Finance 27 February 2017

Social enterprise entrepreneurs are struggling to access investment

Social investment
A social enterprise is an organisation that applies commercial strategies to tackle social problems and benefit society
Writing for Business Advice, David Bartram, head of ventures at social enterprise support network UnLtd, argues that high costs, lack of consistency and sector exclusivity mean investment is not reaching social enterprise startups desperate to access funding for growth.

While initial seed funding can be relatively simple to access for a social enterprise, most entrepreneurs would agree that follow-up funding of between 50, 000 and 200, 000 is far harder to come by. Whilst programmes such as the Big Venture Challenge and Big Potential are helping, this missing middle? of finance is hampering the market.

Deals of this size are impeded by high transaction and due diligence costs. Against the purely commercial market, the cost of due diligence is higher for the social investment market as deals are rarely standardised in form or sector. As each deal is bespoke it often carries its own unique challenge. On top of this, investors are required to evaluate and monitor social impact in addition to standard financial metrics.

Simply put, it costs too much. According to Cabinet Office reports, many social investment intermediaries cite transaction and due diligence costs averaging 5, 000 per deal. Social investment funds are forced to make a simple decision make ten deals averaging 100, 000, resulting in 50, 000 of sunk costs, or two deals at 500, 000 with 10, 000 of costs.

This scenario ignores further challenges to investing in early stage social ventures looking to scale namely, increased risk, lack of transparency and uncertainty that these deals offer. The result is social ventures struggle to access investment of between 50, 000 and 200, 000 and are therefore unable to grow.

So who pays for the high transaction cost and the cost of the due diligence required to make deals of this size? Should we expect investors to exclusively pick up the bill? Can social ventures absorb these costs? it’s likely to be a no on both fronts.

As the market grows, we will see more specialised funds and more efficient due diligence processes, thus a reduction in transaction and due diligence costs, but for the time being this is rarely the case.

UnLtd’s Big Venture Challenge has played a valuable role in this space by getting social ventures investment ready, thus reducing the cost to the investor, but this is coming to an end later this year. Social enterprise businessesneed access to larger funds enabling deals at the lower end of the market, effectively addressing the missing middle.

The objectives should be to better equip social ventures to take on social investment while ensuring that social investors are better able to carry out due diligence and reduce their high transaction cost.

It is unlikely that any intervention will work in isolation and practically achieving both requires changes in the market. Here are four ways to help the early stage social investment market:

Investing in social investment readiness and accelerator programmes

This will ensure social ventures are better prepared for investor conversations and negotiations. This will take away the pressure from social investors to undertake this capacity building work which is often required before they can start their due diligence process.

Supporting partnerships between investors and support providers

Greater collaboration between investors and support organisations will ensure there is a sharing of the cost of due diligence.

UnLtd’s Big Venture Challenge has been successful in doing this with many investors stressing that the most valuable risk mitigation came through the filtering and due diligence provided through the programme.

Creating sector specific social investment funds


 
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Business Law & Compliance