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Impact ventures: an introduction to legal models and raising social investment

Posted on 13 September 2024

This session which was hosted in collaboration with Daring Capital, explores legal models and raising social investment.

During this interactive session, Kieran John (Managing Associate from Mishcon de Reya) and Jem Stein (Founder of Daring Capital) covered:

  • avenues to impact for companies (outsourcing, operations, and products / services);
  • legal structures and starting a company;
  • legal models for impact companies; and
  • raising social investment.

Kieran John, Managing Associate
Mishcon de Reya

Hello everyone and welcome to today’s webinar.  My name’s Kieran and I’m an Impact Lawyer from Mishcon de Reya.  So this session today has two halves, the first half is, which I’m going to kick off with, is the legal aspects of you know starting an impact company and scaling an impact company, and I hand over to my co-presenter Jem to cover social investments.  While I get the slides loaded up, Jem do you want to quickly introduce yourself. 

Jem Stein, Founder
Daring Capital

Sure, yeah.  Hello everyone, my name’s Jem, I’m the Founder of Daring Capital.  I, we provide earl stage investment finance into purpose driven ventures.  I’ll cover that a little bit more later in my session.  I’m looking forward to delivering it for you all.

Kieran John, Managing Associate
Mishcon de Reya

Brilliant, thanks Jem.  Before I kick off, Jem can you see my first slide?

Jem Stein, Founder
Daring Capital

Yes, I can. 

Kieran John, Managing Associate
Mishcon de Reya

Yeah, brilliant.  Great.  So, I guess firstly thanks to everyone for joining today’s session early on a Monday morning.  If you’re like me, you’ve had a few coffees already and hopefully you’re ready to go and learn a bit more about legal models and also raising social investment.  In terms of timing, we have about an hour and fifteen minutes to play with.  I’ll spend around thirty minutes covering the legal aspects, Jem will spend thirty minutes covering social investment and then we have around fifteen minutes at the end for questions.  Talking of questions, please submit these using the Q&A button and we’ll try our best to answer these at the end.  After the session you will receive an email with a recording as well as slides and other helpful resources to read in your own time and if you can notice on Zoom, there’s a function to look at resources and that’s got our contact details as well as some other resources but maybe look at those once you’ve done the session. 

Okay, so I’m now going to briefly introduce myself, which I’ll keep short and sweet.  So, I’m a lawyer that specialises in providing corporate, commercial and governance advice to impact clients.  In no particular order, we advise innovative charities, universities, tech transfer offices, nonprofits, philanthropists, social venture spinout companies and other founder led companies that are intentionally set up to have a positive social and/or environmental impact.  I also have the pleasure of hosting our Positive Disrupters podcast where I interview impact founders, funders and enablers.  We’ve released four episodes of Positive Disrupters, which can be found on all major podcast platforms.  We’ve also got two episodes lined up so, watch this space.  Okay, it’s probably enough for me so, I’ll now move onto our objectives for the first part of today’s session.

Okay, so the first half of today’s session is designed to provide you with an understanding of three topics.  Firstly, the avenues to impact for companies, next we’ll cover legal structures and starting a company and I’ll bring the first half to a close by covering legal models for impact companies.  The content is geared towards founders and operators of startup and scaleup impact companies but I hope that you’ll all take something away from today’s session. 

So, we’re going to kick off the session by covering avenues to impact.  Without wanting to play up to the lawyer stereotype, we’re kicking off Part 1 with a definition of ‘impact’.  This is provided by the Impact Frontiers, which was formerly called The Impact Management Project, which brought together stakeholders to reach a consensus on the definition of ‘impact’.  I’ll have a quick swig of water and give you all a moment to quickly read through this definition. 

So, this definition says that “Impact is a change in an outcome caused by an organisation.  An impact can be positive or negative, intended or unintended.  An outcome is the level of wellbeing experienced by a group of people, or the condition of the natural environment, as a result of an event or action.”  So, on screen we’ve highlighted a few key points to pin down and discuss now.  The first one is outcome.  So impact is about the outcomes on people or the planet, for example gender equality or halting biodiversity loss.  Founders and operators can only be confident that impact is occurring when they can demonstrate that impact is being generated for the specific outcome they are focussing on.  This is different to an output, which are tangible or direct results of a process, task of activity.  Outputs can be directly measured and often include deliverables such as products or services, for example, the number of people downloading an app.  But going back to outcomes, there are numerous frameworks which can be used to help with pinning down an outcome of a venture.  The most well-known impact frameworks are the UN Sustainable Development Goals, which is also called the SDGs, we’ve also got Better Society Capital’s Outcomes Matrix and also the Global Impact Investing Network’s IRIS+ Framework.  Most default to using the UN SDGs but this comes with a bit of a health warning.  Firstly, it’s a policy framework rather than a tool designed for impact ventures and it’s also got some glaring gaps, for example there’s no outcomes focussed on the LGBTQ+ community.  But going back to the screen with our other highlighted words, we’ve got positive and negative.  So, whilst impact minded founders hope to create a positive impact and often do, it’s possible to create negative impacts both intentionally and unintentionally, for example, a venture could have drone technology which could be used to monitor a dwindling orangutan population in Indonesia, but it could also be used in warfare.  So, founders and operators have to be mindful of the actions of their company and actively seek to reduce negative impacts whilst also increasing positive impact.  This is particularly important in a venture context where there’s a lot of uncertainty about business models, at least in the early stages of the company. 

Okay, so we’ve provided the definition of impact, now we’re going to go on to how ventures can create impact.  So, from our perspective there are broadly three ways that ventures can create positive impact.  To start with, outsourcing.  So a company can donate a percentage of profits to charity or undertake CSR activities but this doesn’t necessarily mean that its business model is to deliver positive social or environmental outcomes.  By way of an example, if a venture has collected goods or money for a foodbank, it may be reducing hunger but you wouldn’t say that that is a direct outcome of the venture.  The charity running the foodbank is looking to deliver outcome and the venture is supporting the charity to do that.  So your venture could do this but you may feel that it’s better to reinvest your profits so the venture itself can directly have a positive impact rather than outsourcing it. 

Next one is operations.  So, ventures may and should have a diverse board and purchase renewable energy but gender equality and clean energy is not a direct outcome for the venture, it’s just operating the business in an impactful way which is commonly referred to as ESG principles and practices.  So it’s worth considering how you operate from Day 1.  It can be time-consuming to retrofit a later stage business and how it operates and more generally, I’d probably argue that operating in an impactful way should be the bare minimum for every business in 2024 and beyond.  But if you’re an early stage founder, you don’t have to compare yourself to a later stage company which probably has a Head of ESG or a responsible business team whose sole focus is how the business can operate in an impactful way.  It’s about being proportionate to your company at the stage of its lifecycle.  The third way that ventures create impact is through your products and services, so these type of companies are going that one step further and having a direct impact through the outputs of their business.  For example, an ed tech company could provide inclusive and equitable education for its products.  For these ventures, impact is not a nice to have, it’s an intentional part of the business model, where profit is in lockstep with impact. 

In terms of overall message for this slide, I think it can be quite overwhelmingly, overwhelming for a founder to feel like they need to single-handedly move the dial on all the challenges we face as a society and as a planet.  So, consider focussing on perhaps one outcome where your impact is created through your products, your company’s products and services.  In terms of operational impact, I suggest focussing on what your, what is proportionate to where your venture is and its lifecycle, so for example, take diversity, equity and inclusion, if your company’s pre-seed or seed, you could have a diverse team which aren’t made up of people within your immediate network.  If your company’s further along in its lifecycle you could have a DE&I policy or you can undertake a DE&I audit.  If you’d like to read more about ESG in a start-up context, Boersen Capital has a really helpful guide.  In terms of outsourcing, as a previous charity trustee and currently advise charities, I’d never say don’t donate to charity but you might think that your venture could have more impact by building and scaling your company with outsourcing being something to focus on once your company is more established or perhaps something for you to focus on in your own time with your own money.

Okay, so now we’ve covered Part 1, we’re now going to move onto Part 2, which is about legal structures and starting a company.  So, when you kind of get to this stage of your lifecycle, you’re probably pinning down the outcome of your venture and now you want to think about the right legal structure that enables you to deliver that venture.  So, this part of the session we’re going to talk about various legal structures available and understand how the founder and any external investors will fit in to the company’s governance structure.  So, in theory there are a bunch of different legal structures you can look at such as a limited liability partnership and also community benefit societies.  These are options to explore but I’d say that probably 99.9% of impact companies are incorporated as a private limited company.  There are five primary reasons for this, which we’re going to cover now, starting at the top with simplicity.    
So, private limited companies are relatively simple and cheap to set up.  After paying a £50 fee to Companies House, you can incorporate what I’d call a ‘normal’ private limited company in a matter of days, if not hours.  You could instruct a lawyer to help with this but in reality, it’s fairly simple to do and you probably can do so yourself using the step by step guidance.  The second factor is that private limited companies are well known legal structure, which often helps when entering into contracts with third parties, including those overseas.  The third factor is that these companies have what we call ‘separate legal personality’, so the company is a separate legal person in the eyes of the law, which can own land, enter into contracts, sue, be sued.  This helps protect the founder who then doesn’t have to do all these things in their own name.  The next factor is limited liability, which means that a company is essentially responsible for its own debts and other liabilities, not the founders that sit behind it.  And the final reason is flexibility.  Each company is governed by a constitution which can to a significant extent be tailored to the particular of the venture, its founders and also its stakeholders.  The constitution can be evolved as the venture grows and receive funding.  A private limited company also allows a separation of ownership and management which is helpful if you want to bring in additional expertise and funding, and we’re going to explore that a bit more in a second.  But for all those reasons, we’re going to presume that your venture will be a private limited company. 

So, the next decision which needs to be taken before you can set up is whether your company will be limited by guarantee or limited by shares.  So broadly speaking there are three key things that guides decision on this.  The first one is profits, so with a few exceptions companies limited by shares are most commonly used where the owners want to extract profits, whereas companies limited by guarantee are most, mostly nonprofit and non-distribution companies.  This means that all the company’s profits are reinvested in the business and contributing to furthering its purposes rather than paid out to the company’s owners by way of a dividend or other distribution.  This doesn’t mean that a nonprofit company limited by guarantee is prevented from generating profit, the difference is what the management of the company does with that profit.  Companies limited by shares can also be set up as non-distribution and nonprofit companies, its articles just need to be updated to include the relevant provisions. 

So, the second factor is stakeholders.  So, this kind of linked to the first factor on profits.  Investors would generally not invest in a company limited by guarantee as it’s less common to extract profits from it compared to a company limited by shares.  By contrast, some grant funders will be more comfortably with giving grant funding to a company limited by guarantee, precisely because it’s harder to extract profits from it, you know for the personal gain of you know people involved and other private individuals.  Aside from investors, also worth considering other stakeholders such as employees and any kind of partners of your venture.  It’s worth thinking about what they would prefer to work with so, for example, charities, for no real legal reason but often they find it easier to work with companies limited by guarantee but on the flip side, some employees may have expectations to receive a cut of the company through shares at some point in the future.  So these kind of things need to come into the consideration. 

The third key factor is control.  So the company limited by guarantee, control is generally split equally between the founders, for example, one third, one third, one third, where you’ve got three owners.  Whereas in a company owned by shares, you have more flexibility, for example, the founders could own 75% or three-quarters, with the other 25%, you know one-quarter, owned by one or more external investors.  Deciding which type of limited company is a key decision as once the company is established as a company owned by shares, you can’t convert it to a company limited by guarantee or vice versa.  It is possible to transfer the assets but this will involve some process and legal documents.  Whilst I wouldn’t necessarily suggest this and doing this on Day 1, you could consider setting up two legal entities, one that is limited by shares company and one is limited by guarantee.  This may enable you to receive grant funding into the CLG and investment into the CLS.  Whilst this is possible, you need to carefully consider the relationship between the two entities, document this in arm’s length transaction documents and also check this doesn’t breach any terms of a grant funding agreement or any other key contract.  If you’d like to explore this in a bit more detail, you’re welcome to get in touch with me and we can chat through offline. 

So, whichever model you end up going for, your company are the owners and managers.  So, the owners of a company limited by guarantee are called ‘members’ and the owners of a company limited shares are called ‘shareholders’.  In both types of limited company, the managers are called ‘directors’.  So let’s start with the owners.  So, the owners are the persons who ultimately control the company and who have the ultimate backstop powers in the company’s constitution, which are primarily its articles of association.  So for example, the owners will have the power to change the company’s constitution and to decide whether to wind up the company.  In terms of managers, in contrast these are individuals who have day to day control of the company and they are bound by certain legal duties under Company Law which regulates how they can behave, for example they have to avoid putting themselves in a position where they might have a conflict of interest.  Company Law also imposes certain responsibilities on directors, for example, the responsibility to file accounting and company information with Companies House.  In terms of the numbers, all companies must have at least one owner and one director but they can be the same person.  In terms of the numbers of directors, there is no hard and fast rule about this but a good starting point could be three, but you might eventually look to have five but I wouldn’t suggest it’s feasible to have anything more than twelve.  In terms of another tip, it’s worth having odd numbers to prevent deadlock. 

Okay, looking at this from a founder perspective, as a founder you’ll likely want to be the owner and the director of a company so your day to day control as well as the power to ensure that the company closely follows your vision and keeps you involved.  If you receive investment, the investor will also be an owner and they expect to appoint an investor director who will sit on the boards and also have day to day control. 

So, a moment ago we talked about the distinction between shareholders and directors and here’s a simple illustration of governor structure and for the purpose of this we’re using shareholders rather than members just for the investment context.  Essentially, power is delegated down and accountability flows up.  Certain decisions need to be taken at shareholder level and some need to be taken at a director level.  So if you’re both, it’s important to be crystal clear which metaphorical hat you’re wearing and record this decision in writing, ideally in formal board minutes.  It’s also possible to include other layers in a governance structure, for example having subcommittees and staff but for the purposes of this session, we look to keep it simple with a simple governance structure. 

So, now we’re going to cover the role of the founder of in a governance structure.  As the founder will want overall control as well as day to day control, the founder is likely to be a shareholder and a director.  In terms of their contributions, the founder will typically provide a company with money, expertise and probably the most valuable thing in the whole world, time.  In exchange, the founder should benefit financially as a director through a salary and as a shareholder through dividends and possibly an exit but as you, if you’re an early stage founder you know that maybe something a bit further, further in the future than you maybe hope.  Impact founders also have the I guess non-tangible benefit and perhaps fuzzy benefit of making a positive impact which is, is the reason why you’re all in this space as well.  Whilst you don’t necessarily have to, some ventures look for external investment in order to help accelerate the impact of a company.  The investors can provide the company with cash, insights and networks in exchange for a share in the company’s distributable profits and rights in accordance with the company’s governing document which might include appointing an investor director on the board. 

So, we talked about legal structures and in particular the most popular legal structure which is a private limited company.  But if you want your venture to make a positive impact, you’re likely to want to go that one step further by using an impact model which embeds impact within your company’s DNA.  We call these types of companies ‘impact ventures’ or ‘social ventures’.  There are three relatively well-known impact models and one model we have created to provide impact driven founders with a relatively simple model that enables a startup or existing business to embed impact in its company’s constitution.  The three well-known models are community interest company, social enterprise and B Corp, and the model we created is called Embed.  So in this Part 3, we summarise each model, plot them on the scale and outline the key questions that may help you with pinning down the right model for your company.

So, let’s start with the first model which is community interest company, which is often abbreviated to CIC because it’s quite long, long word.  So CICs are businesses that operate with a social purpose where profits are largely reinvested back in the business with limited distribution to outside investors.  It’s a relatively new form of company that legally safeguards social mission but still allows directors to be paid.  It’s an increasingly popular model with approximately 700 CICs registered in July 2024 alone.  In terms of the key features, firstly we have the community interest test which differentiates CICs from other for profit legal structures and must be passed in order to achieve and to maintain CIC status.  It would be for the CIC to determine the community it intends to benefit but the CIC regulator must be satisfied that a reasonable person might consider the activities of the CIC would be carried on for the benefit of the community.  A company won’t pass this test if it carries on political activities or if the activities only benefit members of a particular body. 

Next, we have the asset lock.  This is designed to ensure that the company retains and uses their assets to further the community benefit purposes.  This legal requirement is a fundamental feature of CICs and typically provides reassurance to funders who take comfort that their funding will be dedicated permanently to the community benefit purposes and this is particularly important for grant funders.  CICs are subject to what we call ‘light touch’ regulation by the CIC regulator and this external accountability can provide legitimacy and comfort to stakeholders such as grant funders.  The CIC regulator has statutory powers including the ability to change the company’s directors and also wind up the company.  As with all the models covered in this session, in terms of tax, CICs aren’t charities and therefore are in the same position as any other type of limited company, which depending on your view about tax, might not be a bad thing.  In terms of other benefits and limitations, the CIC, the legal requirements to reinvest at least 65% of distributable profits may make it more difficult to obtain external investment but compared to other types of impact models we’re covering today, CICs may be more likely to obtain charitable or other grant funding.  There isn’t a strictly speaking a legal reason for this but it’s more about the approach of grant funders. 

So, the next model is social enterprise and you’ve probably come across this term but it’s not a legally defined terms so if some companies may call themselves social enterprises without strictly speaking being one.  To be a certified social enterprise by Social Enterprise UK, a business has to be established for a social or environmental purpose and must reinvest at least 50% of its profits.  This can be quite restrictive to training investments, but social enterprises are well, relatively well known way of doing business and they often closely align to the charity sector. 

The third model is B Corp.  So, this is a worldwide movement that certifies businesses which meets high standards of verified social and environmental performance, product transparency and legal accountability to balance profit and purpose.  B Corps have a purpose that includes profit but also social and environmental factors.  This model is increasingly popular in consumer facing businesses so, you may see B Corps in the supermarket aisles or when you’re purchasing goods online and some really well-known examples are Patagonia, Innocent Drinks and Tony’s Chocolonely. 

Okay, so we’ve now covered the three models of the most well-known impact models but now we’re going to cover ours, which is called Embed.  This is a bespoke impact model which we created based on our experience of working with impact companies who often have to grapple with some of the limitations of the other impact models.  We call it Embed as it enables founders to embed impact in their startup or established business.  With the Embed model, the company has a bespoke constitution which contains impact line provisions but also flexibility which is often helpful for early stage founders.  The key provision is a purpose clause which specifies the outcome that the venture is seeking to achieve as well as an indication of how the company will achieve that outcome.  A founder can pick and choose other impact line provisions as well, for example, the legal requirement to produce a annual impact report, provisions regarding impactful operations and also a clause which entrenches the purpose in such a way that it can only be removed or amended by unanimous decision of all shareholders.  Through embeds the founders can demonstrate how their venture is intentionally impactful whilst providing the platform for the company to receive investment to help with funding the impact of the venture. 

So, we like to illustrate the four main impact models using this scale.  On the left-hand side of the scale we’ve got charities which are driven purely by social impact and on the right-hand side of the scale we have purely profit generating businesses which are driven largely by financial returns for shareholders.  The models I’ve just mentioned sit somewhere in-between.  We plot CICs on the left-hand side of the scale because this model is subject to light touch regulation and has restrictions on distribution of profits.  This is also why certified social enterprises are near the left-hand side of the scale.  Embed can move up or down depending on the founder’s vision for the company but mostly, we mostly embed companies around here because they’ve got a bespoke purpose, they haven’t restricted the distribution of profits, in turn providing opportunities to seek investment.  B Corps are nearer the right-hand side of the scale because they have a pro forma purpose which isn’t focussed on specific outcome with no restrictions on distribution of profits.  I think the key thing to mention on this slide here is that if you set up a CIC, if you want to change the model then the option you have is going further to the left which is convert to a charity or winding up.  This may be fine for your venture but some founders prefer a model like Embed which provides a bit more flexibility in the early stages. 

I’m conscious of time so I’m now going to move onto the next slide which is based around the kind of key questions we run through with founders when we’re helping them to pick the right impact model.  In terms of these questions, we’ve kind of grouped them into five key categories which we’re going to run through now, starting with regulation.  So, a key question is how regulated do you want your venture to be?  Do you want an external regulator like a CIC regulator because that maybe provides credibility in the eyes of stakeholders.  The next factor is people so, do you want the ability to pay profits to yourselves as the founder and to any other investors?  Do you also need to incentivise your executive staff or the wider, all your employees?  And once you’ve set up, how involved will you be in the company?  Next one is IP so, is there valuable intellectual property to commercialise?  Who owns it and how will it be exploited?  If IP is owned by a CIC, it must only be used in accordance with the asset lock which does provide some limitations.  In terms of purpose, are you clear on the impactful outcome of your venture and how your venture will create that impact?  Do you want a bespoke purpose or are you happy with a pro forma purpose such as the B Corp purpose which is generic and broadly needs to be adopted as written.  Similarly, are you comfortable measuring or reporting your impact and providing this information to stakeholders?  And the final one is a big one, funding, and ultimately could be a separate session on its own, I know Jem’s going to talk a bit more about investment now but in addition to revenue, what are the main sources of external funding for your venture?  Are you focussing on investment or are you focussing on securing grant funding and this can influence where you sit on the scale and obviously, you’re welcome to get in touch with me if you’d like to discuss this in a bit more detail but I’m going to bring this, first part of the session to a close, we’re talking about other legal things to think about. 

The first one on the left-hand side is transaction documents so, this really depends on the transaction but if you’re receiving equity investments, so your document is like a term sheet, shareholders agreement and other founder services agreements.  The next legal thing to think about is data protection.  So you need to consider how you’ll inform your customers about how you process their personal data and this is usually done by a privacy policy displayed on your website.  You’ll need to register with the ICO if you want to do anything more complex with that data.  The next on is IP, so you need to check that the company owns the IP to be exploited and this may necessitate founders, consultants or volunteers assigning IP to the company.  Next one is trademarks.  So, it’s advisable to run a trademark search to check if your company name is identical or similar to another business name or brand in the UK.  If it is, you may need to rebrand or pay a fee.  If it’s not, you could obtain formal protection by submitting a trademark application.  The next one is employees, so how are you going to engage with your members of the team?  Are they going to be employees in law or are they going to be consultants, which provide more flexibility.  It’s important to speak to an employment lawyer about this because there are certain restrictions you have to comply with if people are employees and it doesn’t really matter what you call the document, it’s a kind of the reality of the relationship.  And next and final thing to mention is commercial agreements.  So this is you know formalised agreements with other legal entities and individuals, are designed to limit your risk and set out what’s expected of the parties.  And this really depends on what you’re doing but typical agreements are NDAs, non-disclosure agreements, IP licenses or assignments and also terms and conditions when you sell goods or services to customers. 

So, I appreciate there’s a lot of legal things to think about but our general approach is to not over-lawyer and focus on the key aspects of your business, which could be securing funding and mitigating key risks through a contact.  Before I hand over to Jem, I want to quicky recap what we covered in this first half.  So, Part 1, we provided a definition of impact and the avenues to impact for companies.  In Part 2, we explored legal structures and starting a company and we brought the session to a close by covering the most well-known legal models for impact companies, so we’ve got CICs, social enterprises, B Corp and Embed.  I’ll be around at the end for questions but now I’ll hand over to Jem to cover social investment.  So, over to you, Jem. 

Jem Stein, Founder
Daring Capital

Great, thanks Kieran, that was incredibly helpful. 

Hello, everyone.  Lovely to meet you all.  My name’s Jem, I’m the Founder of Daring Capital.  I’m just going to share my slides.  Can you all see that?  Can you see that, Kieran?

Kieran John, Managing Associate
Mishcon de Reya

Yes, I can see that, go ahead.

Jem Stein, Founder
Daring Capital

Great.  So, what we will cover today.  We’ll cover a few things, so just to be really clear, this is a beginner’s guide to social investment, we’re not trying to overcomplicate this, we’re not going to go into anything too complicated, hopefully, although if there’s any questions, I’m happy to deal with more detail.  This is going to be an overview of the different options for social investment.  So, we’ll cover a definition of social investment, what social investment is not so, we’re just going to do a little bit of myth busting there, and we’ll cover…

Kieran John, Managing Associate
Mishcon de Reya

Sorry, sorry, Jem.  I think the cut slides, people can’t see the slide yet.  So, sorry to interrupt you there.  I think we’ve got a few questions, messages saying people can’t see the slides yet but…

Jem Stein, Founder
Daring Capital

Can you see them, Kieran, sorry? 

Kieran John, Managing Associate
Mishcon de Reya

I can, yeah.  So maybe Lucky in the background can work his magic maybe.

Jem Stein, Founder
Daring Capital

Now can, are they up there now?

Kieran John, Managing Associate
Mishcon de Reya

Err, yeah, I can, I can still see them, obviously I’m looking at the Q&A section to see if anyone else can see them as well.  Yes, I think they’re showing now, great.  Good.

Jem Stein, Founder
Daring Capital

Great, alright.  Thank you.  Good to know that people are watching and paying attention.  That was a little test.  Cool, yeah, so, bit of myth busting, we’ll cover the three main types of social investment so, debt, RPA which stands for Revenue Participation Agreements, we’ll define what that is don’t worry, and equity investment, and I’ll have a slide on further resources.  So, without further ado, a little bit about me.  So, I’m the Founder of something called Daring Capital, we’re an investment syndicate so that means we’re a group of investors that find extraordinary social entrepreneurs starting purpose driven businesses, we invest in them and we support them to grow.  I’m a poacher turned gamekeeper, if you like so, prior to that I ran a social enterprise called The Bike Project. We provide bikes for refugees and asylum seekers across the UK.  So, I ran that for about twelve years and we grew to most, well about nine cities in the UK, had a couple of million turnover so, yeah, had some ups and downs with that over the years which I’ll talk about maybe on another webinar. 

So, what is social investment?  So, this is from Good Finance, which is a great resource for all things social investment.  So, “Social investment is the use of repayable finance to help an organisation achieve a social purpose.”  So, the key bits are there has to be a social purpose there, hence the ‘social’ and there is some kind of repayment involved through whatever it might be but there, the investor gets their money back in some way.  So, those are the two key elements of the definition.  What social investment is not, so this is really important because there’s lots of things that are, are banded around about social investment so it’s not philanthropy so, in the US in particular, there’s the word ‘invest’ is used quite loosely to also include philanthropy.  We’re not talking about philanthropy here today, we’re talking about you know talking about venture philanthropy or anything like that, really talking about where, as I said in the previous definition, there is some kind of repayment of the capital through whatever means that might be, but yeah there is some kind of repayment, it is not philanthropy.  And crucially, social investment is most often not cheap so, there is a perception that social investment is actually more affordable than mainstream finance or that it is in some way like concessionary.  In the most cases, it’s not actually and in a lot of cases it’s more expensive than mainstream finance.  Why is that?  That’s because well, you can argue whether this is right or wrong but that’s because in social investors’ minds, they’re taking more risks, they’re taking bets on social enterprises or businesses that are for whatever reason more early stage, a bit riskier, have lower rates of return and therefore they need to charge a bit more to compensate for that, that’s the logic there but it’s really important to note that most social investment isn’t particularly cheap or isn’t really what they call concessionary.  It’s also not easily accessible, social investment processes tend to be pretty long if you’re applying, it’s different if you’re dealing with angels obviously, but if you’re you know applying to a mainstream social investor, it can be a pretty big process, involving a lot of work, a lot of documents submitted, as many, most people who’ve been through it will tell you.  So, I think it’s just important to note those three things at the start to get rid of a few myths and it, those, they’ll all become obvious as we go through each one.  It’s not philanthropy, it’s not cheap and it’s not easily accessible.  For the most part. 

Cool, okay, so three types of social investment we’ll cover.  Debt, so interest bearing loans to, so I’m going to use the word ‘social enterprise' here to cover obviously you’ve all listened to Kieran’s talk and he’s covered all the different types.  For, just as a shorthand, I’m going to use the words ‘social enterprise’ to cover all sorts, all forms of businesses that we’re looking at.  There is debate about what that means but I’m just using that word to, to cover everything.  So, interest bearing loans, social enterprises, RPA is where the interest is dependent on the financial performance of social enterprise, I’ll break that down a bit more in a minute.  And equity is buying shares in businesses.  So, we’ll go through each one. 

So, to start with, debt.  So, there is unsecured and there is secured debt.  Unsecured so, means that there is no, the best analogy is probably a house, right.  If you get a mortgage, your debt is secured against the house, that means if something goes wrong and you can’t pay it back, they will take the house so, they basically has the, and sell the house and use that to repay the debt.  That means that the investor has a guarantee, some kind of guarantee that they are getting repaid because it is what is known as ‘secured’.  Unsecured is where there is no specific thing, no specific asset that the loan is secured against, which means that there is, you know if it goes wrong, they don’t have like an asset that they can sell to repay it.  So that, it’s a really important distinction when you’re looking at these models.  So, social investment intermediaries do provide repayable loans for specific, usually for specific projects not just general growth, to social enterprises.  Loan terms, so you can, I say loans of £20k to £1 million so, CAF do, technically do from £20k, I’d say most loans are £100k plus.  It’s harder, there may be some a bit smaller but certainly £50k plus, pretty rare to find the option of getting a £20k loan in my experience anyway.  Technically, CAF say they provide it but it’s not that common.  The general, yeah, generally it’s six to twelve months capital repayment holiday, so you’ve got six to twelve months before you have to start repaying the capital, you’re probably repaying the interest in that time.  6% to 10% interest rates.  I’d say 6% is pretty low, I think mostly you’re probably looking at at least 8% but 6% is technically possible.  Sometimes there’s what’s known as ‘arrangement fee’, that’s just a set-up fee of another 2% to 3% of the value.  And there’s often a floating charge.  I put that in there to inform you, for the sake of time I’m not going to go into what a floating charge is now, you can kind of Google it afterwards.  And generally, it’s available, these loans are usually available to businesses that are turning over at least £100k, rare to find loans, certainly of any size that are available to early stage businesses.  Why?  Why is that?  That’s because if you think about it, to actually make this kind of model work you need quite a short turnaround time, you’ve got twelve months, you’ve got immediately after you take that loan on Day 1, you’re starting to pay interest so there’s a little bit of money there but then within six to twelve months you’re starting to repay the capital, so you need to be, if you think about the business, you need to be, your business model needs to be generating revenue very, very quickly from that project, extra revenue, because it needs to be repaying not only its normal debts but this extra debt very quickly.  So, that’s, that’s a, it’s a pretty quick turnaround and so it’s really only suitable for very specific use cases.  So, when we look at, what are the pros and cons of this model?  So, I think the pros are for you know as Kieran mentioned, some businesses if you’re limited by shares, then great you can access equity, well, we come onto equity in a minute, but if you’re not limited by shares, if you don’t have share capital, you can’t access equity so, debt may, debt or RPA which we’ll come onto, may actually be your only option.  So, it can be very useful for that.  It also is, so that’s useful if you’re like a CIC or you’re a company, a guarantee or a charity.  The cons of it are it's not cheap, it’s impatient, as I mentioned before, it’s pretty quick turnaround, it’s not patient capital and it’s fairly inflexible, so let’s say your project goes really well, you start repaying it, brilliant.  If it goes badly, you’re still on the hook for this money, right, it doesn’t, the social investor is not in it with you, you, they, you know heads if it goes well, brilliant they get their money back, if it goes badly, they still get their money back, you still have to repay them so, it is quite inflexible in that way.  In practice, the most common use cases for this type of capital that I’ve seen so, by way of background so, I also sit on the Social Investment Committees for two large foundations so we see a lot of debt models.  I’d say the biggest use cases is public sector contract where you need some, you’re basically guaranteed the money but you need the cash upfront to pay your costs, it’s basically a cashflow issue.  So, you know that the contract is coming in, you know that you’ll get a guaranteed income source from it pretty quickly but you need some cash upfront to you know do something with that, hire staff, etc, it’s a cashflow problem, short-term cashflow problem.  Most common providers that, well, there’s loads but social investment business is a big one, SIB, CAF Venturesome, Big Issue Invest have a number of funds that deliver this. 

Cool.  Moving on to secured debt.  Again, very similar to unsecured debt.  So this is where typically, you buy a building but I haven’t ever, I don’t think I’ve ever seen an example of this where it’s not a secured debt, where it’s not a building, where it’s a different type of asset.  Building is, is a fairly standard thing so, again, terms are very similar, except the interest rate is lower and that’s because it’s secured so there’s a much, it’s a much safer bet for a social investor because they know if something goes wrong that it’s secured against an asset such as a building.  This is the most common form of debt, more common than unsecured debt because you know you buy a, it’s just so, it’s just very straightforward, you go, you know, let’s say you’re setting up a café, you need the money to buy the building, you buy the building or you’re setting up a children’s home, that’s very common too, you buy the building, you get the people in, you start generating the money and it’s secured against the home, it’s a very straightforward model.  So that’s, that’s very common, very easy for social investors to understand and feel safe about.  Pros and cons are relatively similar as before as well. 

So, we’ve got a little example here.  Campus Skateparks, not-for-profit organisation using skateboarding to engage with young people.  They had one skatepark up and running so they could know the model, they knew the ins and outs of that model.  They secured a loan of £80k from Big Issue Invest to cover the refurbishment costs of their second site.  So, you know they had the model up and running, they knew how it worked, they knew that the capital would come in pretty quickly with the second model and secured a loan to help them achieve that. 

Cool, RPA.  So, slightly complicated, can be slightly complicated but essentially, you pay a percentage, the way it works, a bit like a loan but instead of repaying a fixed interest rate, you pay a percentage of your sales over a fixed period of time.  So, basically, let’s say you borrow £100 grand, you might say okay, you get a year repayment holiday and then you pay off let’s say 5-10% of your sales over a three to five year period and that means that the risk is, risk is shared a bit more between investor and a company.  Why does that matter?  Well, if it’s a slightly riskier project, let’s say you don’t know how it’s going to go, you then can say well, we only repay it if it, we only repay a higher amount if it goes well, usually you sort of have to repay the capital, rare that that’s on the line, but it’s a much lower interest rate if it, a much lower repayment rate if it goes badly.  Usually it’s also capped so let’s say it goes absolutely wild, you know, you don’t, the investor doesn’t get all of that money, it’s capped over a period of time and capped at usually a multiple of the original value.  So yeah, the advantage of this is it just, you know risk, it’s a bit less risky for the venture.  The disadvantage I’d say is well, couple of disadvantages, I’d say it’s gone out of fashion, I mean it would be interesting to hear what Kieran thinks, he sees much, it's, it’s gone out of fashion a bit amongst social investors purely because it’s a bit complicated.  If you’re a really simple business with one income stream, one product, that’s quite straightforward but that’s quite rare.  What ends up often happening if you start saying well, you know, this, the income stream wasn’t related to that and this was and so, the administration, the legal agreements and the administration of it can be quite complex and for that reason it’s gone out of fashion a bit amongst social investors.  The other disadvantage is there is, you know, let’s say things are going really well, you want to, let’s say Campus Skateparks, they did it, they set up one, when it goes well they raised a loan to do another one, they’re then a little bit hampered because they can’t reinvest the profits from the next, they’re limited in how much the profit from the next one they can reinvest in setting up a third one and that’s because they’re paying a huge amount out.  So, if it goes well, it’s actually very expensive, you’re paying a lot of money at a time where, well, depends on your goals but if you’re ambitious, you want to set, grow more, you’re very hampered because you’ve got this massive cost that you’re paying out all the time.  So, the, it, it’s for specific things it can be very helpful, it has its pros and cons, it’s also not widely available anymore.  Growth Impact Fund, quite like this, it’s part of, well, it’s a partnership between limited and big issue invest, they quite like this model so, if you’re eligible for them that might be something for them to look at.  CAF also technically offer it, I don’t know how common in practice they, they actually offer it.  Cool. 

And so I have an example here for you all.  The Charity Technology Trust, I had to really dig deep to, do a lot of research to find someone that had made this work.  So, providing pro bono digital software to the charity sector through its portal.  They were already pretty well established so generating £500k in revenue, including £80k from the portal.  They secured £50k in RPA from CAF Venturesome to grow their platform and CAF were owed 2% of revenue over a five year period.  That’s pretty low I’d say, 2%, that’s a pretty concessionary amount which is maybe why it worked so well but it worked really well for both parties and grew, allowed them to grow their portal pretty quickly.  Great. 

Moving on.  Equity.  Okay.  I’m going to just, equity, so basically that is the sale of shares, I’m not going to go into a lot of detail about what it is now, you can look it up afterwards but effectively it’s a sale of shares so, let’s say you initially own a 100% of the company by the end so let’s say you’re selling part of the company at a certain price, so you sell the shares to generate, and use the revenue to help you grow and develop the business so, at the start you own 100% but as you can see here, you sell a minority stake to investor who owns 20% afterwards.  So, the most common providers of equity finance are what are known as angel investors, private investors, or venture capital funds and we’ll cover both now. 

So, Impact VC is this kind of term used for venture capital firms that have an impact focus so, they are in many, in many ways, so they are basically a fund so they have raised money from external investors and they’ll then have, manage a pool of money to invest in high growth, high return businesses with global returns and very large potential markets.  What’s really important to note here is Impact VC is usually not concessionary so, it’s usually… concessionary is the wrong word here, sorry.  There is usually no real compromise on return so, they are looking for very similar levels of returns to a standard venture capital fund.  That means they are looking for businesses that need to, that can grow really, really quickly and achieve a huge exit so, sell for you know huge amounts of money within five to seven years.  So, amounts vary wildly if you’re early stage, you know maybe £200k to £5 million, £5 million is at a much, much later stage really.  Returns are generated through the sale of business, you’re not paying anything in the meantime, they’re not interested in dividends, they’re interested in the business being sold.  So investors typically look for returns of 10x within five to seven years, that means that you have to grow really, really fast, tens, hundreds of millions of turnover if something, you know, is your goal.  Realistically, there’re not that many use cases that fit that, mostly technology, pretty much exclusively technology.  B2B, so business to business, SAAS, so software is, you know, business to business software essentially isn’t very common.  The most common area within impact space is climate tech, for obvious reasons can provide huge growth in a way that other model, other impact business models may struggle with.  There are a few common providers, Growth Impact Fund, Ascension, The Conduit, Green Angel Ventures and Ada are loosely impact I’d say.  The pros of this, so pros of you know the pros of equity more generally, your interests are aligned so if they win, you win, if they lose, you lose.  You can raise large amounts of capital potentially and you don’t need to pay it back until there is an exit.  Worth pointing out at the moment we’re also going through a little bit of, well, I’ll come onto the cons and the…  So, cons are, this only works for for-profit structures, you have to be you know have shares, it only really works for high growth companies, very, very high growth companies and there’s also a loss of control there so, you have to exit.  Realistically, you’re very, very unlikely to be able to buy it back yourself, you’re gonna need to sell it either PO, private equity, maybe a competitor and you’re going to need to sell it within a timeframe.  They’ll also come sit on your board, they’ll have a lot of power over the business, they’re very, very focussed on growing to meet that exit.  So, there are pros and cons to that.  It’s worth also noting that we’re going through a little bit of a, a winter in terms of venture capital, it’s a very tough market out there to raise venture capital in, so high interest rates for a load of complicated reasons so, there’s not a lot of venture capital money out there at the moment, particularly at early stage.  The other thing to note sorry, is that you have to, generally you have to be generating sort of six figure revenue to make this work.  Cool.

Private investors so, this is the other type of equity investment so, individual investors known as angels and family offices which are sort of 52.30 incredibly wealthy people, employ people to manage their money.  They deploy money into for-profit businesses so, there’s a huge range of types of inve… not types, a huge range of interest within in private investors so the terms, the criteria will vary, will vary hugely, unlike VC which is quite consistent in terms of how they approach these things.  Returns will be generated through a sale of the business.  In some instances, it could be through dividends.  Angels tend to invest at a very, could invest at a very early stage.  Family offices tend to invest a little bit more but a little bit further down the line, probably not at very early stage so, it’s worth bearing that in mind.  Not always easy to access so, if you’ve got good networks the great.  If not, syndicates, Daring Capital, Conduit or Green Angels are a good way of going for them, Association Charitable Foundations you can look that up, have open days where businesses can pitch to potential foundations that might invest.  LinkedIn is a big one, being active on LinkedIn, finding investors dm’ing them is a great way to find potential angel investors on, you know, it’s not easy to find them if you don’t have those networks but I’d say probably syndicates is your, is probably your best bet.  The pros, like with VC, your interests are aligned, if they win, you win, lose, you lose.  But the big advantage over VC is that you could, it’s much easier to find angels that are more aligned with what you want to do if you don’t want to you know grow incredibly fast and sell to private equity or something.  You are more likely to find angels that will want you to grow but maybe a bit more flexible on terms, maybe a little bit more interested in your impact, maybe, yeah, have, more likely to find angels that want to invest on the terms that you want to raise money at because they believe in what you’re doing or, or whatever the, whatever the reason might be.  They’re less involved in your business, I mean it’s not necessarily the case but you can, you can negotiate so they’re less involved in your business, they’re not so controlling over how you exit, how you manage it.  There’s also, well like with all equity, there’s no cap on how much you can raise, whereas with debt and RPA there is a, realistically there’s, you can’t be what’s called overleveraged so, you can’t just raise millions and millions of debt because then you’ve got all this money to pay back, right.  With equity, there’s not really that cap, you can just keep, if you can raise it, you can keep raising the money if you can find the investors, it’s not like a, you know a kind of a limit on what you can raise.  I’d say the big con is, for-profit, only for for-profit businesses, again it has to be share capital, they can be hard to find and that can also, you generally need several, it’s unlikely one angel is going to come in by themselves, it means you have, you know, lots, you know you might have lots of different angels, you have to manage a group of angels, a group of investors, it’s an invested group that you have to talk to rather than just like one or two, maybe a bit more work and maybe competing demands there as well.

So, there aren’t a ton of examples of successful exits in this space because it’s quite new and exits can take, exit, by exit I mean the shares are sold, but here’s, here’s like probably one of the big ones.  So, Oomph! Is helping older people stay healthy by running specialist exercise classes in care homes.  They secured £2.1 million over multiple rounds to scale their offering and provide it online.  Investments, investors were repaid I think after about eight years through the sale of Oomph! to a larger company, a larger software company.  So, that’s one of the big one, big examples. 

Great, we’re doing great time.  So, some further resources.  I’d say if you’re looking for further resources, you’ve got Good Finance, lots of, they’re pretty introductory guides, I wouldn’t say it’s hugely comprehensive but they do have guides, they’re also launching a course for school for social entrepreneurs which is just out actually but with an intro to social investment.  They also have a database of social investors which is free to access for the guide, everything on here is free.  Alternative Funding School, they have lots of, they have a mailing list that shares, lists of new investors, we’re signing up to that, they’ve just launched a paid database as well and Daring Capital, we have a newsletter that shares, we share lots of tips on fundraising and you can also look at our blog. 

So, yeah, 10.57, doing great time.  That is it from my presentation.  We will move on to some questions. 

Kieran John, Managing Associate
Mishcon de Reya

Brilliant.  Thanks for that Jem and thanks everyone for posting some questions.  I’ve picked out I think about five questions in total but first I’m going to share some of the helpful pointers that other people put in the Q&A chat.  So, Delia, I think hopefully I’ve pronounced your name correctly, if not, apologies, mentioned that Good Finance has got a list of investors providing social investment and maybe Daring Capital might be on that list as well.  Lauren from First Point, First Port in Scotland says that they offer RPAs through their capital funds so, if you’re a venture based in Scotland, maybe go and check that out.  And Kevin, yeah shared some interesting insights that Tony Hawk was a friend of your brother so that’s, that’s essentially on the skatepark example but I guess in terms of the questions, I think most of them are directed at you, Jem so, I can ask it if you, if you, but firstly we’ve got a question from Rick Mower who’s part of Raw, which is a fantastic social business in Oxford.  So, Rick asks you Jem, “Will CAF, SIB etc offer unsecured debt finance to company limited by shares with a social mission?” 

Jem Stein, Founder
Daring Capital

Will, will CAF offer?

Kieran John, Managing Associate
Mishcon de Reya

Yeah, will CAF social investment business and other examples offer unsecured debt finance to a company limited by shares to have social mission?

Jem Stein, Founder
Daring Capital

So, it does vary a bit from investor to investor.  I’d say most social investment intermediate, most social investors that are providing debt finance will look at that but they will want may, if you’re not a CIC, you’re a company limited by shares they may want other types of restrictions like a profit lock or an asset lock or a mission lock, lots of locks there to look at, which Kieran can probably explain what they are better than me but they’ll want some kind of other structure within your governance that either secures your social mission, make sure that that’s really embedded in what you do, or that restricts the ability for you or your, or maybe other investors to sell assets or to you know take too much profit out of the company.  So, it, it will vary and it’s worth contacting them but usually it’s doable if you’re willing to put in place other bits of governance that will show that you’re not going to take all the money out and that you’re really dedicated to your mission. 

Kieran John, Managing Associate
Mishcon de Reya

Yeah, in terms of the asset lock from a legal perspective, basically if your asset is valued say at £100, you can only distribute that outside of an asset locked organisation if it’s for full market value or to another asset block body which might be a community interest company or another company with that or a charity or another company with that purpose built in that’s locked down, which basically means you can’t distribute it for an under value so, a bit of that comes to getting the assets valued but takes us a bit onto Anush, Anush’s question.  So, you ask about “Can IP be considered an asset if tying it to secure investment funding?”  So I guess probably you know I could start quickly Jem and hand over to you but I guess this is probably an accountant is probably the best place to pin this down but I think an IP is an intangible, intangible asset sorry, on a balance sheet but I think Jem does that, is there anything you’ve come across in your world?

Jem Stein, Founder
Daring Capital

Yeah, so I, I’d say the point of an asset is it is worth something, it’s definitely worth something and that you can use it, like a building, property is very well established with valuations and how much it’s worth, you know that it can easily be sold but I think you’d struggle to make that case, it’s obviously a little bit case by case but I think you’d struggle to make a proposal that IP, unless it’s particularly valuable could be used as a, a secure asset.  Yeah, I think, I think that would be a struggle to be honest without I mean obviously, yeah, without knowing more about your situation but I could be, I could be wrong. 

Kieran John, Managing Associate
Mishcon de Reya

Brilliant, thanks for that, Jem and also thanks for the question as well.  We’ve got Lee Willows from ESG Gaming, which is another great social impact organisation.  So, Lee’s got two questions but perhaps due to time we’ll cover one.  So, Lee asks a question related to Campus Parks, kind of asking why didn’t they take on a grant from the Lottery or a livery company to refurbish the parks, refurbish the park, then there’s no money to pay back.  Any thoughts on that, Jem?

Jem Stein, Founder
Daring Capital

Yeah, so, well I’ll talk so, as I mentioned at the beginning, I ran a social enterprise called The Bike Project.  We raised, we were, we are, I handed it over, it’s still going, we’re a registered charity, we were very much eligible for grants so why did we raise social finance?  Two reasons.  One, it’s, in our experience it was hard to find grants.  Three reasons essentially.  It’s hard to find grants that want to, want to do this, like want to be, want to work in this way, most grants want you to achieve direct social outcomes but like for us, we were, we wanted money to set up a new shop, right.  There were social outcomes eventually because we refurbished the bikes, sold the bikes, used the money but you know it’s so many steps, that was a harder sell and the ones that were, it was very, very competitive for.  Social investors get this and they also can provide the finance at scale so, okay, £80k maybe that’s doable for grants but what if you need £200-£300k, that’s really hard to raise at an early stage that kind of money through grants so, it’s a lot easier, it’s a lot, a lot easier is maybe a bit strong but there’s a lot less competition for social finance if you’re eligible as a business, there’s a lot more money out there that’s looking for a home from social finance, they get something like a new skatepark, that’s an intuitive thing they get, you know you don’t have to sell it to them, you know Lottery money is super competitive, and if you can access grants, you might just want to use it for other bits that won’t be eligible for social investment, right, like grants are so hard to get that you know so competitive at the moment that you know you just want to focus on the bits of the organisation that really need it. 

Kieran John, Managing Associate
Mishcon de Reya

Brilliant.  Thanks Jem and thanks for the question as well.  We’ve got a question from Alexandra so, Alexandra asks “If you are an organisation or company limited by guarantee, is there an investment opportunity in terms of angel or family office investing?”  So, I guess well, strictly speaking angels and family offices can give you money but I think it would be quite, you’d be quite hard pressed as a company onto a guarantee defined that kind of investment because theoretically as you mentioned, you essentially can’t really invest in a company limited by guarantee, they may want to do it in kind of a venture philanthropy kind of mindset and they give you some money to help you get to the next level but obviously there’s no way for them to kind of receive you know distribute, distributable profits back as a result of that funding so, you could ask them to give you that funding but I think most likely you know in an investment context it’s probably unrealistic but Jem, have you got any experience of that or any other thoughts to share?

Jem Stein, Founder
Daring Capital

Yeah, I’d say it, it’s hard, I mean you could so, you’ve got no shares so and they normally deal in shares, there’s also, which we haven’t gone into, huge tax benefits for private individuals called EIS and SIS which won’t be available if you haven’t got share capital.  If you know them really well, you could ask them for a concessionary loan of some sort.  It’s not typically what they do, particularly a family office might struggle with that, an angel maybe would think about that.  There used to be a scheme called SITR which we won’t go into now that did provide tax breaks for individuals providing social finance to, to eligible organisations but that no longer exists.  So, yeah, I think theoretically possible but pretty difficult to, it’s a pretty difficult sell in practice.  If you’ve got really good relationships with somebody and you’ve got a really good case, it is possible but it’s, to go and do it via debt or grants maybe but it’s, it’s not easy. 

Kieran John, Managing Associate
Mishcon de Reya

Yeah, agreed, and obviously if anyone does have experience, they can share around that obviously, keep things confidential, yeah, welcome to share that with the group.  I’ve got a question from Antonia.  So, I guess the question is directed at me, “Can you explain the difference between a social enterprise and a social venture as some university incubators have used this term ‘social venture’ rather than ‘social enterprise’?”  So, essentially, social ventures are profit seeking businesses that are intentionally set up to have a social and/or environmental purpose and we kind of see social ventures or impact ventures as the kind of four models we showed on screen with social enterprise being an example of that model.  I’m conscious not to get too bogged down into definitions and how you badge yourself because ultimately the most important thing is the impact you’re having through your company but you’re right that in a university context, social venture is kind of the term that’s most commonly used, perhaps because it comes across a bit more entrepreneurial an innovative whereas this perception perhaps incorrectly that social enterprise is a bit more of a local focussed, quite closely associated to local authorities and charities so, ultimately it doesn’t I think for must it doesn’t really matter what you badge yourself but I think it’s just you know important to kind of have some impact somewhere in your business and one way of doing that is social enterprise but you obviously call yourself a social venture as well.  So, yeah, unless Jem, have you got anything to add on that one?

Jem Stein, Founder
Daring Capital

I would just say that like too, Kieran, you’re completely right in what you say, I’d also add that lots of people just misuse these terms or just use terms very loosely, like a lot of people I meet use ‘social enterprise’ as a, as a byword for a CIC, which is not necessarily the case so, I would, the terminology gets banded around quite loosely and it’s not always accurate or not always well defined so, I’d always just clarify with people what they, what they mean when they put it down. 

Kieran John, Managing Associate
Mishcon de Reya

Yeah, definitely, I think linked to that as well, I see lots of people call themselves like ‘charitable social enterprises’ and obviously a charity is a distinct thing in law and if your venture has what can be considered charity purposes and you have revenue over £5k per year, you have to register as a charity so, it’s important to be really clear what your venture is doing and if it is a charity, you go down the route as registering as a charity but if not, make sure you have a purpose clause that doesn’t unintentionally make you a charity and have to go down that route as well but that’s perhaps another session but, I’ve got a question from Ray about the CIC regulator.  So, essentially, “How does the CIC regulator or other third parties monitor if a CIC doesn’t breach its requirements to reinvest 35% of distributable profits and” you know, “what sanctions are there?”  So, essentially, regulation of CICs is kind of a said light touch, so the CIC has to submit a yearly impact report on kind of the activities it’s, it’s carried out through that year and that is available on kind of the public records.  CIC regulator spot checks these and if it has any kind of questions or considerations it can enforce its regulatory powers which as I mentioned earlier, things like appointing or removing directors and ultimately it can wind up the company as well if there are serious issues.  And there are, if you kind of follow the CIC regulator, which is maybe something only I do because I’m an impact lawyer but there are various kind of updates about the CIC regulator and how it uses enforce, enforcery powers but I guess compared to the Charity Commission, which is the regulator to charities, it’s much more light touch but some people don’t want to set up a CIC because they feel like there’s perhaps enough internal regulation either from the founders or other investors or other stakeholders and you don’t need a, a third party to do that but on the flip side other people like that extra reassurance and transparency.  Anything to add on that Jem?

Jem Stein, Founder
Daring Capital

No, it was interesting, I actually didn’t even know the answer to that question so it was good to know.  I’m learning too. 

Kieran John, Managing Associate
Mishcon de Reya

Yeah, well I was learning a lot of your investment stuff as well so it’s mutual so, cool.  So I think, any more questions? 

Jem Stein, Founder
Daring Capital

Got one in there from, sorry, go on.

Kieran John, Managing Associate
Mishcon de Reya

Oh yeah, is it Abigail’s question, yep.  Do you want to do that one, Jem?  I don’t if that’s, have you got that up on screen?

Jem Stein, Founder
Daring Capital

Yeah, sure.  So, “Is it fair to say that most social enterprises, most enterprises in social investment have already achieved proof of concept and viability.  Are there any investors that will support early stage R&D costs to require and deliver innovation?”  So, I’d say there are two categories here.  There are, so if you’re looking for, if you’re looking for debt finance or probably RPA too, you’re probably, you’re probably going to struggle to find investors that will support that at an early stage with R&D.  The way to go with that in my experience is to set up with share capital because angel investors are much more likely to back that kind of thing and also because they get these big tax breaks, SIS and EIS, they often want to invest at an early stage because those may not apply at a later stage.  So, they, so yeah, they are absolutely, yeah, are really up for that and it’s really, if that’s definitely the right place to go for them but yeah, mainstream social investors, the one, the big names I’ve just listed, big names in this world, you know CAF, Big Issue Invest are not providing early stage finance.  Some might provide what they call investment readiness grants so you know you might be finding that, might go to Innovate UK for that but those are grants, they’re also hugely competitive for obvious reasons, there’s lots of early stage businesses and not much money in those pots so that might be something to look at but yeah, angel investors is definitely the way I’d go with that. 

Kieran John, Managing Associate
Mishcon de Reya

Brilliant.  We’ve got a question from Alan who’s building software to make, personalised education available to more people and more affordable prices.  So, Alan’s question is “How can I” you know, “turn that into an impact start up?”  I think firstly, sounds great and good that you’re kind of dedicating your expertise and insights to make this available to more people.  I guess it’s kind of starting what we, finding about the outcome of your venture which could be to you know move the dial on educational access and you could frame how you’re going to do that is through your kind of software and perhaps offering that at more affordable prices and in the impact spaces we’ve got a one-for-one model which is I guess pioneered by the shoe company, Toms, so the way they, their model was you kind of buy, you know buy a pair of shoes which you wear and then they kind of donate another pair of shoes to someone in a different country who’s kind of needing those, those shoes so, you could have something around that as well where you kind of sell your products and services to kind of main, mainstream customers at a certain price and you kind of make them less, less expensive to people who perhaps can’t afford them.  What you could, there’s a variety of models you can do with that but, but hopefully that kind of broadly answers your question.  Jem, have you got anything to add on that one?

Jem Stein, Founder
Daring Capital

Yeah, hard to sort of answer without knowing a lot more detail but I’d say like the key, the answer I’d give to everybody with this type of question, “How can I show my impact?”, is do a theory of change, look up what that is but really be clear on what the problem is you’re solving and how your solution is the right solution for that problem.  Theory of change is the best way of demonstrating that, I think.

Kieran John, Managing Associate
Mishcon de Reya

Yeah, agreed.  We’ve got a few more questions in the chat but I’m really conscious of time so, firstly, thanks, thanks firstly to Jem for co-presenting alongside me and as I mentioned earlier, I learned a lot about social investment and I hope that everyone else listening did as well and thanks to you all for listening to today’s session.  In terms of follow up, so colleagues here will send you an email which will include this recording as well as our slides and some other resources are our free social venture handbook and links to our podcast I talked about and also a report we published about impact investment.  I think Jem you’ve got a few resources as well to share. 

Jem Stein, Founder
Daring Capital

Yes, happy to share my slides and then there’s just loads on Good Finance and I’ll share a couple of websites where you can find resources to help you get started with raising investment from, in equity, from equity investors. 

Kieran John, Managing Associate
Mishcon de Reya

Brilliant.  We’ll try and answer a few of those questions as well and follow up as well but yeah, thanks everyone for your time, I hope you enjoyed today’s session and feel to connect with us on LinkedIn and more generally, keep in touch.  So, thank you.

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