Will Spark change how the third sector does business?

By Richard Litchfield, Managing director, Eastside Consulting

So we are just 48 hours away from the close of applications for Spark and the one thing that we can safely say is that the project has caused quite a stir.

Spark has been mentioned more than 100 times in many different media across England (my favourite being a piece in Private Eye last month); almost 3000 people have visited this website, and at times our office has seemed more like a call centre than a consultancy as would-be applicants rush to get their questions answered.

Good luck to all of you who are putting in an application!

What I am really interested in right now – and forgive my timing if you’re burning the midnight oil to get an application finished – is will Spark be more than breaking news and actually change things in the long term?

One of the main aims of this programme is to do just that and to firmly embed the social enterprise approach in the homeless sector. Charitable and not-for-profit organisations have frequently heard from policy centres and think-tanks of the benefits of social enterprise. But there have been relatively few successful examples to point the way and to show others how to put the ideas into practise. Big Issue Invest and The TREES group are two good examples that buck this trend.

With this in mind, we’re very keen to find the 15 best examples of social enterprises that are preventing and tackling homelessness and hear all about how it’s done. The Spark team has set out to create a programme that provides not only prize money but also skills and resources to enable everyone working in this area to develop enterprise and social business activities for the long-term. We have tried to ‘live’ this approach by offering assistance on the phones to all potential applicants, spending as much time with organisations that are not ready for Spark this year as those who are.

I was particularly interested then to hear feedback from one potential applicant who said this week: “I hope the challenge has generated as much useful debate amongst other providers as it has at [our organisation]”.

So whether you are applying or you have decided not to, please use the comment button below to tell us about your experience. Has Spark made you think differently about the way you do business? And importantly, will the project change the way the third sector does business?

Why are the finance options for social enterprise so limited?

Welcome to the first Sparking Passion blog. Check back regularly or to hear news and views from the sharp end of the match.

The Spark team includes champions of social enterprise, leading social entrepreneurs, specialist social enterprise consultants and financiers and people working on all sorts of interesting projects to prevent and tackle homelessness.

In the first Spark posting Eastside Consulting’s managing director Richard Litchfield considers a question that perplexes many social entrepreneurs:

Why are the finance options for social enterprise so limited?

Someone recently asked me why social investors don’t take risks and back innovative start-up social enterprises. Their fund raising experience had shown that venture capitalists were willing to provide capital for innovation, but those investing in the social economy weren’t.

There are two ways to answer this.

The first is to dispel a myth. The UK venture capital marketplace is not an easy place for the entrepreneur nor is it a crucible for innovation. In fact, the emerging social capital marketplace is much more willing to accept risk than private equity. Any entrepreneur that has been through a venture capital funding round will vouch for this. Industry benchmarks indicate that VCs invest in only one of every 100 businesses they see.

In the social economy, most commercial risk finance is available as debt rather than equity. Following government backing in 2000, a specialist group of funders have emerged called community development finance institutions and they invest where the high street banks don’t go.

Big Issue Invest, the investment arm of the Big Issue, and partner in Spark is a community development finance institute and lender of last resort. The firm arranges venture-style deals and lends against cash flows.

While these are innovations, social enterprises still do lack access to equity. This is partly due to the legal structures of social enterprises. Many enterprises do not have shares (ie equity) to offer investors; or they have an asset lock precluding any sale and therefore exit for an investor.

For a number of years practitioners have called for patient capital and equity-style products to be customised for social enterprise. The Bank of England talked about this back in 2004.

Financing_social_enterprise_report.pdf2004

Spark does just this offering £500,000 patient capital to invest in social enterprises in the homeless sector. Winners will be enterprises that can demonstrate a real return on this investment – both social and financial. This patient capital will also act as a platform and we anticipate that it will leverage in a further £500,000 of debt through specialists, such as Big Issue Invest.

This project is intended to be a ‘spark’ for social enterprise in the homeless sector. Will it also be a spark for a new type of finance in the social economy?