While the social enterprise sector is enjoying a wave of popularity, start-ups are under real pressure to succeed. And greater scrutiny from funders makes failure very public indeed, as Maria Clegg discovers
The social enterprise sector continues to make headlines and capture the public's imagination. In the past week alone, Oxfam announced that it is to support the development of a chain of fair-trade coffee shops called Progreso, and a Brighton businessman announced his decision to open a pub that will distribute its profits to local charities (Third Sector, 19 May).
But, as Paul Harrod - former director of the Aspire Group, which went bust this year owing £350,000 - found out, social enterprises are under greater pressure than typical businesses to make a go of it, and are more open to criticism when things go wrong.
Aspire was launched in Bristol in 1999, a classic social enterprise start-up running on idealism, enthusiasm, and a £5,000 loan from the Prince's Trust. The company helped create jobs for homeless people, who were paid to deliver fair-trade catalogues and process the orders through Aspire's warehouses. Most people came to Aspire with a history of drug or alcohol abuse problems, and were at a stage in their lives where they were ready to change but unable to find work because of their past.
Harrod, one of Aspire's seven directors, turned conventional business thinking on its head. "Most catalogue companies pay employees through commission so you secure your profits first, then pay the staff.
"But we believed it was important that staff should have secure take-home pay, so we paid the staff a guaranteed wage, as well as investing in their training and development."
Initially, the business was extremely successful, but the nature of the company's social aims soon came into conflict with its business aims.
As employees' circumstances and employability improved, Aspire supported staff to move on, but this meant that the company was constantly training workers to leave.
"We paid the price for that in the end," says Harrod. When Aspire ran into financial difficulties because of seasonal fluctuations in catalogue sales, it was difficult to raise funds because they had already exhausted their regular sources. "Our assets were stock and databases, not property - we were very cash-led," he says.
Communication between the different offices in different cities was also problematic. "We worked with local communities, so Aspire was deliberately very decentralised. We were thinking about economies of scale when we took Aspire to new cities, but the model was expanded before it had really proved itself."
Harrod admits that he felt crushed when the Aspire Group collapsed. "It was a big blow because it was such a huge part of my life. I had let people down who supported Aspire and had taken such a huge risk on us. Natwest, the Charities Aid Foundation and Foursome Investments were among our biggest supporters, and they all lost money."
Although hundreds of businesses go bust every week, the collapse of a high-profile social enterprise has drawn attention to the viability of the model.
According to the DTI, a third of new businesses fail in the first three years, but the failure of an innovative social enterprise has attracted a particular kind of attention.
"Many people were very cynical about whether the project could succeed," Harrod notes. "But we've had far more press coverage now than we ever did when we were successful."
Harrod emphasises that, although the catalogue company he built up over five years has collapsed, the work of Aspire's offices around the country is ongoing.
Six separate offices have carried on as independent social enterprises.
A new company has since been set up, Aspire Support UK, to ensure that homeless people in the six cities are still getting a helping hand into the job market.
Social enterprise often receives a mixture of funding from statutory and voluntary sources. Cathy Pharoah, research director at CAF, says that this puts them under greater scrutiny.
"It's the inevitability of straying into a mixed funding environment," says Pharoah. "It means that social projects need to be clear with funders if they are still growing and developing, because the funder has to be 'signed up' to the risk."
Pharoah warns that the social enterprise model is in danger of being stifled by expectations. "The Government and the voluntary sector both seized upon social enterprise with very high hopes of what it can achieve, and it is harder when things do go wrong.
"But the reality is that venture capitalists are always losing money. The voluntary sector should look positively at what Aspire was able to achieve, and learn from it."
Many voluntary organisations are moving into social enterprise through the provision of public services, and Jonathan Bland, chief executive of the Social Enterprise Coalition, says that charities must be aware that the market can be a cold place.
"To succeed in social enterprise, charities need board members with a risk-taking mentality and the right business skills. The voluntary sector has to develop a culture where it can say, 'okay, this enterprise failed, but at least we had a go'."
Nick Aldridge, head of policy at chief executives' body Acevo, agrees: "Our sector is applauded for its approach to innovation and we have to continue to try things that may not work. If a social enterprise doesn't work straight away, those people will take what they've learned and apply it in a different way, which may have a better chance of success."
Harrod is now working on a business incubator project for Bristol University and is still clearly bruised by the group's collapse. But his passion for the concept is dented rather than destroyed.
"It all happened quite recently. I want to take stock and learn from it, rather than jump straight back in. Within two years of finishing university, my business partner and I were running a nationwide project, with a turnover in its last financial year of £1.5m.
"There was a lot of encouragement to grow quickly. The social outcomes were there - but we just grew too quickly without building a sustainable business model first.
"The fact remains that Aspire started from nothing and ended up with a database of 30,000 customers who were gained and retained by a group of homeless people with poor employment prospects. Our motivation was to create employment for one of the most marginalised and hardest-to-reach groups, and that was only ever going to be achieved through social enterprise."