01/12/2011

If there is an adviser to angels who knows how to spot a new opportunity for angel investors, it’s Sally Goodsell, Head of Finance South East. Why do I think this? Well, it’s Sally who has spearheaded the recent drive to encourage female led investment in female entrepreneurs. And it is also Sally who has really introduced formal training programmes to help angels become better investors. So, when I heard that she was spearheading another new initiative it was obviously something that deserved my attention, especially when I learned that it was in the world of something I really care about – Social Enterprise or Impact as it is also known.

Sally is one of those people who does not just talk the talk, she walks the walk. So it did not surprise me that when I rang her up last week to find out what she was doing in Social Enterprise that she was already in the full throes of activity. I had thought that she was starting a Social Enterprise angel co-investment fund. What she told me was not only that it was up and running but it looks as if it will be making its first two investments in the next few weeks! And she let slip that her team is also in the midst of raising awareness of the exciting potential for angels of investing in Social Enterprise and as if that was not enough, they are also organising investment readiness programmes for social entrepreneurs so that they will be successful in raising investment when they do come forward for it.

It was the angel involvement that particularly pricked my attention. It’s well known that angels invest not just to make great financial returns, but to give something back too. But how does this work in the Social Enterprise spectrum?

Sally confirmed my assumption. “Actually it’s not that difficult getting angels’ attention about Social Impact investing,” she told me, “as long as you explain to them up front that this is all about another way of giving back. When we were researching the opportunity we took soundings from some of the angels we know and it was clear that they all have social enterprises they are supporting with time and money, but they have not put these into the same box as their angel portfolio, until now. They were supporting local businesses which are focused on benefitting the community as a priority over making money, but they also included charities and other not-for-profit organisations in this context.

“Our roadshows with established business angel networks to explain about social investing came out with pretty similar results. All we had to do is show the investors how aligned social impact investing is to angel investing and we grabbed their attention. We also found that as we developed the investment case, the issue of environment impact investing was even more closely aligned to the clean tech investing than other sectors. As this is an area that most angels are very engaged with at the moment, it made the job even simpler. Essentially we just have to encourage angels to look at the “charitable” things they are doing already from a different angle.”

I asked Sally why angels need to draw their angel activities closer to their “socially good” activities.

“The challenge is that there is still a large “missing middle” funding gap for social enterprises. It mimics the equity gap that angels are being expected to fill in the raw commercial investing world. There are now some strong VC players engaged for large sums – Bridges Ventures is a case in point and for really small enterprises, grant funding will do for a while, but is no use if you really want to be disruptive in terms of social or environmental impact. There are two groups in the 3rd sector, as it is known, that desperately need the money and skills of angels to cross their own personal chasms. The first one is those who are still tiny and reliant on grant funding models. They need help with developing their business models until they can create a sustainable financial model of one type or another that will enable them to stand on their own two feet and to keep growing. The second group is those that are already up and running, but which have explosive growth potential, but need finance and management resources to help them exploit their opportunities. Both these groups are ideal for angel support.”

I can see what Sally means, the challenges are just the same as those facing fast growing businesses in the for-profit world. So, why is social impact investing different from traditional angel investing then?

The first point is that social enterprises typically have a different legal structure to “normal” Ltd companies. They may be charities, CICs (Community Investment Companies) or companies limited by guarantee. So the way you invest and the way you get financial returns are fundamentally different. Noticeably you are not going to get an exit through a trade sale or flotation. If you do invest (and by not means everyone who invests, does) with the intention of getting your money back and more, you will probably need to structure your investment with a debt or preferred share structure to fit with the legal restrictions surrounding these sorts of legal entities. You will probably be looking at a drip feed return via interest and capital repayments, rather than a one off exit.

The issue of what returns a social enterprise should generate for investors is a hot topic at the moment. With investors typically being exhorted to look for “10x their money” and “double digit annual returns” in their angel world, the logic might suggest that if you back a Social Impact business you might be justified in expecting that your returns will be more about ‘doing good’. So you might be interested to learn that such Social entrepreneurs do expect to offer financial returns. In fact the current view is that annualised returns of about 6% per annum are about right. However, the concept of Social Impact investing is relatively new and the debate about returns is certainly not yet exhausted and one argument runs along the lines:
“So if you are doing good, as well as making money, shouldn’t the financial rewards for investors be even greater than merely investing in a normal angel deal – especially in a society where social success is so often measured by the degree of financial success you have achieved?”

Sally made an interesting point. “I think that one way of giving rewards to social investors without putting the business under too much financial pressure at a challenging phase of its life, would be for HM Government to give enhanced tax breaks to social investors. And these breaks should relate to how impact investing really works in practice. There is no point in giving CGT relief for example on the exit if there is no “big exit” expectation. What social impact investors need is tax breaks on the interest payments they may receive for the loan they made as well as a tax break on the loan capital they provide in the first place. Another thing the government could do is something around Gift Aid and how it could be adapted for investments as opposed to donations.”

Another difference is that social entrepreneurs may be even less financially savvy than your typical entrepreneur. They may mix up just “doing good” with “doing good sustainably.” The help Social Investors can give in this area is invaluable in making the difference for many between success and failure.

Sally Goodsell has spotted an opportunity when it comes to her angel co-investment fund. There are a raft of examples now that have shown that social enterprise can be as or more successful than their traditional merely profit driven counterparts. There have been notable successes in the food and drink world in particular – Divine Chocolate and Café Direct to name but a few. Many hundreds more companies have discovered that having good social credentials makes a big difference to their overall brand values. Innocent Drinks is an obvious example. These businesses have proved that aligning the profit (often referred to as a surplus by the way) motive with the “doing good” one can have pretty successful commercial results. Indeed a social enterprise recently pitched at Pitching for Management and modestly told us that it was doubling turnover each year and with 40%+ profit margins – KPIs that many a traditional “angel” backed entrepreneur would die to achieve! But the doing good bit is and will remain a priority for the management teams.

Sally confirmed that more and more social enterprises are pretty exciting investments opportunities even without their social angle. Her new co-investment fund has already seen dozens of opportunities and as I have already mentioned she will shortly be announcing the first two investments.

What next after the current awareness raising activities and this co-investment fund I asked Sally?

“I think in five years time Social Investing won’t be seen as a separate investment category. All entrepreneurs will have be engaged in the social impact of their business and all social entrepreneurs will see themselves simply as entrepreneurs; meanwhile no angel will be investing unless the social impact case has been made alongside the investment one. This Social Impact Co-investment fund is a pilot – we hope to prove to our backers that we should be the ones to set up more, larger ones in the future. And I cannot see a time when Finance South East is not supporting angels and entrepreneurs to engage successfully as well as acting as an early stage VC fund manager, as that is core to what we do.”

Knowing Sally, I am sure that once she and her team have ensured that Social Impact investing is integral to angel investing, they will find another challenge to overcome. My challenge is going to be seeing if I can find it before she does!”


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