More Risk Please: Investing for more social enterprises

‍ “I can do this” (Photo by Ben Kitching on Unsplash)

By Tim Thorlby

6 min read

Many social purpose start-ups struggle to find finance to get their enterprise rolling. Start-ups are a risk, of course, so investors are scarce. But in these increasingly insecure and risk-averse times that we live in, we actually need funders and social investors to do the counterintuitive thing – and take more risks, not less. In the social sector, our approach to financial risk needs a wholesale rethink.

Hey, let’s start a social enterprise!

Last time I looked there were over 130,000 social enterprises in the UK, accounting for something like 5% of the UK economy. These are enterprises which are explicitly run to deliver a social purpose. They come in all shapes and sizes and can be found in lots of sectors – coffee roasters, cleaning companies, shops, community windfarms, specialist schools, even a few farms. They do wonderful things. They are mostly small; 80% have a turnover of less than £1m, but some have achieved scale.

I started a social-purpose business once.

I was part of the team which developed and then launched Clean for Good in 2017, an ethical office cleaning business for London. I ended up running it as Managing Director for four years too and am happy to say it continues to grow and win awards under new leadership, with an annual turnover now heading towards £2m. (If you have an office in London, you should really get them to quote for you! They deliver an excellent service.)

Like most businesses, the business has had to survive major challenges – the start-up phase, a global pandemic, a handover of leadership, economic ‘headwinds’, etc.

But the biggest challenge? Making the huge leap from having a Business Plan to launching the business. It’s a huge leap because this was the bit where we needed to raise £100k of ‘start up finance’ to get the business rolling. It was one of the toughest bits of the whole process.

Making the leap

We spent nearly two years trying to raise our start-up funds from anyone who would talk to us.

Obviously, no bank would touch us with a bargepole because we were a start-up. But even the social investment sector wouldn’t touch us with a bargepole either …because we were a start-up. No-one wants to lend money to a new organisation with no track record because it’s a risk.

The sorts of venture capitalists out there who do invest money into new businesses would also not pick up the phone because we were social-purpose (not nearly enough profit) and too small to bother with.

So, are there any social-purpose venture capitalists out there? Um, not really. Certainly none operating at any kind of scale that I can see.

Most social enterprises have the same challenge when getting started. Where to find that first bit of finance? It’s sometimes called ‘risk capital’ because, well, it’s risky; new businesses are always a bit of an unknown quantity.

This kind of finance in a new enterprise tends to be ‘equity’ – i.e. people put money in and own part of the business (e.g. buying shares) and they accept that a) they may lose their money, and b) it may not pay out any dividend/interest for a few years.

This is the core difference between equity (buying shares) and debt (loan finance) – equity is usually more ‘patient’ because there is no repayment date for the money to be repaid to the investor (like a loan would have) and it is ‘flexible’ because there is no interest rate or fixed rate of return; dividends (a share of the profits) are paid to investors when the business can afford it.

So, patient and flexible money, prepared to take a risk, is exactly the kind of money that any social enterprise start-up needs.

It is in very short supply in the UK. This is a problem. It is holding back the social enterprise sector.

By the way, when starting our enterprise, we never got to £100k of start-up finance in the end; it proved to be too difficult. We compromised somewhere short (increasing our risks) and managed to find support from friends, associates and charitable organisations close to us who – very generously and bravely – took a risk on us.

Our very atypical first-time ‘investors’ who bought shares in Clean for Good have played a key role in creating an award-winning business which delivers fair pay and dignified work for nearly 100 cleaners in London today. Their social investment is disrupting the cleaning sector, renowned for low pay and poor working conditions. They are heroes and adventurers. They also didn’t lose their money, they now own a chunk of a growing social business, their shares now pay out dividends (mostly going to charity shareholders) and their money delivers genuine social impact, every year.  

The UK really needs more award-winning social enterprises. Getting started really shouldn’t be this hard.

Money, power and equity

I want to pause here just to briefly reflect on what we mean by ‘equity’.

In my last blog, I wrote about lending money to organisations (‘debt finance’) and how this is inherently relational; it always creates a relationship and so we need to be very mindful of the fairness of that partnership. Money, after all, is power.  

What can we say about equity? This, too, is very relational.

When we invest money into a business we create a relationship between the investor and the people working in the enterprise.  It is a partnership because they need each other. The enterprise needs the finance to get going. The investor also needs the enterprise so that their money can earn some kind of return, because it won’t earn a profit sitting quietly in a piggybank.

In many ways, equity finance gives a closer partnership than debt finance because it shares the risks - and rewards - more fairly. If a business makes a profit, it can give this out to shareholders through paying out dividends (profits) on their shares, then they join in the happiness. If a business makes no money in a year, the shareholders get nothing and join in the frustration.

On the other hand, the loan which the business is repaying will have to be repaid regardless. So, the lender is partly insulated against the ups and downs of business life and will usually get repaid first, before shareholders.

Given that lenders generally want their money back, they are not very interested in supporting start-ups. It is usually equity investors who get a new business going. Obviously, they also want their money back, one day, and a return on their investment, but they are there on Day One to cheer you on. They are risk-takers and adventurers. They will often invest in a portfolio of start-ups to spread the risk; you win some, you lose some.

Just to be clear, I am not being rude about debt finance – it is very important and has a key role to play in business growth. But for the challenges and rigours of the start-up world, it is often not the right tool to use.

The problem, as discussed, is that finding this kind of patient, flexible ‘risk’ capital for your social start up is hard work.

Can you have ‘equity’ in a social enterprise?

Ah yes, let’s just clear this up.

Firstly, yes, you can sometimes have some good old fashioned shareholder investment in a social-purpose business.

Community Interest Companies (CICs) allow this, with various rules to limit private profit distribution. Also, you can structure a normal Company Limited by Shares to be owned in such a way that private profits don’t leak out. For example, all of the shares might be owned by a registered charity or two. So, yes, you can sometimes have normal share equity in a social enterprise.

Secondly, there are other ways of financing the start-up of a not-for-private-profit social which are not strictly ‘equity’ but behave a bit like it. We can talk about a broader range of money called ‘risk capital’. This might be a simple grant, that a funder provides, or a ‘soft loan’, lent on the understanding that it may not be returned. There are lots of ways for funders or investors to financially support a start-up social enterprise.

So, strictly speaking, we are talking here about any kind of patient, flexible ‘risk capital’ that helps get your social enterprise off the ground.

Have you tried down the back of the sofa?

There is, of course, some social purpose start-up finance out there. Some funders do exist.  

There are a few national organisations offering support to social start-ups which also often include some small grants – e.g. Unltd and the School of Social Entrepreneurs run various courses.

There are a number of local or regional ‘accelerators’ often set up by local authorities and partners to help people starting up a new enterprise, and even one by a group of universities in London, London Social Ventures. These are often more about coaching and providing input rather than direct funding, but sometimes they include modest grants too.

The co-operative movement also offers several models, providing different ways of pooling money to get a new enterprise off the ground. The Community Shares model in particular has been popular in recent years when local fundraising has been needed to raise tens of thousands of pounds or more for a community enterprise.

More informally, people sometimes use crowdfunding or ‘kick-starter’ campaigns to raise funds to start a new initiative, offering shares or rewards of some kind.

There are also some charitable foundations which are dabbling with ‘enterprise grants’ to help charities and social enterprises start new things or grow. Some have also piloted ‘quasi equity’ which is really a loan but with terms and conditions that try to make it behave like equity – for example, with repayments linked to the enterprise’s performance rather than a fixed timetable – ‘pay back when you can’.

These are all helpful, but the quantity of social purpose start-up finance available today remains small.

The word on the street

Looking across the sector, I am not the only one who thinks things need to change.

The Adebowale Commission undertook a comprehensive review of the state of the UK’s social enterprise and social investment sector in 2021. One of their key findings was that there was a serious lack of ‘equity and quasi equity’ for social enterprises. It was less than 10% of the social investment market. It was (at the time) less than 3% of Big Society Capital’s offering. Too many organisations, even social investors, were playing it safe, sticking to loans into established enterprises or investing in secure property funds.

This lack of ‘risk capital’ is holding back the social sector as a whole; it is slowing down the rate of start-ups and, if you can get started, slowing down the growth of these new enterprises in their early years.

In 2024, the Adebowale Commission provided an update on progress towards their recommendations. They concluded that, in regard to the availability of equity for social enterprises - not much had changed.

Uncertain times require more risk-takers

So, what should we do?  

The UK faces all kinds of social challenges, often complex and deeply seated. A million young people out of work. A failing children’s care sector. Significant homelessness. Climate change. It’s a long list. Most of it is urgent.

The innovation, service and dynamism that social enterprises can bring to our national challenges is real. They are not the only answer, but they are definitely part of the answer. We urgently need more social enterprises, and we need them to grow faster and we need some of them should be scaling to become mainstream service providers.

To achieve this, the UK needs significantly more patient, flexible risk capital to help more start-up social enterprises get off the ground and grow faster in their early years.

This money is not going to come from the marketplace, it’s going to come from civil society, with a bit of help from the public sector. It’s going to come from charitable foundations and philanthropists and social investors. It should also come from major sources of social-purpose capital like Better Society Capital and the UK’s Dormant Assets Scheme.

We are not short of resources. Charitable grant giving in the UK is over £23 billion per year. The ‘impact investment’ sector is estimated at £100 billion capital. These are big numbers.

But too many of these organisations are ‘playing it safe’, conserving resources for the ‘future’, prioritising institutional longevity. Even the charitable grant givers, who are very happy to give away grants to support charitable work, are not happy to invest in, or provide grant support for, a new social enterprise because of ‘the risk’.

I think there are four significant flaws with this ‘playing it safe’ mindset:

1 - There is no such thing as a risk-free option

The ‘play it safe’ mindset assumes that giving out grants to charities to deliver services is inherently less risky than investing in a social enterprise start up. This is not always true. Risks abound in the charity sector too, they just look different. Services don’t always work well, targets are not always hit. Grant givers know this, so (usually) do tonnes of work and make charities jump through ten hoops before they get their funding. And still it doesn’t work out sometimes. My point is that there is no risk-free option, so these choices are not as different as they may appear.  

2 - Charities and social enterprises deliver different kinds of social impact - and we need both

The second problem with the ‘playing it safe’ approach is the idea that giving grants to a charity to sustain a service is somehow automatically delivering a better and more reliable social impact than by taking the ‘more risky’ option of supporting a new social enterprise.

The issue here is that they often do different things. Many of our charities (doing excellent work) are often tackling the consequences of social problems but are much less likely to be addressing the root causes of those social problems in ways that social enterprises often do – through building new housing, developing community assets, creating jobs, reskilling people, etc. We need charities. But we also need social enterprises. If your foundation cares about a social issue, why is it OK to fund a charity but not a social enterprise? Are you only tackling the presenting need or addressing the root cause too? I would argue that only giving grants to charities is an incomplete approach.

3 - The benefits of creating new social enterprises are long-term

The third flaw with the ‘supporting social start-ups is too risky’ mindset is that it fails to take into account the long term impact of social investments. When a grant supports a charity’s revenue costs, the value is immediate, but short-lived. The charity may well be back next year for the same grant. If the same grant helped to create a new social business, and it succeeds, then not only will you get your money back to invest again, you might also earn a dividend along the way and the new social business may become self-sustaining as it grows, delivering social benefits every year with no need for further support. The value of these long-term benefits, year in and year out, can be huge. So, if you supported ten social enterprises to start and only half survived, the long-term benefits of even half the group would still be significant and grow every year. Is this long-term impact being taken into account when a foundation assesses the risks? I don’t believe so. It’s not enough to measure the risks, they are also need to measure the potential long-term rewards/impact.

4 - Changing the world means taking risks!

Finally, the very idea that charitable grants or philanthropic giving cannot be used to do risky things is itself very strange. How else are we going to change the world? Can it be done from our armchairs? Can we really make progress without taking risks or making sacrifices? The very idea that we can genuinely tackle deep-seated and complex social problems without taking risks or trying anything new is surely a nonsense. Philanthropic capital is ideally suited as ‘risk capital’ for the social economy.

Yes, of course, any use of philanthropic or public resources for support start-up social enterprises needs to be carefully and properly appraised. And, yes, it is only one part of the work of civil society, (I am not against giving grants to charities!). But it is time to give ‘risk capital’ its place too. It is a largely missing tool in civil society’s funding toolbox.

Ask: 1% for social enterprise

I want to recommend that the UK philanthropic / charitable giving sector sets aside 1% of its grant giving every year for investing into start-up social enterprises.

This would be approximately £250m every year in the UK.

This would be transformational for the social sector and for the UK itself.

There are lots of organisations that know how to invest this money so charities would not need to do it themselves, the funds could be pooled and given to expert providers across the UK.

We face some real emergencies. More dynamic and urgent solutions are required.

The prize is enormous – building a more entrepreneurial civil society, finding more innovative solutions to our deepest social challenges, creating new enterprises and jobs, regenerating deprived areas, building a stronger purpose-driven economy in every community.

What have we got to lose?

Can we take more risks please?

This blog was written by Tim Thorlby. Please sign up for the monthly email if you’d like to know about future blogs, usually published once a month. It’s all free.