Raising capital for your social enterprise is never easy. On Thursday, at the annual Shine Unconference in London, three experts in the field came together to give advice on how social enterprises can secure the investment they need to grow their business.
They were Tom Storey, director of REDS10, a social enterprise supporting local authorities, developers and contractors in meeting local labour and apprenticeship targets on construction projects; investor Richard Flaye, a media entrepreneur and portfolio director who has several non-executive directorships, and was introduced to REDS10 through the Big Venture Challenge; and Simon Evill, social business manager of ClearlySo, which provides services to help social enterprises raise capital.
Here's their advice for social enterprises:
Have a trusted first customer before seeking investment
In founding REDS10, Storey admits that he took a "leap of faith", leaving his well-paid job as operations director at Bovis Land Lease. However, this risk was mitigated by the fact that he already had his first customer; the London Borough of Hackney, who had asked him to organise training programmes around the construction of Olympic venues. This validated the business concept at a time when many were sceptical. "You are constantly up against people who benefit from the current state of mind and who are challenging your vision", says Storey.
REDS10 are now active in 13 London boroughs. It is useful to have potential future customers in mind, as a scalable business model is attractive to investors. Evill points out that in a conservative financial environment "It is hard to pitch unless you have clear demand for your services," and suggests that social enterprises carry out "clear market testing" before seeking investment. When pitching, identify the questions potential investors are likely to ask and prepare detailed answers.
Choose your investor wisely
Storey says social enterprises should seek investors who can provide "guidance and expertise" as well as capital. He suggests researching wealthy people who have business interests in the area, or who have "gremlins" around a certain topic, giving the hypothetical example of the McDonalds chief executive and child obesity. Organisations such as ClearlySo and the UK Business Angels Association offer directories and networking opportunities which connect social entrepreneurs to suitable potential investors. However, Evill warns of the time-consuming and fickle nature of the process, whereby investors can quickly develop other interests. He says that many social enterprises seek investment too early, and must ensure that they have sufficient time and resources.
It is important for both parties that the investor is enthusiastic about the enterprises social aims.
Storey warns against a 'cap in hand' approach. "You need to say 'Here's what we do. If you don't want to be a part of it, there are plenty of others that do," he says. In Flaye, REDS10 found an investor who fits the bill. "I've always wanted to be an investor and make money, but I was also angry about the fact that, as a country, we don't do enough to get young people into work," he says.
Show that you have business acumen as well as a social mission
Flaye says that one of the reasons REDS10 shone out as an investment prospect was their business sense. "Tom is the creative visionary, and I think Paul [Ruddick, managing director of REDS10] just wants to run a successful business," he says. "You need that balance to make it work." Although the business plan must be informed, it also needs to be flexible. Flaye estimates that about 50% of the business plan he bought into is still valid, but this doesn't worry him. "That's the nature of a young business," he says. "It will change." If you are rejected by an investor, ask for feedback and alter your business plan accordingly.
An understanding of concepts like corporate governance, due diligence and forecasting will reassure potential investors that you are serious about the business element of your social enterprise. This could mean taking a financial literacy course or, like REDS10, becoming a member of an organisation such as ClearlySo who offer financial advisory services. "I could see that REDS10 was running along the proper business lines" says Flaye. "It wasn't just about the social side."
Minimise the financial risk
Although this may sound like a Catch-22, it is a good idea to have the finances in reasonable shape before seeking investment, and to clearly document these. Flaye explains that REDS10 already had some revenue when he met them, which proved to him that their business model was viable.
Seeking additional funding outside of large-scale private investment can also help to minimise risk; either through crowdsourcing or funding initiatives. REDS10 first made contact with Flaye through the Big Venture Challenge, a lottery-funded initiative who then matched his £150,000 offer of funding. Flaye admits that he would not have invested without the financial boost of match funding. "I could see that they had a very good management team", he says, "but there was a lot of financial risk".
Helen Crane is reporting from the Shine Unconference 2012
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