These last couple of months have been a busy time for all of us at UnLtd involved in the Big Venture Challenge: a call for the 25 most ambitious social ventures in England that are seeking debt or equity investment to scale their operations.
When applications closed at the end of June we were overwhelmed (figuratively and literally) with the response of 640 applications. We’ve now reduced that to 41 for interviews, that start today. The good news is that the competition was fierce and there were some truly exceptional applications – way more than the number we have capacity to interview. Thankfully many came from entrepreneurs that we already know and work with but, equally pleasingly, many came from those we don’t.
As any funder will tell you, there’s always a sizeable number of applications that, whilst impressive in many ways, don’t quite tick all the boxes. This time we explicitly marketed for ‘the most ambitious’ social entrepreneurs in the country and that was a box that was certainly ticked by almost everyone. But ambition alone is not enough. A number of applications highlighted a gap in the sector between the ambition of the social entrepreneurs (i.e. those that think they’re investment ready) and the reality of expectations from the investment community (i.e. their requirements of ventures in order to actually be ready for investment).
To me, this isn’t wholly unsurprising. I’m pleased the response to BVC can put to bed the view, held by some, that social entrepreneurs somehow don’t want investment. They’re clearly flocking to it. But I’ve worried for sometime that the hype around social investment will lead too many social entrepreneurs to rush full-speed towards the dollar signs, forgetting about the boring middle bit of actually building sustainable business models.
When doing the application assessments, I tended to go straight to the question about customers: who’s buying their product, how much are they buying and for how long are they contracted? And what sort of shape are their customers in? What value are they getting from this and who else could they be buying from?
Whilst many of the BVC applicants took the time to forecast impressive hockey-stick projections, not all detailed who they thought would be buying their products, let alone actually showed us they’d gone out and tested the market with these customers before approaching us.
Of course, not all social ventures can or should target the private sector. And many of those that target the public sector do a fine job of managing their sales pipelines and projections – but in general terms this is a tougher job, particularly when tendering is involved. Whilst most SMEs working in B2B supply chains lack real security of contracts, if their customer is healthy and they’re doing a good job, it’s a very good start. The first lesson I learnt on my first day in sales was getting repeat sales is a hundred times easier – and manifold more valuable – than sourcing new sales.
Many social enterprises are still of the mindset of accepting the uncertainty, bureaucracy and whimsical nature of public sector tenders and grant-makers as a necessary part of what they do. It strikes me this is a very different kind of selling from the one I know in the private sector: much less focused somehow and giving much less confidence to make realistic projections. And I also don’t think this is as attractive to the investment community – for a number of reasons.
Talking to an investor recently he echoed this. He’d be much happier with his potential investees working with the private sector. And not just for the securing of revenues. Beyond strong sales pipelines, the other big piece of the jigsaw missing from the social investment market – particularly those investors like him looking for equity stakes – is readily available exits.
Recent EVCA data showed trade sales as consistently the most frequent exit route – around 25% of all exits over the last 4 years – vs around 5% on IPO . Yet, our sector obsesses about things like the Social Stock Exchange without any dedicated focus on putting in place an M&A market. Operating within private sector supply chains is clearly a piece of this jigsaw: it places you in an industry, where other businesses – customers or competitors – can see your value.
For now, most of the investments in the social space are debt-based – but this means not enough risks are being taken. To attract equity investors there must be the possibility of exits. And, amongst other things, I suspect this requires a shift in mindset amongst social businesses to build their business models around the private sector / B2B landscape. Exits are, of course, important as they provide financial incentives for investors and entrepreneurs alike to invest their time and money in delivering social value.
If the early indicators from the Big Venture Challenge show anything, I think they show the need for teams like UnLtd Ventures to put more focus on spotting talent early and working with them over a period of time before introductions to investors are hurried. There’s a vast amount of money flooding to our sector at the moment. It would be a tragedy if it just as swiftly returned from whence it came, convinced there was no market for it. It feels like we’re only going to have a limited amount of time to prove not only that we want it, but actually that we can use it.
Surely there’s a role for organisations like UnLtd to work with the most scalable ventures not on which investors to approach and how to ‘sell’ to them, but on which potential large customers to approach and how to sell to them… To build a market that understands the value of working with social businesses and to work with them to put a value on these relationships to their financial bottom line. So that when investors eventually enter the picture many more boxes are ticked.
And what does this require…? Well, after the flood of individuals from financial backgrounds to the social sector in the last few years, maybe we now need an influx of just good old fashioned sales people to help sniff out those big wins…
Shared Value Supply Chains 