When we ask whether an organisation is investment-ready, we might be interested in specific skills in financial management or measuring impact. But more often than not the key issue is whether the organisation has a business model that generates enough revenue to fund the charity’s work and creates enough of a surplus to pay back an investor.
As I’ve written in this column before, earned income is currently the main source of growth in the sector and many organisations are exploring innovative ways to develop enterprising activity to build their resilience. There should therefore be an opportunity to share more of that learning and experience and build a much better knowledge base about the business models that are working in the sector to help build the resilience not only of individual organisations but also of the sector as a whole.
Sharing business models across the social sector is not without its challenges, though.
In the corporate world, business models are often talked about in terms of competitive advantage and distinctiveness – what separates you from others. The concept is therefore not automatically well aligned to the values of creating shared social impact.
And while business models are often talked about in terms of the particular qualities of a company – its product, its people, its partnerships – various studies show that wider market factors, such as what your competitors do – or don’t do – can be just as significant.
It is also the case that studying things that are working isn’t necessarily a good way of thinking about things that might work. With traditional sources of income so challenged and demand rising so rapidly in our sector, the need for innovation in the sector’s business models is great and doing more of the same might not be sufficient.
So if successful business models are so dependent on the specific context for the organisation, how can we generate shared learning to help more organisations develop resilient business models?
Perhaps the first aspect to consider is where the revenue is ultimately coming from. Big Society Capital has recently published data on the revenue source of about 700 social investments made between 2004 and 2017. It looks at three principal sources: consumers and businesses, people via government and government direct.
This is helpful for thinking about the resilience of a business model. For example, a charity working in schools to boost attainment might work with 30 schools – or customers – and therefore feel it has a resilient model with diverse income streams. However, if all those schools are using ring-fenced pupil premium budgets to pay that charity, then the organisation is very exposed to a change in government policy. Similar changes have already had an impact on the business models of organisations working in community energy.
But for charities to be able to learn from the successful business models of others, we need to know more than just where the money is coming from.
Considering the similarities in specific sub-sectors – such as homelessness or youth services – might be an effective way of looking further into this. It might present the opportunity to distil business models from what the "products" are, who the "customers" are and how they relate to the delivery of impact.
Many charities that are embracing enterprising models are doing so as part of a complex hybrid of different sources of income, which might include traditional philanthropy, statutory contracts and using property. The innovation that these organisations are bringing might not come from things that have never been tried before. It might come from combining in a new way elements of business models that have worked in other places.
I think that over the next few years understanding the most effective business models will become a key debate in the sector. We need to make sure we frame this in a way that is useful for charities and social enterprises.
Seb Elsworth is the chief executive of Access, a foundation that helps charities and social enterprises to access social investment