Focus on Social Enterprise

Social enterprises vary in terms of scope and funding, but their objectives are very much in tune with current economic times. Find out how such businesses may stand to play a crucial role in boosting the UK economy.

Thanks to celebrity businesspeople such as Richard Branson, Alan Sugar and the various investors who occupy TV’s Dragon’s Den, the successful entrepreneur has become something of a British cultural icon. Less well known are the social entrepreneurs, men and women who set up businesses with the primary mission of delivering some kind of social benefit, either in their own community or on a bigger stage. And yet, according to figures published by the Department of Business, Innovation and Skills, social enterprises employ around 800,000 people in the UK, a number that is likely to grow in the months and years ahead.

The scope of social entrepreneurship is huge. Some of these businesses address specific needs in local and often disadvantaged areas. That could mean regenerating a local community centre, working with the long-term unemployed to improve their life chances, or helping with the rehabilitation of people with drug or alcohol problems. In other cases, a social enterprise may address a matter of global concern. Manufacturer Divine Chocolate, for example, sells its products in the UK with the aim of improving conditions for its overseas farmers. Fair trade coffee company Cafédirect has a similar remit. Other social enterprises have environmental objectives, as does Tim Smit’s Eden Project.

Making a difference 

The common factor linking all social enterprises is that money is raised not by receiving donations but by selling goods or services. However, the ownership structure and dynamic of a social enterprise differs from that of a conventional business, as Nick Temple, Director of Business and Enterprise at industry body Social Enterprise UK, explains: “In a social enterprise, profits are made but cycled back into the business or directed to a good cause rather than being channelled to shareholders”. Therefore, the primary objective is to make a difference rather than make a fortune.

This isn’t to say social enterprises aren’t run along commercial lines. Like any other business, a social enterprise must pay suppliers and employees. Profits are necessary too as these can be used to achieve a social objective. A successful social enterprise can expand and build a customer base like any other commercial venture, while maintaining its commitment to achieving a goal. As such, those who establish and run a social enterprise are often as entrepreneurial, committed and hands-on as any Richard Branson or Alan Sugar.

And a social enterprise will often compete directly with conventional businesses. Jamie Oliver’s restaurant franchise Fifteen operates as a social business, with a remit to train young unemployed people to work at the highest level in the restaurant industry. In order to succeed, such a business must compete successfully with restaurants that are operating simply to make profits for their owners and shareholders.

In tune with the times

The concept of the social enterprise is very much in tune with the times. In promoting their idea of a ‘Big Society’, the Government has emphasised that private sector businesses have a crucial role to play in creating a better Britain. Indeed, as the Government’s deficit reduction strategy reduces public spending on social programmes, the likelihood is that the private sector will play a bigger role in delivering services with a social dimension.

Some fully commercial businesses (those that exist to make a profit for shareholders) are also working in the broad arena of regeneration or public policy. Much of the Government’s ‘Welfare to Work’ programme is led by conventional businesses that ultimately pay returns to shareholders. But such a definition also encompasses social enterprises. Some act as subcontractors to the lead partners in the Welfare to Work programme. Others are standalone ventures offering services at a grassroots level. Bromley-by-Bow’s United Reform Church finances social programmes through initiatives including a self-financing café and the rental of space to artists.

Funding a social enterprise

Arguably, the greatest challenge facing an ambitious social entrepreneur is where to obtain growth capital. Private equity is a common funding route for more conventional businesses, but presents an obvious problem for a social enterprise. If the structure of a business is based on reinvesting profits rather than channelling them to shareholders, then a private equity funder stands little chance of making a return on their investment.

“While many social entrepreneurs take salaries, there is generally not an exit event to raise cash for the owner or shareholders. Therefore, the primary objective is to make a difference rather than make a fortune.” Nick Temple, Director of Business and Enterprise, Social Enterprise UK

And yet social enterprises are fully capable of supporting investment. New investment models are constantly being developed, as Social Enterprise UK’s Nick Temple points out: “Often these involve funds or individuals investing in a similar way, but accepting that the returns will be smaller or treated differently.” For instance, Big Issue Invest provides loans and equity investment for companies with a growth finance requirement of between £50,000 and £500,000. The fund takes dividends but these are channelled to its parent company, which is itself a social enterprise. Santander’s own Social Enterprise Development Awards (SEDAs) also provide eligible companies with much-needed funding. In this case, offering up to £10,000 to support the growth plans of social enterprises and Community Interest Companies looking to improve both their business and their local community.

Businesses can also raise money from business angels. For example, social investment company ClearlySo launched Clearly Social Angels in the House of Commons with a remit to connect private investors with high quality social businesses. Equity Plus launched a similar initiative four years earlier. Investment activity is still relatively muted, partly because of a shortage of investment-ready businesses. However, other organisations, including the Adventure Capital Fund, offer a combination of loans and grants tailored to the circumstances of social networks.

Conventional bank lending is also an option for social enterprises. Some banks tailor loan packages specifically for the non-profit making sector. In addition, the Government’s forthcoming financial institution ‘Big Society Capital’ will use unclaimed monies in UK accounts as a source of funding for non-profit making businesses.

Both funding and equity investment is available if not always easy to obtain. And as the social enterprise sector becomes more important socially and economically, commercial funding models will doubtless continue to evolve.


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