With the plans for the development of a "big society bank" endorsed on Monday, government has never put social enterprises so squarely at the heart of its policy-making. This year alone, the big society bank will receive an unprecedented £260m to invest in intermediary organisations, compared to the £360m that was injected into the social investment market by the Labour government over 13 years. Despite this, growing a social enterprise that covers its costs and genuinely helps vulnerable people remains an almighty challenge.
The Big Society Bank is clearly good news but obstacles still remain and social enterprises will need to pick fights judiciously if they are to respond to the tough problems facing society. The bank will enable intermediaries to offer cash as capital investment not revenue.
The bank does not level the playing field for government contracts, which, in an increasingly competitive environment, seems to slope towards large private sector firms such as A4E and Serco. For example, 16 out of 18 prime contractors of the government's work programme announced in April are commercial organisations; it seems that voluntary organisations will be relegated to less profitable sub contracts.
Ironically, "evidence-based" government procurement often creates more bureaucratic process than impact. Large contractors can afford systems to feed the beast of bureaucracy but many social entrepreneurs feel that they are working harder for the customer, funder or auditor than for the communities they were set up to serve. To stand a fair chance, social entrepreneurs need to innovate. For example, Enabling Enterprise, a venture introducing enterprise skills into the school curriculum, has developed a suite of systems to dramatically reduce the amount of time teachers need to spend on tracking pupil performance, thereby freeing them up to focus on teaching not form filling.
While the Big Society Bank will offer capital to help social enterprises scale, it may not provide the right kind of capital for new, potentially ground breaking, ideas. Ambitious start-up ventures require investment to test their models and start paying their way. The Big Society Bank will not be issuing grants so it looks unlikely that intermediaries will, in turn, be able to offer the kind of "soft capital" required to new social enterprises. Largely avoiding the world of social investment, the successful graduate teaching programme, Teach First, secured its founding investments from businesses, government agencies and charitable foundations. This diverse range of sympathetic supporters sacrificed financial return to give the untested vision of Teach First a chance. Other successful start-ups continue to cobble together the finance they need rather than waiting for social investors to meet their needs.
While the Big Society Bank offers investment for growing larger social enterprises, it does not help those organisations become investable. Other investors looking to scale social enterprises have already struggled to find organisations that are ready for investment. Ethical bank Triodos had to close a large fund for social enterprises last year after only being able to make one investment. Investors report that only 16% of the social enterprises that approach them are investable.
To attract investment to scale, an enterprise needs a clear strategy, a robust model for generating revenue, and economics that scale (or, as the enterprise grows it will simply become bigger, and not better). This is tough; entrepreneurs often need support from some of the 100-plus organisations – identified in the NESTA-commissioned report, Growing Social Ventures – that are dedicated to supporting Britain's 65,000 social enterprises improve, expand or become more resilient. For example, Scottish social enterprise Working Rite was supported by the Young Foundation to develop a financially sustainable business model before it could attract capital to its apprenticeship-style work preparation programme, even though it had achieved better results for youngsters from tough backgrounds than its larger, commercial competitors.
While we welcome the Big Society Bank, the government needs to level the playing field in the ever-tighter fight for government contacts. Shrewd social entrepreneurs – like those behind Enabling Enterprise, Teach First and Working Rite – will need to continue to scrape around for risk capital, and scramble to build robust business models under innovative services. From on high the government declares that social enterprise is critical to the success of the big society, yet on the ground it can feel like "soft privatisation".
Jack Graham is a Senior Associate at the Young Foundation, working with a range of social enterprise start-ups, and co-author of a large-scale report looking at social finance in the UK
Jon Huggett is a social entrepreneur and ex-partner at non-profit consultancy Bridgespan and Bain who now works with social ventures such as Wikimedia
This article was originally posted on Guardian Professional.