After 32 Let’s Talk Good Finance (LTGF) events, there has been a lot of learning about what social investment is and what it isn’t. Here, we take a look at the highlights from that learning.
In the social enterprise and charity world, social investment is but a tiny cog in the Holy Grail of creating, maintaining and developing a resilient and resourceful organisation.
We know that social investment won’t solve the sector’s funding problems. We also know that it can’t replace grant or other income. So amidst all the myth and hype around it, how do we make the case for what social investment can do and when it is the right tool for the job?
LET’S TALK GOOD FINANCE: WHY IT’S GOOD TO TALK AND HEAR DIRECT FROM PEERS WITH EXPERIENCE
Let’s Talk Good Finance is one of the ways we aim to get the message out there. The events aren’t about ‘selling social investment’. Instead, they focus on good old fashioned conversation. There are no daft questions and the audience feels empowered to challenge or seek an honest answer with no spin or window dressing.
But more significantly, those who have been there and done it take centre stage. This is, perhaps, why the ‘hear from a peer’ slots are what attendees value most.
Below are seven lessons from those who've done it...
1. Social investment is not benevolent money
It always feels important to dispel any idea that this is grant money. This is why we have got such great feedback from showing the at the start of each event. It was also great to hear several of our speakers talk about their experience of using both grant and social investment.
2. Impact matters
For investors, the key difference is that investors ask you to tell them what difference you are going to make with the money they lend you. Fundamentally, investors invest in people and the impact both you and they care about.
3. Taking on finance from a social investor is about much more than the money
Ready-made deals almost never land in a social investor’s lap. Many of the ‘hear from a peer’ speakers have shared how they thought they wanted X but with the investor’s help and support, they realised Y was a better solution.
Social investors won’t make you try and borrow more than you need or can afford. But social enterprises and charities often underestimate the amount needed (or simply try to cost for the minimum they need to get by when factoring borrowing money).
Many examples come to mind. Paul from Foresight Lincolnshire, Steve from Probe (Hull) and Nathan from Lincolnshire all recounted how they saw their investor as a partner, a trusted advisor and a stakeholder in their organisation’s success. Even after the investment was repaid, they felt comfortable and welcome to continue the relationship and chat through ideas as well as to pick the brains of their relationship manager with regards to their network of contacts.
4. Honesty is always the best policy. If things don’t work out as you planned, tell your investor.
It isn’t in any investor’s interest to have an investment fail. So whilst the numbers must stack up for them to be able to lend, it’s not unusual (in fact, it’s fairly common) for investment terms to be reviewed, loan periods to be extended, capital repayment holidays to be granted and additional support (for the board or executive team) offered.
One of the little known upsides from working with a social investor is that they will help you stress-test your model.
We heard a great example of this from Katie, CEO at Holywell Housing Trust, who received investment from Resonance’s Health and Wellbeing Fund at LTGF Cornwall. Whilst there is always lots of noise and media about when things do go wrong, no social investor ever wants to have to call in a loan. This will always be the last and final option. If there is an upside, they will help you look for it.
5. Social investment – what does it cost and why isn’t it cheaper if it’s social?
Three years ago discussion around the cost of capital was limited. These days, it’s great to see attendees asking investors what the average cost of their type of lending is. In this way, social enterprises and charities can see that, just like their organisations, social investors don’t all do the same thing. And they don’t all lend the same type of money.
Where social investors get their money from, denotes the amount of risk they can take. For example, Charity Bank specialise in the lower risk form of lending, which is often secured on property (like the mortgage arrangement we are familiar with). This is because the money they lend comes from deposits from other charities, trusts, foundations or individual retail investors like you and me through an Ethical ISA product. This differs from CAF Venturesome whose money is philanthropic at its source. Whilst this doesn’t mean they don’t need it back, they can make adjustments in price and risk profile in order to do higher risk lending.
Big Society Capital contributes to both the supply and the cost of money as we are the wholesale investor behind many of the social investors and their funds. Risk is all about taking a balanced approach: some will pay more; some will pay less and some will be lost!
6. Due diligence isn’t fun but it does make your business better for going through the process (even if you don’t get the investment)
Well, the verdict is almost unanimous: due diligence isn’t fun (although we did manage to find one social entrepreneur, Cherie White from Think Forward, who actually enjoyed it!)
For the most part, people told us they understood why they were being asked for the information. But it seemed over complicated and at times they weren’t always clear why the information was being asked for.
You are going to have to know your numbers better than ever before and you’ll have to fit this in on top of the day job. Just don’t be afraid to ask for clarity or to challenge what is needed and why, so you are confident that providing more detail is going to be of value both to you and the investor.
And whilst many didn’t find the process fun, on a number of occasions, I have heard our peers saying that due diligence is a really valuable organisational process. Even when the result was that the investment wasn’t made!
7. It always takes longer than you think
Lastly, some wise words from Impact Hub Birmingham:
don’t leave it until you really ‘need’ the money! Social investment doesn’t work best when it is a bailout or emergency solution.
Social investors have processes and credit committees who have the decision making power. And even if these meet monthly, how quickly you are able to supply the information that is needed to complete due diligence will have an impact on timescales. What all our peers agreed on is that it takes longer than you think!
Any social enterprise or charity engaging with an investor should ask exactly what their time frames and processes are. This way you’ll both be on the same page in terms of time scales and deadlines.
FIND OUT MORE
If you’re interested in learning more, join the conversation at a Let’s Talk Good Finance event.
If you’re based in the North of England, actively looking for investment, and would like to meet a range of social investors, register for Good Finance Live.
If you are interested in working with us to host an event, email Luna at: firstname.lastname@example.org.
And if you would like us to share what we have learnt as part of the programme of LTGF events, read the full report.
By Melanie Mills, Social Sector Engagement Director, Big Society Capital.