Appetite for social investment is growing – last year the market was valued at £1.9 billion.[1] Yet access to affordable finance remains an issue for social ventures looking for less than £250,000.
Our solution launched last week – the UnLtd Impact Fund. This will offer ventures a blended finance package of affordable loans topped up with grants. The aim is to help social ventures increase their social impact through growth. We are initially focused on ventures creating jobs and employment opportunities.
At UnLtd we’ve been tackling the ‘missing middle’ of finance over the last four years. From 2013 to 2016 the Big Venture Challenge offered 12-month intensive support to ambitious social ventures. We supported 120 ventures and 74 of them raised over £13 million of investment – an average of £177,000 per venture.
This model produced significant impact. On average, after our support these organisations were helping 684 more people than they did previously.
The programme taught us that social ventures would benefit from our direct investment which creates long term relationships, aiding the creation of societal change. Furthermore, our social ventures told us that collaborations between entrepreneurs were key, as is post-investment support.
A disconnect in the sector
There remain significant challenges for ventures as they seek to grow. Many early stage investors are desperate to make investments, while social ventures are eager to access capital to facilitate growth. Yet often, they seem to be speaking different languages.
Investors take on more cost by putting money into early stage ventures due to higher relative due diligence and transaction costs. Put simply, it’s expensive to lend smaller amounts. Equally, early stage organisations are higher risk. This results in small margins for investors and a reluctance to invest in early stage social ventures, creating a fragmented market with few ventures able to access finance to grow their impact.
For social ventures, the challenges are vast. For many, this is the first time they’ve raised investment; a high proportion of social ventures have no experience of taking repayable finance[2]. Without support, navigating the dangers – and jargon – involved in taking investment, executing a growth plan becomes overwhelming; many give up.
Funding options and dangers
A common route for entrepreneurs intending to grow their organisations is to seek debt or equity finance, but it’s expensive. Investors, needing to compensate for the increased risk, charge higher interest rates or seek higher equity stakes.
The dangers of debt are clear. Should an individual fail to make repayments the business would run out of cash and fold. The situation is worse if the loan is secured against an asset, particularly if it’s personally guaranteed. This is a key reason why the UnLtd Impact Fund is unsecured: it’s in the best interest of the venture.
For equity, it appears simple: the higher the valuation, the lower the stake in the venture the entrepreneur sells, with no immediate need to repay the money. However, equity investors are left unhappy if the venture then fails to back up its valuation through performance.
What’s our solution?
We know that support is fundamental to ensure that a social venture makes the best use of their investment, and most importantly, does what’s in the best interest of their beneficiaries. Money alone won’t grow an organisation if there isn’t an effective plan detailing how to use it. It’s our belief that support and funding must go hand-in-hand.
Alongside specialist support and accessible funding, we need to build collaborations – between other social ventures and investors – enticed by the potential of collective outcomes. By bringing together groups of social ventures all focused on defined social issues, we can create a wider benefit on society.
Our answer is to embed support alongside early stage investment while also exploring how each investee can collaborate. The expert support will enhance the venture’s sustainability and create impactful growth plans while reducing the chance of defaults.
We will build connections and an evidence base on which to influence policy, leading to societal change which creates an easier environment for social entrepreneurs to operate. This is the premise behind the UnLtd Impact Fund. All our investees will be working in a defined impact area: building access to employment, particularly for those people distant from the labour market.
We’re delighted to be embarking on this mission with the City & Guilds Group: our first step towards sector-wide collaboration. You can find out more about the UnLtd Impact Fund at www.untld.org.uk/UnLtd-Impact-Fund and follow the conversation on social media using the hashtag #UnLtdImpactFund
[1] Big Society Capital research
[2] CAF. In Demand: The changing need for repayable finance in the charity sector – https://www.cafonline.org/docs/default-source/about-us-publications/in_demand_0314.pdf
Ben Smith is the investment manager at UnLtd. The UnLtd Impact Fund is being funded by Access Foundation’s Growth Fund with finance from the Big Lottery Fund and Big Society Capital