capital, capacity, impact? a quick tour of the social investment market
TRANSCRIPT
Capital, capacity, impact?
A quick tour of the social investment market
Objectives of the session:
• To discuss a range of business models used for creating social impact– To differentiate between revenue and capital funding needs
within those models
• To explore ‘appropriate’ funding mechanisms, especially the role of social investment in financing capital requirements
• To discuss the role of the social investment market, and the UK’s social investment ‘boom’.
Objectives of the session:
• To discuss a range of business models used for creating social impact– To differentiate between revenue and capital funding needs
within those models
• To explore ‘appropriate’ funding mechanisms, especially the role of social investment in financing capital requirements
• To discuss the role of the social investment market, and the UK’s social investment ‘boom’.
11.20 – 11.40
Achieving social impact: a familiar model....
Expenditure on activitiesRevenue Outputs Outcomes
Which in business jargon we could call ‘value’
Thinking about this as a business model
Expenditure on services and products
Revenue
Maybe:GrantsDonationsContractsSpot purchases
Outputs Outcomes
Social value
Capacity / capability
CapitalForm maybe:GrantsDonationsLoansEquity
“Surpluses” (Profits), Financial value
Need maybe:Fixed assetsWorking capitalGrowth & developmentReserves and insurance
This chart ignores externalities created by the organisation – positive and negative
Build capacity through:Fixed assets and systemsCash and investment assetsHuman resourcesConsultancy
Jargon check....• revenue– covers the costs of expenditure of on-going work (service
provision, projects etc)– suppliers of income = purchasers of the organisations work– minimise the risk of not achieving intended outcomes /
value
• capital– money and other resources that build the capacity and
capability needed to deliver your service / project / work– capital funders = investors in the organisation– accept and manage the risk of not creating value
Is this the only model?
• 3 models?– Social enterprise
– Fundraising
– Social firm
Fundraising business model
Costs of meeting donors requirements
RevenueOutputs
Investment in fundraising
“Surpluses” (Profits)
Costs of delivering services to
beneficiaries
Capacity to deliver
services
Outcomes
Capital
Social firm
Expenditure on services and products
Revenue
Outputs for Customers
Outcomes
Capacity / capability
Capital
“Surpluses” (Profits)
“Externalities”
Business models, social and financial value
• Think about the organisations you have worked with and for:– How do they generate revenue?– What business models do they use?– How do they create value and for who?
And what about?
• Microsoft
• Charity shops
• Serco
• A charitable foundation
Objectives of the session:
• To discuss a range of business models used for creating social impact– To differentiate between revenue and capital funding needs
within those models
• To explore ‘appropriate’ funding mechanisms, especially the role of social investment in financing capital requirements
• To discuss the role of the social investment market, and the UK’s social investment ‘boom’.
11.45 – 12.20
Thinking about the role of capital in a business model
Expenditure on services and products
Revenue
Maybe:GrantsDonationsContractsSpot purchases
Outputs Outcomes
Social value
Capacity / capability
CapitalForm maybe:GrantsDonationsLoansEquity
“Surpluses” (Profits), Financial value
This chart ignores externalities created by the organisation – positive and negative
Thinking about why organisations need capital
• What things does your organisation use, build or buy that are not part of on-going service delivery?
physical equipment
bridging finance
growth / development
reserves / insurance
Capital needs of organisations
Build and maintain capacity through:•Fixed assets and systems•Cash and investment assets•Human resources•Consultancy
• What is the financial risk of these needs?– financial risk = “chances of
getting back the initial money spent”
pre-fundingrevenue
Capital needs (your balance sheet)
relatively low financial risk
relatively high financial risk
• match the risk of your need with a financial instrument that balances this risk
financial need
financial instrument
physical equipment
bridging finance development “rainy days”pre-funding
fundraising
Types of finance available to youInstrument Financial risk to recipient Example suppliers
Own reserves None (other than opportunity cost) n/a
Grant None – no repayment Grant makers, venture philanthropists
Equity / Quasi-equity (royalties) Lower – if activity fails, nothing to repay Specialist investors such as Venturesome, Bridges
Social Entrepreneurs Fund
Patient capital e.g. Preference shares, unsecured bonds
Lower – can take the form of unsecured debt/equity-like investment, but over a longer period and typically on ‘softer’ terms
Few provide genuinely patient capital, Investing for Good
Overdraft / standby facility
Medium – short-term cashflow lending usually against expected revenue
Some banks provide overdrafts (may require security over assets/personally guaranteed) Venturesome provides (unsecured) standby facilities
Secured loan (mortgage)
High – asset used as security to guarantee repayment
Banks (Charity Bank, Triodos, Unity Trust Bank, and mainstream lenders)
LOW RISK HIGH RISK
HIGH CHANCE OF REPAYMENT
LOW CHANCE OF REPAYMENT
Secured loan
Standby Facility
Overdraft
Unsecured Loan
Patient Capital
Quasi-equity
Equity
Grant
Physical equipment
Bridging finance
Pre-funding of revenue
Reserveccapital
Growthcapital
Appropriate financing
Fixed Asset Acquisition
• for physical equipment to do the work e.g. office, desks, chairs, machinery– Sefton Carers Centre
• needs to buy the building it currently rents• it’s the only suitable building in the area (cost £1m)• earns revenues from contracts with local public sector
Working Capital• to manage timing differences between cash out and cash in
– Questscope: bridging finance• EU contract, paid in arrears• need to spend money up front doing the work and then claim it back
• to fund on-going costs ahead of revenue– B-Eat: reserve capital
• income patterns “lumpy”, expenditure pattern constant• have a track record of average income = expenditure• raises money from fundraising events, grant makers, some trading of
publications, training and conferences
Growth capital
• for exploration / development of new work that enables better delivery of mission– Charity Technology Trust: growth capital
• CTXchange supplies software at low cost to charities• need to invest up to £100,000 in infrastructure and marketing• increased sales should generate profits to repay the investment
Reserve capital / insurance
• for “rainy days” i.e. to protect the organisation’s work from unexpected shock– Interhealth:
• notification from landlord of early termination of lease• premises are specialist / new premises hard to find and costly /
new premises need to be secured immediately• earns revenue from
– Spot purchasing of medical appointments– Annual membership fees
Objectives of the session:
• To discuss a range of business models used for creating social impact– To differentiate between revenue and capital funding needs
within those models
• To explore ‘appropriate’ funding mechanisms, especially the role of social investment in financing capital requirements
• To discuss the role of the social investment market, and the UK’s social investment ‘boom’.
12.25 – 12.40
Social investment market, impact investment, social impact bonds, what?• Social or impact investment is strategic investment with the primary goal of
improving outcomes for individuals, communities, society• The secondary goal is to see a return on capital• c£180m invested in 2010, majority lending by social banks• Often understood to be about lending to the third sector, but it is broader than
that• Government has a strategy / policy:
– ‘Growing the social investment market’– Connects with public sector outsourcing and mutualisation policies too.
Grantmaking aka Philanthropy
Mainstream investingEthical / SRI investing
How does this relate to ‘normal’ investment, or grant making?
Positive outcomes for individuals, communities, society
Negative outcomes for individuals, communities, society
Maximum financial return
-100% return = grants
Neutral outcomes
Social investment aka impact investment aka investing for outcomes
0% return
Potted history of investing for outcomes
• Building societies – c18th: mutual benefit for the community• Netherlands e.g. Triodos – an idea in 1968, a bank in 1980
• Social Investment Taskforce 2000• Futurebuilders, Community Builders etc 2002+• Growing social investment strategy 2011• Big Society Capital 2011/12• Payment by outcomes & Social Impact Bonds 2011+?
• Plus long history of investment in developing economies
Investing for outcomes can’t happen in isolation
• Currently:– Majority of investment funds are for
general social purpose– Returns are too low for the risks
involved
• Graham Allen MP’s proposal for an ‘Early Intervention Foundation’ is one model of focusing on a set of outcomes and stimulating revenue, capital and measurement together
A market?Intermediaries linking demand and supply
Charities
Social enterprises
Social businesses
Financially excluded individuals??
Social investment intermediaries
Investors Social Ventures
Individuals
Charitable foundations
Financial institutions e.g. pension funds, investment trusts,
banks
Returning to the objectives:
• To discuss a range of business models used for creating social impact– To differentiate between revenue and capital funding needs
within those models
• To explore ‘appropriate’ funding mechanisms, especially the role of social investment in financing capital requirements
• To discuss the role of the social investment market, and the UK’s social investment ‘boom’.