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 betw...
Objectives of the session:
• To discuss a range of business models used for
creating social impact
– To differentiate betw...
Achieving social impact:
a familiar model....

Revenue

Outputs

Outcomes

Expenditure on activities
Which in
business
jar...
Thinking about this as a business
model
Revenue
Maybe:
 Grants
 Donations
 Contracts
 Spot purchases

Expenditure on s...
Jargon check....
• revenue
– covers the costs of expenditure of on-going work (service
provision, projects etc)
– supplier...
Is this the only model?
• 3 models?
– Social enterprise
– Fundraising

– Social firm
Fundraising business model
“Surpluses” (Profits)

Revenue
Costs of meeting
donors requirements

Investment in
fundraising
...
Social firm
“Externalities”
Revenue

Expenditure on services
and products

Capacity / capability

Capital

Outcomes

Outpu...
Business models, social and financial
value
• Think about the organisations you have
worked with and for:
– How do they ge...
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 betw...
Thinking about the role of capital in a
business model
Revenue
Maybe:
 Grants
 Donations
 Contracts
 Spot purchases

E...
Thinking about why organisations
need capital
• What things does your organisation use, build
or buy that are not part of ...
Capital needs of organisations
physical
equipment

bridging
finance

pre-funding
revenue

Build and maintain capacity
thro...
Capital needs (your balance sheet)
physical
equipment

bridging
finance

pre-funding
fundraising

development

relatively ...
Types of finance available to you
Instrument

Financial risk to recipient

Example suppliers

Own reserves

None (other th...
Appropriate financing
HIGH
CHANCE OF
REPAYMENT

Secured loan
Standby
Facility
Overdraft

Unsecured
Loan
Patient
Capital
Qu...
Fixed Asset Acquisition
• for physical equipment to do the work e.g.
office, desks, chairs, machinery
– Sefton Carers Cent...
Working Capital
• to manage timing differences between cash out and cash in
– Questscope: bridging finance
• EU contract, ...
Growth capital
• for exploration / development of new work that
enables better delivery of mission
– Charity Technology Tr...
Reserve capital / insurance
• for “rainy days” i.e. to protect the organisation’s
work from unexpected shock
– Interhealth...
Objectives of the session:
• To discuss a range of business models used for
creating social impact
– To differentiate betw...
Social investment market, impact
investment, social impact bonds, what?
•

•
•
•
•

Social or impact investment is strateg...
How does this relate to ‘normal’ investment, or grant
making?
Maximum financial return

Mainstream investing
Ethical / SRI...
Potted history of investing for
outcomes
• Building societies – c18th: mutual benefit for the community
• Netherlands e.g....
Investing for outcomes can’t happen in isolation

•

Currently:
– Majority of investment funds are for
general social purp...
A market?
Intermediaries linking demand and supply
Social Ventures

Investors
Financial institutions
e.g. pension funds,
i...
Returning to the objectives:
• To discuss a range of business models used for
creating social impact
– To differentiate be...
Discussion....

• Joe.ludlow@nesta.org.uk
• 0207 438 2663
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Capital, capacity, impact? A quick tour of the social investment market

  1. 1. Capital, capacity, impact? A quick tour of the social investment market
  2. 2. 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’.
  3. 3. 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 11.20 – 11.40 • 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’.
  4. 4. Achieving social impact: a familiar model.... Revenue Outputs Outcomes Expenditure on activities Which in business jargon we could call ‘value’
  5. 5. Thinking about this as a business model Revenue Maybe:  Grants  Donations  Contracts  Spot purchases Expenditure on services and products Outputs Outcomes Social value Capacity / capability Capital Form maybe:  Grants  Donations  Loans  Equity Need maybe:  Fixed assets  Working capital  Growth & development  Reserves and insurance “Surpluses” (Profits), Financial value Build capacity through:  Fixed assets and systems  Cash and investment assets  Human resources  Consultancy This chart ignores externalities created by the organisation – positive and negative
  6. 6. 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
  7. 7. Is this the only model? • 3 models? – Social enterprise – Fundraising – Social firm
  8. 8. Fundraising business model “Surpluses” (Profits) Revenue Costs of meeting donors requirements Investment in fundraising Capital Costs of delivering services to beneficiaries Capacity to deliver services Outputs Outcomes
  9. 9. Social firm “Externalities” Revenue Expenditure on services and products Capacity / capability Capital Outcomes Outputs for Customers “Surpluses” (Profits)
  10. 10. 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?
  11. 11. And what about? • Microsoft • Charity shops • Serco • A charitable foundation
  12. 12. 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 11.45 – 12.20 • To discuss the role of the social investment market, and the UK’s social investment ‘boom’.
  13. 13. Thinking about the role of capital in a business model Revenue Maybe:  Grants  Donations  Contracts  Spot purchases Expenditure on services and products Outputs Outcomes Social value Capacity / capability “Surpluses” (Profits), Financial value Capital Form maybe:  Grants  Donations  Loans  Equity This chart ignores externalities created by the organisation – positive and negative
  14. 14. Thinking about why organisations need capital • What things does your organisation use, build or buy that are not part of on-going service delivery?
  15. 15. Capital needs of organisations physical equipment bridging finance pre-funding revenue Build and maintain capacity through: •Fixed assets and systems •Cash and investment assets •Human resources •Consultancy growth / development reserves / insurance • What is the financial risk of these needs? – financial risk = “chances of getting back the initial money spent”
  16. 16. Capital needs (your balance sheet) physical equipment bridging finance pre-funding fundraising development relatively low financial risk • match the risk of your need with a financial instrument that balances this risk “rainy days” relatively high financial risk financial need financial instrument
  17. 17. Types of finance available to you Instrument 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)
  18. 18. Appropriate financing HIGH CHANCE OF REPAYMENT Secured loan Standby Facility Overdraft Unsecured Loan Patient Capital Quasi-equity Equity LOW CHANCE OF REPAYMENT Grant LOW RISK HIGH RISK Physical equipment Bridging finance Pre-funding of revenue Growth capital Reservec capital
  19. 19. 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
  20. 20. 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
  21. 21. 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
  22. 22. 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
  23. 23. 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
  24. 24. 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.
  25. 25. How does this relate to ‘normal’ investment, or grant making? Maximum financial return Mainstream investing Ethical / SRI investing Negative outcomes for individuals, co mmunities, so ciety 0% return Social investment aka impact investment aka investing for outcomes Neutral outcomes Grantmaking aka Philanthropy -100% return = grants Positive outcomes for individuals, communities, society
  26. 26. 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
  27. 27. 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
  28. 28. A market? Intermediaries linking demand and supply Social Ventures Investors Financial institutions e.g. pension funds, investment trusts, banks Charities Social investment intermediaries Social enterprises Charitable foundations Social businesses Individuals Financially excluded individuals??
  29. 29. 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’.
  30. 30. Discussion.... • Joe.ludlow@nesta.org.uk • 0207 438 2663
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