The current economic climate has resulted in a substantial decrease in the availability of grant funding for charities and social enterprises. In fact voluntary sector grants have decreased from a peak of £5.6bn in 2004 to £3.0bn in 2011. In addition to this, government spending, which accounts for over £7bn in voluntary sector income, is projected to fall by nearly 20% between 2011 and 2018 (NCVO Civil Society Almanac 2013). For many voluntary sector organisations this has had a significant impact on their activities. Employment in the sector has reduced by 23,000 between 2010 and 2011 alone.
In this context, charities and social enterprises should not seek social investment to replace traditional grant funding. Like using a credit card to pay for your food shopping- it will catch up with you eventually! Social investment must not be used to fund pure charitable activities where there is no expectation of a return further down the line. While it is important to realise this distinction, it is wholly academic. When social investors carry out their due diligence they always consider this and will not lend money or invest in an entity which intends to use the money to fund charitable programmes- after all they will want their money back at some stage!
Yet, over the same period that grants have decreased, contract/commissioned income for the voluntary sector has increased from £5.3bn in 2004 to £11.2bn in 2011. Also, the Social Value Act, which came into force in February, offers an advantage for charities and social enterprises contracting with the public sector by forcing commissioners to consider the potential social value in many of their contracts.
Social enterprises should only seek social investment to build capacity and revenue generating activities which will provide enough of a profit (or surplus) to eventually repay the capital along with interest. So you could use social investment to hire great staff who will add to your business development capability or to help you to enter a new market. Contract revenues are increasing and many of these contracts will be on a ‘payment by results’ basis. Social investment has a vital role to play by providing the working capital for these kinds of contracts. In fact there are likely to be a number of funds such as the recently launched Bridges Social Impact Bond Fund to help charities and social enterprises access the funding they will need to compete for these types of contracts.
At The Young Foundation we are committed to making positive social change happen and we have supported countless social enterprises to scale over our 55 year history. Social investment offers a great opportunity for social enterprises to scale and we want to help more and more great ideas connect with this new type of capital so that they can scale their positive social impact through sustainable business models.
So, we advise you to look before you leap into social investment. It might not be for you, or it might not be the right time for you to get involved. But if you’ve taken a good look and like what you see, maybe now is the time to take the plunge.
Richard Kennedy is the Interim Director of the Ventures team at The Young Foundation.
The Young Foundation Accelerator programme helps early stage social enterprises to understand their social business model, focus their resources and scale up their activities and social impact. We help entrepreneurs understand the social investment market place and if and when accessing this type of finance is right for them. To find out more about The Accelerator visit www.growingsocialventures.org or watch our recently launched video ‘Social Investment – an introduction for voluntary youth sector organisations’ which is relevant to all sectors.