no guarantee of receiving funds. During what became a prolonged process, random questions kept coming and the work the applicant was expected to carry out as part of the ongoing application process

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increased. All responses were demanded within tight deadlines arbitrarily set by the investor with scant regard for the everyday workload of the applicant. The application was for a reasonable amount of money (£250k+), so the enterprise received two visits (each visit from different staff). It was during these visits that the applicant bumped into one of the more pronounced vagaries of social finance: those who assessed their application had absolutely no knowledge of the specific work described but portrayed themselves as experts all the same. The visitors each had a background in banking / finance, contributing to the investor’s default stance, the sole importance of the finances. Here the application moved into the strange phase where the ‘social’ went out the window (viewed as no longer relevant) replaced wholly by financial barter whereby again, through seemingly random acts, the figures supplied by the applicant are manipulated to satisfy the hard held views of the assessors. This particular phase of application was their view of your efficiency and shaving some cost or other, never venturing into the high context territory we described earlier in the book.


The Investable Social Entrepreneur

What followed were more questions and more work – some of it with little or no reference to the original application and with no explanation as to why it was needed.

For the funder – the focus is on process... The funder moves on and expects the applicant to accept their decision, inviting them to apply again sometime soon.

The assessors signed off the application and presented to the investment panel. The panel then issued instruction for more questioning of the applicant. Again, all the questions related only to finance matters. In return, the relevant clarification and evidence was supplied and nearly one year later the finance was refused. The justification was that the panel felt the application was outside of their core funding parameters.

For the applicant – the focus is on people... From the fallout of this process the applicant has to pick up the pieces of the key stakeholder relationships arranged as part of the application. Relationships that often require the supply of quite sensitive information and all the complications and time that this demands. The applicant also must resolve how they will make up for the lost year in the enterprise’s development, all the associated costs incurred and income lost during the process. This type of loss is always threatening to people’s jobs and the overall sustainability of the enterprise.

At this point two opposing outcomes take shape, one based on low context process the other based on people:

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2. The Social Entrepreneur’s Story

Trust us, if you have yet to go through an extensive investment application process where competition rules this is the norm and not the exception. The process is full of waste, second-guessing and is largely to do with a power relationship in which you as an applicant will never play an equal part. If you want larger investments of £250k+, even with the strongest business model / track record you could be waiting up to 6+ months or more for a decision, only to fall foul of some vague, likely never to be fully explained panel decision, leaving you to dust yourself off and do it all again, or not, as the case may be. Even accepting that there is always going to be a shortage of available investment, social investment does not have to be this way.

Why the money doesn’t fit Fig. 5 below shows the types of money that were provided by the social finance market in 2012. Fig. 5: Money provided by the social finance market in 2012 UK Social Finance Market % Total Value

Other

1.1%

Social impact bond

1.1%

Equity

2.3%

Quasi-equity

0.2%

Unsecured loans

5.2% 90.2%

Secured loans 0.0%

20.0%

Source ICF GHK – Growing the Social Investment Market: The Landscape and Economic Impact, July 2013

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40.0%

60.0%

80.0%

100.0%


The Investable Social Entrepreneur

95% of the funds available from social finance are loans. The case study on page 24 shows the reality of a social enterprise taking on a loan. The vast majority of loans on offer are secured – where the enterprise needs to have property or other assets that can be used as security and which the lender can take possession of if loan repayments are not made on time. Enterprises that do not have suitable assets (most don’t) may be able to persuade a lender to offer them an unsecured loan but only if they have a long enough trading history and can show that they will be able to make the monthly repayments. Yet we know from survey data provided by SEUK and others that most social enterprises are too small (average monthly turnover £15,000 according to SEUK’s The People’s Business) and have not been in existence long enough to be able to take the money that social finance is prepared to provide. It only makes sense to take on a loan if you are certain that you have the income to make all the monthly repayments throughout the period of the loan. For most in the social enterprise world that is a pipe dream. The austerity climate that we described earlier often translates into difficult to obtain and unpredictable revenues that can disappear altogether with very little warning. It’s hard enough to know what your income will be in 6 months’ time, let alone whether you will have enough coming in to make the last few monthly payments of a 3 year loan. Most social enterprises are too small and not sufficiently well established within their markets to be able to support the types of finance that are (in theory) available from social finance providers. What is on offer is the wrong sort of money.

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2. The Social Entrepreneur’s Story

The Backstory of most successful social enterprises: Every successful social enterprise has their story of how they first started and later became the success they are today. But it is generally never spoken about that most have distinct and shared backstories that hide some of the important factors that made them what they are. – They were once charities or still retain charitable status to obtain the benefits that come with it. – Most started by accessing large amounts of grant. Grants that will invariably amount to hundreds of thousands, even millions of £s. – Their early periods of trading were precarious and it may have taken years to refine their business model into something close to what it is now. This means that their initial trading period was propped up by a jigsaw of grant funding. – Many still look for grant income even though they are now ‘successfully’ trading.

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– At some point, most will have nearly gone out of business. Perhaps on more than one occasion. There are a couple of points to this backstory: 1. Without large amounts of grant or similar forms of capital in the early years these enterprises would not have become successful. The early years of social enterprise is difficult and requires some sort of financial foothold to maintain momentum and find the marketplace, often through a great deal of trial and error. 2. The jigsaw of fundraising that social enterprises go through saps time, energy and resources. Piecing together the different amounts from differing funders whilst trying to generate trading revenues is a very difficult balance to achieve and threatens viability. Fundraising is often the drug of necessity (starting off / survival) but it can quickly become the drug of choice and this can have a detrimental impact on the enterprise’s ability to stay focused on trading.


The Investable Social Entrepreneur

Moving in the right direction What we start to discuss in detail for the remainder of this book is the design of the ‘Right Sort of Money’ – Builder Capital. What the Builder Capital model does is acknowledge the need for time and patient funding during a social enterprise’s early years. The model then says by investing the right amount of risk capital at an early stage of development the entrepreneur / enterprise is freed up from serial grant fundraising, thus able to fully concentrate on trading. This is an approach we see as being critical to the start-off potential of any enterprise with the plan and opportunity to do so. Builder Capital provides the opportunity for the enterprise to free itself from a “cobbled together” approach to raising funds. While meeting immediate funding needs, such an approach can result in the wrong sort of customers (not playing to the enterprise’s strengths) and the wrong sort of money (project finance rather than core funding). By providing very patient risk capital – the right sort of money – Builder Capital buys the enterprise time to find and develop markets for the social impact that they are capable of delivering. It enables the enterprise to develop a strategy for business development, social impact creation and financial sustainability.

Builder Capital provides the opportunity for the enterprise to free itself from a “cobbled together” approach to raising funds.

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The Investable Social Entrepreneur

3. The Right Sort of Money Designing Builder Capital

34


35


3. The Right Sort of Money

Design is a funny word. Some people think design means how it looks. But of course if you dig a little deeper, it’s really how it works. The design of the Mac wasn’t what it looked like, although that was part of it. Primarily, it was how it worked. To design something really well, you have to get it. You have to really get what it’s all about. It takes passionate commitment to really thoroughly understand something, chew it up, not just quickly swallow it. Most people don’t take the time to do that... Steve Jobs

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The Investable Social Entrepreneur

What does the right sort of money look like? If social enterprises are to successfully develop sustainable business solutions for meeting social need they require access to a different sort of money to that which is currently (in theory) available. • M  oney that is pro-actively seeking to make positive social change and is prepared to take on the risks that come with genuine innovation. • M  oney that is ultra-patient and which will support the enterprise as it battles through market dysfunction on the way to a viable business model. • M  oney that is looking to build effective organisations that can sustain themselves in the long-term. • M  oney that enables the entrepreneur to avoid the need to continually fundraise. • M  oney that is there to do an important job and which expects to earn returns: social returns only in the first instance; financial returns as well once the enterprise has developed a viable and sustainable model. We call this money Builder Capital.

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3. The Right Sort of Money

Introducing Builder Capital To continue the construction industry terminology, Builder Capital is the financial scaffolding which supports the formation of a financially sustainable social enterprise during its earliest phases of development. Builder Capital is there to: • Pay for the development of the enterprise: – Key staff – Premises – Mission-critical equipment, software or processes – Finding new customers • Fund R&D to develop services / products • Absorb losses while a viable business model is established Investment of the right amount of Builder Capital in the early stages of an enterprise’s development will remove the need for the entrepreneur to spend time bringing together whatever funding they can find and instead focus on developing an effective model that meets the social need and creates a sustainable business. With Builder Capital in place time and effort can now be directed towards developing products and finding customers rather than filling out funding applications and answering yet more requests for information from financiers. The enterprise can develop lasting customer relationships that will lead to mutually beneficial business opportunities rather than having to chase whatever source of income happens to be available at the time. In short, Builder Capital introduces the correct capital and capacity, buying the enterprise time to find and develop markets for the social impact they can deliver.

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The Investable Social Entrepreneur

Fig. 6: The Builder Capital Model

Builder Capital

ÂŁ

Social Investment

Model Sustainability

Model Development

Model Refinement

Model Launch

Model / Market Testing

Pilot / Prototype

Time

R&D

0

Revenues Costs

Social return

Financial surplus / loss

Financial return

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3. The Right Sort of Money

Who are the Builder Capitalists? While accepting that such capital does not fit easily within the conventional risk / return spectrum used within financial markets because it is higher risk and yet offers no security or ownership stake in the enterprise, we maintain that social investors, by definition, are not purely motivated by financial risk and return alone. We think the pioneering Builder Capitalists will be wealthy individuals, trusts / foundations and / or corporations. They will have a powerful social conscience, a desire to see radical change and they will have a better than average understanding of risk. They will know how it feels to be responsible for a business operating in precarious markets and the livelihoods that depend on it. Providers of Builder Capital will understand how long it takes to start with nothing and then to develop an enterprise that can take care of all its own needs without needing to rely on outside help. They will appreciate how hard that is. Builder Capitalists will be interested in solving problems and creating a lasting legacy. Financial returns will be important to them. Social impact even more so.

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The Investable Social Entrepreneur

Builder Capital Key Features • Investors start by asking, “Is there an innovative market-based solution to this social problem?” • And then “Can the social enterprise providing the solution achieve sustainability if supported in the right way and with appropriate funding?” • Builder Capital is ultra-patient with no predetermined repayment schedules. • Capital is at risk. • Builder Capital will deliver social returns only while the social enterprise achieves mutually agreed measures of sustainability. • Builder Capital will deliver modest financial returns that are directly related to the success of the enterprise once sustainability is achieved. • Definitions of how financial returns are to be delivered (share of revenues, financial surplus etc.) and applicable thresholds will be agreed in advance and built in to contracts that will be binding on all parties at the time when Builder Capital is provided to the enterprise.

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The Investable Social Entrepreneur

4. The Route to Sustainability Putting Builder Capital to work

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4. The Route to Sustainability

You can’t start talking about the money and work your way back to the right decision. You have to make the right decision and then try and raise the money as well Harriet Harman

The Builder Capital Route to Sustainability Earlier we stated our formula for sustainability: Social Innovation x Effectiveness = Sustainability In this section we will explain how that can be applied in practice. To start, let’s just remind ourselves of what the various incomings and outgoings of a typical social enterprise are:

Social Enterprise Income Statement Revenue from sales + Grant income = Total income – Operating costs – Interest payments (if applicable) = Surplus or loss

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The Investable Social Entrepreneur

The key to achieving sustainability for any enterprise is to make enough money, over enough years to enable savings (reserves) to be built up, that can be used when economic times get tougher. An organisation without reserves is vulnerable to every recession, loss of a customer, price cut or unanticipated event – it lacks resilience. This is especially important for social enterprises because the times when these kind of events are most likely to occur are exactly the times when social need is high and rising. In other words, social enterprises are at their most useful at precisely the times when economic conditions are at their worst. But they are only useful if they themselves can survive during those bad times. So how can a social enterprise hope to survive the difficult times and achieve sustainability? Builder Capital is the key.

Social Innovation Delivering social innovation requires a careful match between the right social enterprise and the right investor. The right social enterprise is one that has a business model which provides new or better services that improve people’s lives and which has the capability to be sustainable if provided with appropriate funding and support. It will be led by a social entrepreneur who can answer “Yes” to all of the questions on The Investable Social Entrepreneur Checklist on page 10. The right investor is one who provides ultra-patient capital at an early stage of the enterprise’s development and who is comfortable accepting only social returns until the organisation achieves sustainability. Such an investor will closely identify with all the characteristics of Builder Capitalists mentioned on page 38. Importantly, the investor will have their own strong reasons for wanting to support that particular social enterprise. They will feel a real connection with the work that is being undertaken by the enterprise because they have a particular affinity with the local area in which it operates or because they are personally affected in some way by the social issue being addressed. Such a combination will be a powerful engine for change and will be capable of delivering substantial social impact from the outset.

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4. The Route to Sustainability

Effectiveness Delivering effectiveness is about combining the right social enterprise model with the right sort of money at the right time. We believe that the provision of an appropriate amount of Builder Capital at the right time for a social enterprise with a suitable trading model can transform the effectiveness of the organisation, both in terms of the creation of social impact and its viability as a business. This is how we see it working: 1. T  he investment of Builder Capital enables management time, effort and resources to be redeployed from survival activities to product development, finding paying customers and developing markets. 2. A  closer focus on customer needs will enable key customer relationships to be developed and, as a result, delivery models can be improved and refined. This will lead to higher volume of sales and improved pricing power. That means increased revenues. 3. R  emoval of the need to make multiple, different funding applications will reduce complexity and increase service capacity. 4. R  educed complexity, fewer funding applications and possible scale economies as the organisation increases revenue will bring down costs. 5. H  igher revenues plus lower costs will generate surpluses which will enable the enterprise to build up reserves and pay financial returns to investors. 6. W  ith the entrepreneur now focused solely on developing trading routes to deliver social need the enterprise is able to realise its full potential in delivering social change / impact and to achieve financial sustainability.

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The Investable Social Entrepreneur

Fig. 7: Builder Capital – The Key to Sustainability

Grant and Loan funded Social Enterprise

Builder Capital funded Social Enterprise

£

£

Time

Time

Financial surplus

Income

Social impact

Cost

By providing enough risk capital at an early stage of an enterprise’s development it is possible to significantly improve the chances that the organisation will succeed in its mission of delivering social impact via a sustainable trading model. A skilled intermediary who understands the needs of both the social enterprise and the Builder Capitalist will be able to make a powerful match which offers the prospect of high social returns from the outset, moderate financial returns over the long-term and all at a manageable level of risk for the investor and, importantly, the enterprise. Builder Capital transforms an enterprise’s ability to create new economic and social value. Builder Capital can be the critical factor that starts the enterprise off on a journey, moving them from a hand-to-mouth existence and a continuous cycle of fundraising, towards a model that enables the business to focus on meeting social need in a self-sufficient way.

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4. The Route to Sustainability

Case Study: Demonstrating the Builder Capital Model As we mentioned at the start of the book, Builder Capital does not currently exist. As a result, it is not possible to provide examples of it in action. However, we are able to show a stylised version of how it might work by using the financial data from a real social enterprise that has made the transition from 100% grant funding to a successful trading model. We will not name the enterprise (for various reasons) but we will use over 20 years’ worth of its financial and other data that are publicly available in order to show how Builder Capital could be used to fund such an organisation. We stress that this is a highly unusual example – both for the fact that it was able to successfully fund the move from charity to social enterprise (it was admittedly operating in a different time and different market and funding conditions to those being faced today) and that enough data is available for us to work with. However, we think that this example will give you an idea of the impact of Builder Capital in action. The story: – The organisation was founded as a charity in the the 1980s with a mission to help the homeless and alleviate poverty. – Management decided to shift from a grant funded to a trading model. – Products and services were devised that would meet the needs of both beneficiaries and the public sector customers who were paying on their behalf.

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– S  ales efforts focused on finding new customers who would be prepared to pay to meet the needs of beneficiaries because it was in their own business interests to do so. – The enterprise managed to identify ways to save money and improve profitability for their own customers through the provision of goods and services. By understanding the needs of both beneficiaries and paying customers the enterprise created a market which previously did not exist. – A  s the market developed, products and services were adapted and refined in order to ensure that they best met the needs of customers and beneficiaries. As a result, the market grew rapidly. The results: – Annual income from sales increased from zero to over £7mn within the first 10 years – total income from trading over this entire period was £30mn. – Grant as % of total income decreased to less than 10% over the same time – total grants received while the enterprise was developing the new business model amounted to £4mn. – The company suffered 2 years of (very small) losses in the early period of the transition, going on to earn average profit of £450,000 in the last 3 years of the first decade. Total surpluses earned during the period were £1.6mn. – Grant funding in the early stages and the subsequent generation of financial surpluses enabled the


The Investable Social Entrepreneur

enterprise to build up net assets (savings) of over £2mn from nothing at the start of the period. This was in addition to delivering significant social impact throughout. – I n the space of 10 years this organisation transformed itself from a charity that was entirely reliant on grant funding to a highly effective and sustainable social enterprise. – Over a period of 20 years this organisation has generated sales revenues of around £70mn and improved the lives of many thousands of people who have benefited from the work that it does.

– W  hile we note that this organisation was operating in very different economic times to those we face now this case study does demonstrate that it is possible to find new markets capable of delivering substantial growth in the social sector if an enterprise has the right vision, business model and leadership. – It took 7 years for the enterprise to consistently generate profits. In this case no financial returns were payable because the risk capital was provided as grant but it would not have been possible to make any payments to investors before this time.

A few things to note: – G  rant funding was essential in the first few years of this enterprise’s existence while it developed the business model and generated enough sales to become selfsustaining. – £  4mn of grant led to the creation of £30mn of sales revenue over the first 10 years. In the following decade grant funding was a small but valuable contributor at around 5% of total income with £2mn of grant supporting the generation of around £40mn of turnover. – W  ith social impact directly related to sales the enterprise massively increased its ability to meet its social objectives versus what it would have been able to achieve if it had remained as a purely grant funded charity.

The Builder Capital Scenarios: – Assume that instead of having to cobble together grant funding for the first 6 years of the transition period that a Builder Capitalist stepped in to provide the same amount of money as risk capital in year 1. That would have been an investment of £2mn. – Also assume that revenues achieved following the Builder Capital investment are the same as those actually delivered over the 20 year period by the enterprise. This is probably a conservative assumption because the availability of a substantial amount of risk capital at the start would give the social enterprise’s leadership team much more flexibility to seek out new revenue sources than would have been the case using grant funding.

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4. The Route to Sustainability

– Now assume that the Builder Capitalist is willing to accept only social returns for the first 6 years with financial returns becoming payable from year 7 – that is once sales revenues have passed the £5mn mark and the social enterprise has delivered profit for 4 years in a row. In this case, financial returns to Builder Capitalists are paid as a share of revenues – they are directly related to the performance of the enterprise.  cenario 1: If the share of revenues S is set at 3% each year from year 7 then that would mean the enterprise making average annual payments to investors of around £145K. In this scenario, Builder Capitalists would see the full amount of their original £2mn investment repaid after 20 years. The investor would get their money back but there would be no financial return paid in this case. Scenario 2: A 5% share of revenues paid to investors from year 7 would require the enterprise to make annual payments of around £250K with the capital repaid in full in year 14 and an average annual financial return of over 3% if the payments are maintained up to year 20.

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S  cenario 3: If the share of revenues is set at 6% each year from year 7 the enterprise would pay around £300K per annum, the full amount of the original investment would be repaid in year 12 and the investor would achieve an average annual return of 5% if payments by the enterprise are sustained to the end of year 20. These scenarios show that the use of Builder Capital (or something like it) means that it is possible to fund a social enterprise to sustainability while creating substantial social impact over many years and for investors to earn decent financial returns. The key is that Builder Capital investors have a willingness to put their money at risk and to be ultra-patient in earning their returns. There will inevitably be a trade-off to be made between the degree of financial returns payable to the providers of Builder Capital and the social returns delivered by the social enterprise – scenario 3 provides the best option for the investor in terms of financial return; scenario 1 requires the lowest % pay-out of income for the social enterprise and so enables funding of more social value. Ultimately, the extent of any trade-off will be determined by the personal preferences of both Builder Capitalist and social entrepreneur and it will be a matter of negotiation between them. Fig. 9 summarises the position:


The Investable Social Entrepreneur

Fig. 9: Builder Capital Illustration

social return Best

better

good

Financial returns paid from:

Years 7 to 20

Years 7 to 20

Years 7 to 20

Social Enterprise commitment:

Payout 3% of income from year 7

Payout 5% of income from year 7

Payout 6% of income from year 7

Full repayment of capital

Full repayment of capital

Full repayment of capital

0% annual financial return

3% annual financial return

5% annual financial return

Year 20

Year 14

Year 12

Scenario 1

Scenario 2

Scenario 3

none

good

BEST

Investor outcome:

Full repayment of investment by:

Financial return

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The Investable Social Entrepreneur

5. About the Journey Being ready for Builder Capital

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5. About the Journey

On Investment Readiness There is much talk in the world of social finance about ‘investment readiness.’ There is a growing ecosystem of service providers who are offering to help social enterprises put together a plan that aims to improve their chances of securing funding from the social finance market. This ecosystem is, in part, due to the Government’s £10m Investment and Contract Readiness Fund (ICRF). For enterprises for whom social finance is appropriate, support such as the ICRF, enables them to understand what is required and to make necessary changes in order to access finance. This support may be invaluable. But what if it is the wrong sort of money? If the finance on offer is not suitable for your organisation then no amount of tweaking of business plans, preparation of Power Point presentations or other investment readiness support will put you in a position where you can sensibly take on the commitments required for such finance. For us, the essential first step in any request for funding is to understand clearly what the right sort of money for your enterprise looks like. That will depend (amongst other things) upon the social need that you are meeting, the degree of market dysfunction your products and services encounter, and the stage of development of your enterprise. For those operating in areas of need in which there is no market opportunity whatsoever, then grant funding is the only realistic option. Larger enterprises providing lighter touch services in high volumes – what we describe as low context delivery – will be better able to meet the repayment schedules and financial return requirements of social (and conventional) finance. Only those social entrepreneurs who can tick all the items on the checklist shown on page 10 should be considering embarking on the Builder Capital journey. This may sound like a very limited view of the world and perhaps it is. However, we believe that it is only by being honest, realistic and straightforward about what type of funding is suitable for different organisations can we reduce some of the angst and pain that comes when trying to get hold of the wrong sort of money. Fig. 10 shows which money fits where.

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The Investable Social Entrepreneur

Fig. 10: What is the right sort of money?

Economic driver

Cost

Efficiency

Sustainability

Organisation type

Charity

Low Context Social Enterprise

High Context Social Enterprise

Funding model

Grant

Short-term finance

Builder Capital

Builder Capital Parameters Revisiting the backstory of successful social enterprises, most, if not all who are now deemed to be a success have become so because of grant. And often those grant amounts have been in the £millions, received over many years. The other linked part of this commentary is that there just aren’t that many successful social enterprises who have managed the transition from large amount of grant into successful trading entities – although this is a story largely untold. It is also a story that is littered with thousands of start-ups that don’t make it at all, or equally, many community-based charities that regardless of ambition are never able to morph into anything more than their local offer. These are situations that can unnecessarily waste so much resource of all kinds. We are sure that most social entrepreneurs imagine that they will become the next big success story and the society we have now needs many more of them to breakthrough and achieve scale, create jobs and push out significant impact. Yet if little or nothing changes in the social finance world and grant remains scarce, as it surely will, then where will the next success stories come from and critically, how will they be funded?

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5. About the Journey

Using Fig. 10 as a guide – most, if not all, who can and will use loan finance will operate in the Charity / Low Context boxes and the deals that are done will be largely risk averse, funding existing services that offer much more of the same. We already know that most of the deals being done are for relatively low amounts – SEUK’s annual survey shows the average amount of finance sought in 2013 was £58,000 while the amount actually received was just £30,000. As pointed out earlier in the book this will offer only limited benefits. The Builder Capital model looks to step into the gaps – replacing grant, providing appropriate amounts of working capital and supplying the enterprise with crucial shock and loss-absorbing risk capital while the route to market is developed. In doing so, Builder Capital introduces a resource capacity that will offer every Investable Social Entrepreneur a greater chance to become the next big success story. This is not a one size fits all solution, of course it isn’t. And as we position the proposition of Builder Capital, it is with a dose of realism that we do so. The model will establish a ‘breakthrough’ route for some enterprises and it will target only those who have the requisite Start-off credentials. However, Builder Capital will only be appropriate for a small number of social enterprises each year – we think probably no more than 5 to 10 in the north west of England, initially at least. Taking the UK as a whole that probably means the Builder Capital market is worth around £50 – £60mn per annum, approximately 25% of the current market size for social finance. We expect those who are successful in persuading investors to back them will secure Builder Capital amounts of somewhere between £250,000 and £2mn each. Based on our research so far we believe this scale of funding will be the optimal level for the Builder Capital Model to operate at. By developing the market for Builder Capital from the bottom up, based on strong long-term relationships and backed by contractual arrangements that meet the needs and expectations of all parties, we believe we can form a solid foundation from which the concept can be proved by a few pioneering trailblazers. From there, it will be up to the social enterprise sector and social investors more broadly to decide if they wish to join the journey.

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The Investable Social Entrepreneur

The Route to Builder Capital If you have determined that Builder Capital is the right sort of money for you and your social enterprise what do you need to do to be ready for it? In our model the Builder Capital journey of referrer relationship-building and trust, applications will always be assessed by social enterprise / investment experts who will work with you with only one intention – to help your social enterprise achieve the investment you need. This sounds easy doesn’t it? Of course there will be additional hurdles but we maintain that if the application process is based on referrals and trust from day one the rest of the process becomes much more straightforward. Any funding journey, Builder Capital or any of those akin to the experience we have highlighted already will require you and your organisation to be in a particular state of readiness. What we outline here is the state we think you should be in before applying for Builder Capital.

Trusting You We believe that the best investments come as a result of genuine partnerships based on trust. Each party brings their own unique contribution which, when combined in the right way, will create a powerful engine for social innovation, the creation of new economic value and a sustainable social enterprise. The whole is greater than the sum of its parts. In order to establish that trust, the entrepreneur and the Builder Capitalist/s need to know each other’s motivations, beliefs and values. This is high context investing. It is about people, equality and responsibility. Investment is not a science. It does require a great deal of hard work and even when it works well the process can be frustrating. It demands of every entrepreneur a resilience of personal purpose that is vital if they are to succeed. Loneliness, anxiety and rejection are never far away but these should be seen as nothing more than part of the process. It is about getting you ready for the time you are in front of the right investors who are ready to listen and to place their trust, and their money, with you.

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5. About the Journey

You, the entrepreneur must learn why the Builder Capitalist is prepared to invest, what they are looking to achieve by backing you and your enterprise and what returns they expect in return for providing you with that all-important early stage risk capital. The Builder Capitalist must understand the social need you are trying to meet, the pressures and constraints that you and your enterprise face and the nature of the dysfunctional markets that define your operations. Each has a responsibility to educate the other. True partnerships are formed from honesty, passion and dedication to a common cause. The partnership will be successful only if each party fully signs up to what the other is trying to achieve. You will be able to articulate the issues surrounding the social need you are dealing with and the business of trading to meet that need forwards, backwards, inside out and upside down. It will be clear within minutes of talking to you that you understand the need and the markets your enterprise operates in intimately. You will be able to demonstrate a commitment to achieving sustainability for your enterprise through trade once you have been freed from the need to rely on the “cobbling together� funding model.

Trust in you and your enterprise is about your backstory, your strength in depth, your track record of delivery, your examination of and knowledge of what the future is likely to hold for your business.

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The Investable Social Entrepreneur

Trusting your enterprise Your enterprise will have the right legal structure and the correct governance / support arrangements to wrap all that you do in the most appropriate environment to successfully trade – this is a key part of your constituency approach. You will have a business plan that shows the positive difference any Builder Capital you are seeking will make to your enterprise. Your business plan will demonstrate how and when your enterprise will start to make financial returns to investors and how long these will be paid for. You will be able to articulate the social impact you can create if you are given the right sort of money and how that will enable you to win new business. You will talk about the customers you will be able to cultivate, the improvements you will be able to make to your products and services and the changes that you will be able to make to your operations in order to improve their effectiveness. You may have developed a brand that is trademarked, providing increased security to the value of your business model. In short, trust in you and your enterprise is about your backstory, your strength in depth (board of directors, staff, customer base, constituency... ) your track record of delivery, your examination of and knowledge of what the future is likely to hold for your business. And, of course, your all-round ability to stand up to the challenges of the growth you claim you can achieve.

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The Investable Social Entrepreneur

6. Where we go next Making Builder Capital a reality

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6. Where we go next

The Builder Capital Journey This book uses terms such as, Market Dysfunction, Constituency, Campaigning, High Context, Low Context, being Effective over Efficient, Right Money, Wrong Money, Trust and Relationship all set out to lay the foundations of the investment environment that will hold Builder Capital together. Some of the terms such as Right Money, Wrong Money could be seen as provocative or maybe even to apportion blame. This is never the intention. They are cast explicitly to reflect upon the social enterprise practice we are part of, the research we have undertaken, the practitioner’s stories we have gathered and our assessment of social finance as it is currently offered. It is all work in progress and work that points to a need for something new in the social investment world. New investment that implicitly understands how and why social enterprise matters and, on the same terms, how and why social enterprise has the best chance of establishing new sustainable solutions to the social problems the UK has. We hope that after reading this you will agree that Builder Capital, or something like it, is needed and that providers of it have a crucial role to play in the push for solutions that are able to be sustained way past the start-up phase. As a Sector, moreover as a ‘Movement’, it is incumbent on all those who have a stake to make sure, as far as possible, that only the Right Money is applicable and that the money is always able to add tangible long-term trading capacity and value to whoever takes it on. Fig. 11 indicates how an early investment of Builder Capital can increase the capacity and value of a social enterprise, enabling it to move away from survival, into growth and onto sustainability.

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The Investable Social Entrepreneur

Fig. 11: The Builder Capital Journey

Builder Capital Where you are now: • Low sales volumes • Lack of pricing power • High costs of delivery • Continuous fund raising • Little or no capacity for innovation or business development • Social impact delivery at less than full potential • Weak financial position

The route to sustainability: • Management time, effort and resources are redeployed from survival activities to product innovation, finding paying customers and developing markets • Closer focus on customer needs will build key relationships and improve / refine delivery models • Better customer relationships will lead to higher sales volumes, improved pricing power and increased revenues

Where you want to get to: • Higher sales volumes • Improved pricing power • Reduction in compexity / lower costs • Accumulation of financial reserves • Business development and high context social innovation is the main focus for management • Very high social impact delivery • Ability to deliver financial and social returns to investors

• R  educed complexity, fewer funding applications and possible scale economies as revenues increase will bring down costs • Higher revenues plus lower costs will generate surpluses • Financial surpluses will enable the enterprise to improve resilience by building reserves and pay financial returns to investors

Facilitating the route to investment and sustainability, plus enabling journeys similar to the one we describe above will be what we set out to do next – attracting Builder Capital investment and investees in equal measure. So how do we make Builder Capital a reality – an asset to establish real social change? In Fig. 12 overleaf we map out the steps we think will need to be taken in order for the Builder Capital Model to become a reality.

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6. Where we go next

Fig. 12: 8 Steps to Making Builder Capital a Reality

1 2 3 4 5 6 7 8 Step

A thorough assessment of funding sources currently available to social enterprises, their strengths and weaknesses.

Step

A good understanding of the social enterprise market and its trading opportunities.

Step

Step

A good understanding of Builder Capitalists – who they are, what their social and financial return expectations are.

Establishment of new intermediaries who have appropriate experience, skills and knowledge and who understand all aspects of the market. For example The Builder Capital Hub.

Step

Establish a pipeline of Builder Capital-ready social entrepreneurs and social enterprises.

Step

Establish a network of Builder Capitalists who are prepared to invest given the right opportunities for them.

Step

Development of financial instruments and contractual arrangements suitable for the Builder Capital model.

Step

Launch the model.

Job done – task complete

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Work in progress –more time required


The Investable Social Entrepreneur

Next steps for us We are going to spend 2014 taking all that we have written about out and using a number of events to consult on the perceived pros and cons of the Builder Capital Model. We want the Model to be discussed and tested by social enterprise and investment practitioners alike. Our aim is to expand the social investment market from the bottom up – by ensuring that social enterprises secure the capital that is most appropriate to their needs. We are talking about developing and growing a market for Builder Capital that we estimate could soon reach a size of around £50mn per year. We will use all the feedback we receive to improve on the strengths of the Builder Capital Model and make any changes as we go. 2014 will be all about planning and getting the foundations right. Our analysis is based on years of practice and extensive research and reflects our own experiences up to this point. Going forward, we are looking to enter into a constructive discourse and if others feel we are wrong we welcome being told what we may have missed or got wrong. A key focus for our efforts will be a fresh look at the role of the intermediary and the importance this role plays in achieving sustainability. We have talked about trust and referral and the matching up of the right enterprise to the right investment. It’s a relationship and skills model predicated on reducing risk and providing the best route to success for all involved. In essence what we are setting out to create is a new type of intermediary alongside a new type of investment. An intermediary that consists of a group of highly skilled individuals who can firmly articulate both the social and financial causes. An intermediary who is able to protect both of those causes to the satisfaction of all stakeholders. These individuals and their skills will be wrapped around each investment. Our own initial thoughts on the development of a new type of intermediary include the establishment of a Builder Capital Hub. This will provide a package of High Context support programmes which will bring together peers from social enterprise, for-profit business, public sector procurement and commissioning professionals with a view to understanding and sharing best practice. The Builder Capital Hub will involve investors, entrepreneurs, customers and beneficiaries – all as equal partners in efforts to devise the most effective trading solutions to meet social need. It will be a “pull” model driven by the needs of the stakeholders not a “push” model designed to further the interests of one (dominant) party. The aim will be to gather every Builder Capital investee so that they are supported as they trade and protected as they spend.

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6. Where we go next

We are working on the Builder Capital Hub now and we have a number of ideas as to how it will look, feel and perform. Others will have their own ideas as to what new style intermediaries will look like and we encourage anyone who has models that would facilitate more social enterprises to achieve sustainability to try them out. Only through an ongoing process of trial and error will a viable market be created. Early 2015 is our target to launch the Builder Capital Hub and the first group of Builder Capital supported Start-off entrepreneurs. A small and powerful group, they will launch with a full support package – giving them the best possible chance of becoming the next big success stories of the social enterprise movement. It’s going to be busy and we look forward to meeting you along the way. This book is the start of the establishment of the full Builder Capital constituency. We have started to build an exciting team and are looking for others to join us. If you are interested in learning more about our plans we can be contacted here: robbie@cancook.co.uk helen.heap@seebohmhill.co.uk

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About the Authors Robbie Davison is the Director of Can Cook CiC. Robbie started his social enterprise work in the 1980’s. A founder member of the Furniture Resource Centre, he spent 7 years developing various aspects of that model. In career moves that were both in the Third and Public Sector his roles have always specialized in creating and / or leading initiatives that were wholly focused on treating the problems associated with inner city deprivation. He has raised £millions to facilitate social programmes / enterprise, accessing money from European & Central Government, regional, sub-regional, charitable and private sources. In 2007 he created Can Cook, an enterprise established from work with a Sure Start programme and dedicated to changing food behaviours of people through cookery and training. Can Cook has since trained over 11000 people and has had its social impact independently measured by City University, London. Can Cook also has an incubator kitchen, a street food wagon, caters in a nursing home, campaigns on the issue for food poverty and is in the process of setting up COOKED – a fresh meal delivery service for adults and children in their homes or in care settings. Directly related to this work, Robbie has an MA (DIST) Social Enterprise. He is the author of ‘Does Social Finance Understand Social Need?’.

www.cancook.co.uk

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Helen Heap is an independent social investment analyst and the founder of Seebohm Hill Ltd. Helen spent more than 2 decades working in the financial services industry as an analyst, equity salesperson and investor, mostly in Japanese equities. Her career started at Abbey Life where she analysed companies and managed equity portfolios, including one of the very first socially responsible investment funds, The Ethical Trust. While working at Goldman Sachs, in both London and New York, Helen was involved in selling Japanese shares to institutional investors around the world. At Sloane Robinson she was responsible for selecting stocks for Japanese portfolios and was Head of Sector Research. Seeking a change in direction, Helen spent 2011 working with a number of social enterprises, social investors and the Cabinet Office in roles involving the measurement and reporting of social value. In 2012 she joined employment charity Tomorrow’s People as Social Investment Manager. It was in this role that she met Robbie Davison and together they have co-authored two papers on social finance, ‘Can Social Finance Meet Social Need? ’ and ‘Financing Social Enterprise – The Role of Builder Capital’. Helen went freelance in July 2013 and established Seebohm Hill later that year.

www.seebohmhill.co.uk

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Acknowledgements We owe thanks to many people who have inspired us, stimulated our thinking, encouraged our comments and generally led us to write this book. Not everyone will agree with the arguments we have put forward here and there have sometimes been robust exchanges along the way. We hope to continue the discussion and look forward to being a part of moving the debate on. Special thanks go to: Suzanne Biegel, Bob Blackwell, Matthew Bowcock, Andy Brady, Geoff Burnand, Theresa Burton, Rebecca Carpenter, David Carrington, Chris Dadson, Julie Davies, David Floyd, Sarah Forster, Peter Furmedge, Paul Gibson, Mark Graham, Dan Gregory, Ray Haigh, Paul Halfpenny, Katie Hill, Les Huckfield, Jonathan Jenkins, Rosie Jolly, Val Jones, Aine Kelly, John Kingston, Phil Knibb, Eric Munro, Andrew Muirhead, Isabel Newman, Mark O’Connor, Barry O’Doherty, Lucy Parkes, James Perry, Matt Robinson, Matt Roche, Danyal Sattar, Rod Schwartz, Patrick Shine, Nat Sloane, Matt Smith, Nick Temple, Jan Tomlinson, Nigel Wallis, Heather Waters, Brian Whittaker. The thoughts and ideas of people / organisations we have referenced: Clayton Christensen, J. Gregory Dees, Simon Duffy, Robert Egger, Edward Hall, Harriet Harman, Steve Jobs, John Kay, Mikael Krogerus, George M. Overholser, Roman Tschappeler, Big Lottery Fund, Big Society Capital, Princes Trust, Bridges Ventures, CAF Venturesome, Impetus-The Private Equity Foundation, Social Enterprise North West, Social Enterprise UK Proceeds from this book will go towards ending food poverty in Liverpool. For more information follow @foodpoverty or go to www.cancook.co.uk

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This book describes two journeys. One already well-travelled; the other about to be made. The first journey is the story of many social enterprises in the UK who have tried to obtain funding for their operations from the social finance market. It is a story filled with frustration, sometimes pain and usually disappointment because the money didn’t fit – it was the wrong sort of money. The upcoming journey, we hope, will be a much more satisfying experience for those who are able to undertake it. A journey that starts with Builder Capital – the right sort of money – from the outset and which ultimately leads to a sustainable social enterprise effectively delivering social impact for its constituents and financial returns for investors. In the book we describe why we believe that Builder Capital is the key to enabling more social enterprises to achieve sustainability and we show how that can be achieved. We believe that Builder Capital will be a significant contributor to growth of the social investment market over coming years. We explain what we think is required to make that happen and how we are planning to contribute to the development of a much needed new market.

Price £5


The Investable Social Entrepreneur