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2
The Innovation of Social Enterprise
How SCP Makes it Work
Next Steps for SCP
Early Evidence of Success
3
What is a Social Enterprise?
1. The Financial Bottom Line
― The business operates like a private sector enterprise by selling goods or services to its customers
― The business strives for at least break even and, in some instances, for limited profitability
2. The Social Bottom Line
― The enterprise balances its financial mission with a clearly defined social mission
― For SCP, the social mission revolves around the creation of quality employment opportunities for members of disadvantaged or at-risk populations
― These jobs must be provided in the context of a supportive environment that helps employees work towards personal and financial sustainability
The term Social Enterprise can mean many different things. For SCP, a social enterprise is a businesses that balances a double bottom line:
4
Types of Social Enterprises
1. Our narrow definition of Social Enterprise includes:
― Businesses that create employment in a supportive environment for identifiable at-risk populations in any geography (e.g. at-risk youth, psychiatric survivors)
― These businesses employ groups who have significant employment barriers such as skills deficits, psychological issues, or substance issues
2. Our broader definition includes Community Economic Development (CED) Enterprises:
― Businesses that create employment in geographically identifiable, economically depressed communities
― Unemployment in these communities is considerably higher than the national average often as a result of the loss of primary industry which supplied the majority of employment in the area (e.g. forestry, fisheries)
― The individuals in this community may not have inherent employment barriers beyond those created by their geographic location and their current training
Historically, SCP has taken a narrow definition of Social Enterprise but going forward we will work with a broader range of Social Enterprises:
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Where is the Innovation? What makes SCP’s social enterprise model innovative is not the individual strengths
of the business model or the social service that is provided
Business Mission Social Mission
SCP portfolio companies tend to operate in very traditional markets
Several examples of similar businesses exist in the regular private sector
In absence of a social mission and with good management these businesses could make profit and create a return for investors
On the surface, SCP Portfolio organizations may have no innate competitive advantage over other market players
SCP portfolio companies strive to create skill and job training opportunities
Several examples of programs that strive to create these opportunities exist in the nonprofit sector
With good management these nonprofits can help those who access the programs
Training capabilities of management in SCP Portfolio organizations are not inherently better than those running charitable programs
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Where is the Innovation? What makes the model innovative is the way that these two components of the
social enterprise mutually reinforce one another
The social mission creates sources of potential competitive advantage for the business:
― Provides access to preferential sales channels
― Provides access to preferential terms from suppliers
― Provides a strong marketing and branding opportunities with customers
The business strengthens the organization’s ability to reach its social goals :
― Provides individuals with a real income rather than a small stipend from a training program
― Creates real-world working experience by giving a paying job with real responsibility so people can learn by doing
― Provides work experience that can be put on a resume for future employers
― Provides income to pay for the social mission so that dependence on external funding is reduced or eliminated
― Provides the self-esteem and pride that most people get from having a “real” job rather than a handout
Business Mission Social Mission
Reinforcement
The innovation is in the ability to create strong social outcomes for a disadvantaged population in the context of a sustainable, competitive business
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The Innovation of Social Enterprise
How SCP Makes it Work
Next Steps for SCP
Early Evidence of Success
8
The Challenge of Social Enterprise
The stresses on the business as a result of employing members of a community who face significant employment barriers will naturally pull the business away from profitability
This phenomenon is particularly evident in many social enterprises that are run within charities to serve very challenged populations
We have investigated several such enterprises that cover 50% or less of their costs through revenue generation
The remaining funds are raised through grants (usually government)
Most businesses that SCP invests in could, under normal circumstances, be run profitably
There are hundreds of examples of renovations companies, packaging companies and retailers that generate returns for shareholders
Typical Social Enterprise
Typical Private Enterprise
Break Even Point
Typically, social enterprises in Canada are organized as training programs where grants cover the vast majority of the expenses and business revenue represents a small portion of the total receipts of the organization
Illustrative
Tendency Pure Social
Return Pure Financial
Return
9
SCP’s Model: What We Bring to the Table
Management team has 30 years of combined experience in the private sector in a variety of sectors Founder brings extensive experience as an entrepreneur and CEO Operational experience with 3 portfolio organizations and strategy work with several other social enterprises
not in the portfolio Partnership with International strategy consulting firm The Monitor Group to provide case teams and expertise
to work with portfolio organizations
SCP tries to change the traditional model by bringing resources and expertise to help overcome some of the key challenges inherent in a social enterprise
One of only a few organizations in Canada providing risk capital for social initiatives One of only a few organizations in Canada providing non-grant financing through program related investments
in a foundation Backed by C$10MM in initial funding through the Bealight Foundation and significant additional commitments
made by the founder for a social venture fund Close relationships with regional co-funders such as Community Ownership Solutions (COS) in Winnipeg
Business Experience/Expertise
Social Enterprise Experience/Expertise
Appropriate Capital
Extensive research into social enterprises in both Canada and the United States One of only a small group of organizations in Canada with hands-on experience in the field of social enterprise
development Management team has direct experience in the areas of social mission strategy, social entrepreneurship, and
community economic development Hands-on experience developing social support infrastructure for various target populations within working
social enterprises One of only a few organizations in Canada adapting the Social Return on Investment framework for tracking
social outcomes
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SCP’s Model: Results of SCP’s Involvement
Break Even Point
By adding expertise and appropriate capital SCP can help its portfolio companies overcome the natural effects of the social mission on the financial sustainability of the business
Further benefit is created by strategically leveraging the social mission to generate competitive advantages for the business either through improved channel access, improved cost structures or enhancements to marketing
Even with these aspects of added value we understand that the business may still not reach the level of profitability that could be gained in a more traditional for-profit business in the same sector
Our belief is that these businesses can at least break-even and, in some instances, generate small (<10%) returns to investors
SCP Portfolio Org
The result is that with the help of SCP, portfolio organizations can strive for financial self sufficiency while still accomplishing the social mission
SCP will only work with organizations committed to reaching this goal
Illustrative
Typical Social Enterprise
SCP Counterbalance Typical Private Enterprise
Pure Social Return
Pure Financial Return
11
The Innovation of Social Enterprise
How SCP Makes it Work
Early Evidence of Success
Next Steps for SCP
12
Real Life Examples SCP has put its business model to work with its initial investments and is beginning to
see results that indicate that the concept can work
Description
SCP Investment
SCP Value Added
Contract packaging company located in London Ontario
Began as a government sponsored workshop program within a psychiatric hospital but was taken independent by the current CEO in the early 1990s
Was successful in bringing on several private sector clients and reducing government dependency however remained financially unstable
Employs a variety of low income individuals from the London area
Pivotal Services Inner City Renovations
Start-up home renovations company in Winnipeg Manitoba
Inspired by a workshop program run by a local nonprofit Created as a joint venture of several nonprofit housing
corporations to renovate run-down housing stocks in the inner city
Employs low-income inner city residents, most of whom are Aboriginal Canadians
Goal is to become employee owned over time
$200,000 loan Funded mostly working capital needs and small
capital investments Allowed for the recruitment of professional
management and improvements in operating efficiency
$30,000 in grant equity and $50,000 in loans Co-invested with local organization called
Community Ownership Solutions Funded all start-up costs and operating losses
during the first year of operations
Access to a Monitor case team which provided advice around customer segmentation and marketing, cost accounting, pricing and growth opportunities
Strategic advice around the creation of social support infrastructure and outcome measurement
Advice and research around leveraging the social mission within customer organizations
Provide significant support in the area of financial planning and cash flow management
Assisted in recrafting the business plan for the organization
Strategic advice and active participation in the creation of social support infrastructure and outcome measurement
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Initial Results: Pivotal Services
Employed individuals from a variety of low income backgrounds, many with psychological challenges
Employed approx 30 full time target employees and up to 70 during times of high demand
Management committed to providing supportive and flexible work environment
Social support infrastructure ad hoc and lacked goals or direction
Social Outcomes Continues to employ individuals from a
variety of low income backgrounds including psychiatric survivors
Now employs approximately 55 full time target employees and up to 70 during times of high demand
Management remains committed to creating a supportive environment, however, the social support infrastructure and training has become more sophisticated and consistent
Financial Outcomes
2001 revenue of approximately $1.1MM with less than 15% growth
Organization came close to breakeven some years but experienced significant cash flow problems and had made few reinvestments in the business
Inexperienced management team with significant skills mismatches
2002 revenue of approx. $1.4MM with 25% growth
Enterprise is near the break-even point Management has begun to re-invest in the
business and has fewer cash-flow challenges
New, professional operations management has been added and skills re-aligned
Leveraging Social Mission
Little or no use of the social mission to create competitive advantage for the company
Prior to SCP Involvement With SCP Involvement
Has now identified and is actively pursuing leads that have been generated through the use of the social mission
One year after our initial investment, preliminary evidence suggests that SCP’s approach has been effective in helping to create a financially viable social enterprise
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Initial Results: Inner City Renovations
ICR was a start-up Small home building programs employed
individuals from low income, inner city neighbourhoods
Programs that were the precursor to ICR employed fewer than 10 individuals each
Programs were run by a local nonprofits as charitable work
Social Outcomes Continues to employ low income individuals from inner-city Winnipeg, the majority of whom are aboriginal
Employs approximately 25 full time staff of which approximately 19 are target employees
Social worker has been hired to assist workers with issues unrelated to the job
Training being provided that will lay the groundwork for future employee ownership
Financial Outcomes
ICR as a business did not exist Programs existed to create training opportunities
and revenue figures were irrelevant Organizations relied on ongoing support from the
nonprofit and other funders
2003 revenue of approx. C$1MM Lost money in its first several months of
operations but is expected to be breaking-even month over month by the end of 2003
New, professional production management has been added and skills re-aligned
Leveraging Social Mission
Social mission was the only major value proposition and therefore the organization worked almost exclusively with the nonprofits
Prior to SCP Involvement With SCP Involvement
Continues revenue generating partnership with nonprofit housing corporations
Leveraging social mission to secure contracts with the government and the private sector
Made connections with the Manitoba Government to provide technical training to employees
While it is still very early going at ICR, results here are also beginning to improve
15
The Innovation of Social Enterprise
How SCP Makes it Work
Next Steps for SCP
Early Evidence of Success
16
Where we Would Like to Go: Making New Investments
We would like to do between 5 and 10 more deals over the course of the next 5 years
We are interested in investing in both for-profit CED businesses and non-profit social enterprises
We believe it is important to be active investors for several reasons― We would like to test the model with different types populations― We would like to test the model with different types of businesses― We would like to create sufficient evidence of the potential synergy
between a business and social mission― We would like to create sufficient expertise around our business model
such that we can consistently add value and improve the chances for success in a social enterprise
Social Capital Partners believes in the concept of learning by doing and therefore feels that it is important to be actively investing
17
Where we Would Like to Go: Growing Current Portfolio Companies
While we continue to make new investments we would also like to scale our current portfolio
― We think that in order to employ hundreds, or even thousands of people we will have to create strategies to significantly grow our portfolio organizations
― We see opportunities to expand some of our existing portfolio into new markets where similar social and business opportunities exist
― We see opportunities to expand each of our portfolio organizations within its current market
We believe that we have invested in businesses that are conducive to growth― We see opportunities for each of our current portfolio organizations in
markets beyond their own― In each case we believe that there are other communities where the
business conditions and social need exist to create similar enterprises
We also believe that a key to making this model truly successful will be to see our businesses expand well beyond their initial markets
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Our Challenges: Finding Qualified Deals Challenges remain around finding good qualified deals while using limited
organizational resources, therefore, SCP will focus much of its effort on creating regional partnerships for deal sourcing
Deal Source Examples Level of Investment Likely Quality of Deals
Regional Partnerships
Networking Opportunities
Media
Local CED or financial institutions- VanCity Capital Corp- Aboriginal Financial Institutions- ACOA- Western Economic
Diversification
National Press Local press in areas of interest Targeted publications
- Entrepreneur focused magazines
- Economic development publications
Conferences Speaking engagements Referrals
High Requires face-to-face meetings
and coordination
High Regional partner can pre-
qualify deals to ensure alignment
Medium/Low May require investment in travel
and takes up significant time
Medium/Low May get alignment if events
chosen correctly No pre-qualification of deals
Medium Can outsource media planning
and execution Requires significant financial
resources
Medium/Low Difficult to get alignment Potential for misunderstanding
of criteria and mission No pre-qualification of deals However, significant deal flow
created
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Our Challenges: Financing Vehicles
Foundations and philanthropists are limited in terms of the types of organizations that they can support
- Through grants they can only support charitable organizations
- Only a few venture investments can be made using the capital in a foundation (PRIs)
Therefore, foundations and individual philanthropists have virtually no facility to fund social enterprises that are not charities
Many of the most attractive social enterprises could never be registered as charities by the CCRA
Even when registration is possible, the limitations that come with being a charity does not always facilitate the needs of a double bottom line business
The biggest challenge to our ability to invest in and scale more enterprises is that current methods of financing are insufficient
The quality and depth of data around the financial success of social enterprises is limited but:
- Our hypothesis is that these businesses will be unable to generate returns that would be required by typical venture capital financing vehicles
However, the risk profile of these businesses is likely to be too great for typical bank financing
Therefore, the opportunities are very limited for most social enterprises to receive private sector venture financing
Private Sector Vehicles Philanthropic Vehicles
20
Our Challenges: Financing Vehicles
Social Capital Partners invests money that is currently within a foundation started by Bill Young (the Bealight Foundation)
― Therefore, Social Capital Partners is limited in terms of the types of organizations it can fund and has very limited facilities for investing in non-charitable social enterprises.
Through its work, SCP has learned that many, if not most, of the strongest social enterprises are nonprofits or for-profits, not charities
― To date the process of getting funds into these non-charities has proven to be very difficult and has required significant investment of time and money
― Initial investigation into the most fertile sources of new deals has indicated that there will be an ongoing need to invest in non-charities
― Based on our experience to date, it would be improbable that the CCRA would register these business as charitable
― Moreover, in many cases the entrepreneurs would see such registration as highly undesirable
The fact that many social enterprises fall between the regulatory and financial cracks is extremely important and relevant for SCP
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Overcoming the Challenges: New Value Propositions for Investors In our view, one of the most crucial ways to create risk capital for social enterprises
is to demonstrate potential new value propositions to philanthropists and other would-be social investors
Current Value Proposition
Investor Provides
Investor Receives
• A grant for a specific program of a registered charity
• Perhaps some ongoing intellectual support
• A tax receipt that amounts to $.46 or less on the dollar
• Recognition by the charity of the donation
• Anecdotal reports on how the money is being used
• Requests for further money to sustain the program
Alternative Value Proposition
• Money to be provided as loans or equity investments in social enterprises
• Perhaps some ongoing intellectual support
• The principle is returned within 5-7 years
• In addition to the principle a modest return may be provided (perhaps 3-5%)
• Specific social and financial return on investment reports
• Recognition by the social enterprise of the investment
• The Ability to re-invest the money in other social initiatives
• A self-sustaining social enterprise
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Overcoming Challenges: New Financing Options for Social Enterprises
Enterprise Type / Potential Return
Stage
Social Enterprise
(50% – 103%)
CED Enterprise
(103% plus)
Growth
Start-up
Early/ Mid
Grants
Equity / Enhanced Equity
Subordinated / Enhanced Debt
Low Interest Loans
With access to new sources of venture funding, SCP can expand its ability to provide appropriate forms of capital to the various forms of social enterprises
Illustrative
Current SCP Investment Capability
Required SCP Investment Capability
23
Overcoming Challenges: SCP’s Structure SCP may restructure itself to create a range of venture financing vehicles for social
enterprise in Canada.
Social Venture Foundation Social Venture Fund
SCP: Fund Manager
Deal Characteristics • C$2M fund• Social enterprises started by
charitable organizations (qualified donees)
• Funding in the form of grants or very low interest loans
• Enterprises strive for break-even• ROI in the form of a tax return• SROI measured around
employment and sustainable livelihoods
Deal Characteristics • C$5M fund• For profit or nonprofit social
enterprises (non-qualified donees)• Funding in the form of equity or
subordinated debt instruments• Enterprises strive for limited profits• ROI in the 3-5% range for investors• SROI measured around
employment and sustainable livelihoods
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Necessary Conditions for Going Forward
1. Lead Deals
– SCP will have identified 2 – 3 lead deals that could be shown to potential investors in a fund as examples of good CED investments
– These companies would have a demonstrable ability to generate returns in the 3 – 10% range while creating employment in an community that has experienced some form of economic dislocation
2. Aligned Investor Group
– SCP will have identified a group of investors who are aligned with the objectives of the fund and willing to be involved in a pilot fund
– These investors would have to be willing to invest a combined total of at least C$3M
3. Regional Partners
– In order to effectively invest in multiple geographies across multiple industries SCP will have to create a network of strong co-investors and partners
– Partners will help create deal flow in specific geographies and perform some on-the-ground management duties for mutual investments
Before SCP moves ahead with a strategy to expand its work with social enterprises and CED businesses, the following conditions will have to be in place
25
Questions That SCP Will Answer With the First Fund
Can investors be convinced that there may be advantage to viewing some investments through both a social and financial lens?
– Under what conditions and using what value propositions?
– What types of investors are most likely to be interested?
What types of investment vehicles should be created to allow investors to consider investment in social initiatives as a viable use of capital?
Are there specific investment characteristics that make the most sense for these types of vehicles from a risk/return standpoint?
– Assuming that Social Enterprises and CED businesses are the best investment types, what are some of the key success factors for making these organizations work effectively?
Through our work with social enterprises SCP hopes to answer questions that will help lead the way forward to creating more social capital vehicles