As my report about subsidy in the social investment market over the last 15 years shows, at least £1bn has been spent on efforts to grow the market, most of that over the last 10 years. Whether you consider that this has been money well spent rather depends on how you see the role of subsidy.

If you consider that subsidy should be a temporary measure deployed to stimulate the development of a self-sustaining “market”, then either subsidy isn’t being used in the right way or it will be required for a great deal longer. 

In terms of the functioning of ‘the market’, there is no sign that heavily subsidised activities – from ‘investment readiness’ support to the ‘market’ for social impact bonds – are significantly closer to being either self-sustaining or independent of central government/Quango-backed subsidy.

If your goal is simply to increase the supply of capital to charities and social enterprises then there are clear successes to point to. Thousands of charities and social enterprises have had access to capital which they likely would not otherwise have had. Significant gaps in the supply of capital do remain, although some of these are being addressed with initiatives like Access’s Growth Fund.

Reflecting on what we’ve learned about the provision of subsidy, there is no obvious single answer to “what’s next?” but there are some themes around which subsidy could usefully be focused:

Supporting social organisations: if one of the key aims for social investment is to support charities and social enterprises to develop as businesses, subsidies should be directed towards the best possible approaches to supporting this goal.

The experiences of the past 10 years do not suggest that the pseudo-market in approved-provider, grant-funded consultancy supported by ‘investment readiness’ programmes such as the Investment and Contract Readiness Fund (ICRF) and Big Potential should continue to be the dominant model.

ICRF – targeted at organisations seeking investment or contract worth over £500,000 – provided organisations with an average grant of £85,000 to be spent primarily on approved consultants. The evaluation notes just over 50% of grantees secured investment or a contract and only 1 in 3 of those felt they would not have secured those deals without ICRF support. On that basis one could argue that an average of £510,000 was spent securing each additional deal.

The latest evaluation of Big Potential Breakthrough – the soon-to close current scheme aimed at organisations seeking to raise investment of £500,000 or less – notes that of 124 grantees, 5 have so far secured investment.

The figures are not necessarily a reflection of the quality of the support offered by the consultants providing support via these programmes – it may offer wider benefits, including helping some organisations to avoid seeking investment at a time when it would not be right for them – but it suggests that attempts to directly stimulate the social investment market with ‘investment readiness’ support  could be improved upon.

More relevant response to the business challenges facing charities and social enterprises are likely to include a mixture of (amongst others):

• basic early stage social enterprise business support free at point of delivery on a regional (if possible local) basis
• allocated (personal budget) style blocks of funding for organisations to spend on the blend of professional support most relevant to their needs – whether this is buying in specialist legal advice, creating an online sales system or employing a freelance contract bid writer
• revenue grants to support organisations with a good commercial plan at a pre-commercial stage

Risk Finance: Aside from ‘investment readiness’, there is the issue of the available investment itself. On what basis (and in what ways) is it useful to subsidise social investments that would not be justifiable for an investor seeking a risk adjusted return?

The two key broad categories where this kind of subsidy seems justifiable are:

• Clearly socially useful, not quite commercial – charities and social enterprises that are close to being commercially investable but whose business models’ would be significantly damaged by the attempt to repay an unsubsidised commercial investment.
• VC risks / ISA returns – this is investment into charities or social enterprises that, if the investment is successful would generate positive social impact that is (a) on a huge scale (b) unusually transformative or (c) both on a huge scale and unusually transformative. While the potential social returns are the equivalent of those of a tech startup seeking VC funding, the potential financial returns are relatively modest even if the investment is successful.

In both cases, the aim of subsidy is both to mitigate the risk of the investor losing their money but also to mitigate the risk of the investee being forced to significantly dilute their social impact in order to secure/repay finance on straight commercial terms.

The key question for any subsidy for investment deals – from the Growth Fund to the Social Investment Tax Relief – is whether the activity being supported is socially useful and whether there’s a clear reason why subsidising investment is a more effective way of supporting activity than other possible options.

Supporting government policy goals: in addition to the broader policy goal of help charities and social enterprises to become sustainable businesses, significant amounts of subsidy have been specifically focused on supporting central government’s attempts to promote ‘outcomes-based commissioning’.

There are a range of views on the extent to which ‘outcomes-based commissioning’ is useful but it is entirely legitimate for the government to choose to support it as a policy goal.

So far, this support has been primarily focused on supporting the creation of a market for social impact bonds and drawing investment into that market. As a result, in an extension of the wider problem, much of this money has been spent on promoting and subsidising consultant-led contracting models.

An alternative approach would begin with independent assessment of the practical barriers to outcomes based commissioning, followed by a plan to allocate align subsidies and policy to solve those problems.

Understanding what’s going on: while there is no shortage of writing about social investment, there is very little data about actual investment and even less easily comprehensible analysis of the data that is available.

This is one area of ‘market infrastructure’ that needs more subsidy rather than less. One possible approach would be a platform building on the work of Engaged X to provide ongoing post-deal data in an accessible format.

Seeing what sticks

Motivations, priorities and even understandings of what ‘social’ means will (quite rightly) always be contested but we should now be at a point where we know more about what some forms of subsidy are likely to achieve – and have a better idea of the important questions related to others. Hopefully the result will be targeting of subsidy in ways that are most useful to charities and social enterprises, and to supporting positive social change.