Homeopathic Finance – Equitable Capital for Social Enterprises

This report is part of on-going research by the New Economics Foundation, leading to
a
book by the end of 2001. If you have any comments or feedback on the report, please
send them to [email protected] to guide our on-going research.

The social economy can play a key role in creating jobs, improving public services and combating
social exclusion, as both the British government and the European Union have acknowledged.
The social economy is growing in the UK, and interest in how to revive a full spectrum of activity
within the sector is therefore intensifying. For this, the long and rich history of social
enterprise, both in the UK and internationally, should not be ignored.

Over 5,000 non-profit-making organisations with tax-exempt status are currently registered
each year in Britain. The pressure on grant funders has never been greater, and there is a
growing recognition that the development of social enterprise may provide a more self-reliant
approach for these organisations than dependence on grant support. Yet at present there is
little practical understanding of how social businesses or co-operatives can best be funded and
financed. This short report shows that there are clear, straightforward and achievable steps
to support, develop, and finance social enterprises in the UK and recommends a radical new
agenda and action to achieve this.

The report looks at what social enterprise is, the history of social enterprise in the UK (focusing
on the lessons learned), the barriers the sector faces, how the sector is financed at the
moment, what support structures will aid development, and what conclusions can be drawn. The
case studies profiled are drawn from research that the New Economics Foundation has
conducted over the past twelve months with social enterprise practitioners in England. A fuller
account of this research will appear in a New Economics Foundation book in late 2001.1

What is social enterprise?

Social enterprise re-emerged in the mid-1990s, but it is in fact a form of business with a history
longer than that of the corporate sector. Social enterprise can be placed diagrammatically, as
Illustration 1 below shows, in between charitable organisations and the private sector. The
spectrum of social enterprise therefore ranges from the trading activities of charities at one
end, to mutual businesses at the other.

Illustration 1
The social enterprise way – the ethical path between charity and commerce

The mutuality bridge

Charity Social Co-ops and Small

business Mutuals business
enterprise

1
This interim report is based on in-depth qualitative research by Pat Conaty and Sarah McGeehan of the
New Economics Foundation (NEF) which was conducted from April to September 2000 among a sample of over
40 social enterprises and support organisations. An earlier executive summary of this report was co-
produced with Danyal Sattar. The research itself, this report and the forthcoming book, which will be co-
authored by Pat Conaty and Ed Mayo, has been generously funded by the Calouste Gulbenkian Foundation.

1 New Economics Foundation, 31st May 2001

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Although the number of mutuals that started in the nineteenth century continues to decline,
particularly with the ongoing privatisation in financial services, research by Demos and the New
Economics Foundation has shown that a growing number of new enterprises are entering the
social enterprise sector. NEF estimates that the number of social enterprises is growing at nine
per cent per year, with wide variations in growth rates (from zero to 200 per cent) among
different types of social enterprise. This new, wide-ranging resurgence in ethical business
includes the emergence of credit unions, social firms, housing co-operatives, fair trade
initiatives, ecological enterprises, managed workspaces, farmers’ markets, recycling
initiatives, employment services, community finance, community shops, artistic ventures,
social care co-operatives, time banks and community enterprise mutuals. Most initiatives are
still small and working at the margins of the scale of need they seek to address. However, a
growing number of projects are demonstrating ways in which social enterprise activity can be
strengthened, scaled up and made more successful. There is an urgent need to consolidate this
information and make it more widely known. But there is also a real need to learn from the
forgotten practices of the past.

Lessons from history overlooked

Social enterprises have developed in the past to address failures both of the market and of the
state. The green philosopher Ivan Illich and labour historian E P Thompson have both, in their
different ways, chronicled this culture of mutual aid and popular enterprise, which has roots
extending back many centuries before the industrial revolution.

The earliest craft guilds were ethically-guided enterprises. They were locally-based micro-
enterprises of, usually, under five employees. Their concept of socially ‘just enterprise’ pre-
dated the modern ‘value free’ and amoral nineteenth century understanding of the free market
by over eight hundred years (as social economic historians like Karl Polanyi and R H Tawney have
shown). Present concerns with fair trade and the cancellation of debt to the poorest nations
(see www.jubileeplus.org) have their ethical roots in the twelfth and thirteenth century
prohibitions on usury and in the defence of the Just Price.

In the Elizabethan period, the craft guilds were brought under state regulation and lost their
autonomy. At the same time, the international merchant guilds based in London were given
exclusive royal charters with monopoly powers. Both corporations of today and charities can
trace their history back to the Tudor period.

In the eighteenth century, autonomous social enterprise resurrected itself in the form of the
friendly society movement, which aimed originally to provide basic insurance services to the
working class in response to the upheavals caused by the Industrial Revolution. The Friendly
Society Acts of 1757 and 1792 regulated a growing range of new social enterprises, which
included building societies, savings clubs, ‘coffin clubs’, trade unions and early co-operatives.

It was not, however, until the Industrial and Provident Society Acts of 1852 and 1862 that social
and mutual enterprise was given a robust legal framework including limited liability. The original
industrial and provident society (IPS) law was drafted by Christian socialists J M Ludlow and
Edward Neale in discussion with many practitioners in the growing co-operative movement. The
legislation built upon the co-operative Rochdale principles of 1844 and from lessons drawn by
Ludlow from the French mutualist structures which originated in Lyons in the 1830s.

The radical nineteenth century IPS legislation, building on the earlier friendly society
framework, enabled the mutual business movement to develop rapidly between 1865 and 1914.
This period saw the emergence of 43,000 friendly societies, 1,400 local co-operative societies,
and almost 3,000 building societies. The speed and scale with which social enterprises sprang up
far outstripped the numbers of charities being registered during the same period.

There has been a widespread failure on the part of social enterprise developers today (apart
from community-based housing associations) to look to the IPS legislation which historically

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provided appropriate structures for ownership and governance. This oversight has, in part,
been caused by delays on the part of the Registry of Friendly Societies, and the fact that the
costs of establishing an IPS are higher than those of registering an off-the-shelf company.
Another reason is that until recently IPS formation required at least seven founding members,
which has discouraged new worker-owned enterprises from pursuing this route. The result has
been that new enterprises have almost invariably chosen to adopt the legal structure under
company law used to govern charities, i.e. the company limited by guarantee. Such a structure
does not allow for equity to be raised, nor does it normally provide for service users or
providers to participate equitably as stakeholders within a democratic mutual form (on the one
member, one vote principle of co-operative law). Yet the IPS structure had been carefully
designed, specifically to accommodate such needs and to allow for equity and share capital to be
raised, both readily and cost effectively, to meet business funding requirements.

The famous economist John Stuart Mill helped secure passage of the Industrial and Provident
Society Acts. He also devoted the fourth book of his Principles of Political Economy to the real
prospects for the co-operative economy to replace the private sector economy in due course.
In this early ‘new economics’ text, Mill also made the first arguments for an ecological
economics where the economy could stop growing in future because, as the technology evolved
to meet society’s material needs, an enlightened ethics prioritising human growth, social and
artistic development to improve the quality of life for all citizens could be fostered. In this
future, fairer world, Mill argued, the operating principles and practices would be those of the
co-operative, social economy. New economists Hazel Henderson and Herman Daly continue to
draw attention to this Millian vision and to the potential for a revived social economy today. At
the very least, there is a need to recover the wisdom of the past if we wish to create a new,
sound, social economy for the future.

What are the barriers to reviving social enterprise?

In contrast to the period from 1865 to 1914, today the overwhelming majority of non-profit-
making organisations routinely pursue charitable status, with little consideration given to an
alternative social enterprise pathway. Likewise, the percentage of self-employed has grown
from about 6 percent of the workforce twenty years ago to 16 percent today, and some
500,000 new private businesses start up each year. However, social enterprise as a choice
within this broadening enterprise spectrum is still marginal. Why is this the case? Our research
suggests that the expansion of social enterprise has been hindered since the 1970s as a result
of a failure to consider what the appropriate legal structure for such enterprises should be and,
in particular, a failure to consider how equity for effective social business growth might be
provided.

Attempts have been made since the late 1970s to revive social enterprise through the Co-
operative Development Agencies in England and Wales, and through the Community Business
support services in Scotland. While there has been modest growth in the numbers of social
enterprises, research has shown that expectations have not been fulfilled – although one
notable exception here is the growth of credit unions. There is a need to evaluate the reasons
why social enterprise has grown so slowly, compared to the expansion of the small business
sector more generally over the same period.

Studies by Greater London Enterprise in 1988 revealed a problem of serious under-capitalisation

which affected worker co-operatives; this was not helped by their prevalent structure as
companies limited by guarantee, with the consequent constitutional barrier to attracting
equity. European-wide studies of co-operatives since the 1970s have also highlighted the
problems of low levels of equity and an over-reliance on debt finance (high levels of gearing). In
Scotland, most community businesses failed in the early 1990s when regional authorities were
abolished and revenue subsidies were withdrawn. Those that did survive had built up an asset
base (for example, Govan Workspace and housing co-ops in Glasgow) or had developed equity by
issuing share capital (such as credit unions). It should, however, be noted that although social
enterprise in the UK has had difficulties re-establishing itself for these reasons, social
enterprise in Italy has been far more successful: the Italian worker co-operatives in the

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private sector employ over 300,000 and those in the social business sector employ a further
500,000.

There have, however, been many tremendous successes in the social business sector which the
NEF research highlights. Community enterprise and co-operative enterprise in the 1980s
focused primarily on start-up businesses rather than on business transformation strategies. In
the 1990s, greater emphasis has been placed on business transformation and, consequently, an
interesting range of larger social enterprises has emerged. For example, two social enterprises
which have been particularly successful are the Big Issue and the Furniture Resource Centre.

John Bird started the Big Issue in 1991, specifically as a social business. It was one of the first
social enterprises to demonstrate that, for social businesses which are determined not to
behave like charities, there are opportunities for serious growth. The Big Issue was, originally,
a creative experiment to find out whether a focused business approach could deliver work and
dignity to the most disadvantaged in London – rough sleepers. Seed capital for the business
came from a small grant of £30,000 from the Body Shop Foundation; little were John or his
colleague Tessa Swinthenbank to realise the strength of demand on the part of homeless people
to sell the paper, nor how many copies the public was prepared to buy. As a result of a line of
credit from the Body Shop, they were able to expand and the paper has been trading profitably
every year for the last ten years. Turnover is now over £13 million a year. The Big Issue
supports over 120 jobs in producing the paper for London and the Midlands, and over 5,000 jobs
for street vendors. There are now a further five Big Issue spin-off companies nationally and
other clones of the model across the planet. Profits in the South East support the Big Issue
Foundation’s work, providing social support services, employment help, advice services, access
to drug support services and housing aid.

The Furniture Resource Centre (FRC) in Liverpool is another major success story of the 1990s,
and can provide lessons about strategies for business transformation. FRC began in the late
1980s as a furniture recycling project, but faced closure in the early 1990s when local trading
standards officers stopped them recycling three-piece suites and other furniture that did not
comply with new, tougher fire regulations. Nic Francis, an ex-stock broker who was then
managing the project, decided to apply his private sector experience to raise capital and to
expand into the primary production of furniture. FRC has not looked back since. Now led by
Nic’s successor, Liam Black, this social enterprise has diversified into a separate goods repair
and recycling business, a complete furnishings service for housing associations and local
authorities, a major retail outlet in the centre of Liverpool, and a training school for up-and-
coming social entrepreneurs. A decade ago, 10 per cent of FRC’s income came from trading and
90 per cent from grants. Today this ratio is inverted and over 90 per cent of its income comes
from business trading. Every year, FRC takes on some 80 long-term unemployed people and
places nine out of ten in jobs by the end of the year, either within its own operations or
elsewhere.

Liam Black, John Bird and Tessa Swinthenbank have all been disappointed that so few voluntary
sector organisations have followed their example and replicated what they have done. Bird sees
the problem as a dominant ‘alms culture’ where the non-profit sector has grown accustomed to
‘begging’. As a result, the mentality for many organisations and the ethos in the sector
generally has become ‘no grant, no go’. While accepting that there is a place for charity, Bird
isolates the pervasiveness of this ethos as a huge barrier to a potential renaissance of social
enterprise. This view was echoed by many of the other successful social enterprise developers
interviewed by NEF.

Fieldwork interviews revealed a number of further barriers to the development and growth of
social enterprises: these are summarised in Table A. The research identified that the key
barriers were an unhealthy ‘bids culture’, a corresponding sense that resources are scarce
(which interviewees said feeds into unhealthy forms of competition within the third sector), and
a need for a more sophisticated approach to finance (including a more sophisticated use of
grants and loans, and a need for ‘patient’ equity). There is also a vital cultural need to formulate
a framework of management skills and expertise specific to social enterprise, both by looking to

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the emerging work of current practitioners and by rediscovering the rich historic tradition
that has been lost.

Table A: Barriers to the development of social enterprises

Issue Key finding
The ‘charitable mind-set’ The pervasiveness of this ethos and ‘bids culture’ is the biggest barrier
to social enterprise.

Lack of social venture What is required is equitable, ‘patient’, ‘up close’, participation
capital finance

The loss of the social The social enterprise tradition has been lost for several generations
enterprise tradition now, and there are few role models left who can pass on the old
mutual business skills and trade secrets.

The company limited by This structure is not appropriate for social enterprises which exceed
guarantee legal structure five employees and need to raise equity for growth.

The confusion of social This confusion is a major impediment to clear-headed policy and
enterprise with charity practice.

A need for social Social entrepreneurs do not have a network and are therefore
entrepreneurs, as distinct isolated and invisible to each other and to the public. They do not
from voluntary and charity have a voice of their own or the ability to advocate, as a body, on
association service behalf of the social enterprise sector.
managers

The difficulties social Until social enterprises can scale up through business success, it is
enterprises face if they wish hard for them to be multi-purpose, unlike grant-supported
to be multi-purpose organisations. Social enterprises need to find their market niche and
organisations focus initially on delivering one product or service, efficiently and at
the right price.
The ‘five Ms’ There are five vital ingredients that social enterprises need if they
are to succeed: moral motivation, markets, management, monies (in
the right ratios and types), and ‘mouth’. Money is important, but
only in conjunction with the other ‘M’s.

Skills gaps As social enterprises grow, they run into skills gaps. Money and
management expertise need to be brought or bought in, or be made
available in other ways to address this (one example is by drafting in
non-executive directors with the requisite knowledge and
experience).
A need for better In order to attract sympathetic ethical investors and wider
measurement of the social involvement from the local community, social enterprises need a
impact of social enterprise system of ‘social accountancy’ and must be able to demonstrate their
financial, social and ethical performance.

A perception that the social While social enterprises are developing a range of financial tools and
enterprise sector is not as skills, exit routes and better financial returns for investors do need
business-minded as the to be addressed if they are to attract new sources of investment on
private sector an ongoing basis.

A need for locally available This could come from a range of sources. Social enterprise
finance development cannot rely on national funds, but needs ‘up close’, local
finance.
The inadequacy of global Global capital markets are inadequate for sustainable regional and
capital markets local development. A radical look is needed at how to revive local
capital markets: it may be helpful to look to mutualist traditions and
co-operative banking practices both in Europe (e.g. Banca Etica
Popolare in Italy) and elsewhere.

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One of the major barriers identified in the research was that of the company limited by
guarantee structure. Some organisations, like Coin Street Community Builders in London,
operate complex group structures with four or more companies performing different functions.
They recognised the limits of the company limited by guarantee structure for those
organisations wishing to trade more extensively. Some social business pioneers like Traidcraft,
Industrial Common Ownership Finance (ICOF) and the Centre for Alternative Technology had
experimented with ‘ethical plc’ legal structures in the 1980s in order to raise equity. Since
then, however, there has been a growing acknowledgement that the structure of the industrial
and provident society for community benefit is a more versatile and cost-effective one for
multi-stakeholder social businesses with growth prospects (as opposed to micro-enterprises
with five or fewer employees).

Shared Interest, which provides social finance for fair trade, and which grew out of the work of
Traidcraft, has pioneered the IPS for community benefit approach following on from Traidcraft’s
previous experiments with the ethical plc structure. Since the early 1990s other social finance
organisations such as Aston Reinvestment Trust and ICOF Community Capital, fair trade
organisations such as Out of this World, and the Phone Co-op have also adopted this approach.
The Industrial Common Ownership Movement (ICOM) is now using the IPS for community benefit
structure more and more frequently for fair trade enterprises and other mixed mutuals such as
community-owned village shops (for example, at Slaidburn in North Lancashire). With this
renewed interest in the IPS structure, there is a particularly poignant sense that history has
been lost as, until the early 1960s, the IPS structure had been the norm as a means of raising
capital within the British co-operative movement.

Another barrier to growth is the fact that as the social enterprise sector grows, it will need to
be serviced by increasing amounts of local finance. Such finance is, however, becoming steadily
available locally; indeed those social businesses which require capital in order to operate, such
as community credit unions and community loan funds (such as Aston Reinvestment Trust and
Portsmouth Area Regeneration Trust), are at the forefront of current social business
redevelopment. This ‘up close’ finance from local communities and socially concerned ethical
investors is a unique selling point for other social enterprises to promote to attract the
participating finance they need from their own members and other potential members.

Longstanding social enterprise practitioners, such as Traidcraft, are pioneering methods of

measuring their social impact and are therefore countering another barrier to growth. They
have developed accountancy systems to help measure and track added social value. This is vital
if practitioners are to demonstrate the distinction between social enterprise and conventional
enterprise, and thereby attract ethical investors in order to build stronger and more successful
social businesses.

It is crucial that third sector organisations that seek to operate as traditional multi-purpose
charities recognise the importance of social economic discipline and focus - the research case
studies bring this out. A multi-purpose or multi-service structure need not be absolutely ruled
out for social enterprise. However, this form is not appropriate for small enterprises, which
need to identify and focus on their niche markets in order to be successful. Learning to
practice the five Ms of moral motivation, markets, management, monies (in the right debt to
equity/grant ratios) and mouth is key to social business success.

The NEF research also highlights the inequality that social enterprises face in accessing
services provided by banks and Business Links, particularly when seeking access to start-up
grants and seed capital. Following the Policy Action Team 3 report for the National
Neighbourhood Renewal Strategy, this problem is now being addressed by the Small Business
Service (SBS) and by the Department of the Environment, Transport and the Regions.

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How is the sector currently financed?

Table B below shows the range of innovative approaches that social enterprises have taken to
fund themselves. It shows the creativity of the sector in developing finance mechanisms that
can overcome the difficulties they face as social enterprises. Some of these mechanisms are
considered in more detail further below.

Table B: Current mechanisms for finance of social enterprise

Currently used or available

Ethical share issues using the plc The Ethical Property Company, Traidcraft, Wind
rules Fund plc and others are currently using this
mechanism.

Withdrawable share capital This is available to enterprises with industrial and

provident society legal status.

Community finance loans Loans are available from Investors in Society,

Aston Reinvestment Trust, ICOF, Triodos Bank,
and the Local Investment Fund, typically for
property or equipment (i.e. asset based
finance), but also for working capital.

Non-voting preference shares by An available option

cooperatives under the Companies
Act

Low coupon loan stock raised by An available option

industrial and provident societies

Mutual guarantee mechanisms by a This is an innovative and highly successful system

federation of mutuals which is being developed by the Co-operative
Development Society in London to finance
housing co-operatives’ costs of site acquisition
and construction.

Non-profit licensing of new This is available from the Technology Exchange

technology Ltd in Hertfordshire with some patents for social
enterprise and socially useful products.

Mezzanine finance This is used by a wide range of community

finance institutions (particularly in the USA) as
quasi-equity and could be developed here; this
form of deeply subordinated debt could be
offered by British charitable foundations as a
recoverable grant.
Social business angels Risk capital from private individuals is available
from Triodos Bank under their Triodos Match
service for both social and ecological businesses.

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Illustration 2
The financing spectrum for social enterprise between charity and commerce

Investment spectrums
Time and money

Financial

Statutory grants Gifts and Social Commercial Commercial

donations investment credit equity

Time

Seconded time Volunteered time Sweat equity Time at Time at market

discounted rates rates

Charity Social Commerce

business

Source: Aston Reinvestment Trust (1996)

Traidcraft, Wind Fund plc and the Ethical Property Company have all used the mechanism of an
ethical share issue using plc rules. Traidcraft established its ethical plc trading company in 1985
as a sister to its charitable older brother. Both companies have overlapping directors. Mark
Hayes, a former venture capitalist with 3i, guided the success of their two share issues which,
in the company’s first year and again in the early 1990s, raised £2 million in non-voting
redeemable preference shares. In good years, these shares have yielded a dividend of three to
four per cent to investors. Because of the social justice nature of the business, most investors
have either waived the take-up of this dividend or have covenanted it to Traidcraft’s
charitable, sister company. In the past 20 years Traidcraft has grown from a small charity of six
staff, with a turnover of £110,000, to a social business with 120 staff and a turnover of just
under £10 million. Wind Fund plc, which is backed by Triodos Bank, has supported the
development of renewable energy in Britain and is another enterprise which has used the
mechanism of the ethical plc share issue. Likewise, the Ethical Property Company’s successful
ethical plc share issue in 1999 raised over £1.3 million to fund the development of managed
workspace for social and ecological enterprises in Bristol, Oxford, Sheffield and London. These
workspaces range in size from 1,200 to 18,000 square feet.

The Phone Co-op is a good example of the use of the old IPS tool of ‘withdrawable share capital’
to support the growth of a social enterprise. It was established in 1997 by Vivian Woodall to
help social economy organisations bulk-buy telecom services at large discounts. The Phone Co-
op’s turnover has grown from £14,000 in year one to £166,000 in year two, and to over
£500,000 in year three. The big boost came in August 1999 when the company was changed
from a workers’ co-operative registered as a company limited by guarantee to an IPS for
community benefit. The issue of withdrawable share capital to original investors and to Phone
Co-op customers raised £53,000 in equity, with a dividend of four per cent. The company has
grown from one to nine employees and the business also supports over 80 sales agents on
commission.

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To date, attempts to establish mutual guarantee societies to help small businesses obtain less
expensive bank loans, following similar schemes that exist elsewhere in Europe, have been held
up due to legal and regulatory disputes. However, in 1995 the Co-operative Development
Society in London was able to launch its Co-operative Housing Finance Society as a specialist
loan guarantee subsidiary. This operates in close partnership with the Co-op Bank and
Nationwide Building Society, and over £8 million in housing co-op loans has so far been
guaranteed in the Greater London area.

Triodos Bank has striven to link together social and ecological entrepreneurs seeking ethical
business opportunities, with better-off social investors who are able to bring in capital but are
willing to be patient in respect to a financial return. Glen Saunders of Triodos describes this
investment as ‘target accounting’, whereby the social bank acts as a transparent lens linking
ethical investors with ethical borrowers. Triodos has now taken this idea further with its
Triodos Match service – the first international social business angel service. The difference from
earlier target accounting is that social business angels, like traditional business angels, bring
both capital and business expertise (or money and management nouse) to help social enterprises
with growth opportunities ‘get it right’.

How might the social enterprise sector be better financed in future?

The mechanisms currently deployed for financing social enterprises are generally still
experimental and not widely known. The NEF research has isolated elements of good practice
which are emerging, but there is no formal training available to help organisations gain an
understanding of these financial tools.

The most widely-known finance mechanism is that of the existing Community Loan Funds in
Britain, which provides services for either property development or equipment finance via for
example the Local Investment Fund, the Charities Aid Foundation Investors in Society, Aston
Reinvestment Trust, the Glasgow Regeneration Fund or ICOF Community Capital.

There are, however, a number of other financial services: some are under development, while
others have been available in the past and could be reintroduced. These are set out in Table C
below.

The London Rebuilding Society (LRS) is the first city-wide community finance organisation to be
established specifically to meet the needs of social enterprises. LRS aims to meet the needs of
many smaller community enterprise organisations and other non-profits which, as its research
in London has shown, normally would not have access to credit because of their small size, lack
of a track record, or lack of a detailed business plan. The LRS Mutual Aid Fund, which is
currently under development and is to be piloted from late 2001, has been designed to make
micro-credit available to non-profits and social enterprises in London. The fund will operate like
other revolving loan funds, but as the loans will be small, LRS will experiment with peer-lending
techniques and with interest-free ‘fee based’ lending, as practiced by the JAK co-operative
credit societies in Denmark and Sweden.

InterWork is an alliance of Christian-based social co-operatives working with the long term
unemployed, ex-offenders and those recovering from either alcohol or drug addiction.
InterWork social firms look to the success of the Mondragon co-operatives in the Basque
country of Spain both for inspiration and for guidance on financing techniques. For example,
over the past five years Betel, in Birmingham, has developed four social enterprises in its group,
which include a woodwork and furniture restoration business, a gardening business, a calendar
business and four charity shops. This social business initially only had initially a seed capital
grant of £5,000 and a peppercorn rent on premises, but has benefited as a fast expanding
business in a series of loans from Aston Reinvestment Trust over the years. In Bristol, Aspire is
a fair trade organisation which is at the centre of the InterWork alliance’s work. Aspire is
raising equity finance under the Enterprise Investment Scheme to develop a marketing business
both for creating employment through fair trade and to market goods on behalf of InterWork

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members.

Table C: New social finance mechanisms under development

Finance mechanisms

Mutual Aid Fund This is under development by the London Rebuilding Society
(LRS) as a revolving loan service with some similarities to,
but major legal differences from, a credit union.

Social enterprise micro-credit The London Rebuilding Society Mutual Aid Fund will pilot this
as one of its products.

Invoice discounting service An invoice discounting service was formerly run by West
Midlands Co-operative Finance; although it was popular, it
is no longer available to social enterprises. Greater London
Enterprise runs a small business-focused scheme in London.

Social venture capital This is under development with the InterWork group of
social firms – including First Fruit in London, Betel in
Birmingham, Aspire in Bristol, and Helping Hand in
Blackpool.
Corporate venturing This involves the use of larger businesses as stakeholders
for new social enterprise development; for example, a
proposal that the Co-op Group take on a corporate
venturing role for Poptel, an internet co-op.

Venture philanthropy This is under consideration by a range of different

interested foundations (e.g. Guide Dogs for the Blind and
the Charities Aid Foundation).

The issue of venture capital is a challenging one for the social enterprise sector. Conventional
venture capital seeks an exit route via a listing on the Alternative Investment Market, other
tradeable equity market or through a merger and acquistion. For this reason our research
indicates that neo-liberal style ‘social venture capital’ is an oxymoron and a danger to the social
economy. Some, fast-growing social enterprises, such as the co-operatively owned internet firm
Poptel, have used venture capital funds creatively; in Poptel’s case through corporate
venturing. However, this has raised serious concerns for Poptel about how to preserve its own
majority social ownership among its workforce which venture capital is antithetical to.
Investment stakes sourced within the broader social economy itself to assist smaller social
ventures through homeopathic finance from larger social enterprises can address this. Such
mutualist solutions within the co-operative movement as were common in the nineteenth
century are therefore being redeveloped by Poptel as a future safeguard mechanism to prevent
privatisation.

The venture philanthropy idea, which has been developed in the USA under the title of policy-
related investment (PRI), is in the early stages of development in the wake of the report by the
Social Investment Task Force. The Charities Aid Foundation, Guide Dogs for the Blind, Project
Connect and Unlimited are all working on the opportunities for venture philanthropy in the UK,
supported by the Charities Commission. The Charities Commission has already released for
consultation proposed guidelines on programme related investments by charities in the UK.

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New market opportunities and support mechanisms

There is a clear strategic need to support the development of the social enterprise sector
which, at present, is very small. The case studies produced by NEF (to be set out more fully in
the forthcoming book) clearly indicate that practices within the sector are already highly
creative. New approaches and ventures are constantly emerging, and new opportunities for
social enterprise have been clarified by the research and by focus group discussions with social
entrepreneurs. These new initiatives are given in Table D. It needs to be stressed that social
enterprise is not an easy option. Unless policy-makers and those seeking to enter the non-profit
social business sector all work together to address the barriers to action highlighted in Table A,
these new ventures will be slow to develop and face considerable difficulty in moving forward.
Again, some of these ventures are examined at more length below.

The model of a co-production mutual, involving key stakeholders to drive the social enterprise
movement forward, is a concept which is very different from the way in which the UK co-
operative sector has traditionally been segregated into either consumer or producer co-ops.
This model can fit well within the IPS for community benefit structure. In the nineteenth
century, this model was known as a Co-Partnership society and there were still 42 such mutual
enterprises in 1935 (Jones, 2001).

Additionally the growing social co-operative business model in Italy which brings together
professional workers and disadvantaged employees as well as service users in the governance of
the enterprise has many lessons for the UK. However there are no off-the-shelf answers here as
multi-stakeholder models are highly problematic; much further work will be needed to develop
governance and accountability systems that are effective but do not hold back
entrepreneurship and business focus.

Several of NEF’s case studies highlighted the potential of the North American community land
trust (CLT) model for holding land in stewardship. They examined experiments in using this
model, including Stonesfield Community Trust in Oxfordshire and the Living Village Trust in
Shropshire. Members of the Confederation of Co-operative Housing in Manchester, Birmingham
and London are particularly interested in the opportunities provided to them by CLTs, and
Community Finance Solutions in Salford is working on three rural CLT pilots in Wessex, Suffolk
and North Lancashire.

The Rebuilding Society Network (RSN), the new national association for community development
finance institutions supported by the UK Social Investment Forum, has significant experience
among its members in IPS share issues. It is in a good position to take a lead in developing a
centre of expertise and support for other non-financial social entrepreneurs who might want to
learn how to raise equity in this way. It has formed the Ethical Investors’ Club, a registered
company that helps social and ecological enterprises raise equity. However, the Ethical
Investors’ Club will need continued support from bodies such as RSN if it is to develop this
service and other secondary market opportunities.

The recent NEF book, Low Flying Heroes: Micro-Social Enterprises under the Radar Screen (April
2001), celebrates the enormous range of overlooked community initiatives, self-help groups,
mutual aid ventures and sole traders in the social economy. The Scarman Trust is assisting these
community entrepreneurs through its CanDo awards, and is also developing CanDo Alliances in
its seven regions of Britain to provide collective buying services, access to individual learning
accounts and mutually-organised training services. It is also working with Birmingham Credit
Union Development Agency, Riverside Credit Union in Liverpool and NEF to encourage the wider
availability of microfinance services to the socially excluded by the piloting of Community
Development Credit Unions – an American model for extending community banking services
through social enterprise strategies.

Market development is crucial to the success of the social enterprise sector, which is currently
tiny. There is, therefore, a vital need for a national network of social enterprises, which will be
a focus of the national social enterprise conference, organised by Social Enterprise London on
31st May 2001, for which this report has been prepared. This association will create enormous

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possibilities for raising the profile of the most dynamic social enterprises, widening press and
media interest, and developing the social enterprise sector’s economic strength and political
clout through trade fairs and exhibitions.

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Table D: market opportunities, new ventures and support mechanisms

New venture What they are
Co-production mutuals  These are mutual enterprises combining at least two different
stakeholders, such as workers, consumers, and local investors. Poptel,
the internet co-op, and the Phone Co-op are good examples, as are the
social businesses in the InterWork association.
 ICOM has developed a model set of legal rules for these social
enterprises and reports that this mixed mutual model has become the
standard for fair trade bodies and for the community co-operatives
involved in the nascent takeover of village shops and post offices in
England, Scotland and Wales.
 Time banks and LETs require social investment in order to grow. The
founder of time banks in the USA, Edgar Cahn, refers to them as co-
production enterprises.
 In a number of cases, farmers’ markets are also adopting this
structure.

Community land trusts  This mechanism brings local land into mutual ownership. It is used widely
in the USA, Canada and India for a variety of purposes including organic
farming, conservation of the natural habitat with community
management, co-operative housing, mutualisation of caravan parks,
equity-release finance to assist pensioner homeowners with repairs, and
managed workspace.
 Aston Reinvestment Trust is working to pioneer this in Birmingham with
three registered social landlords and the city council; in Scotland the
mechanism is already in use for land reform in the Highlands and Islands,
and rural community land trusts are under development in Dorset,
Suffolk, Stroud, and North Lancashire.

Social enterprise stock  Some Rebuilding Society Network members have already formed a legal
exchanges entity, called the Ethical Investors’ Club, to develop social enterprise
investors’ clubs and to develop a secondary market in social enterprise
shares. However, progress here will require strategic support and
involvement from a national network of social enterprises.

Social enterprise trade  In the 1980s an annual Co-ops Trade Fair was successful in building a
fairs network within the co-operative sector, but this has not been held for
over a decade. However, other services are emerging. Aspire has
developed a catalogue for InterWork social firms and Poptel is
developing an e-commerce service for the social enterprise sector (as
.coop – the alternative to .com).

Social enterprise sole  Sole traders and other community entrepreneurs could be assisted by
traders the development of social enterprise mutuals (as Demos, NEF and the
Scarman Trust have all advocated in recent research).

Fund management  ICOF operates fund management services for community loan funds, but
services these could be developed further by the Rebuilding Society Network.
The service would give guidance to those developing new IPSs or plc
share issues. It could help them to develop a cost-effective product, and
so help them raise socially-directed investment from ethical investors.
 The Furniture Resource Centre in Liverpool is considering social
enterprise franchising and licensing as a means of allowing other regional
social enterprises to replicate their formula. It has recently established
a training centre for social businesses.

Social enterprise unions  A national social enterprise association or regional networks could
develop a bulk-purchasing service to cater for a wide range of business
supply needs.

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Conclusion and Recommendations

The research carried out by NEF initially focused on the third sector. During the course of our
investigations, however, it became clear that many issues relating to social enterprise activity
and business transformation could potentially apply to many private and public sector bodies as
well. This larger potential for social enterprise solutions right across the economy is illustrated
well below.

Illustration 3
Social enterprise at the inter-sectoral heart
of a new social economy of active citizens

Greenwich Leisure in London is one example of a public sector service which has converted
itself into a social enterprise. It was initially a local authority service, which in 1993 faced
massive job cuts. It transformed itself into a social enterprise and in the past six years has
increased its employees to over a thousand, has expanded the number of recreation services it
offers from seven to 11, and has increased its business turnover by over 300 per cent.
Greenwich Leisure has helped 13 other local authority services in England transform themselves
into social enterprises in a similar way.

There are many opportunities for social enterprises in the areas of domiciliary care and
childcare. Care co-ops in the Midlands and the North East are leading the way in these fields.
However, because of regulatory requirements, training overheads and the need for working
capital, domiciliary care businesses do need to obtain contracts for a minimum of 1,000 hours a
week to be viable, and in order to meet this level of work they need to be able to support
between 50 and 1,200 employees. The financing challenges here are therefore considerable.

In the environmental services, in energy services and in recycling, some strong businesses are
emerging. Ealing Community Transport began in the early 1980s as a small non-profit enterprise.

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It is, today, a fast-growing social enterprise made up of four companies, employing over 200
employees. Its activities include transport services, home composting and delivery, commercial
recycling, furniture recycling and CFC recovery. It provides services for eight local authorities
and it is the national pioneer in kerbside recycling, providing direct services to over 425,000
households.

Specialist enterprise credit unions and micro-credit services for small businesses are growing in
London and elsewhere (such as WEETU in East Anglia and Street UK in Bradford, Glasgow, and
Newcastle upon Tyne). This practice is showing the potential for the ‘co-operative advantage’
for the small business sector and the added value and cost saving of mutualist solutions for the
self-employed and micro-enterprises in particular.

Farmers’ markets, an innovation which began in Dorset, Devon and Somerset, have spread
nationally. There should, by the end of 2001, be over 800 farmers’ markets in Britain. In the
South West, organic producers are developing networks to encourage mutual business
opportunities, and West Dorset Food and Land Trust is developing with other partners a
Mondragon-style venture to build extensive agricultural co-operation within the organic sector.
The Plunkett Foundation (Parnell 2001) has announced a wider national strategy along similar
lines to support the rebirth of rural co-operative services in England similar to the successful
New Generation Farmer Co-operatives in the USA.

The conclusion from the research is that if we do not forget the rich history of social enterprise
- its diversity and achievements, as well as its setbacks - and if we are prepared to learn from
those past successes and failures, then there are truly radical opportunities for developing a
renewed social enterprise sector. There are significant opportunities for attracting third
sector organisations who wish to be more than simply traditional-style charities. Moreover
there are also tangible possibilities for attracting private sector enterprises who can be shown
the financial benefits of mutuality and who recognise the disadvantages of destructive price
wars. It should not be forgotten that small businesses in the farming sector, in fishing and in the
building trades were the very backbone of nineteenth century mutuality.

There are, in particular, superb opportunities to develop the model of mutuality on a large scale
in strategic public services such as trains, water, energy, housing, health and education. NEF
has been commissioned by the National Consumer Council to look at these opportunities over
the next six months and will, during this period, be running a series of seminars to debate these
and other exciting opportunities for developing social enterprise, in partnership with Social
Enterprise London, the London School of Economics and the London Rebuilding Society.

As a result of the research findings, which are outlined in the case studies, and from focus
group discussions, NEF have identified a number of straightforward recommendations. These
address the barriers identified above, and aim to take forward the exciting opportunities for a
new renaissance in the social enterprise sector. The recommendations are summarised below in
Table E.

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Table E: Key recommendations

Organisation Action
The Small Business  The Small Business Service should ensure that social enterprises
Service benefit from the same advice, assistance and development
programmes to which conventional businesses are entitled.

Department of Trade  The government should give social enterprises breathing space
and Industry, and treat them as autonomous organisations just like other
Department of the small businesses. They should be free to use a range of
Environment, different legal forms and ways of raising finance. There is no
Transport and the one single model for social enterprises, and attempts to
Regions, Financial regulate for one should be avoided. The free spirit of social
Services Authority enterprise should be respected as this spirit is respected in the
private business sector.
Registry of Friendly  The industrial and provident society legislation should be
Societies, Financial applied more often to social enterprises. Unreasonable delays in
Services Authority registration should be tackled, to provide a more effective
service.
Inland Revenue,  Social enterprises and social firms employing a majority of
Treasury disadvantaged groups should benefit from tax relief similar to
provisions relating to the social co-operatives in Italy.

The Rebuilding  The Network should take a lead in developing the Ethical
Society Network Investors’ Club, in providing advice and information to
investors in the social economy, and in assisting the
development of local social enterprise investors’ clubs.

The Community  The Community Ventures Fund should provide funding on an

Ventures Fund experimental basis for a range of equitable finance mechanisms
for social enterprise. This should be separate from any
Community Development Venture Capital funds for conventional
small businesses.

The Community  The Community Dividend scheme of the local co-operative

Dividend system societies should provide seed money, and other sources of
start-up help, to new social enterprises regionally.

Future national  A national association for social enterprises should be

association established.
 More national training services for social enterprise
development should be supported. The most experienced
practitioners in the field of social enterprise will be needed to
guide the appropriate content of the curriculum, to ensure
quality training is supported and to ensure that this is done in a
co-ordinated way.
Social auditing  An appropriate system for measuring social and environmental
added value needs to be developed which is affordable, user-
friendly and builds on the social accountancy systems pioneered
by organisations such as Traidcraft and the New Economics
Foundation.

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Comment: Don’t fo rget to fill this in!

Social Enterprise Finance Interviewees and Case Studies

Finance Ecological Enterprise

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Birmingham Credit Union Development Agency Bristol Electric Railbus

Capital Strategies Bugbugs
Industrial Common Ownership Finance EAGA Partnership
Local Investment Fund Ealing Community Transport
London Rebuilding Society Envolve
Investors in Society National Association of Farmers’ Markets
Riverside Credit Union Sharing Resources
Triodos Bank West Dorset Food and Land Trust
Unity Trust Bank
New Mutuals
Property Development
Greenwhich Leisure
Candid Arts Trust Poptel
Coin Street The Phone Shop Co-op
Co-operative Development Society
Ethical Property Company Employee Mutual / ILM
Living Village Trust
Regeneration Trust Bootstrap Enterprise
Furniture Resource Centre
Social Firms NEWTEC
Scarman Trust
Betel Time Dollar Institute
Helping Hand
InterWork Fairtrade
Social Firms’ Development Network
Big Issue
Employee Ownership Traidcraft

Democratic Business Legal Services / Other

Job Ownership
SUMA Wholefoods Claros Consulting
Video Engineering and Training ICOM
Scott Bader Commonwealth Wrigleys Solicitors
The School for Entrepreneurs
Open University Co-op research Unit

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