Social Investment, the Missing Middle
Sarah Sharlott, CEO of Realise Futures and SEEE board member
When staff within my teams approach me with ideas for new business opportunities, my first question is "How will this play with Mr Lyons at the Nat West". Mr Lyons was my long suffering bank manager both when I was a student and when I had my first job. He was brilliant at asking the right, if awkward questions about how I was managing my money and what I might do with any money the bank lent to me.
I think the same principle applies to would be social enterprise ventures. To secure finance for growth or even interim sustainability Social Enterprises have to think about what might play well with the mythical Mr Lyons but also what are their chances of actually securing finance even if they have a robust business model, a growth plan and even potential orders and contracts.
What exists currently for SMEs within the social enterprise sector in particular but not exclusively is the reluctance of traditional lenders to take even the smallest of risks in lending money to a new or small enterprise.
Thus many Small and Medium sized social enterprises find themselves caught in the missing middle, a now popular term which refers to the financing gap in emerging markets which places them above micro finance and below traditional institutional lending, i.e. Mr Lyons at the Nat West!
Although everyone from the Governor of the Bank of England to the Prime Minister to Nobel Laureate Muhammad Yunus, recognise the value of such businesses to general economic growth especially in developing countries and in emerging markets, it is still incredibly difficult to secure early or middle stage growth capital.
Essentially this means there is a gap in available capital and SME Venture Funds serving SMEs. Consequently the 'Missing Middle' has a big influence on the ability of social business ventures to increase their commercial aims, and deepen the positive social and environmental benefits, and is one of the main issues that key players within impact investment and global financial institutions are working to solve. But the process is slow and this is now being recognised by organisations such as Big Society Capital and The Big Lottery which is finally addressing the role it can play in supporting Small and Medium social enterprises to scale up and deliver social impact. The Big Lottery have traditionally shied away from supporting anything with company in its title, hence the lack of support for social enterprises especially those whose legal model is a CIC. So their willingness to recognise the investment potential in the social enterprise (SME) sector is to be welcomed. The next step is to help them take the plunge and begin investing in social enterprise ventures.
Where investment is available, it is often the case that the rate of return expected on the investment will be much higher. It is regularly reported that social finance organisations often offer rates of return on any lending they offer which is at a much higher interest rate than some of the high street banks. Some financing organisations will want to exert a substantial level of influence on the board of the organisation into which they are investing. Sometimes this in effect challenges the business model of the organisation and seeks almost to repurpose the organisation. I have always been clear that in return for investment, I will not take the social out of our enterprise and nor will I offer up my first born as collateral for any investment funding we receive. Don't misunderstand me Mr Lyons taught me well, I know that as a business we have to be clear about how we will pay back the investment we have benefitted from. However I would like some consistency in the application of good practice on securing a return and recognition that social investors really do understand the potential social as well as economic impacts of the organisations into which they are investing.
Therefore for Social Enterprise SMEs, patient capital is essential, reasonably priced overdraft facilities and support to underwrite cash flow will be critical to helping an organisation begin to deliver on a new contract it has secured.
The Current Situatation
Social investment is a growing financial market. It's already worth £160m a year. It exists to help social enterprises raise capital that they might find difficult to secure from traditional investment sources, and help investors find organisations that deliver a social as well as a financial return.
Recently Social Enterprise UK has helpfully pulled together all the sources of funding for social enterprises to access and has listed the support organisations such as intermediaries who can help in putting investment proposals together.
Disclaimer: SEEE does not necessarily share the views expressed in this blog
These resources can be found online at socialenterprise.org.uk/policy-campaigns/policy/social-investment/social-investment-resources