This blog post follows on from last week’s. While the first post discussed the role of the state as a co-investor and legislator, this post addresses issues of investor readiness and research.
Building investor readiness
As grant funding is slashed, the viability of the social economy will rest on the ability of social ventures to attract funding. To do so, they need to become “investor-ready”. This means demonstrating, through evaluations of different kinds, that they are both income generating and can deliver a verifiable social return.
There are those who would argue that under New Labour the third sector became bloated with social projects which either duplicated existing interventions or effectively ran as grant dependent charities with little chance of achieving financial sustainability. To this logic the social investment economy will be a process of rationalisation: culling the inefficient and ineffective by directing resources to the efficient and effective. The problem is that demonstrating social impact, in particular, is much easier for a) larger social ventures and b) those which deliver social returns over a shorter time horizon. Niche social ventures which are highly specialised but deliver high impact returns over a longer term (or as a vital cog in a supply chain of social action) will struggle to advertise their returns in a competitive social marketplace where investment decisions might not be based on a nuanced appreciation of social impact but on quantified measures of return (SROI, for example).
Nonetheless, the government has taken measures to help social projects expand their business capacity and become investor ready. NESTA’s Social Venture Intermediary Fund is one such scheme, and the launch of the Every Business Commits scheme over a year ago is another. General incentives for pro bono corporate sector advice and guidance have also been introduced, but there are cultural barriers here. Third sector organisations are nothing if not mission-driven, and corporate sector approaches to lean processes and rationalisation can jar against ingrained working cultures which are often fundamental to the identity of social ventures. This is controversial ground and sensitivity is needed.
Business capacity/capability building is vital to the growth of the social economy but institutional investors are unlikely to be keen to subsidise this process. It will therefore fall on government – and specifically Big Society Capital – to do so. Unless it commits to this process, the abundance of worthy social ventures will not translate into investment opportunities, and the market will stall. The Acumen Fund has commented recently that a structural issue with social enterprise at a global level lies with a surfeit of keen investors but a shortage of investable businesses. In the UK the issue might not simply be a shortage of investable business, but a shortage of social enterprise able to express their social returns.
Enhancing research capacity
If the number of investable social enterprises has not kept pace with the availability of social investment, this is partially because of a paucity of research. NPC and NEF aside, there are very few think tanks or academic outfits dedicated to providing research to support the market. This is being redressed but the pace is glacial. In particular, research needs to be focussed on two key areas: market intelligence (to guide Social Finance Investment Intermediaries) and broader explorations of impact analysis options.
If we take a global view of the social investment market it is apparent that institutional investors in the developing world (I’m thinking about Vox Capital in Brazil as an example) have begun to invest in market intelligence because without it social enterprise will fail to meet the most pressing gaps in service provision and thereby innovate appropriately. In the UK I would argue that there is a welter of research on social needs, but a failure to adapt this information for the social investment market.
Exploring broader options for social impact analysis, particularly for smaller social projects (but also on a sector-specific basis, like those for arts organisations) is vital to helping to grow the social economy by allowing such projects to credibly demonstrate their social impact at an affordable and meaningful level. Without these options to showcase social impact, the likelihood is that investment will either flow to larger social enterprises with the financial resources to pay for SROI, or to those which can evidence solid financial returns. If the social enterprise sector is to be driven by the expression and realisation of “blended value” alternative methods have to be developed and brought to market soon. At the same time, as I have written before, means have to be found to drive down the cost of established methodologies such as SROI, ironing out inconsistencies in the calculative process, and facilitating equity in stakeholder involvement.
If you’d like more information or more detailed analysis on all or any of these individual themes, please contact me at P.Pathak@soton.ac.uk. I am currently available for expert consultancy and media work. Fuller explanations and examples of alternatives to SROI will be made in my next book, titled Social Investment Made Simple and due for publication in 2013. You can follow me on Twitter @pathik10. I am appearing on the expert panel for The Guardian’s social enterprise & higher education Q&A this Friday, 22 June at 11am.