Now really is an exciting time for social ventures. The decade long (2002-2012) social enterprise reality-distortion bubble has finally burst. Social ventures and social investment is the new game in town with an integrity and focus on actual business solutions for scaling social impact. It’s damn refreshing.

First came the Investment and Contract Readiness Fund managed by The Social Investment Business that offers financial support to ensure that social ventures are better equipped to take on new forms of investment, with a focus on high growth potential. It’s innovative as applicants need to work up their applications with approved providers such as Reasonance, which has experience in angel investment and collective investment schemes, which are then assessed by an investors panel of the biggest players in the social investment market such as Big Issue Invest.

And then recently announced is the groundbreaking Social Incubator Fund by the Big Lottery Fund which funds social venture incubators to support the start-up of new social ventures to feed into the social investment market. The Fund will also offer finance to social ventures (through the incubators) where the financial return is too low or risk too high for Government funded investment bodies such as Big Society Capital – yes the Big Lottery (through Cabinet Office funding and the new policy direction) are now in the risk capital game and their eligibility criteria has loosened to include social businesses (not just recognised social enterprise structures such as Community Interest Companies). This really is game-changing and will massively stimulate the UK social investment market and two recent excellent publications on this are Growing the Social Investment Market: Progress update by the Cabinet Office and Ten Reforms to Grow the Social Investment Market – by Stephen Lloyd and Luke Fletcher by Bates Wells & Braithwaite.

The double dividend cap (20% on paid up value per share and 35% aggregate  cap on distributable profits) is the biggest barrier to creating a thriving market in CIC shares and in attracting risk equity from investors as it takes a minimum of five years for them to simply recoup their investment (assuming the enterprise is profitable enough for the 35% profits to pay back the investment year on year). The CIC Association have created a discussion group on the Regulators review of Dividend caps 2012 – due this summer – where three competing recommendations are put forward. The first is to enable dividend payouts to be based on the current market value of the share rather than the initial paid up value but this still limits the maximum payout to 20% per share and as John Mulkerrin states ‘It fails the basic notion of what a share is on a technical level’ – that’s not a good situation for attracting entrepreneurs into the social space. The second recommendation is to remove the individual caps and just use the aggregate cap at 35% and the third is to do the same but place the aggregate cap at 20% (or 25%).

For us the solution is to simplify the whole process by removing the cap on the paid up value of share and increasing the aggregate cap to 49% to allow the social entrepreneurs to run their enterprise in the most tax efficient way. This is still in keeping with the standard definition of social enterprise of ‘principally reinvests its surpluses into the organisation’ and would be a simple and attractive value proposition to would be social entrepreneurs who would otherwise be hampered by their ability to be rewarded for sweat equity and scaling their enterprise’s social impact. At the moment social entrepreneurs that set up a CIC ltd by shares and have not put any money in (as they have worked 120 hour weeks for 6 months in setting the venture up) cannot receive any dividends whatsoever – this situation must change.

Published by Richard Patey

Internet marketer, author, publisher, snowboarder and editor of this blog.