Tinkering or game-changing – part 2

Tinkering or game-changing – part 2

In the first part of this blog, we commended the announcements on Social Investment Tax Relief and reform of the CIC limited by share. Could these be the game-changing moves we need to scale up social entrepreneurs’ social impact? Today, we look at new developments beyond asset-locked social enterprise forms. We ask if there is a new class of social purpose business emerging, and what this could mean for social entrepreneurs.

Profit with purpose

UnLtd supports social entrepreneurs, irrespective of the legal form that they choose for their ventures. Our Award Winners’ ventures include voluntary associations, charities, companies limited by guarantee, industrial and provident societies, community interest companies, limited liability partnerships and companies limited by share. We look beyond the legal form to focus on the social purpose and social impact, and the vision and commitment of the social entrepreneur.

The company limited by share (CLS) is the normal legal entity for ‘for-profit’ business. It has no built-in asset lock or restrictions on private gain, so it is not usually seen as a vehicle for social enterprise. But it is increasingly being used by social entrepreneurs. From 2009 to 2013, CLS applications to our ‘scaling up’ programmes rose from 34% to 54%. Eight per cent of UnLtd Award Winners supported since 2003 with surviving ventures chose the CLS as their legal form.

What is driving this change? Our research suggests a mixture of factors:

– Some social entrepreneurs are looking for risk capital as they grow their ventures, and see equity as the best option as it doesn’t tie them into costly debt repayments.

– As a result of angel investors getting tax relief on CLS investments, social entrepreneurs looking for risk capital feel that they can increase their chances if they are a CLS.

– Social entrepreneurs put a huge amount of time, energy and personal funds getting their venture off the ground, and some feel that the CLS allows them the possibility of a reasonable return on their ‘sweat equity’.

– Bringing in equity investors can help social entrepreneurs to access expertise, networks or access to markets.

– In some markets, social entrepreneurs feel that being a CLS helps them to be seen as credible or nimble enough to compete.

– There is an increasing cultural acceptance of social purpose business, distinct both from conventional for-profit business and from asset-locked social enterprise.

– Social purpose businesses are being offered incubation and other forms of support that have until now only been available to ‘pure’ for-profits.

If the new Social Investment Tax Relief delivers its potential, and if the proposed reforms to the CIC limited by share succeed in it being perceived as a viable option for entrepreneurs and investors, some of the above driving factors might become less significant. But our sense is that despite these reforms, interest in mission-locked social purpose business is likely to grow further and faster. This could represent a new category in the spectrum from charity to business, as below (diagram missing)

This prospect is being taken seriously at the global level by the G8, whose Social Impact Investment Taskforce last week discussed a new working group on profit-with-purpose businesses – how to identify them, how they are different to asset-locked social enterprise, and what mechanisms can be used to lock in the social mission.

The G8 group is looking at emerging legal forms such as the benefit corporation in the United States, and tools such as B-Impact certification and golden shares for reporting on, or locking in the social mission. In many countries, there isn’t the variety of legal forms for social enterprise that we have in the UK, so adapting a for-profit legal form and finding ways to embed and lock in a social purpose may be the best option for many social entrepreneurs.

From our point of view, this is all about ensuring the social entrepreneur’s legacy, protecting the social venture from being diverted from its primary social purpose, and gaining the trust of stakeholders that social impact is embedded in its DNA – hence the label ‘trust engine’.

It’s also about finding ways to leverage in investment from new sources to help social ventures to grow and to increase their social impact. It is not about diverting existing social investment cash away from charities and social enterprises. 81% of investment secured by UnLtd Award Winners in the first round of Big Venture Challenge was from investors new to the social sector, and 78% was in equity. This investment has so far helped the investee ventures to reach three times more beneficiaries.

And more fundamentally, it’s about the agency of the social entrepreneur to make an informed choice about how best to deliver his or her vision.

There’s much work to be done at this new frontier of social venturing – and we acknowledge concerns that trust engines, mission locks and profit-with-purpose labels need rigour and clarity. At such a formative stage we need to test and learn what works on the ground, and as with any innovations, some will stick as others fall by the wayside. The debate needs real-life examples, so we are currently talking to social entrepreneurs to understand why they are increasingly turning to the CLS and what emerging trust engines are helping them to deliver their social mission.

We’ll be feeding our findings into the G8 working group, and publishing our own research in the coming months, so watch this space. And if you have set up a social purpose CLS, we’re keen to hear from you – please get in touch.
See more at: http://unltd.org.uk/2013/12/13/tinkering-or-game-changing-part-2/#sthash.SlEmKgwM.dpuf