What makes an organisation suitable for social investment? This is a question we’re often asked by potential investees. As providers of simple finance for UK charities and social enterprises, we do of course receive many applications for finance from organisations who simply aren’t ready for investment.
But we also believe there are many fantastic organisations with investible ideas who don’t apply. We think that this may often be due to a lack of clarity about what the social investment offer is or concern about the process of raising investment. And sometimes just a lack of confidence in the idea.
Here are some recommendations for organisations considering their first steps into this world.
1. It’s all about the people
We have learned that whatever the numbers say, people are key to the success of an investment. That’s why we have backed near start-ups and organisations doing interesting things, or entering new geographies for the first time. The ability of the team to demonstrate their skills and successes is as important as a good corporate track record.
And it’s not just the management team – quality governance is a key consideration in our investment decisions. The stronger the better. We can take more risk if there is a motivated group of experienced people surrounding the management team.
2. The importance of income generation
Our investment is often used to unlock new revenue streams. An organisation requiring capital to develop a new service that once established will unlock access to a contract is appealing. This is often the case when organisations are considering their ability to deliver a service to a local authority or another type of commissioner.
3. Financial returns
Social Investors understand the problem. Investees need to be able to demonstrate they can pay back finance, but social investors work in the world of government cuts and understand the pressure of shrinking expenditure on vital services. We are increasingly finding ways to work with investees to share risk as a way of unlocking opportunities for them.
4. Preparing the business case
Where available we recommend that investees submit 3-5 years’ worth of historic financial information and a well thought through business plan and projections – substance over style for the business plan. And investees shouldn’t worry if past performance has been mixed, we know this is only part of the story – we’ll need an explanation, but we’re really looking to understand how the situation will change in the future. Having a good narrative is vital for potential investees. A clear link between how the investment will be used and how it will be repaid is also key.
We recommend that investees are careful when projecting costs. Being overly conservative can undermine interest in the project – but it is also important for them to remember they will need be able to justify and explain the numbers. Comparing their projections against other organisations doing something similar is a good way to make sure they are striking the right balance.
We know there are many organisations out there with great ideas that would be ideal for social investment. We hope these tips will encourage some of them to apply in 2018.
Ben Rick is managing director of Social and Sustainable Capital (SASC)