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2013: A crossroads for social enterprise?

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I rather liked this tagcloud on social innovation from the European Summer School on Social Economy (which sounds like a jolly nice place). So I thought I’d copy it…

It’s about this time of year (or maybe I’m a little bit late this time round) when various members of the commentariat start to look ahead with unbridled optimism to what the year ahead might hold in store. Some make predictions – and if that’s your thing, check this really interesting list out – but as I’m only at best an occasional blogger, I’ll stick to a fervent hope and aspiration: that 2013 is a year of further, and significant, transformation for socially-orientated enterprise.

Why does this stuff matter? Well, 2012 wasn’t a great year for ethical conduct and public confidence in our most avaricious private companies, and a year of exceptional volatility throughout the financial markets has frayed investor nerves and encouraged flight to safe havens. Conversely, with the mutual sector’s poster child reporting a bumper Christmas, there is an ever-increasing store of alternative financial models thinking about values-driven pitches for consumer and investor support (and as I said in my first blog, I think we are living in a world where businesses have become increasingly social in order to succeed). And partly as a result of all this, the demand and need for businesses predicated on social as well as financial return (from traditional charities stepping in to offer services where markets fail, to tech startups launching community-enhancing apps drawing on new public data) has in no way diminished.

This year’s opportunities

This is not a zero-sum game – for private enterprise to deliver optimal economic and social outcomes would surely be impossible without a thriving for-profit economy and top-notch socially-orientated businesses working alongside each other to deliver optimal economic and social outcomes. But I think what is really interesting about this year is the way that these two traditionally distinct sectors might merge – driven by a gradual (but intensifying) shift from a dependence on philanthropy and grants to more innovative forms of investment into social businesses, and new approaches to business models across the ‘not just for profit’ sector. For example:-

  1. New financial products that generate social impact in a sustainable and repeatable way are actually being created, instead of just being talked about. Goldman Sachs’ participation in a $9.6m social impact bond to underwrite investment in Rikers’ Island prison’s anti-recidivism programme – with the potential for Goldmans to take financial upside and downside across the life of the bond – locks private investment to social outcomes in a promising way. Scarcely a month passes without reports of new SIBs being mooted across the world: let’s see how many ultimately deliver both the social and financial benefit they promise, and what happens to the service users and investors when they do.
  2. Public services across ‘Western’ economies face new and unprecedented challenges as spending continues to tighten, forcing public bodies to think creatively about how they’re commissioning (and de-commissioning) services, and with whom. Have a read of Laura Bunt and Charlie Ledbetter’s the Art of Exit pamphlet for a really intriguing analysis of this transformational process. One thing that struck me in this pamphlet was the importance the authors assigned to commissioners getting in place a well-planned political and communications effort to mobilise popular support prior to changing the delivery model of a public service. Contracting with businesses with a clearly articulated social purpose – where their success creates direct knock-on benefits to the service users – could be a really powerful force supporting public service commissioners to do this adapt their services in a way that supports sustained public engagement and support. Which would of course have the happy impact of creating countless new opportunities for social businesses.
  3. Business and investment practices are starting to permeate from ‘traditional’ marketplaces to the social enterprise space, and vice versa:
  • Social investment funds are taking an increasingly adaptive and flexible approach to their funding portfolios – look at the Omidyar Network’s ‘priming the pump’ series for an example of how funds are starting to look at a look at adapting individual investments to market impact, using marketplace and sectoral analysis to determine the model of investment preferred in individual deals. JP Morgan and the Global Impact Investing Network last week forecast a 12% growth in this ‘impact investment’ sector in 2013, ultimately leading to $9bn in investment through the year.
    • Ideas starting off life in socially-orientated business are increasingly ceasing to stay there. For example, NESTA’s 2013 list discusses the prospect of big business stealing and adapting  collaborative consumption  approaches modelled by social enterprises in their practices. My money’s on a bit more of this happening in 2013.

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Growing socially

So, things are definitely happening here. But where does this leave social business? The answer lies in your take on what’s needed to support growth in this industry – of individual social businesses and the sector as a whole – and what the positive and negative consequences of greater growth and scale could be.

On the one hand, there are strong views that the new models and investment that I’ve mentioned above bring risks as well as rewards. As Colin Crookes warns in this (generally excellent) blog published last week by the Guardian:-

“So in 2013 we will see the battle between scale (dressed up as impact) and social enterprise; large corporations with “social impact” departments backed by large investment funds against genuine social entrepreneurs using new legislation to promote social cohesion.” 

However, are those ‘genuine social entrepreneuers’ always the right people to carry businesses forward to maturity? Is it wrong for others (including ‘large corporations’) to get involved with social enterprise? As Crookes says, growing financial scale does pose challenges about how best to hold on to and embed social value. But the new conditions I’ve mentioned above also force difficult questions to be asked about how best to support social businesses to grow and expand successfully. And as mentioned in articles over Christmas, this is something London doesn’t always do very well, as we can get a bit too breathless about chasing the Next Big Thing and forget about the need to persevere at supporting sustained business growth over the longer-term. This conundrum- about how to support sustained growth without compromising social value- makes a lot of sense to me, as I’ve experienced it. For instance, this Harvard Business School article last week really chimed with my relatively brief experience as founder of one of the scrappy, 90%+ of low-profit social enterprises:-

“We can’t ask social enterprises to have a big impact if they can’t get the resources they need to grow bigger. In Britain, for example, fewer than 10% of the tens of thousands of social enterprises generate more than £1 million in revenue. Why is that?

One reason is that the scrappy, entrepreneurial approach that characterizes many of these organizations starts to break down as they pass that threshold. Normal business complexity sets in. Founding CEOs realize—or fail to realize—that their maniacal energy and personal devotion can only take their enterprises so far.”

Too true.

 

What now?

So, let’s be absolutely clear: I really, really want 2013 to be a transformational year for social enterprise. But, I think that for this to happen:-

1. We need to think really carefully about where the market failures lie where social businesses can add the greatest possible value, and be really demanding about the people and business models that will do this best, with investment responding accordingly (i.e. grants have their place, but so does investment and business generating significant return and revenue). In short, we’re going have to get really comfortable with the social and for-profit worlds coexisting in a much more integrated way…

2. … but we also need to recognise that in order for social businesses and the social enterprise to grow in a way that commands public and investor support (and holds on to the sector’s unique strengths), we will need to develop as much rigor and discipline about measuring and rewarding social impact as is applied to financial growth.

What do you think – am I overplaying the risks here, or do you agree? What are your hopes and fears for social businesses in 2013?

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Who wants to own a startup?

What you can now stand to get in return for crowdfunding a startup

Being someone with a slightly more than a passing interest in the world of crowdfunding, I popped along to NESTA last week for the launch of ‘The Venture Crowd’, a new research report into equity crowdfunding. Do have a look, it’s worth a browse – and mercifully, compared to most social research it’s pretty concise and to-the-point. Which is nice.

I’m going to blog next week on what NESTA and other similar organisations could do to boost demand for non-equity crowdfunding (in short: a lot more), but for now here’s some thoughts on the new kid on the block:-

What it is

If crowdfunding was the next big thing in 2010-11 (with NESTA estimating that $1.5bn was raised for crowdfunding projects in 2011 alone), then equity crowdfunding is making a strong case to follow suit for 2012-13. The concept is pretty simple – take the concept of getting lots of people to give a little bit of money to help make your project happen, and instead of offering them kooky rewards (like your name weaved into the side of a bus) you offer them a stake in your company. If your business idea takes off, your backers- from £10 upwards – get a share of the return. The vast majority of equity offered in this space so far has been non-voting, so if you’re a crowd-investor you’d have to sit tight and cross your fingers to hope your company does well.

To date, equity crowdfunding platforms have been thin on the ground, given the complexity of navigating financial regulation. For once, the UK is out in front here, with Crowdcube launching just over a year ago (Check out their excellent infographic on their first year’s work, where they raised over £2.8m raised for 15 fully funded pitches), but with the passing of the JOBS Act in the US – which among other things lifts the majority of regulatory burden for companies seeking to raise money from a large number of small investments – expect to see an explosion of new platforms any minute. The UK market is starting to form too, with Seedrs, winner of the recent London Web Summit launched only last week, trumpeting the fact that it is fully authorized by the UK authorities.

Who it’s for
It’s way too early to tell what sort of businesses might stand the best chance of success in trying to crowdsource startup capital – judging by Crowdcube, most seem to be consumer-facing brands seeking to sell a product or service to the general public, starting with a new bubble bath manufacturer. Soon-to-launch CrowdMission is aiming to try something a bit different, with a focus on social and sustainable businesses, rather than naked profiteering. This is an interesting proposition: while there’s no question that projects with a social purpose dominate the non-equity stakes (so with the right pitches the platform should be able to get ‘normal’ people excited about investing) – and I reckon non-equity finance for social businesses could still turn out to be a game-changing proposition – will micro-investors really be motivated by returns that are surely smaller than for-profit competitors? And if so, is it truly a more attractive proposition to offer non-voting equity with a tiny return, compared to a really exciting non-financial reward?

Which brings me on to (imho) the great unanswered question – who do these new platforms want as their ‘crowd’? Is this a play for genuinely new micro-investors, or simply a way of getting existing angel investor communities to put their cash elsewhere (so, something like FundingCircle)?

 This is a question that occupied much of our time when we ran WeDidThis, and was where NESTA’s session last Tuesday got interesting – when pushed on the question, answers ranged from angel investor Ami Shpiro’s view that this would complement offers for existing big investors (who do need “somewhere to go“, and a crowdfunding platform would be as good as anywhere) to CrowdMission founder Karen Darby’s more emotive “people like my Mum“. And lots inbetween.

 This is an important question, because it helps us start to understand how big the market could be for this form of funding. It may be that an initial base of bigger, traditional investors create a critical mass that helps popularise this for new micro-investors. But for now, I’m not quite sure – for instance, although Crowdcube’s statistics suggest that they are a crowd of small investors, I’m not sure that’s the full story. Their average donation size is up at around £1.9k, which seems quite a lot for ‘cold’ investors. As a comparison, for my site WeDidThis our equivalent was about £30, and although I’d expect there to be a fair disparity between the two sites, to know that this is really pulling in the masses, it’d be great to see this number come down a bit over time.

 

A typical CrowdCube pitch

Why I’m excited 

In theory, equity crowdfunding is absolutely brilliant:

  • It makes the process of seeking finance totally open (and, with luck, fun) and makes startup executives think about building broad word of mouth support from the word go. Which can be a really powerful tool in making new companies grow faster.
  • It enables everyone to participate and benefit from the growth of UK startups. Getting involved with making new companies grow is really exciting, but so far is the preserve only of a small number of dragons. Equity crowdfunding can change this, creating a whole new class of micro-investors.
  • For startups, the option of going to the crowd for capital could be a useful (if labour-intensive) way to bridge the gap between very early-stage loans and grants, and going for bigger investment (and ultimately listed company status).

Why I’m wary
However, equity crowdfunding is a very different proposition to backing a Kickstarter project and I’m really not sure we’ve fully bottomed this out. Here are a few of the concerns lurking in the back of my mind:-

  • How to balance encouraging new investors and warning them about the risks – As this blog sets out much more eloquently than I could, we are talking about very high-risk equity here. That’s not to say that buying it isn’t fun. Just that you shouldn’t bank on getting your money back. (And to be fair to CrowdCube and Seedrs, they are very clear about this). The JOBS Act takes an interesting approach to this, limiting the amount that non-accredited investors can invest in equity crowdfunding – subject to much lighter regulation than traditional investment – to 2% of their income, up to $10,000.
  • But go too far on investor protection and you risk putting off casual investors (who are surely the target market for this). For example, while I’m really excited about what Seedrs will do and think the team look great, I found registering to become an investor with them a somewhat burdensome process – I went through two long questionnaires, downloaded a 26-page contract had to agree to the statement below, and then had to send in copies of my passport and driving licence:-

Although you will be able to invest a minimum of £10 in any given business through the Seedrs platform, we strongly advise you to build a highly diversified portfolio. You should therefore plan to invest no less than £1,000 in aggregate if you are going to invest through the platform at all.”

Is amassing a £1,000 highly diversified portfolio really ‘crowdfunding’ as we’ve come to understand it? I’m not so sure….

  • Governance/ vetting risk – It’s taken 2 years for the first case of a high-profile crowdfunding fraud, which is not bad going, all told. Given the massive volume of projects going through Kickstarter, that’s not a bad rate, and when you’re talking about a site that mainly takes small donations (nb not investments), most people seem to be happy with the general success of Kickstarter’s self-policing policy. However, turn small donations into slightly larger investments and things change. Although Darren Westlake from CrowdCube has been pretty candid about rejecting lots of pitches coming his way, I do think we need to keep talking about how platforms can help their users get to know the companies pitching for their cash.
  • Getting the offer right – As Jeff Lynn, Seedrs’ founder, said at the NESTA session, this sort of funding offers financial and social return wrapped together, so investors are likely to tolerate lower financial return. All well and good. However, although I can well understand why startups would be reluctant to gain a crowd of voting shareholders (at such a low entry point), it’d be great to see companies start to get a bit more innovative about how they enable their crowd-investors involved in growth of the company they are investing in.

In conclusion, there is a hell of a lot to be excited about here – but to make this a truly inclusive movement, I think platforms will need to find innovative ways of helping their users discover and get to know the companies pitching for support, cultivating a user offer that makes very small equity investing a valuable and fun experiece for the micro-investor, while being super-clear on the risks.

But if we can get all that right, this could make capitalism very interesting indeed. And it could help quite a few smashing startups get off the ground.

Check back next week for more on how we can make everyone into crowdfunders, including reaction to Kickstarter’s announcement that they’re coming to the UK…..

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