Social enterprise: business or philanthropy

One of the key organisations underpinning the growth in the sector in Australia is Victoria-based Social Traders, a social enterprise development company that provides financial and business modeling support to start-up enterprises at different stages of development.

"It's often very difficult for a social enterprise to get off the ground with commercial forms of finance."
Tracee Hutchison, CEO Human Rights Arts & Film Festival

In the latest of BlueNotes' Passion and Science of Giving series, Social Traders' Managing Director David Brookes spoke with Tracee Hutchison.

TRACEE HUTCHISON: David, can you tell us just what a “social enterprise is”?

DAVID BROOKES: When we talk about social enterprise, it's a business that's being set up to deliver a social purpose. But, fundamentally, you've got to get the business fundamentals right. So what we do is when someone comes to us with an idea, the first thing we've got to ask is “has it got market potential?” And, if it's got market potential, do we think the proponent has got the potential to actually realise the business opportunity?

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Caption: David Brookes, Managing Director Social Traders speaking at the Social Enterprise Summit, Inverness Scotland on June 11th 2015.

We have an accelerator program, The Crunch, where we match those business proponents up with business mentors. But, even after all that, a proportion of those ideas won't actually end up making that transition to an actual enterprise.

For the ones that do, what that enterprise needs is capital and funding to get started. And so we can help find that sort of capital. And once they get started we can also provide them with ongoing business support and coaching to make sure they're implementing the business plan and responding to the market that they're operating in.

TH: So what does that help actually look like? Is it, quite literally, identifying philanthropies, corporates and foundations that might want to fund particular enterprises? Do you act, quite literally, as a broker in that sense?

DB: We do, very much, act as a broker and facilitator. In many cases Social Traders has provided direct investment or co-investment in a number of social enterprises in Victoria. So we might make them an investment offer but then they've got to find other funding or investment from other parties. But we're quite active in that process, we'll help identify which funders or social investors we think might be particularly interested in their social enterprise and the impact it is going to achieve.

So we don't just send them off and say 'Good Luck!' – we actually provide quite an active broking role. The other aspect of our approach is when they've been successful and found their start up capital, we continue to work with them in that early, operational phase to make sure that our investment is going to deliver that medium and long term impact which the enterprise has been set up to achieve.

TH: So in that funding chain – where you're funding others and enabling them to find suitable funding to realise their vision – who funds you?

DB: Social Traders was set up seven years ago and we received our seed funding from the Victorian State Government and a private philanthropic foundation, the Dara Foundation. We're fortunate to still enjoy some support from those investors and they've been instrumental in us being able to provide a full suite of services to social enterprises here in Victoria.

But we're also generating a lot of earned income and we've identified and secured a lot of additional revenue from the corporate sector, from philanthropic trusts and foundations and other government agencies.

TH: What do you think the ideal funding model for a social enterprise should look like?

DB: I think the funding model for social enterprise will depend on the business. Social enterprises are very diverse so they operate in all industry sectors and there's different motivations for social enterprise – it could be around training and employment, it could be around delivering vital community services or it could be around revenue generation for a not for profit organisation. So the funding model will vary.

But typically, for a start-up social enterprise, our experience and I think international experience demonstrates social enterprises typically require a blended approach to finance and funding. It's often very difficult for a social enterprise to get off the ground with commercial forms of finance and funding and for a lot of not for profits it's not possible to have equity investment.

So our approach with start-up and early stage enterprises is to provide a hybrid mix of what tends to be non-repayable investment and patient loan capital, where the lender is 'patient' about the time frame of the repayment.

And we think the loan component is important because it creates a discipline on the enterprise that this is a business and that the business over the medium to long term has to be able to earn trading income and pay for the money and funding it needs to operate its business.

So now, Social Traders has 10 enterprises in our investment portfolio and most of those investments we have are a mix of non-repayable and loan. But the loan component is structured so that there is a repayment holiday-period that might be up to 2 or 3 years until the enterprise is cash-flow positive.

There's no security required on the loan and the interest rate is below market rate so we are described as 'patient' investors because our objective is to get the enterprise off the ground. That form of blended capital is quite unique in Australia because typically what we've had is grant-funding available from government or philanthropy or commercial finance from the banks or more recently the social enterprise investment fund.

All of those grants and impact investments have got a place but in the middle there's a huge need for this hybrid, patient investment capital for social enterprises.

TH: Social enterprise has been the new black for corporate social responsibility objectives in the corporate sector for some time now, you yourself come from a background in the corporate sector with Rio Tinto and Toyota, some of the really big givers, what motivates the corporate sector to back a social enterprise – is it just that they want to make their stakeholders feel good about their investments or has it genuinely gone beyond that?

DB: Look I think it's a bit of both but I think what we're seeing in Australia is the interest the corporate and private sector is showing in social enterprise is leading the world. To some extent Australia lags in terms of the government policy enabling environment but I've just come from a social enterprise summit in Scotland and the Social Enterprise World Forum in Italy and I hear and see what's happening around the world and what corporates are doing here and what Social Traders is doing with some of Australia's leading businesses, is leading the world.

Getting back to the drivers, I think we're still on a steep learning curve with the business community about what social enterprise actually is but as we engage and educate around that I think the thing that appeals to them about social enterprise is these are models of addressing some serious social and community issues that has a business model around it.

TH: It's always difficult to nominate your favorite child – but can you nominate some of the stand-out social enterprise start ups that Social Traders has been involved with?

DB: Look it is really difficult to pick one or two because we've worked with hundreds of social enterprises over the past six or seven years. Joining Hands is a great social enterprise that tackles the problem of disadvantage through wellness and health treatments. It's a great demonstration that social enterprise has the ability to break the cycle of disadvantage by providing employment and strengthening Australian communities at the same time.

The other one is QC consulting, which provides an excellent vehicle for young people from refugee and migrant backgrounds to participate in meaningful and tangible training and employment opportunities. By providing business skills coaching, networking, and access to appropriate capital, we're really proud that CQ Consulting has become a successful trading arm of Melbourne City Mission."

TH: “What do you see as the future potential for social enterprise in Australia?”

DB: “I'm very optimistic. We already have a very strong and significant sector. There are over 20,000 social enterprises operating throughout Australia in metropolitan, rural and remote communities representing around 3 per cent of GDP. But I think we can potentially double that contribution – and I think we need to – to address our ongoing social, environmental and cultural issues.

We're making progress in terms of engaging governments at various levels to identify and recognise the contribution and potential of social enterprise in a policy environment and, hopefully, bring Australia in line with the role social enterprise is playing in other parts of the world.