Consultation response Ferd Social Entrepreneurs

Transcription

1 Ferd Social Entrepreneurs Strandveien 50 P.O. Box 34 N Lysaker Norway Interest Representative Register ID: Ferd Social Entrepreneurs response to the European Commission s Consultation on promoting Social Investment Funds as part of the Social Business Initiative Ferd Social Entrepreneurs (FSE) highly appreciates the Commission s initiative towards promoting Social Investment Funds. We are following EU action in the area, including the work on the social economy and CSR, closely and with keen interest. FSE welcomes the European Commission s consultation on possible European measures to support social businesses through private investment funds, and is grateful for the opportunity to take part in this consultation. FSE is part of the Ferd Group, a privately owned Norwegian industrial and financial group. FSE invests in social entrepreneurs that reflect our vision to create enduring value and leave clear footprints. Within this field, FSE s principal objective is to help companies that enable children and young people to develop themselves and their potential. Our investment focus is social entrepreneurs, and our goal is to enable the recipient company to grow to a level where the company is financially viable without FSE s support. Normally, FSEs investment horizon is 3-7 years. We invest up to NOK 20 million ( 2.6m) per year on social entrepreneurs, and we currently support nine social businesses in Norway. We would like to comment on questions relating to the following 6 topics in the consultation; Box 1: Defining social business, Box 2: Funding challenge, Box 8: Asset valuation Financial assessment, Box 9: Asset valuation Social assessment and reporting, Box 11: Risk management and Box 17: Ensuring effective integration with social businesses and distributors. 1

2 Box 1: Defining social business I. Do you agree that the main features of social businesses are as outlined above? If you disagree, please outline the features that you think are important. FSE agrees with part of the European Commission s definition: that the primary objective of a social business should be social, ethical or environmental outcomes. We have chosen to further constrict investments to social outcomes. FSE defines a social business as any organization, project and individual who is working to help people, particularly children and young people, realize their goals and recognize the opportunities ahead of them. Moreover, we have opted for a further specification of what we regard as social entrepreneurship, in that there must be a clear social objective, supported by a sustainable business model that in the long run will ensure that the company has a healthy financial balance. According to our definitions, a social business should fulfil the following criteria to become part of our portfolio; 1. Have innovative solutions for social problems in society at large. 2. Build organizations or structures that address the tasks and challenges that neither the public sector nor the free market have so far identified or managed to solve. 3. Be primarily committed to achieving social results, supported by a sustainable business model that ensures the long- term sustainability of their operations We have also added a final criterion that focuses our investments on a particular group of social businesses; 4. A social business should help children and young people develop themselves and their potential. We believe that the first three criteria form a general definition of a social business, and thus could be useful for the Commission s work towards a common definition. The final criterion is our specification and as we comment below under point II, it should be up to the investor to make such further clarifications. II. To what extent do you think this initiative should focus solely on those social businesses that do not distribute profits to their investors? Or shall it also focus on those which distribute profits to their investors (e.g. at least to a limited extent)? If so, how might social businesses be distinguished from other businesses? FSE believes that what defines social companies is that their primary objective is achieving social outcomes. In our opinion, it is not a key variable how the company distributes their profit. FSE welcomes the discussion on whether social businesses include those who distribute dividends to their investors. This is a difficult debate, as there is a large industry of profitable companies on social arenas that are not automatically social businesses, as we understand the concept. Moreover, it can also be arbitrary to set a limit of profit distribution at a given percentage. 2

3 FSE seeks to invest in entrepreneurs and enable them to achieve their objectives while operating in an economically sustainable way. The companies we invest in have a clear social goal, and the financial part is only relevant for securing future operations. In our experience, a social entrepreneur s goal is thus not to use the company to secure a high personal profit. Few companies are in the situation of turning a profit, and if they would, most would be reinvested in the company. However, as an investor we want to emphasise the importance of a flexible definition. We believe that it should be a social business own decision whether the distribution of dividends will help them achieving their primary social objective. In our opinion, as social business is an emerging market, the EU should allow definitions to mature within the social business community, and avoid complex top- down definitions of a market that is in its early phase and thus constantly changing. Moreover, we believe that each investor should be able to choose a definition of social business that fits with their investment strategy. For instance, FSE has chosen to narrow our investment universe to social businesses that help children and young people. Definitions can thus be investor driven, whereby different investors, be it private investors, investment funds or public funding bodies, choose a definition that companies have to fulfil in order to receive funding. We believe it is important that any new framework for social investment does not undermine this flexibility. Box 2: The funding challenge I. What are the main difficulties social businesses faces, in your experience, in getting access to finance? Do different kinds of social businesses face different barriers? In FSE s experience, most of the social business ideas germinate among individuals with little business experience, but with a great engagement for a particular social outcome. Their main funding challenge is progressing from an initial business idea to a commercially viable business capable of attracting long- term investors. Moreover, in our experience, social business is an area with a lot of people in need of funding outside traditional funding sources, as traditional funds normally do not cover social businesses. Social businesses are a relatively new business area, and traditional investors are not familiar with the concept and therefore hesitant to invest. Social businesses are therefore first and foremost looking towards philanthropic funding or public start- up financing. Accordingly, one key barrier is access to public start- up funds. In our experience such funds are to a large extent focusing on traditional entrepreneurship, often involving technological development and innovation, thereby excluding more complex business models and service innovation. The consequence is that most social businesses and social innovations fall outside the criteria of public start- up funds. This points to the importance of reinforcing current start- up funding programmes to better accommodate the needs of social businesses, or create new programmes focusing on social entrepreneurs in particular. This applies both to national and European funding programmes. One possibility could be to improve the high growth and innovative SME facility under the Competitiveness and Innovation framework Programme (CIP), or to create a new EU- level programme focused on start- up funding of social businesses. 3

4 II. To what extent do you think barriers to access to finance are limiting the growth of social businesses across the EU? Do you agree that there is a need to tackle any such barriers at the EU level? FSE believes that, to a certain extent, barriers of access to finance limit the growth of social businesses. As explained above, access to long- term finance is important for social entrepreneurs. However, limited growth across the EU may not be due primarily to a lack of access to finance. In our experience the limited growth is as much related to non- financial factors such as (1) a lack of business management skills, and (2) a shortfall of available learning and network platforms. Knowledge about business strategy and management is key to make any business successful, including social enterprises. FSE believes that it is not enough to provide funding, if this is not accompanied by knowledge and expertise. The competence can be gained from investors, taking on other roles than portfolio management, but it can also be acquired through communication with other entrepreneurs, both social and traditional. Thus, one way of increasing competence sharing is the creation of networks and meeting places for companies and investors, which is more adapted to the particularities of social businesses. One example of a platform is the already existing Enterprise Europe Network, which could be adapted to social businesses. The newly established Social Innovation Europe website could also be used as a launch pad for such meeting places. Moreover, such platforms can also help stimulate cooperation across borders and thus spread best practice. Social business ideas rise locally, and are often restrained to locality. The projects of social businesses are therefore often small in scale and adapted to local particularities such as language and culture. This, however, should not restrict the possibilities of spreading successful social business ideas within the internal market. We believe there is a need to enable social enterprises to spread and work together across Europe. Spreading of best practice can also improve the access to funding, because the existence of an already successful social enterprise can show that professionalisation is possible, and thus provide an investment case for investors. One example from our experience is the Danish company Specialisterne, whose vision is to give individuals with Autism Spectrum Disorder an opportunity to be seen as valuable and worthy members of society. FSE is currently investing in a Norwegian company, Unicus, which employs individuals with autism, and undertakes assignments for client companies in an area where its employees have particular skills as a result of their autism: testing IT systems. For Unicus the best- practice example of Specialisterne provides invaluable inspiration, and for us as an investor it shows that success and dissemination of good ideas is possible. III. Do you agree that there is a need to tackle any such barriers at the EU level? As mentioned above, the EU can help by adapting start- up funds to the needs and particularities of social businesses, or by creating new programmes focused on social entrepreneurs. Furthermore, the EU can play a role in lifting successful social business ideas beyond national borders through platforms for knowledge sharing and networking among entrepreneurs and investors. One example is Enterprise Europe Network, where one could establish a sector group for social enterprises. On this note, FSE believes that to separate social businesses into distinct platforms is not the solution. Networking between 4

5 social businesses and traditional businesses is as important as networking between social businesses, as traditional entrepreneurs often have the valuable knowledge of business development necessary for social entrepreneurs. Box 8: Asset valuation Financial assessment, Box 9: Asset valuation Social assessment and reporting I. Do you think that any non- social business assets that might be permitted should be subject to different valuation requirements? Might different kinds of assets require different approaches? II. How do you think 'social returns' might be best addressed and measured? III. How might this build on other existing work, for instance on non- financial company reporting, social accounting, socially responsible investing, etc.? IV. What information do you think needs to be disclosed to investors, and how might this best be presented? FSE takes the opportunity to reply to the asset valuation issues under one heading. On a general note, FSE agree with the Commission s description of the difficulties of financial assessment. We also agree that it is important to measure the social return of social businesses. FSE acknowledges the importance of developing result indicators for the social effects of the organisation s activities. Indicators are important in order to demonstrate the return of our investments on the double bottom line, financial and social, to the society FSE is a part of. However, as this is a complex issue, FSE want to emphasise three important aspects that we have found challenging in our asset valuation, which has led us to use a pragmatic and flexible measurement approach. Firstly, due to the great diversity among social businesses it is difficult to find a one- size- fits- all measurement model. The social objectives of various social entrepreneurs vary greatly. Although many objectives might be quantifiable using traditional metrics (such as the number of people helped back to work) some are not easily quantifiable, or not quantifiable at all, such as improved life quality or increased awareness. Different kinds of assets require different approaches, both in financial and social assessment. Secondly, as an investment market, social businesses to date represent a novel market. Various methods for measurement are being developed, tested and debated among investors, but a common agreement is yet to emerge. We believe this is closely related to the immaturity of markets. Thirdly, most social entrepreneurs are small enterprises who have limited resources to fulfil demands for information, such as information about company assets or assessment and documentation of company s results. If a social entrepreneur is required to provide detailed information and quantifiable documentation of results to investors, we see a risk of taking away capacity from achieving the social goals of the business. We therefore believe that avoiding excessive and time- consuming bureaucracy is crucial. 5

6 FSE s own asset valuation and reporting focuses on two aspects. First, we assess whether the company has a healthy financial basis. At this point, companies normally do not turn a profit. Instead, we consider the feasibility of achieving a balanced budget in the long run. Second, we currently do not impose common measurement requirements. Instead, we urge our social entrepreneurs to improve their own measurement over time, through the development of measurable metrics that fit the social objectives of the business, and that can quantify the social benefits generated by the projects. Given the abovementioned characteristics of the social investment market diversity, immaturity and resource scarcity we advise the Commission to be cautious in developing a single measurement model based on the lowest common denominator that social businesses are required to adhere to. The Commission should take into account the principle of subsidiarity and consider the extent to which a common EU definition at this point would aid the sector, as the market needs a flexible approach in its early development. Financial markets needs to be given time to build a new culture around assessing these new types of businesses. Box 11: Risk management I. What particular features of social investments might require specific risk management requirements? In our experience, it is difficult to identify, measure and manage all relevant risks when investing in social businesses. Social businesses, as mentioned, represent a novel market where risk management procedures are less developed. In particular, this holds true for investments in social entrepreneurs in an early phase. Moreover, managers of social businesses are not always competent business developers. These are two features that necessitate specific risk management. Another key area that requires specific risk management is the interaction of social business with the public sector. FSE believes that a key feature of social businesses is their targeting of markets that are not mature, and where people are not yet willing to pay the price for the services social businesses provide. Furthermore, social businesses often perform services within the realm of public services. For instance, social businesses often take part in public tenders. However, working with public sector and public procurement rules is often time- consuming, costly, unpredictable and high risk. Box 17: Ensuring effective integration with social businesses and distributors I. Do you think there are any possible actions at the European level that might ensure effective distribution of social investment funds? The Commission has identified the importance of making social businesses aware of the funding opportunities available for them and to have initiatives that can help them prepare for drawing on such funding opportunities. 6

7 FSE acknowledge the challenge for investors to make social businesses aware of funding opportunities available to them. On this point, FSE identified two challenges and formulated concrete solutions to improve our performance. Firstly, it is the overall need to communicate the funding opportunities to social businesses. Ferd has worked to improve our communication with social entrepreneurs and have seen an improvement through the use of two initiatives. 1. Outreach activities: FSE has tried to increase our visibility on different business forums and events by having our management team give a number of public talks and presentations on the topic. Our CEO has a high standing in the Norwegian business community, which provides him with a strong platform to present the idea of social entrepreneurship for the traditional industry. Another important communication channel is social media, which enables communication with a wide range of actors such as companies, citizens, politicians and media. FSE has actively pushed social media. Our FSE Facebook Group has some 600 members, and our CEO is also very active on twitter with 5,415 followers. 2. Create focused conferences and awards to attract attention: A focused conference with social entrepreneurs, investors and interested companies brings the parties together and enables formal and informal discussions that can bring knowledge about funding opportunities. FSE has developed a conference called velferd (on welfare) and the associated velferd Prize for Social Entrepreneur of the Year. This conference has been organized for the last two years and has succeeded in giving participants the opportunity to showcase success stories and by providing a meeting place for companies, investors and others engaged in social entrepreneurship. We have also created the international Ferd Award for Social Entrepreneurship, which aims to celebrate current or past participants of Junior Achievement - Young Enterprise Europe s entrepreneurship programmes (JA - YE Europe is supported by EU s lifelong learning programme), who through their enterprises have created a positive social impact in various fields of activities. A second challenge is to clearly communicate the criteria for investment to the social businesses in order to avoid applications by firms that do not comply with these criteria. The process of applying for funding is a time consuming task for social businesses, and it is thus important to avoid applications that are spurious. FSE receives a number of applications from very good projects that do not satisfy FSE s criteria. In particular, they do not correspond with the concept of social entrepreneurship, as FSE understands it. This might be because social entrepreneurship is still a new concept in Norway. However, it also indicates a need to communicate sufficiently clearly what the investor is looking for. FSE has worked to sharpen our presentation on our website and developed a simplified web- based application form launched in This form has made it easier for applicants to apply, and helped us to better organise applications through a common database. 7

8 General comments to the consultation II. Competent funding The importance of an active investment strategy As a horizontal comment, FSE would like to point out the importance of an active investment strategy when investing in social businesses. The Commission touches upon this in the consultation, for instance in section 3.5, when discussing the possibilities for a more active investor role and in section 4.1., where the Commission mentions other activities deployed to support the social businesses they target. Active investment strategies are increasingly spreading across social investment funds and investors, and in a possible framework for social investment fund this should be taken into account. Managers of social businesses may not be proficient in business economics and management. FSE focuses on providing the social businesses with capital, but also business skills. Being part of the industrial group Ferd, we have aligned FSE s social investment strategy closely with our company s field of expertise: traditional venture and private equity investment. Doing what we do best provides us with legitimacy as an investor. More particularly, FSE are assisting portfolio companies to (1) identify growth potential and exploit strategic opportunities in the market, (2) develop a competent and motivated management, and (3) ensure an experienced and competent board with capacity to lead the company forward. This is made possible through close and open cooperation with the management and board, sharing competence and network and using FSEs position on the company s board. In our experience, the social entrepreneurs appreciate the access to our network and our focus on developing the necessary expertise as much as, and sometimes more, than the financial investments themselves. On this note, we would like to emphasise the importance of the development of social investment funds that focus on an active investment strategy. One example is The Social Capital Fund 1, Denmark s first social venture fund, investing capital and competencies in social entrepreneurs to scale their social impact and economic performance. Their investment strategy secures that financial investments will be accompanied by intellectual capital investments from a pro bono network of leading business service companies competence partners to build capacity among the social entrepreneurs. This is a good example of how social investment funds can work together with other partners to deliver competent funding for social entrepreneurs. For the Commission s work going forward it is thus important to acknowledge that financing through social investment funds may not in itself be sufficient without the added dimension of skill- building and access to networks to allow investments to grow. One possibility is that public sector and EU funding can complement social investment funds in funding the necessary competence building, for instance through the establishment of informal network platforms. One example of such a platform is The Hub 2, created in London by social entrepreneurs and functions and sets out to create places that resemble a member's club, an innovation agency, a serviced office and a think- tank to create a very different kind of innovation environment. The Hub seeks to create these places all around the world, is currently in 26 cities, and 1 capital.dk/about- ipc 2 hub.net/ 8

9 recently opened in Bergen in the West of Norway. This initiative serves as a great example for other entrepreneurial networks. III. The business lifecycle A second horizontal issue is for any EU framework to take into account the lifecycle of social businesses that is, to allow for the difference in investment strategies when investing in companies who are in the entrepreneurial/start- up phase and companies already established as social enterprises. Asset valuations, investment strategy and risk management processes differ when investing in social entrepreneurs, and these differences must be taken into account in a new framework for social investment funds. We wish to thank the European Commission for allowing us to respond to this consultation, and remain at your disposal for any questions you might have. Katinka Greve Leiner, Director, Ferd Social Entrepreneurs Contact information: Strandveien 50 P.O. Box 34 N Lysaker Norway Phone: Fax: post@ferd.no 9