Blog

1 December 2017, 15:10

Using social investment to become financially sustainable

Cass Centre for Charity Effectiveness' Director of Social Finance and Social, Mark Salway, discusses Social Investment as a way forward to create a sustainable future for charities. 

At a recent charity conference, the issue of local authority funding quickly came up. For this charity, it was a similar story to many others: grants disappearing, donations down and local authority funding being replaced with outcomes-based contracts. But this time, the conversation took a different turn. “We believe that we need to improve our back office, get a grip on our management information and innovate to survive. We need to focus more and stop doing certain non-value added activities, but we believe we can create a sustainable model for our charity. We just need a little investment to get started.”

Using an intern from the Rank Foundation they had created a social enterprise model to become sustainable and were looking towards the future with hope. They were going to use some of their building space to generate external revenue, package their work as a new course they could market, potentially charge some of their existing customers for services (but they weren’t sure if this would be acceptable yet) and develop better management information systems and IT systems to grow. They had decided to focus much more closely on outcomes, and were hoping to find investment for new IT, and as seed capital to develop and market their new course. They wanted to prototype in a light touch way, and react to what they learned. During 2015–16 we ran six seminars at Cass Business School; 150 charities took part, alongside around 20 investment organisations. The sessions were called ‘Demystifying the hype’ and the aim was to build understanding amongst nonprofits, investment organisations and charities about social investment. We were able to understand the motivations for charities using social investment. This knowledge identified that social investment should be seen for what it is, a tool to help the sector, not a panacea for all. The seminars identified the primary reasons why charities are interested in social investment as:

• Sustainability, ensuring the ability to diversify income streams in a way that is self-sustaining and predictable
• Impact, allowing charities to identify priorities and provide funding linked to these
• Scaling up and growth, enabling work to be taken to scale and facilitating greater impact
• Investing in IT or the low carbon economy and investing in changing business models to achieve this
• Autonomy and flexibility in income streams, rather than needing to dance to the donor’s tune
• Building their internal infrastructure to focus on impact measurement.

Sustainability came out very strongly as the main reason why charities were interested in social investment. Our seminar series highlighted, however, the significant need for training to develop new business models and to explain how social investment could help. So how did the charity in the opening paragraph sense this opportunity? They did this by really understanding the needs of their beneficiaries, the outcomes they hoped to achieve and then matching this to potential income stream. They identified that their building was not fully utilised and that they had a main activity which could easily be packaged as a social enterprise. However, to take this on they needed one of the Trustees to be able to sense the opportunity, and they took the time to really think. They also needed to wrestle with the organisational culture and identify that they needed some help to get started. They found good quality information from Good Finance website and had already started to research funders (such as Stepping Stones) to help them transform. Charities want money that is affordable and will help them build sustainability and predictable income streams. Our recent report has showed that:

• 60 per cent of charities see social investment as either positively changing their business models or being transformational to them
• 33 per cent of charities felt that social investment would bring little or no change to their organisations
• 7 per cent were openly negative about it.

Our work has also highlighted that where organisations have a social investment champion, this person can help take social investment forward and help others to see the potential. It is highly correlated that those organisations where no champion exists typically do not even consider social investment. Thinking further, it is interesting to reflect on the academic work on sustainability. A literature review on the subject would see a broad range of issues falling under sustainability: organisational capacity, financial viability, advocacy and ability to tell your story, infrastructure, and public image, for example.

If you consider your charity could you guarantee sustainability of each of these areas? To truly build sustainable charities we need to focus on strategies and avoid mission creep. Charities will need to review their work often to ensure quality services and products. Charities will also need to review their organisational purpose on a regular basis to ensure continuing relevance and clarity.

Finally, charities will need to make sure that sufficient is spent on infrastructure to guarantee the delivery platform they operate from. Looking at another example will highlight this. It comes from a charity who have been seeing their revenue stream from government contracts being taken by commercial health providers. In the short-term they are rapidly losing business.

In the longer-term, the commercial organisations can’t deliver against the outcomes required and the charity then gets the contracts back at a lower price – a vicious circle. This charity looked towards the future and identified two things they needed to be able to transform and compete. They needed to be part of a consortium to give them sufficient size and clout to compete.

Secondly, they needed to update their financial department to report in a commercial profit and loss format; a simple thing but one where they lacked skills. They also needed to measure outcomes better and update their systems to achieve this. They thought that an app recording time could help them become more efficient and meet commissioners’ requirements. They felt that to invest from their reserves would have left them with too small a level of cash to trade from, and opted for external investment instead. They found a social investor who helped provide skills on the board, and helped them to think differently. They felt that they could only get money from a bank (as many small charities do) and found it surprising that they could get funds from a social investor who had similar motivations and objectives to themselves. The only thing that they were worried about was the time it took to get through due diligence and prepare the material needed to secure funding – systems, processes, finances and social impact metrics. They were also worried about the ability to pay back the borrowing, but saw without this they would need to contract or merge. They invested in their services, linked with other charities and commercial providers in the area and won a large contract. They have now increased their range and impact and have the skills to grow.

Making sustainable change is key, both for charities themselves and the communities they serve. Being the right size organisation is important, and this may mean steady growth using the right financial tools and models. We need vibrant, entrepreneurial charities and nonprofits to re-invigorate the sector; we need charities at all points on the size scale if demand is to be met. Charities typically want to help beneficiaries in every way they can, but often this leads to them not being able to stop doing activities, at worst it means that they stray far from their original charitable objectives. This becomes a further drain on resource. We need to prioritise ruthlessly. All this learning and more is included in a report on social investment, “Social Investment: as a new charity finance tool, using both head and heart” published by Cass Business School and free to download. We have also published a simple toolkit to help people learn and see if social investment could be a useful tool for them. So how are you going to develop your organisation for the future? Who is your social investment champion? What changes do you need to make to create momentum to take you on a new journey? Maybe, just maybe, social investment could help you on that journey.

Hear from Mark at CFG's Social Investment Conference in London on Tuesday 12 December, secure your place now.