Last week’s ACEVO business newsletter to members about ‘profit with purpose’ organisations caused a flurry of debate across the sector. Here, in a guest blog, Acting Director of Ventures Louise Mousseau, at UnLtd gives her perspective on an issue that’s got people talking…
For the last three years I’ve worked in the UnLtd Ventures team providing support to social entrepreneurs who want to grow their organisations and their social impact. Social entrepreneurs choose from a wide range of legal forms and organisational models. We’ve worked with social entrepreneurs across this range, all of whom are dedicated to social impact. So when it comes to purpose, we know that the legal form of an organisation can be misleading. It’s certainly overly simplistic to assume that all privately-owned businesses seek to maximise returns for private shareholders and investors.
Social entrepreneurs’ decisions about organisational form take into account their particular social missions, their beneficiaries’ needs, and their market context, among many other factors. Some choose the charity route. Some set up a social enterprise, perhaps using the Community Interest Company (CIC) model. And some decide on a social purpose business which uses a conventional company limited by shares (CLS) as its legal structure. There are also hybrid arrangements, for example where a charity has a for-profit subsidiary.
In our experience, social entrepreneurs who choose the CLS model do so for a range of factors. A common reason is access to ‘patient capital’ so they can grow quickly. The advantage of equity investment is that it doesn’t have to be paid back in the short term, like debt usually does.
Some social purpose CLS take formal steps to embed their social mission into the business, hence the term “profit-with-purpose”. UK company law is extremely accommodating on this. Contrary to popular perceptions, the directors of a private company can specify whatever purpose they wish for it, and it is their responsibility to ensure that the business adheres to this stated purpose. Special legal mechanisms can lock in the social mission, committing the company to maintain this focus in the future. There’s also the flexibility to commit the company to specific business practices that are in line with the social mission, for example related to target beneficiaries, remuneration of directors and employees, limits on profit distribution, or charitable donations.
At UnLtd, as part of the Big Venture Challenge Programme, we partner with law firm Hogan Lovells to provide support for social entrepreneurs to legally lock their plans for not maximising profits into their company articles, at the same time that they lock their social mission. The easiest way of seeing what this looks like in practice is to provide some real-world examples.
Let’s start with Little Forest Folk, London’s first fully Ofsted-accredited outdoor nursery. Their aim is to provide a safe and secure childcare setting that addresses the increasing disconnect between children and nature – and all of the related disadvantages that we know our sedentary lifestyles are stacking up for the next generation.
The nursery is fee-paying (at market rate) for parents who can afford it. However, 15% of all places are provided free to young children from low-income households – the government only partially subsidises places for two year olds at present. The income from the fee-paying customers makes the business model sustainable. We call this a ‘Robin Hood’ pricing structure. We see lots of consumer-facing social entrepreneurs choose this approach. It ensures that those who stand to benefit the most from their services are able to do so. For Little Forest Folk, this social commitment is locked into their company Articles. This is done using a CIC holding company which owns a controlling ‘guardian share’.
In addition, Little Forest Folk’s founders want to provide more free places as the business grows more sustainable. A special legal agreement called a covenant is in place that commits them to providing more free places as they become more profitable. Although this clearly limits the return on investment, a social angel investor has invested in the business under these terms because he shared the founders’ vision for improving childcare for all children.
The founders of Digital Mums have chosen a similar model. Nikki and Kathryn founded the business because “a shocking 70% of women leave the workforce because they find it impossible to combine their career and family life. Three quarters feel there is just not enough flexibility.” Their solution has been to set up a specialist programme that trains mums to become social media managers for charities and small businesses. They recognise that mothers affected by additional disadvantage will need a slightly different programme, and will need it to be free or heavily subsidised. They therefore reinvest a percentage of their profits into this offer and have targets for how many mums they want to reach with this support each year. They use a similar legal lock to Little Forest Folk.
Recently, an unemployed mother who was given a free place for her child with Little Forest Folk has used her free time to start training to be a social media manager with Digital Mums.
This kind of social venture has huge potential to deliver social impact at scale. Neither of these two social ventures will need further grant funding to deliver their social impact – it’s actually paid for by not maximising profits, and by building that into the business model from the start. Similar models can be used by charities who want to create a spin out that will need a lot of up-front investment, and where debt is not suitable because it will take time for the new company to become profitable.
So just because a social entrepreneur chooses to use a for-profit legal form, don’t assume that the business or its founders and investors are profit-maximising. There’s a lot of legal innovation going on in the profit-with-purpose space, and we expect these models to become more widely known and recognised in the next few years.
To find out more about Little Forest Folk, click here
If you’re interested in getting expert help with your social media marketing while supporting women back into the workplace, you can go here to find out more about Digital Mums
Applications for Big Venture Challenge 2016 are now open – go to www.unltd.org.uk/bvc