More reflections from SEUK Research

Last week Seb gave his key takeaways from SEUK’s published State of Social Enterprise survey, “Capitalism in Crisis”.  As he discussed, the survey reveals much to be positive about in relation to the ongoing need for smaller amounts of social investment and an increased ability and willingness to access it.

Since then we’ve been looking in closer detail at some of the findings, and comparing it to our own data sets, particularly in relation to our Growth Fund.  We’ve identified some other things that we think are worth highlighting:

  • Focusing as Seb did on the median amount of investment sought (£50k) is one way to consider the data, and suggests that the Growth Fund is still very much targeting the heart of the mainstream finance needs of the sector. But what if you look at things from the other perspective – considering the proportion of sector demand that the median-sized social investment deal (excluding Growth Fund) is aimed at?  That median investment deal in 2018 was £300k, yet only 10% of social enterprises said that they were seeking investment of between £250k-£500k (and only 8% were seeking over £500k).  This would suggest that a lot of social investment is still fishing in a relatively small pond.
  • Another figure which struck us was the proportion who said they felt they had the capacity and resources to secure the investment they needed (of those who expressed a view, 71% felt they did compared to 29% who felt they didn’t). This might seem surprising given the constant refrain of a general lack of “investment readiness” in the sector.  Across the Growth Fund we track how many investees secure some kind of capacity building support prior to securing investment, and interestingly the latest data we have (to June 2019) shows that of the 335 Growth Fund investments made to date, precisely 71% did not need additional support beyond that provided by their investor to secure a deal compared to 29% who did – mirroring the SEUK survey exactly.  This would seem to suggest that social enterprises are both improving their capabilities in relation to investment, but ALSO that they may be increasingly accurate in predicting their capabilities and needs.

These were two ways in which the specifics of the SEUK data set seems to reinforce our own data and intentions, but also the survey threw up a couple of counterpoints too:

  • 52% of organisations said that one of their investment needs was straightforward working capital – it was the most commonly-cited finance need overall. And yet data from our own Growth Fund shows that only 19% of those deals are primarily for working capital.  It is worth reflecting on why this might be, as it appears that investment is somehow not matched up to need.  We’re not sure yet why this might be.  On the face of it, it might be assumed that a request for working capital to smooth cash-flow of existing operations, rather than fund growth and impact, might make a less attractive proposition to investors.  But in Growth Fund we have always been clear that maintenance of impact and underpinning the resilience of charities and social enterprises is an entirely appropriate use of investment resources.  So that’s probably not it.  What may be the case however is that a requirement for working capital may in many cases signify a problem with profitability, rather than a lumpy cash flow, so a working capital proposition may indeed not look very investible – but for financial rather than impact reasons.
  • Access made a shift two years ago to prioritise our capacity building resources on enterprise development rather than investment readiness – signalling a desire to work further “up-stream” on the issues of financial resilience that social investment should be serving and responding to. When we talk about enterprise development and financial resilience we usually mean mixed-income models.  Most successful charities and social enterprises juggle a broad mix of public, private and philanthropic sources of revenue.  But in general our presumption has been that we should target support more on independent trading income streams, and by that we mean a broad move away from public sector contracting, on the basis that it has been an increasingly vulnerable, challenging and competitive income stream to develop and make work.  And yet the SEUK survey shows that such income streams do still dominate the models of many social enterprises – 40-50% of the turnover of most organisations coming from trading with the public sector, and right up to nearly 70% for the largest (£1m+ turnover).  This is a continuing reality which we all need to be mindful of.  And if it really is true that austerity may soon be over, then it could even be an area of growth that our enterprise and investment programmes need once again to respond to.