The difficulty for those thinking of funding or investing in social enterprise is that the concept is wide, some might say baggy; a term that encompasses a range of different organisations with very different needs. This can cause sterile arguments about “what is needed to help social enterprises” where each of the participants is concerned about a different type of organisation.
For a more complete taxonomy of social enterprise, I was delighted to find one on a website called 4lenses. You can access it here. Thank you to Kim Alter and her crew for developing it.
So, let’s consider a quick segmentation of the social enterprise universe, for the purposes of thinking through what types of subsidy might be wanted or required, and therefore help funders choose their area of focus and develop a coherent offer.
a) Serving disadvantaged populations: social enterprises building business models to bring goods or services to those who cannot afford them as they are presently provided. These may need permanent subsidy, may need subsidy while developing the business model or sufficient scale, or while the actual needs and pricing that is possible in the new market is figured out. Microfinance is a good example of this kind of social enterprise. Initially supported with grant capital, as the risks and potential of the market became clearer and therefore lower a wider variety of capital became available. However as the business model became more commercial so many potential customers started to get left behind again, and regulation started to become necessary as the incentive alignment between providers and beneficiaries became less clear.
b) Change agents: Many social enterprises are looking to change something, typically behaviour, for the benefit of the service user and wider society. This means there is an element of preaching to the unconverted and as John Kingston formerly of Venturesome puts it “you can’t get the unconverted to pay for the priest”. Will need subsidy during the conversion process, which may be a while if there are always new hordes/ markets to focus on. Government may want to subsidise change agents, if they are seeking a change that is aligned with government’s agenda and spending focus. Otherwise such a subsidy is likely to come from those motivated by the change mission of the organisation.
c) Supply chain supporters: For example fair trade, where an organisation effectively buys its supplies for more in order to benefit the suppliers or the environment. This may need subsidised availability of investment capital but probably need to be able to make the value of the proposition compelling enough to consumers that they are willing to pay a premium for the product. It is not clear that government necessarily has a role to play in such investment, but in the same way that it is comfortable subsidising charitable giving with a tax subsidy even if it isn’t part of the government’s direct agenda, so investment into fairtrade organisations would have a reasonable case for tax incentives similar to gift aid.
d) Social ownership structures: mutual, co-operatives or similar employee ownership models may be social enterprises but their services may exist in a normal marketplace (John Lewis for example). For those spinning out of government, they may have issues of being thinly capitalised and therefore needing investment. With all such organisations they struggle raising outside capital so getting scale up without some kind of supportive capital can be difficult. Those in social services therefore should have access to social enterprise investment. Those in more commercial marketplaces, for example an employee owned software company I once worked for, don’t have a particular argument for social investment.
e) Providers of social services: Not all social service providers are social enterprises, some are from the private sector. So this gets to be a tricky area, what justification would there be for government or other subsidy if others don’t appear to need it. Here the potential value of providing supportive investment is high, but there are issues about how you sort the wheat from the chaff…
This last is in some ways the nub of the problem. What differentiates a commercial company from a social enterprise working in the same space, both competing for government contract? Who needs to differentiate them? Why? I’ve been picking round this topic for a little while. Time to tackle it soon…