Within the emerging social investment market, the same words frequently mean different things to different people. In particular, the label 'social enterprise' can be especially problematic. In part, this is because there is no shared understanding of the underlying business models beneath the 'social enterprise' umbrella.
For investors, as the number of organisations labelled as 'social enterprises'
proliferates, it is becoming increasingly urgent to agree, and then to adopt,
a common methodology for disentangling the assessment of financial risk
from the likelihood of an investment achieving social returns.
Others have already written about ways in which social enterprises may be categorised and described1. We wish to contribute to this ongoing discussion by outlining Venturesome's current thinking about this issue. This paper introduces a conceptual framework which we hope both investors and investees will find useful as a guide to thinking through how different business models create social impact – and the consequences of this for generating financial returns.
The Three Models Framework
We believe that there are three fundamental ways that social impact2 can be created through trading activities:
1.1 Model One:
Engage in a trading activity that has no direct social impact, make a profit, and then transfer some or all of that profit to another
activity that does have direct social impact (the 'profit generator model')
1.2 Model Two:
Engage in a trading activity that does have direct social impact, but manage a trade-off between producing financial return and social impact (the 'trade-off model')
1.3 Model Three:
Engage in a trading activity that not only has direct social impact, but also generates a financial return in direct correlation to the social impact created (the 'lock-step model') It is important to note that these three models are statements of fact, not judgment. In abstract isolation, no particular model is better than or preferred to any other. In practice, a business adopting one model may produce better overall returns than an example of another model due to specific factors such as the quality of the management team, the market environment, or the strength of competing organisations.
About the Author
Venturesome is a social investment fund, an initiative of the Charities Aid Foundation (CAF). Venturesome provides capital to civil society organisations, operating in the space between providers of charitable grants and providers of bank loans at market rates. Since launch in 2002, over £12.5m has been offered to some 200 organisations. In addition to accumulating practical deal experience, Venturesome has endeavoured to have a central role in building a robust social investment market, adopting an open-book approach to share knowledge and build experience, but also ready to operate in competition so as to raise standards.