Transcript Title

The SCP Business Model
August 2003
The Innovation of Social Enterprise
How SCP Makes it Work
Early Evidence of Success
Next Steps for SCP
2
What is a Social Enterprise?
The term Social Enterprise can mean many different things. For SCP, a social
enterprise is a businesses that balances a double bottom line:
1.
2.
The Financial Bottom Line
―
The business operates like a private sector enterprise by selling goods or
services to its customers
―
The business strives for at least break even and, in some instances, for limited
profitability
The Social Bottom Line
―
The enterprise balances its financial mission with a clearly defined social
mission
―
For SCP, the social mission revolves around the creation of quality employment
opportunities for members of disadvantaged or at-risk populations
―
These jobs must be provided in the context of a supportive environment that
helps employees work towards personal and financial sustainability
3
Types of Social Enterprises
Historically, SCP has taken a narrow definition of Social Enterprise but going forward
we will work with a broader range of Social Enterprises:
1.
2.
Our narrow definition of Social Enterprise includes:
―
Businesses that create employment in a supportive environment for identifiable
at-risk populations in any geography (e.g. at-risk youth, psychiatric survivors)
―
These businesses employ groups who have significant employment barriers
such as skills deficits, psychological issues, or substance issues
Our broader definition includes Community Economic Development (CED)
Enterprises:
―
Businesses that create employment in geographically identifiable,
economically depressed communities
―
Unemployment in these communities is considerably higher than the national
average often as a result of the loss of primary industry which supplied the
majority of employment in the area (e.g. forestry, fisheries)
―
The individuals in this community may not have inherent employment barriers
beyond those created by their geographic location and their current training
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Where is the Innovation?
What makes SCP’s social enterprise model innovative is not the individual strengths
of the business model or the social service that is provided
Business Mission

SCP portfolio companies tend to
operate in very traditional markets

Several examples of similar
businesses exist in the regular
private sector


Social Mission
In absence of a social mission and
with good management these
businesses could make profit and
create a return for investors
On the surface, SCP Portfolio
organizations may have no innate
competitive advantage over other
market players
5

SCP portfolio companies strive to
create skill and job training
opportunities

Several examples of programs that
strive to create these opportunities
exist in the nonprofit sector

With good management these
nonprofits can help those who
access the programs

Training capabilities of management
in SCP Portfolio organizations are
not inherently better than those
running charitable programs
Where is the Innovation?
What makes the model innovative is the way that these two components of the
social enterprise mutually reinforce one another
Business Mission

Social Mission
The social mission creates sources of
potential competitive advantage for the
business:
― Provides access to preferential
sales channels
―
―
Provides access to preferential
terms from suppliers
Provides a strong marketing and
branding opportunities with
customers

Reinforcement
The business strengthens the organization’s
ability to reach its social goals :
― Provides individuals with a real income
rather than a small stipend from a training
program
― Creates real-world working experience by
giving a paying job with real responsibility
so people can learn by doing
― Provides work experience that can be put
on a resume for future employers
― Provides income to pay for the social
mission so that dependence on external
funding is reduced or eliminated
― Provides the self-esteem and pride that
most people get from having a “real” job
rather than a handout
The innovation is in the ability to create strong social outcomes for a
disadvantaged population in the context of a sustainable, competitive business
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The Innovation of Social Enterprise
How SCP Makes it Work
Early Evidence of Success
Next Steps for SCP
7
Illustrative
The Challenge of Social Enterprise
Typically, social enterprises in Canada are organized as training programs where
grants cover the vast majority of the expenses and business revenue represents a
small portion of the total receipts of the organization
Pure Social
Return
Typical Social
Enterprise

Most businesses that SCP invests in could, under
normal circumstances, be run profitably

There are hundreds of examples of renovations
companies, packaging companies and retailers that
generate returns for shareholders
Tendency
Break Even
Point
Typical Private
Enterprise

The stresses on the business as a result of employing members of a
community who face significant employment barriers will naturally
pull the business away from profitability

This phenomenon is particularly evident in many social enterprises
that are run within charities to serve very challenged populations

We have investigated several such enterprises that cover 50% or
less of their costs through revenue generation

The remaining funds are raised through grants (usually government)
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Pure Financial
Return
SCP’s Model: What We Bring to the Table
SCP tries to change the traditional model by bringing resources and expertise to
help overcome some of the key challenges inherent in a social enterprise
Business
Experience/Expertise
Social Enterprise
Experience/Expertise
Appropriate Capital

Management team has 30 years of combined experience in the private sector in a variety of sectors

Founder brings extensive experience as an entrepreneur and CEO

Operational experience with 3 portfolio organizations and strategy work with several other social enterprises
not in the portfolio

Partnership with International strategy consulting firm The Monitor Group to provide case teams and expertise
to work with portfolio organizations

Extensive research into social enterprises in both Canada and the United States

One of only a small group of organizations in Canada with hands-on experience in the field of social enterprise
development

Management team has direct experience in the areas of social mission strategy, social entrepreneurship, and
community economic development

Hands-on experience developing social support infrastructure for various target populations within working
social enterprises

One of only a few organizations in Canada adapting the Social Return on Investment framework for tracking
social outcomes

One of only a few organizations in Canada providing risk capital for social initiatives

One of only a few organizations in Canada providing non-grant financing through program related investments
in a foundation

Backed by C$10MM in initial funding through the Bealight Foundation and significant additional commitments
made by the founder for a social venture fund

Close relationships with regional co-funders such as Community Ownership Solutions (COS) in Winnipeg
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Illustrative
SCP’s Model: Results of SCP’s Involvement
The result is that with the help of SCP, portfolio organizations can strive for financial
self sufficiency while still accomplishing the social mission
 SCP will only work with organizations committed to reaching this goal
Typical Social
Enterprise
SCP Counterbalance
SCP
Portfolio Org
Typical Private
Enterprise
Break Even
Point
Pure Social
Return
Pure Financial
Return

By adding expertise and appropriate capital SCP can help its portfolio companies
overcome the natural effects of the social mission on the financial sustainability of
the business

Further benefit is created by strategically leveraging the social mission to generate
competitive advantages for the business either through improved channel access,
improved cost structures or enhancements to marketing

Even with these aspects of added value we understand that the business may still
not reach the level of profitability that could be gained in a more traditional for-profit
business in the same sector

Our belief is that these businesses can at least break-even and, in some instances,
generate small (<10%) returns to investors
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The Innovation of Social Enterprise
How SCP Makes it Work
Early Evidence of Success
Next Steps for SCP
11
Real Life Examples
SCP has put its business model to work with its initial investments and is beginning to
see results that indicate that the concept can work
Inner City Renovations
Pivotal Services
Description
SCP
Investment
SCP Value
Added

Contract packaging company located in London
Ontario

Start-up home renovations company in Winnipeg
Manitoba

Began as a government sponsored workshop
program within a psychiatric hospital but was taken
independent by the current CEO in the early 1990s

Inspired by a workshop program run by a local nonprofit

Created as a joint venture of several nonprofit housing
corporations to renovate run-down housing stocks in the
inner city

Employs low-income inner city residents, most of whom
are Aboriginal Canadians

Was successful in bringing on several private sector
clients and reducing government dependency
however remained financially unstable

Employs a variety of low income individuals from the
London area

Goal is to become employee owned over time

$200,000 loan

$30,000 in grant equity and $50,000 in loans

Funded mostly working capital needs and small
capital investments

Co-invested with local organization called
Community Ownership Solutions

Allowed for the recruitment of professional
management and improvements in operating
efficiency

Funded all start-up costs and operating losses
during the first year of operations

Access to a Monitor case team which provided
advice around customer segmentation and
marketing, cost accounting, pricing and growth
opportunities

Provide significant support in the area of financial
planning and cash flow management

Assisted in recrafting the business plan for the
organization

Strategic advice and active participation in the
creation of social support infrastructure and outcome
measurement

Strategic advice around the creation of social
support infrastructure and outcome measurement

Advice and research around leveraging the social
mission within customer organizations
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Initial Results: Pivotal Services
One year after our initial investment, preliminary evidence suggests that SCP’s
approach has been effective in helping to create a financially viable social enterprise
Prior to SCP Involvement
Social
Outcomes






Financial
Outcomes

Leveraging
Social Mission

With SCP Involvement
Employed individuals from a variety of low
income backgrounds, many with
psychological challenges
Employed approx 30 full time target
employees and up to 70 during times of high
demand
Management committed to providing
supportive and flexible work environment
Social support infrastructure ad hoc and
lacked goals or direction

2001 revenue of approximately $1.1MM with
less than 15% growth
Organization came close to breakeven some
years but experienced significant cash flow
problems and had made few reinvestments in
the business
Inexperienced management team with
significant skills mismatches

Little or no use of the social mission to
create competitive advantage for the
company






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Continues to employ individuals from a
variety of low income backgrounds including
psychiatric survivors
Now employs approximately 55 full time
target employees and up to 70 during times
of high demand
Management remains committed to creating
a supportive environment, however, the
social support infrastructure and training has
become more sophisticated and consistent
2002 revenue of approx. $1.4MM with 25%
growth
Enterprise is near the break-even point
Management has begun to re-invest in the
business and has fewer cash-flow
challenges
New, professional operations management
has been added and skills re-aligned
Has now identified and is actively
pursuing leads that have been generated
through the use of the social mission
Initial Results: Inner City Renovations
While it is still very early going at ICR, results here are also beginning to improve
Prior to SCP Involvement
Social
Outcomes





Financial
Outcomes



Leveraging
Social Mission
With SCP Involvement
ICR was a start-up
Small home building programs employed
individuals from low income, inner city
neighbourhoods
Programs that were the precursor to ICR
employed fewer than 10 individuals each
Programs were run by a local nonprofits as
charitable work

ICR as a business did not exist
Programs existed to create training opportunities
and revenue figures were irrelevant
Organizations relied on ongoing support from the
nonprofit and other funders

Social mission was the only major value
proposition and therefore the organization
worked almost exclusively with the
nonprofits








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Continues to employ low income individuals
from inner-city Winnipeg, the majority of whom
are aboriginal
Employs approximately 25 full time staff of
which approximately 19 are target employees
Social worker has been hired to assist workers
with issues unrelated to the job
Training being provided that will lay the
groundwork for future employee ownership
2003 revenue of approx. C$1MM
Lost money in its first several months of
operations but is expected to be breaking-even
month over month by the end of 2003
New, professional production management has
been added and skills re-aligned
Continues revenue generating partnership with
nonprofit housing corporations
Leveraging social mission to secure contracts
with the government and the private sector
Made connections with the Manitoba
Government to provide technical training to
employees
The Innovation of Social Enterprise
How SCP Makes it Work
Early Evidence of Success
Next Steps for SCP
15
Where we Would Like to Go: Making New Investments
Social Capital Partners believes in the concept of learning by doing and therefore
feels that it is important to be actively investing

We would like to do between 5 and 10 more deals over the course of the next 5
years

We are interested in investing in both for-profit CED businesses and non-profit
social enterprises

We believe it is important to be active investors for several reasons
― We would like to test the model with different types populations
― We would like to test the model with different types of businesses
―
―
We would like to create sufficient evidence of the potential synergy
between a business and social mission
We would like to create sufficient expertise around our business model
such that we can consistently add value and improve the chances for
success in a social enterprise
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Where we Would Like to Go: Growing Current Portfolio Companies
We also believe that a key to making this model truly successful will be to see our
businesses expand well beyond their initial markets

While we continue to make new investments we would also like to scale our
current portfolio
― We think that in order to employ hundreds, or even thousands of people
we will have to create strategies to significantly grow our portfolio
organizations
―
―

We see opportunities to expand some of our existing portfolio into new
markets where similar social and business opportunities exist
We see opportunities to expand each of our portfolio organizations within
its current market
We believe that we have invested in businesses that are conducive to growth
― We see opportunities for each of our current portfolio organizations in
markets beyond their own
― In each case we believe that there are other communities where the
business conditions and social need exist to create similar enterprises
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Our Challenges: Finding Qualified Deals
Challenges remain around finding good qualified deals while using limited
organizational resources, therefore, SCP will focus much of its effort on creating
regional partnerships for deal sourcing
Deal Source
Examples

Regional
Partnerships
Networking
Opportunities




Media


Level of Investment
Local CED or financial institutions
- VanCity Capital Corp
- Aboriginal Financial Institutions
- ACOA
- Western Economic
Diversification



Conferences
Speaking engagements
Referrals

Likely Quality of Deals
High
Requires face-to-face meetings
and coordination

Medium/Low
May require investment in travel
and takes up significant time




National Press
Local press in areas of interest
Targeted publications
- Entrepreneur focused
magazines
- Economic development
publications



Medium
Can outsource media planning
and execution
Requires significant financial
resources





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High
Regional partner can prequalify deals to ensure
alignment
Medium/Low
May get alignment if events
chosen correctly
No pre-qualification of deals
Medium/Low
Difficult to get alignment
Potential for misunderstanding
of criteria and mission
No pre-qualification of deals
However, significant deal flow
created
Our Challenges: Financing Vehicles
The biggest challenge to our ability to invest in and scale more enterprises is that
current methods of financing are insufficient
Private Sector Vehicles

The quality and depth of data around the
financial success of social enterprises is
limited but:
- Our hypothesis is that these businesses
will be unable to generate returns that
would be required by typical venture
capital financing vehicles


Philanthropic Vehicles

However, the risk profile of these
businesses is likely to be too great for
typical bank financing
Foundations and philanthropists are limited
in terms of the types of organizations that
they can support
- Through grants they can only support
charitable organizations
- Only a few venture investments can be
made using the capital in a foundation
(PRIs)

Therefore, the opportunities are very limited
for most social enterprises to receive
private sector venture financing
Therefore, foundations and individual
philanthropists have virtually no facility to
fund social enterprises that are not charities

Many of the most attractive social
enterprises could never be registered as
charities by the CCRA

19
Even when registration is possible, the
limitations that come with being a charity
does not always facilitate the needs of a
double bottom line business
Our Challenges: Financing Vehicles
The fact that many social enterprises fall between the regulatory and financial cracks
is extremely important and relevant for SCP

Social Capital Partners invests money that is currently within a foundation started by
Bill Young (the Bealight Foundation)
―

Therefore, Social Capital Partners is limited in terms of the types of organizations
it can fund and has very limited facilities for investing in non-charitable social
enterprises.
Through its work, SCP has learned that many, if not most, of the strongest social
enterprises are nonprofits or for-profits, not charities
―
To date the process of getting funds into these non-charities has proven to be
very difficult and has required significant investment of time and money
―
Initial investigation into the most fertile sources of new deals has indicated that
there will be an ongoing need to invest in non-charities
―
Based on our experience to date, it would be improbable that the CCRA would
register these business as charitable
―
Moreover, in many cases the entrepreneurs would see such registration as highly
undesirable
20
Overcoming the Challenges: New Value Propositions for Investors
In our view, one of the most crucial ways to create risk capital for social enterprises
is to demonstrate potential new value propositions to philanthropists and other
would-be social investors
Current Value Proposition
Investor
Provides
Investor
Receives
Alternative Value Proposition
• A grant for a specific program of a
registered charity
• Perhaps some ongoing intellectual
support
• Money to be provided as loans or equity
investments in social enterprises
• Perhaps some ongoing intellectual
support
• A tax receipt that amounts to $.46 or
less on the dollar
• Recognition by the charity of the
donation
• Anecdotal reports on how the money is
being used
• Requests for further money to sustain
the program
• The principle is returned within 5-7
years
• In addition to the principle a modest
return may be provided (perhaps 3-5%)
• Specific social and financial return on
investment reports
• Recognition by the social enterprise of
the investment
• The Ability to re-invest the money in
other social initiatives
• A self-sustaining social enterprise
21
Illustrative
Overcoming Challenges: New Financing Options for Social Enterprises
With access to new sources of venture funding, SCP can expand its ability to provide
appropriate forms of capital to the various forms of social enterprises
Growth
Required SCP
Investment
Capability
Equity / Enhanced
Equity
Subordinated /
Enhanced Debt
Stage
Early/ Mid
Current SCP
Investment
Capability
Low Interest
Loans
Grants
Start-up
Social Enterprise
(50% – 103%)
Enterprise Type /
Potential Return
22
CED Enterprise
(103% plus)
Overcoming Challenges: SCP’s Structure
SCP may restructure itself to create a range of venture financing vehicles for social
enterprise in Canada.
Social Venture Foundation
Social Venture Fund
SCP: Fund Manager
Deal Characteristics
• C$2M fund
• Social enterprises started by
charitable organizations (qualified
donees)
• Funding in the form of grants or very
low interest loans
• Enterprises strive for break-even
• ROI in the form of a tax return
• SROI measured around employment
and sustainable livelihoods
Deal Characteristics
• C$5M fund
• For profit or nonprofit social
enterprises (non-qualified donees)
• Funding in the form of equity or
subordinated debt instruments
• Enterprises strive for limited profits
• ROI in the 3-5% range for investors
• SROI measured around
employment and sustainable
livelihoods
23
Necessary Conditions for Going Forward
Before SCP moves ahead with a strategy to expand its work with social enterprises
and CED businesses, the following conditions will have to be in place
1. Lead Deals
–
SCP will have identified 2 – 3 lead deals that could be shown to potential
investors in a fund as examples of good CED investments
–
These companies would have a demonstrable ability to generate returns in the 3
– 10% range while creating employment in an community that has experienced
some form of economic dislocation
2. Aligned Investor Group
–
SCP will have identified a group of investors who are aligned with the objectives
of the fund and willing to be involved in a pilot fund
–
These investors would have to be willing to invest a combined total of at least
C$3M
3. Regional Partners
–
In order to effectively invest in multiple geographies across multiple industries
SCP will have to create a network of strong co-investors and partners
–
Partners will help create deal flow in specific geographies and perform some onthe-ground management duties for mutual investments
24
Questions That SCP Will Answer With the First Fund
Through our work with social enterprises SCP hopes to answer questions that will
help lead the way forward to creating more social capital vehicles

Can investors be convinced that there may be advantage to viewing some
investments through both a social and financial lens?
– Under what conditions and using what value propositions?
– What types of investors are most likely to be interested?

What types of investment vehicles should be created to allow investors to
consider investment in social initiatives as a viable use of capital?

Are there specific investment characteristics that make the most sense for
these types of vehicles from a risk/return standpoint?
– Assuming that Social Enterprises and CED businesses are the best
investment types, what are some of the key success factors for making
these organizations work effectively?
25