Investing in social enterprise, investing in models

 

Lisa van Heereveld

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The definition of social enterprise has been at the centre of global debates for a long time. The overall UK consensus seems to be that social enterprises should generate at least 50 per cent of their revenue through trading activities. However, questions still remain whether this is a viable model for the longer term.

This topic was also one of the key debates at the Social Enterprise World Forum (SEWF) 2018. The forum highlighted that there is still much ambiguity between ideal definitions and business models of social enterprises. In a debate regarding the financial models of social enterprise, the small majority of delegates argued that social enterprises should strive toward full financial self-sustainment. This means that initial grants and donations should be used to help social enterprises scale and grow their income, decreasing the total percentage of dependency on other sources of revenue. After all, the word ‘enterprise’ in social enterprise refers to business-like models that do not rely on ‘hand outs’.

However, the small minority of delegates argued that it is fine for social enterprises to rely on a percentage of grants and donations in the longer term, providing at least half of their revenue is generated through trading. Due to the purpose-driven nature of social enterprises, these organisations may struggle to compete against cost-cutting corporate giants. This view is underpinned by ideological perceptions that politics of marketization have a negative impact on social value delivery, and that social enterprises need some form of grant or donation to maximise their social outcomes.

Regardless of which views are right or wrong, the adoption of a particular stance by organisations will significant impact the way they manage their cash flow and operations. Philanthropists must therefore consider their own stance in this debate to determine what effective investment means to them and how they would like their money to be spent.

An argument for investing in more grant-reliant social enterprises could be that these organisations are in higher need of the money as they have not identified alternative ways of growing income. Indeed, at the SEWF it was argued that organisations never choose to ‘chase grants’ or donations. Chasing grants and donations can be highly time-intense and involves additional activities such as managing investor relations and communications. Organisations consistently seeking these types of funding might just not have a model or mission that lends itself to sufficient income-generation, highlighting the need for philanthropic investment to achieve their social missions. For example, an organisation distributing educational technology in developing countries may have more difficulty becoming financially self-sustaining than an organisation selling sustainable food products to people with disposable income.

An argument for investing in social enterprises working toward self-sustainment, is that the investment can help them independently generate more income in the long-term and therefore, scale and grow. These organisations are less likely to feel forced to adjust to restricted grant or donation requirements, and are less likely to be in need for constant new pots of funding.

There is no ultimate answer as to which investment is most appropriate. The answer lies within the ‘why’ philanthropists choose to invest in organisations and their personal beliefs. It could be argued that there is a place and demand for both areas of investment. If anything, the social enterprise movement has generated more flexibility in terms of deciding where investor money should be distributed. Instead of charities versus businesses, investors now have a range of investment choices between more business-like social enterprises, social enterprises relying on some form of donation, and charities. These shifts require a change in thinking of investors to consider the desired impact of their funding on the social enterprise’s business model.

Lisa van Heereveld is a Young Talent Programme Delegate at SEWF 2018

Tagged in: Social Enterprise World Forum


Comments (1)

Gretel Ferat

Great post Lisa, congrats! To add to the discussion, I worked in the charity and corporate philanthropy sector in Mexico for almost 10 years and some of the work I did was around changing benefactors' perception of the money they were giving us (charities). We never went in asking for grants or donations, instead we were always after "investment" in projects that had a clear return for the benefactor, not measured financially, but in impact. This impact was also always related to goals in areas (either geographically or thematically) that were attractive to the benefactor and potentially saved them money on CSR campaigns in the long-term. You can think of it almost as doing CSR as a service. Our charity was specialised in a topic that the benefactor had no expertise on, so by investing in us, they a) enabled us to keep doing what we did b) improved their relationship with their key stakeholders c) avoid the need to develop expertise that didn't add to their business d) still were able to deliver on their CSR-related goals f) were able to report back on CSR key performance indicators to their own investors All of this, by simply making sure that we were speaking business language to our benefactors, highlighting the benefits of working with us and making really clear what the return of investment they would get. We never introduced products or made changes to our services. We did have to spend a fair amount of time making sure we were targeting the right benefactors, but once the relationship was established it was very easy to maintain, as they were able to see a tangible benefit from it and that enabled the charity to grow internationally. I'm not saying this model should/could/would work for all social enterprises or charities out there, but it does provide a way to make grant funding a bit more sustainable, and hopefully something that might provide food for thought for those struggling to find alternative sources of income.


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