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Cathy Pharoah: Real risk is shunned - so how can the sector become more entrepreneurial?

Third Sector, 22 February 2011

Cathy Pharoah

Cathy Pharoah

Textbook wisdom identifies that risk-taking is the key to enterprise, says our columnist

The elephant in the room in discussions of social enterprise in the third sector is risk. Actually, it's talked about all the time, but in highly conservative contexts such as risk analysis, risk assessment and risk management. But the question of risks is rarely raised, except when discussing how to avoid them.

If we have a culture of grant-dependency, at least half the responsibility should be shouldered by those who have given grants, particularly in public funding. Risks of financial return on investment have not been an issue, but reputational and managerial risk have been paramount. So funding has gone to projects seen to be of social value and to groups that can deliver them. Risks have been identified more in relation to short-term project management and deliverables than to future funding and exit strategies.

Investment in social market research or third sector research and development is inherently more risky because it's hard to predict what might come from them. In their absence, sector organisations have had little to help them develop realistic business plans in relation to the kind of client groups they serve.

Such research and development would have revealed more about where subsidies or cross-subsidisation would be needed and left the sector in a stronger position. So, in the circumstances, it's wrong to criticise groups for grant-dependency.

To make up for lost time, organisations are now exhorted to become entrepreneurial and get business plans ready, preferably by April, when cuts set in. At the wave of a magic wand, risk and R&D costs have been transferred to the sector.

The gap is huge. Predictions of statutory funding loss vary between £3bn and £5bn, so it's sobering that it's taken social investment funds more than a decade to get to £1bn. Investors complain the sector is too risky, and a strength of the social impact bond is that it locates risk with the investor or funder.

But the bond might be attractive only where fairly quick and measurable outcomes leading to savings are identifiable. And few understand any of this - at a recent conference, Debra Allcock Tyler of the Directory of Social Change asked the audience if they knew what a social impact bond was: three hands went up.

The Charity Commission's consultation on social investment by foundations ends on 28 February. It is likely to open the door further for investment in non-financial return, while trustees will still be expected to manage risks appropriately and take responsibility for their decisions.

This isn't necessarily what entrepreneurialism is about. Textbook wisdom identifies that risk-taking is the key - that's why appropriate finance for enterprise start-ups is often not obtainable from professional investors seeking returns, but from those likely to be influenced by goodwill, personal trust and gut instinct. Hounded third sector organisations don't seem to have any of these.

Cathy Pharoah is professor of charity funding at Cass Business School

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