Diversifying income streams is an ongoing fundraising focus for many charities. One of the routes open to them is to set up and run a profit-generating business, such as the traditional high-street charity shop.
However, charities are also seeking to harness innovation and build new ventures in a way that supports their charitable purposes. In many cases, they can do this by adopting the social investment model. Crisis Venture Studio is one example of this. It was set up in 2020 by Crisis, an established homeless charity with sufficient resources to invest in a start-up that might make a big difference to the issue of homelessness. Big Issue Invest, a social investment arm of The Big Issue Group, is another example.
Investing to deliver change
We are increasingly seeing innovative charities responding to the challenge of incubating good ideas and empowering people to achieve them by establishing a subsidiary company or a new venture. These entities are outside of the charity’s core activities and are effectively spin-outs, providing a new funding stream for the charity, for example, if a charity takes shares in a spin-out, it stands to make profits from it as a shareholder.
The charity Versus Arthritis has launched a social investment venture called Arthr, which markets specialised devices to improve the quality of life for people with arthritis. Arthr uses its profits to reinvest in developing more products and to make donations to Versus Arthritis. It perfectly fits the concept of bringing innovative ideas into the charity sector and helping the charity to diversify its income.
Born out of relevant expertise
It also demonstrates that a charity can use its expertise in a particular field to identify the start-ups it should invest in because it understands which are likely to have the most impact for its beneficiaries.
There are legal hurdles to overcome in setting up these social investments, not least there is a question over what constitutes “social investment”. A specific power allowing charities to undertake social investment was introduced in 2016, and the Charity Commission is currently consulting on what is responsible investment by charities, which may well have an impact on this kind of investment decision by charity trustees.
Bound by duties
When a charity decides to invest, whether it is a social enterprise business model, a start-up or an entity designed to pursue the charity’s purposes, its trustees must adhere to a defined set of investment duties. These include a complex legal and financial analysis of the proposed social investment, examining whether it is within the charity’s purposes and whether the decision to invest can be justified. The charity trustees must also ensure they don’t breach their trustee duties when making these investment decisions.
Once the decision to make a social investment has been made, the charity trustees may need to set up a sub-committee to supervise the investment. The trustees may also decide to bring in new people to sit as non-trustee members of the committee to help them make good investment decisions and to supervise those investments.
Separating public and private benefit
A key challenge for trustees is ensuring that any personal profit arising to anyone from the social investment model is only an incidental part of the project. Charities must be established for the public benefit and any private benefit must be purely incidental.
Charity trustees must, therefore, ask themselves whether any one individual is receiving a private benefit which is more than incidental from any investment which is made both to further the charity’s purposes and to provide a profit (this is different to an investment made purely for financial return). If so, the benefit will have to be authorised by the Charity Commission or should not be made.
Maintaining genuine independence
Managing conflicts of interest is another significant issue for trustees. If the charity creates a new business that has many of the same trustees as the charity, then it is arguable no one is able to make independent decisions. The question arises as to whether they are acting in the charity’s interests, as opposed to representing the new business or perhaps some personal investment. Spinning-out social investments can, therefore, be a challenge when considering issues of private benefits, trustee duties and managing conflicts of interest.
Funding better futures for young people
With the right advice at an early stage, however, charities can establish successful socially motivated and profitable ventures. One such example we recently worked with is Workfinder, a limited company spun out from the charity Founders4Schools. Founders4Schools is an award-winning charity established to improve students’ employment opportunities by connecting them to inspiring business volunteers in their communities and beyond. Workfinder complements this work by providing a digital tool to help students find meaningful work experience – often with businesses that wouldn’t normally take work experience students, such as fast growth tech companies.
Appreciating that Workfinders’ reach and impact could be increased with additional investment, Founders4Schools made the decision to spin out Workfinder as a separate company. We assisted with structuring the charity’s investment in the company as well as bringing on board outside investors. Whilst inevitably complex to navigate all the requirements of charity law, this is a great example of creating a commercially viable business with impact by taking it out of the traditional charity model and into a separate vehicle.
To discuss how a social investment model could best work for your charity, or to talk about any legal and business aspects of charity and social ventures, please get in touch.
Starting a Social Venture?
Our Social Ventures team has created a handbook to guide you through the key stages of setting up and running a Social Venture, from initial funding right through to maturity and sustainable delivery. Find out more.