Creating a successful business need not just been about making as much money as you can. It can also be the most fantastic opportunity to do some good in the world at the same time. You can choose to do this in one of two ways – make your money first and then spend it in an altruistic way, such as Bill Gates is doing, or set up your business in such a way that it does good alongside making money and has another goal other than simply making profits.
This kind of business is called a social enterprise, and the numbers of businesses being set up like this are growing fast – there are now more than 60,000 social enterprises in the UK alone.
What is a social enterprise?
A social enterprise is a business which has a primary social or environmental objective and reinvests a substantial percentage of the profits it makes into furthering that objective rather than distributing them to shareholders or owners.
It has a clear sense of its ‘social mission’ – in other words, what difference it is trying to make, who it aims to help, and how it plans to do it. It generates most or all of its income through selling goods or services rather than through grants and donations.
Setting your business apart as a social enterprise
There is no official legal definition of a social enterprise, or indeed any formal structure or format required in order to create one, but it is widely accepted that a social enterprise should aim to invest at least 50% of its profits into socially positive cause, either by donating those profits to an external charity or community organisation which provides a positive social impact, or by reinvesting that amount back into the business itself to provide a positive social impact in the way it operates.
Most social enterprises choose to include details of their commitment to a social mission in their company’s articles of association. You may also choose to get an externally awarded sign of your commitment to social causes by getting a mark of accreditation from Social Enterprise Mark or Social Enterprise UK.
Social business needs to be a sustainable business
In theory, you can adopt any business structure to be a social enterprise although in practice it makes sense to set up a limited liability company rather than trade as a sole trader.
You also need to ensure that your social enterprise is sustainable as a business – giving away 50% of your profits is not going to mean very much if you are not making any profits in the first place, no to mention making your route to capital very difficult.
Securing social enterprise investment
The path to securing investment for a social enterprise can be a tricky one – fraught with confusing choices, mix messages, and the hyped-up use of jargon – I mean, what do I even mean by ‘investment’? For the purposes of this article, it will mean any additional finance sought where there is an expectation of financial return – this excludes grants, donations and other philanthropic capital.
Briefly, I should also add that social enterprises can seek investment from traditional commercial providers, or ‘investors’ as I will refer to them – such as your high street bank – or, from social investors which seek a social as well as a financial return.
Like commercial investors, social investors also range from social banks to specialist investors, providing a range of products from loans to Dragon’s Den style equity investments – see Social Enterprise UK’s online directory for a list of social investors.
Lastly, I should say that different investment needs will lead you down different paths, and things can get complicated, but hopefully, the below will be a useful starting point to help you prepare.
Does your social enterprise make money?
A seemingly simple question but one that sits at the crux of what investment you will be able to raise. The first thing investors look at is whether you will be able to pay them – this could be repaying them what you’ve borrowed or the potential to pay them a dividend/share of future profits or revenue.
Essentially, is your business model financially sustainable? If you only ever make enough money to cover your day-to-day running costs, and if the reason you are seeking investment does not change this (for example, seeking investment in order to stay afloat or to fund a free charitable service), then seeking investment may not be suitable for your needs – stick to grants, donations and other philanthropic capital.
Understand as a social entrepreneur what you’re asking for
Being a social entrepreneur is more than just knowing what the money is for or how much you need, but understanding what are you asking for from the investor in terms of what length of time do you need the money for, the level of risk you’re asking the investor to take, and how much return (financial and perhaps also social) you are offering.
The most common form of investment is a secured loan. It is one of the less risky investments as it requires the business to offer some security (commonly, an asset such as a building), and, usually, prove they have an established sustainable revenue model and sound trading history.
However, not all social enterprises find themselves in that happy situation and are deemed riskier to investors – this can be typical of start-ups, those developing new products or entering untested markets. It is also common for social enterprises to be asset light as their assets may be protected for the benefit for the community or social mission. The investment may also be riskier if the return is tied to performance or only available after a certain length of time.
With these additional complexities, the deal may need to be structured in a way to reward the investor for taking a higher risk. In an equity investment, this may mean giving the investor a bigger share of the profits/revenue or more control and ownership of the business. In a debt investment, this may mean a higher rate of interest.
Of course, there are social investors who are willing to forgo any short-term financial return to achieve the maximum social return. Known as patient capital, these investors may also tolerate higher risk, accept below market rate returns and offer support to help your business to succeed. When you really understand what you are asking for, then you can start trying to find a match on the market.
There’s also the possibility of accessing an unsecured loan from the startup loans scheme.
Matchmaking in the social entrepreneurship marketplace
When seeking investment, you will find a whole range of investors from big banks to specialist providers. They are likely to offer different types of products and may also have different areas of focus, from the sectors they invest into the size of investments.
In the social investment market, there may be an additional layer of complexity as the investors may also be interested in different types or levels of social return.
As with any match-making exercise, you may decide to do it yourself and apply directly to the investor, or you may need to seek some advice or support. This may be to get basic information on the different investors and types of products available, or for more technical support such as capital raising or a brokerage service.
These organisations are commonly referred to as ‘intermediaries’ (confusingly, investors are also referred to as ‘intermediaries’, so just remember there are two types – ones who arrange the transactions i.e. investors you apply to directly for money, and ones which provide advice and support but do not offer any money directly). With all these considerations it is worthwhile spending time doing research into the various investors and intermediaries out there – see Social Enterprise UK’s online directory for a list of social investors and intermediaries.
A targeted approach to selecting suitable investors will reduce wasted time and effort for both you and investors. Take advantage of networking opportunities to get to know social enterprises that have gone through similar experiences or speak to investors to get to know them better – they are trying to find you as much as you, them!
Do your sums and show your working out
Lastly, before you make the final approach for investment make sure you have all your finances in order, demonstrating how your business plan works in facts and figures. This is the first thing that investors look at and includes: financial history, profit and loss accounts, cash flow, balance sheet, future projections…the whole whack, as well as details on how and who manages this.
Do you remember the lady from the latest series of The Apprentice who quoted a five million pound turnover for her business because she preferred the number five to ten…yes? Don’t be her.
Alternatives to a social enterprise
As an alternative to setting up a social enterprise, you can also choose to show your commitment to social causes in other ways, by choosing to employ only disabled people or former convicts, for example, or by only using recycled or environmentally sustainable materials. In this case, it is probably more useful to describe your company as a social venture, or simply an ethical business.
A case study of a successful social enterprise
Kresse Wesling and James Henrit make handbags, belts and wallets out of old fire hoses being thrown out by British fire brigades. Previously the decommissioned fire hoses would have been thrown into landfill sites, but now Kresse and James take them and turn them into beautiful accessories, selling them via their website. Then they donate 50 percent of their profits to the Fire Fighters charity.
The idea for the business was dreamt up when Kresse spotted an old red fire hose and dragged it home to show James to see if he could do anything with it. The linings for the bags and wallets are all made from recycled materials too, such as textiles from old office furniture, scrap sailcloth and waste parachute silk. The two of them also made shopping bags for the supermarket chain J Sainsbury made from old coffee sacks, which would have otherwise been thrown away.
Kresse said: “We are firm believers that you are not going to save the planet with a doom and gloom message. You are going to save it by making it fun and exciting and engaging for everybody.’