Can social finance meet social need?

Can social finance meet social need?
Can Cook CIC & Tomorrow’s People
June 2013

Executive Summary

1. The market for the provision of services to meet social need is underdeveloped but evolving quickly. As public sector spending and service provision is cut, large private sector companies are becoming increasingly involved in this market, pursuing scale economies, back office efficiencies and standardised provision in order to provide basic service levels for beneficiaries at a cost that enables providers to make a financial return. The authors of this paper argue that most currently available forms of social finance are suitable only to meet the funding needs of these types of organisation.

2. The most innovative solutions to difficult social problems are most likely to come from highly motivated social entrepreneurs running enterprises based within the communities that they serve. But this group finds it hardest to get appropriate funding, therefore these solutions often don’t get off the ground and the social enterprises providing them are unable to develop into sustainable organisations. We suggest that the absence of suitable funding for this type of organisation represents a crucial gap in the market for social finance.

3. This paper makes a key distinction between funding that is intended to build a social enterprise from its earliest stages in order to achieve long-term sustainability for the organisation – Builder Finance; finance provided to pay for ongoing service delivery for beneficiaries prior to revenue models being established – Grants; and funding that supports expansion and development for organisations that have well-established revenue models – Social (Expansion) Finance. Each of these is important and they all do different jobs. It is hoped that by defining terms in this way entrepreneurs and funders alike can save much time and effort by identifying at the outset which type of funding is likely to be most suitable for social enterprises at their own particular stage of development.

4. We show how the processes of innovation and product development undertaken by social enterprises seeking to meet social need will often enable organisations in the earliest stages of company development to deliver substantial social value even before sustainable revenues are generated. These enterprises will not have the means to pay interest on loans, or to meet regular repayments of debt, but by finding new solutions to some of the most intractable social problems they will often deliver social impact that goes well beyond the immediate beneficiaries and communities that they serve.

5. Only if these enterprises are supported through a period in which they can develop products and services that meet social need in a financially viable way are they then able to deliver both social and financial returns and take on the kind of funding that is currently provided by the social finance market.

6. We ask are there any investors out there who are prepared to accept only social returns for an initial period with a high risk of capital loss, plus the prospect of sustained positive social and financial returns in the medium and long-term once the organisation achieves financial sustainability? The absence of genuine risk capital prepared to accept a period of social returns only is the key gap in the social finance market that exists today.

7. The authors welcome the establishment of Big Society Capital (BSC) and with this paper we hope to help BSC deliver on its mission to “Effectively and efficiently channel appropriate and affordable capital to the social sector”.

8. In its role as investor in social investment finance intermediaries BSC will be an important provider of capital to the sector. However, BSC’s “need to balance the overall levels of financial risk it takes in pursuit of social impact with the need to generate sufficient financial returns to remain operationally viable” means that there will be substantial parts of the social sector that will not be able to access any of the capital provided from this source. We provide a picture of the market for social need in order to show where the gaps are and offer some suggestions as to how they may be addressed.

9. We urge the Boards of The Big Society Trust and Big Society Capital to think more creatively and expansively about the important role that they can perform in supporting early stage social enterprises, and charities who are developing trading capabilities, in obtaining the right sort of capital. We would also like to see formation of The Big Society Foundation as soon as possible with a view to it working alongside the philanthropic sector in order to ensure that all parts of the market for social need have the opportunity to have their funding needs met.

10. Without meaningful dialogue on what the social issues are, which are the social enterprises with the best ideas, and what are the most appropriate financial instruments that can connect investors to the entrepreneurs in a mutually beneficial way, it is unlikely that the markets for social need or social investment will ever fully develop. The BSC Group is uniquely placed to bridge the gap, create and sustain the dialogue and facilitate the development of new financial instruments that will meet the capital needs of all social enterprises, whatever their stage of development. The BSC Group has a crucial role to play as a market maker as well as investor in order to facilitate better matching between the enterprises that need capital and the investors who can provide it. We look forward to participating in that process.

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