Democratic Business Series: The Capital Gap

Autumn 2023 #43
written by
Greater Manchester Centre for Voluntary Organisation (GMCVO); Joseph Rowntree Foundation; Local Trust; Power to Change & Kindred
illustration by
Carl Godfrey
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The role of funding and finance in economic development is self-evident – but how do we release and manage wealth from public finances, membership revenue, pension funds, dormant assets, philanthropic gifts and other forms of national wealth so it can support the democratic economy? 

For this interview – part of our Democratic Business Summit series – we speak to a range of advocates in local government, business federations, foundations, and think tanks to get their perspective on the capital gap and alternative investment approaches. 

Power to Change 

As the most local form of business, community businesses deliver vital services, creating jobs and bringing underutilised spaces back to life, for the benefit of the local community and economy. But despite their strong social and economic value, accessing the finance needed to scale and thrive remains a major challenge for community businesses. 

As many operate in places where the market has failed to meet the needs of local people, margins can be low, making community businesses’ finances vulnerable in the face of external shocks such as the pandemic and cost of living crisis. 

While the flexible and unrestricted income earned through trading distinguishes community businesses from other forms of third sector organisation, most community businesses operate a hybrid business model, deriving income from grants, social investment, and private borrowing, too. Each of these types of finance support different business needs and serve community businesses at different stages of their development. And all have their challenges, such as the stringent eligibility and use criteria of some grants and the need for a history of income generation to access repayable finance.

Enterprise grants are helping community businesses to grow and diversify their income from trading, while blended finance models, combining grant funding with repayable social investment, are helping community businesses to take on repayable capital for the first time. At the regional level, the emergence of relational social investment and support vehicles like Kindred in Liverpool City Region is providing investment and a supportive local network of socially trading organisations. 

While these approaches are helping to make finance more accessible, there is also a role for government in closing the capital gap. Community businesses are not backed with the subsidy and incentives that government uses to nurture more traditional forms of business. For example, a successor to Social Investment Tax Relief that expands eligibility to include co-operatives and ventures like community renewables and housing could turbocharge the £210m community shares market. And a business rates relief in line with the 75% relief for the retail, hospitality, and leisure sectors could give more community businesses the financial confidence to take on high street assets. 

The anticipated establishment of community wealth funds from dormant assets also presents an opportunity to unlock patient, long-term funding and support for communities in the most deprived parts of the country. 

Closing the capital gap for community business will take innovative and bold action, from all parts of the system. 

Jessica Craig

Joseph Rowntree Foundation 

At the Joseph Rowntree Foundation (JRF), we are interested in how wealth can be transferred out of excessive private accumulation and into democratic forms of community and ecological wealth building. 

These themes were explored at our recent Next Frontiers conference, at which a central question throughout was, ‘what will it take to shift wealth so that it works in service of regenerative and reparative futures, rather than sustaining the status quo?’ In her keynote speech at the conference, Nwamaka Agbo, CEO of the US-based Kataly Foundation, spoke about her ‘Restorative Economies framework’, which is centred around prioritising the investment of resources in communities that have suffered from economic disinvestment and political disenfranchisement. Restorative economics advocates for the growth and support of community-owned and community-governed assets among Black, Indigenous, and other communities of colour, as a means of creating shared prosperity, self-determination, and collective political power.

As part of the initial stages of our work in Emerging Futures, we have convened a learning journey for ourselves and other UK funders, drawing on models of democratic, community-led investment, particularly in the US, to build our knowledge and discuss how we may be able to help resource similar models in the UK. 

An alternative investment model we covered in the learning journey is the Boston Ujima Project, a democratic, member-run organisation building co-operative economic infrastructure in Boston, US, with a mission to return wealth to working-class communities of colour. A core component of the project is an investment fund that raises capital from community members, supporters, and foundations, and invests in local businesses. Of the investors in the fund, it is only the community members who are entitled to vote on new investment proposals, irrespective of the size of their investment. The local members also have together approved a set of business standards, such as paying a living wage and providing retirement benefits, to ensure investments align with their values.

As well as being democratically managed by local members, the fund is structured so that lower-income investors take on the least risk and have the highest expected returns, more so than philanthropic investors and those supporters able to invest relatively large sums.

At JRF, we are interested in how we can work with others in the UK to facilitate the transfer of private wealth, including philanthropic wealth, from the dominant financial system to community-controlled initiatives that build economic democracy and self-determination. The Next Frontiers conference and learning journey have helped us greatly in our initial thinking, and we will be sharing more details as this work progresses. 

Jonathan Hutchins-Levy

GMCVO

GMCVO’s mission is to drive economic and social inclusion in Greater Manchester (GM), and we see access to affordable, accessible social investment as a key element of this mission. Since starting to deliver social investment in 2017, our organisation has invested £4.9M into the social economy of GM. Our role as a social investor has highlighted the impact of place-based investing in the UK and the importance of local relationships when bridging the capital gap. In order to really understand communities, you have to be present in them, and we spend a lot of time talking about social investment across all the boroughs. 

GMCVO uses dormant assets and investment funds for our Social Investment Funds. Our funding mainly comes from Access – The Foundation for Social Investment, Big Society Capital (BSC), The National Lottery Community Fund, and Greater Manchester Combined Authority. We are also part of a national pilot exploring the importance of local support systems around accessing social investment funded by Access and BSC in Stockport, Oldham, Bolton, and Wigan called the Local Access Programme, and we are just launching a new fund in partnership with eight place-based Credit Unions, Access, GMCA, and The Esmée Fairbairn Foundation. The partnership with the Credit Unions will deepen the reach into communities and enable people to access different capital through these local finance institutions, which has not been available before. It feels like an exciting time for us, a shift away from traditional social lending into a real community-based social investment fund with all the loan capital coming from Greater Manchester and then given back to improve the GM social economy.

We continuously hold ourselves to account with our systems and processes – we are not a bank and traditional lending eligibility doesn’t factor into our processes. In order to be approved for social investment we find that people who haven’t traditionally been able to access it need a lot of advice and support. This is where we see a current gap and are working to fill it. For businesses to raise social investment, they need to be able to pull together documents for investment committees that explain the business and the plans for investment, and link these to cash flow forecasts and assumptions. A loan is repayable finance, though, and we have a duty of care to ensure that businesses can afford to repay a loan. This is really challenging for some businesses – social entrepreneurs often come into social enterprise with the social mission at the forefront of their plans. Running a successful trading social business is very challenging and grant dependency is still too dominant in the social enterprise sector. 

Cathryn Chrimes

Illustration by Carl Godfrey

Local Trust

The Community Wealth Fund as envisaged by Local Trust and the Community Wealth Fund Alliance (CWFA) would target ‘left behind’ neighbourhoods, awarding each £1M, and giving spending and decision making power to local people instead of existing democratic structures. Residents know better than councils or government what is lacking in their areas and what would improve their communities, and only they can ensure the money goes where it is needed. This funding model is unique in that it places responsibility and trust with local people, something that the Big Local programme has demonstrated can have a huge impact.

The 225 communities around England that have been identified as the most ‘left behind’, many of them in northern ex-mining towns or on the south coast, have historically missed out on statutory and lottery funding and its benefits. As well as lacking investment, these communities of less than 10,000 residents don’t have active local community groups or social infrastructure such as pubs, green spaces and places to meet. They also have high rates of crime, unemployment, and poverty. These areas suffer worse socio-economic outcomes than other deprived areas, and demonstrate the extent of the capital gap in the UK. 

The funding would be provided over a 10-15 year period, which allows time for residents to build capacity and capability. The long-term funding aspect of this model is based on the Big Local programme, which saw 150 areas receive £1M each over a timespan of ten years. A founding member of the CWFA and the secretariat for Big Local, Local Trust has seen the importance of capacity building as the first and most important step in neighbourhood transformation. Our research has found that many areas had experienced short irregular bursts of funding but that this inevitably did not lead to lasting change in the same way as long-term, patient funding does. 

The government has agreed that the community wealth fund will be financed by the extended dormant assets scheme which takes money from accounts, stocks, shares and other financial assets for which an owner cannot be found, and dedicates it to good causes. The government has now published a four-week technical consultation (running from 21st September–19th October 2023) which seeks opinions on the design of the community wealth fund, including factors such as who will benefit and the breadth of the funding. For more information, please visit communitywealthfund.org.uk 

Ella Smith

Kindred: How to start a movement

Most social investment funds are designed by former bankers – albeit good and honest former bankers who think there must be a better way. But the tech world has taught us change and disruption is likely to come from elsewhere.

Instead, 150 activists, artists, entrepreneurs, animators, community developers and collaborators designed Kindred. These are people who are having a go at making a living: building a business, with a purpose, or a passion; people maxing out credit cards, borrowing time and floor space from friends or family and mortgaging their homes to make a difference. They are pioneers of a new, more inclusive, economy. Each conversation began with the assumption that the rules would be ‘their rules’. How much can we have? Do we need to match the funding? Where’s the form? Who’s judging us? What must we do to get this money? But each ended with discussions about trust, sharing, and mutual support. Those conversations became Kindred. We offer money at 0%, that is patient and flexible, with payback in social as well as financial returns.

How? 

We find entrepreneurs at events, roadshows, on social media, or antisocial media. We walk around, hang about in cafés, clubs, and pubs. Invite our friends, families, neighbours and haters. We print newspapers, put on exhibitions and tell stories. To start a movement.

Then we share stories of local and social innovation, from our past and present. From socially-trading organisations across the street, the river, or world. We dream together, imagine our future together, then deliver it. Together. To co-create.

We don’t demand business plans or feasibility studies. We need people who make it – whatever it is – happen, so we invite action. It’s action led. 

We come along, try things out and show what’s possible – to ourselves as much as anyone else. Those who keep coming, trying, showing. We’re entrepreneurs.

We encourage ideas to start small. Do one, or two. If two work, so might 22, or 2,222. That’s market testing.

There’s no selecting or judging. We don’t want our communities to compete against each other. Action is the best selection process you could wish for. That’s non-competitive.

When we need money to grow we have a conversation with our peers about the risk we will take together. Some invest their lives and livelihoods, others just supply money. That’s equitable funding.

We invest incrementally. If things don’t work, do less of it; if things do, do more of it. That’s risk management.

Smart folks make sure space is community owned so the value generated is captured and reinvested in the communities creating it. That’s how STOs, social clusters and whole economies, grow. That’s inclusive growth.

Erika Rushton

To read other articles from this series, visit our Democratic Business Summit page.

Autumn 2023 #43
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