As a growing number of angel investors look to invest in social enterprises, their practical contributions become more valuable.
David Floyd
Most social enterprises do not own buildings and particularly in their early stages, do not make profits that are large enough to repay loans. On that basis it seems strange that, according to the recent research from the City of London, loans secured against buildings make up 90% of the UK social investment market. On the other hand, equity investments – where organisations or individuals invest their money in exchange for a share of the business - currently make up less than 3%.
In theory, equity investments seem a far better way of supporting new social enterprise activity than loans but, while co-operatives raise significant amounts of capital by selling shares, non co-operative social enterprises generally don't.
According to Dan Lehner, head of ventures at social entrepreneur support organisation, Unltd, that's beginning to change: "In the space that we work in, where social entrepreneurs are building companies with scale in mind from day one, and have the ambition to rapidly grow and accelerate both their business and the social impact of what they do – there's an increased awareness that equity investment is one of the crucial ways to do that."
One of Unltd's programmes is Big Venture Challenge (BVC), which helps social entrepreneurs to raise investment to scale up their social enterprises. In its first year of operation, BVC provided match-funding and support to 25 social entrepreneurs who raised £1.2m of investment and 67% of that came in the form of high-risk equity investment, mostly from angel investors.
Part of the challenge in increasing equity investment is persuading social entrepreneurs that it's a good idea. As Lehner admits: "I would speculate that social entrepreneurs are more likely to be control freaks than your average entrepreneur. That's often because what they're doing has been driven by a personal experience."
Part of the reason why BVC participants are happy to sell equity is that the programme has actively sought to work with those social entrepreneurs who are keen to receive outside investment but, Lehner says, it's also about education: "Selling equity in your company and giving away decision-making, control of your company aren't the same thing – they often overlap but not necessarily. We need a better process of educating on equity – what it means and doesn't mean, the ways of ensuring that you keep control while also accessing capital in this way."
The other side of the equation is finding people who want to make investments in early-stage social enterprises. BVC participants have found that increasing numbers of angel investors are receptive to the idea of investing in social enterprises. Once on board, angel investors contribute more than money, Lehner explains: "Most of the angel investors have come from sectors, come from industries in which the social ventures are working so they know lots of people, they've got a profile themselves, they know how the sectors work and almost all of them have taken a hands-on role in the company."
As part of the latest round of BVC, Unltd are partnering with Clearly So who have a network of angel investors who are specifically interested in investing in social ventures.
As well as supporting relatively early stage social enterprises to scale-up, selling equity can also be a good way to finance larger more established organisations. Jamie Hartzell, is the founder of Ethex, "a marketplace for positive investments" which enables individuals to invest in bonds and share offers from social organisations. He believes that: "People want to engage with more ethical investment generally and they're looking for an alternative to the ethical investments that are available which are not particularly ethical."
For Hartzell, ethical investment currently means: "They just negative screen things so a lot of it ends up in oil companies and food companies because they're avoiding the arms and the tobacco and the pornography but after that anything goes. The most popular ethical investment last year was Total Oil and Nestlé was in there at about number seven."
Creating a share offer enables social enterprise to explain both the financial return and offer and the social benefit that will be generated as a result of the investment. Hartzell explains: "The financial return probably isn't going to be as good as a purely commercial investment in Total Oil, so you've got to describe the other benefits that people are going to get, which is the social benefit."
According to Hartzell, when organisations seek investment from banks or social investment intermediaries there is a danger: "You spend your whole time being bounced from pillar to post trying to meet the demands of these different individual investors – so instead of running a business, you're meeting the needs of the investors most of the time."
On the other hand: "... if you do an offer document and say 'this is what my business is going to do' invest in it, take or leave it, then you can get on and run your business in line with that and your investors are all on the same basis. It's got a lot more potential as a growth strategy going forward."
For Dan Lehner, a key challenge in increasing the role of equity investment in social enterprise is for the sector to change the way it talks about shareholders. He says: "I think the use of language in some reports by very influential players in our space that equates shareholders with the exact opposite of social value is very dangerous. It doesn't help our sector move forward."
He adds: "Most people in our sector come from a political ideology which is very critical of mainstream capitalism, and rightly so, but there's a huge difference between what's going in the public markets and an angel investor coming in at an early stage providing crucial risk capital that [social entrepreneurs] can't get anywhere else plus a huge array of skills, networks, credibility." (
http://www.theguardian.com/social-enterprise-network/2013/sep/13/social-investment-angel-investors)
David Floyd is managing director of Social Spider CIC. He writes the blog Beanbags and Bullsh!t.
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