An explanation of how to raise risk capital for ventures serving a community purpose.
All enterprises need risk capital to start, to grow, and to be sustainable. This risk finance has to come from somewhere, usually from shareholders, owners, investors, banks and, of course, from the business itself, reinvesting its profits. Risk capital allows the enterprise to ride the ups and downs of development, which are to be expected when pursuing ambitious, challenging or innovative objectives.
One of the main reasons why social enterprises can find it difficult to compete with private enterprises is their lack of risk capital. A root cause of this under-capitalisation is a belief that social enterprises should not have shareholders, the investors who provide capital to business. Equity investment is considered anathema, because shares give legal title, meaning that the enterprise is owned, controlled and run in the interest of investors.
Social investment institutions have developed alternatives: quasi-equity, patient capital, even social impact bonds. But most of these products are, ultimately, a form of debt. And indebtedness is a poor form of risk capital, especially for social enterprises, where the high levels of profitability that are needed to repay debt might be incompatible with their social aims. All debts, however patient, eventually have to be repaid.
Social enterprises have been defined as businesses that have “primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners.” But what if the shareholders and owners are not driven by a need to maximise profit?
Community shareholders invest in local enterprises providing goods and services that meet local needs, and only expect a fair and modest return on their investment. is long-term alignment of the interests of owners, investors and customers, is at the heart of the community enterprise movement. And this works best when the community purpose of the enterprise is the primary motive for investment.
Another important and novel aspect of community shares is that it invites people to directly invest in enterprise, a new experience for most of the population, who are more used to handing over their savings to financial institutions to manage and invest.
Investing in shares is risky; investors can lose some or all of their money. Shareholders are last in the line of creditors if the enterprise gets into financial difficulties. There are no government-backed compensation schemes to bail out shareholders, as there are with savings accounts in banks, building societies and credit unions.
Community shareholders are also taking a risk, but it is a risk they can help to manage. They can be loyal customers, and many are willing to be volunteers and activists, using their skills, expertise and knowledge for the benefit of the enterprise and the wider community. Some community shareholders are prepared to get even more involved, acting as experts or advisers or even serving as elected directors. All of this can strengthen the business model, making the enterprise more competitive, resilient and sustainable.
At a time when many communities are faced with the loss of amenities such as shops, pubs, post offices, libraries, children’s nurseries, sports facilities, local food suppliers, public buildings, open spaces, and affordable housing, and when people fear losing their life savings in complex investment products they do not fully understand and cannot influence, then the time might be right for community shares as a better alternative.