Component 1: developing business models and appropriate funding strategies for social investment

We explored business models in the last chapter — Chapter 9. We now also consider business planning to make sure that any use of social investment is robust, signed off by the trustees and management, and properly thought through.

First, and most important, a charity’s business model must be aligned with the use of social investment. The business case must:

• • clearly identify the revenue-generating activities, organisational savings or savings to the public purse
• • show how investment capital will be paid back, including any risk premium and interest
• • be flexible, to ensure that the model is sustainable, even if income and expenditure vary against expectations.

All charities see a future shift towards social investment and borrowing and away from grants and donations. As business models are key, taking the time to understand how social investment can be deployed effectively is critical.

In previous chapters, we highlighted the need to evolve charity funding models to relieve the pressure on government grants, contracts income and donations. A model which is replicable and scalable through social investment plays well to most charities with ambitions of growth.

Interest rates in the market have been historically low. However, charities should be careful to ensure that any social investment taken is sustainable in the future even if interest rates rise. Ultimately, the charity will need to pay back the money it has borrowed, plus interest, if using debt. This may depend on future interest rate levels.

Using existing charity reserves as investment capital

• • Of charity respondents, 23 per cent feel that they have surplus reserves that could be used to do more (Salway, 2017, p. 27)
• • Using reserves is an exciting proposition that could help other social projects, either within the same charity or externally
• • A charity could use its reserves as security for external borrowing to leverage fund-raising or start a new social enterprise
• • It can encourage existing staff to become “intrapreneurs” — effective and dynamic internal social entrepreneurs empowered to drive impact forward
• • Investing internally can help intrapreneurs to come up with business ideas based around a social investment model, aligning powerfully with the existing business of the charity
• • Alternatively it could invest to create new partnerships with corporates, other charities or the government.

Component 2: culture, mind-set and ethics

Tackling cultural resistance

There’s a considerable cultural resistance towards using investment tools in the charity sector. The mind-set of charities is focused on grants, donations and delivering social change. Charities often feel conflicted about commercial tools such as “investment” when they think about “charity” and cannot see the link between the two.

Following from this, charities that will consider borrowing are generally positive about social investment. Those that will not consider borrowing are almost wholly negative about social investment.

As many organisations (both commercial and charitable) grow organically and without borrowing of any kind, we should also factor this into our thinking.

Ethics and equity

Ethics is often at the heart of why some charities feel uncomfortable with social investment - viewing it as wrong to profit from social issues unless all profits are reinvested back into the charity.

There’s a demand for specific “social” capital, separate from mainstream investments and banks, avoiding such perceived conflicts of interest.

Different funders have different motivations, too. Some may be financially motivated, e.g. mainstream banks. Others may be socially motivated, such as trusts, foundations and angel investors. What is important is that a range of investors exist to meet different charities’ needs and motivations.

However, the clear divide in the sector lies around understanding what social investment is and how it can deliver impact for charities.

If organisations understand social investment, they are more likely to use it and think positively about it (+20%). If they do not understand it, they are less likely to use it and think less positively about it (—24%).

(Salway, 2017, p. 12)

To help build understanding of social investment, we need more sector money focused on training and mentoring charities through this change.

Cass CCE has launched a simple, free-to-download toolkit on social investment as part of its Tools for Success guide series — the Cass CCE Social Investment Toolkit (Cass CCE, 2016). Initiatives such as Big Society Capital’s Get Informed (Get Informed, 2018) are also helping to build understanding.