There’s profit potential in social enterprise
Dana Lacey, Financial Post, November 14, 2009
Andrew Carnegie is history’s second-richest capitalist. A steel baron turned philanthropist, he made his money at the turn of the century and gave most of it away just before he died at age 84 in 1919.
But Boomers don’t want to wait until the end to see their money help someone. “Today, there are people like Bill Gates and Warren Buffet who are giving money during their lifetimes,” Paul Martin, former prime minister, told the Financial Post in a recent interview. Mr. Martin was a guest speaker at a recent Ontario Trillium Foundation Conference in Toronto.
For decades, the non-profit sector’s largest financial supporters have been government, business and rich individual donors, although that funding has decreased dramatically in recent years. As the recession drags on, the pressure to fill the funding gap rests almost entirely on the charities and non-profits themselves, even as the market fallout increases demand for their services.
The good news: A new generation of market-savvy philanthropists has emerged. They see the profit potential in social enterprise, which employs market-based strategies for a social purpose. The bad news? Canada will have to race to catch up.
Canada’s non-profit sector is proportionally the second-largest in the world. It employs more than two million people and accounts for 8.5% of the country’s GDP — more than $80-billion a year. But most non-profits run on micro budgets and aren’t able to offer competitive salaries to lure creative, cutting-edge workers from well-paid corporate jobs. Instead, they rely on employees willing to work long hours for little pay, who are attracted by doing good. This business model is not exactly the best incubator for revolutionary ideas.
Social enterprise blurs the lines between non-profits and for-profits. The goals are social, environmental, as well as financial– the triple bottom line.
“There are an awful lot of people who want to see social good come from their investments,” Mr. Martin says. “But they don’t all have Gates’ money and can’t simply give it away — they require a return on that investment. The fact is there is far more money available to social entrepreneurs that way then there would be any other way.”
Social enterprise is hardly a new idea, yet the Canadian government has yet to harness the potential of these “angel investors,” Mr. Martin says. Canada is already years behind the United States and the United Kingdom; both countries have incentive programs in place that help boost social entrepreneurship.
Mr. Martin says Canada also needs to offer incentives. “Business entrepreneurs have access to capital markets and a range of tax incentives — investment tax credits, flow-through shares, dividend tax credits — but none of these things are provided for social entrepreneurs. When governments stimulate the economy what they’re trying to do is stimulate business entrepreneurs. But the fact is social entrepreneurs are also major employers. So let’s level the playing field.”
Mr. Martin says changes to the Income Tax Act and the rules governing how the social-enterprise sector can raise money would make a significant difference.
Meanwhile, Mr. Martin has solicited $50-million from 21 corporate donors to launch the Capital for Aboriginal Prosperity and Entrepreneurship (CAPE) fund, which provides equity, business expertise and mentoring for aboriginal projects with both a financial and social return. The aboriginal entrepreneur receives startup funding in exchange for shares in the new company, which they can buy back as it grows.
“Aboriginals are the youngest and fastest-growing segment of our population. That’s a huge potential workforce. But many lead lives of considerable tragedy. The purpose of the CAPE fund is to give young ab-originals the same chances the rest of Canada’s entrepreneurs have,” Mr. Martin says.
The new philanthropy also needs non-profit-friendly banks and money managers. The Toronto-based Social Capital Partners (SCP) was launched in 2001 to help fill that gap. The non-profit helps fund social enterprises such as Toronto’s TurnAround Couriers, which employs at-risk youth and attracts clients in both the charitable and private sectors, including Royal Bank of Canada and PricewaterhouseCoopers.
SCP also lends money to would-be franchisees of established, community-engaged companies like auto repair experts Active Green + Ross. Unlike a typical bank loan, the money is structured as subordinate debt so it can be classified as equity to other lenders. That means entrepreneurs who wouldn’t otherwise qualify are able to access start-up capital.
SCP offers competitive interest rates, with the condition that the future business employs at least 50% of its workforce from social agencies for disadvantaged Canadians. The more social hires a franchisee employs, the lower their interest rates.
SCP president Bill Young, during a recent speech at an Ontario Trillium Foundation conference, said any innovation in the non-profit sector must be self-financing.
“We need to engage the private sector to tap into their Rolodexes and use their business knowledge,” he said.