For 10 years I underwent a process of losing my hair while I sought finance for the (then) loss-making social business that I co-own with my brother. Between 1999 and 2009 we raised £3.5m of equity and £3m of debt to fund the growth of COOK.
The reason that it was a stressful process was that the business needed venture capital, but our social goals didn’t. Despite many discussions with VC funds, we could never align our respective objectives. We learned that their fund mandates required them to exit the businesses that they invested in, and this meant that by taking their capital we would put our company on a transaction journey that we didn’t want to go on. The company would be bought and sold – probably many times – and the only consideration in each transaction was the ‘x’ – the multiple of value achieved by the venture fund (3x is considered good, 5x is considered a home run). We would be rich, but left with nothing else.
We figured out our financing our own way, and got to profitability. But we were only able to do this because we had a number of unique advantages – another company that we were able to grow and sell to fund our expansion, two very unusual angel investors, and a credit environment in the mid-2000s that effectively offered us risk capital whilst only taking the rights and returns of relatively benign debt.
The asset lock: initially attractive, but…
It was only when, in 2008, I started looking at how to support other social businesses to grow that I came across asset-locked structures – CICs, mutuals, social enterprises with a cap on distributions, and so on. Initially, I was attracted by this. Perhaps they could offer a social entrepreneur access to capital without having to go on the crazy journey that we had. By putting the social goals front and centre, perhaps ‘the right’ investors would be forthcoming.
After five years of doing this, I have reached the conclusion that, instead, these asset locks can risk acting as a Berlin Wall that pens a social entrepreneur into a ghetto and makes success almost impossible.
In trying to understand where the asset lock came from, I have repeatedly been directed to the experience of Anita Roddick with The Body Shop. This was a business whose social mission was at the core of its DNA, but which, some people argue, ended up getting bought by dis-aligned investors who did not share its social purpose. The story of The Body Shop is in some ways a tragedy. The inspiring social DNA that mobilised an entire country, created a great business, and had a profound effect on global practices, such as the testing of cosmetics on animals, was eroded through a series of moves which saw it taken over by conventional business.
It is understandable that the response to such an experience might be an ‘asset-lock’. In one clean move it excludes the rapacious marauding money-men from our precious social enterprises.
I was fortunate enough to meet Dame Anita in 2003 in Chichester. We had a shop there and she was a customer, and she was gracious enough to give us some time. To me, the nub of the story of The Body Shop was that people thought that she’d ‘sold out’ when the business became successful, a journey that ended with L’Oreal buying The Body Shop a few years later.
In fact, she had inadvertently sealed the eventual fate of the business when it was tiny, when she had sold a substantial stake in the business to a local garage owner in Chichester to get the modest amount of capital she needed for the next phase of growth. She subsequently realised that this investor did not share her objectives. The only way she could see to address this at the time was to float the business. I think she saw this as a big mistake as she had exchanged a pain in the backside (her original investor) for something that – for her and her objectives – was surely considerably worse.
Clearly, The Body Shop would have benefited from some protection, so that the social mission could be locked in. History might have been different had any incoming investor, from the outset, been made to buy into that mission as well as the business.
Forced to suckle from the breast of subsidy
But there are significant issues that I have observed with an asset lock. It is like building a Berlin Wall between a social entrepreneur and the ‘real economy’. It excludes the vast majority of investors. By capping the return that an investor can make, it is both reducing the available capital and reducing its risk appetite. It forces the social entrepreneur to take on debt (which weakens it) rather than equity (which strengthens it).
Because of the dearth of risk capital that ensues, it forces the social entrepreneur to suckle from the breast of subsidy. In much the same way that entrepreneurship in Africa is directed at figuring out how to access aid budgets, rather than growing sustainable independent enterprise, so in social entrepreneurship much of the energy ends up kissing the many frogs of subsidised capital. Endless pitches to unpredictable grant-makers, quangos, policy-led programmes. Boxes to tick, funders’ priorities to meet. Even those who succeed initially hit a glass ceiling when they need capital to scale – a different kind of capital, offered by a different kind of funder, interested in different things.
It breaks my heart to see the great quality of entrepreneurs in the social enterprise sector labour in this parallel world, cut off from the capital markets. It breaks my heart for them, but almost more it breaks my heart for the real world, which is deprived of the vision and verve of these entrepreneurs. Instead of winning the argument with real, normal investors that they can create value for them, whilst also doing something positive for society, their time is spent preaching to the choir to get what they don’t need.
All this has left me wondering whether an asset lock is a good thing. Would it have been the right thing for The Body Shop right at the start? Would that business have been the spectacular success that it for so long was, had Anita Roddick spent those critical formative early years for her business trying to figure out what subsidy pot to access, endlessly pitching to them all and adapting her offer to meet their criteria? COOK would not have succeeded, had we entered our journey with an asset lock.
What, instead, if a mission lock had been available that locked in the social mission and made it impossible for investors to ignore it … but which also enabled investors to make a risk adjusted return?
When we started COOK, we’d never heard of ‘social enterprise’, and established it as a bog standard company. This year, with the support of 100% of our shareholders, we changed the constitution of our company to introduce a mission lock. The board is now responsible running the business for stakeholders – shareholders, employees and communities – rather than just for the benefit of shareholders. It has been a genuine revelation how powerful this has been with the management of the business, causing them to completely rethink the purpose of their employment, and the business strategy.
Of course there is a role for asset locks – especially community assets, assets spun out of state ownership and groups of savers. It may be the best option for some. But for those that need risk capital, I increasingly wonder whether liberating the assets, in the context of a robust mission-lock, might not free social entrepreneurs. Whether it might break down this Berlin Wall and free them to escape the ghetto. Whether it might allow them to walk out into the world and change it – business, welfare services and capital markets.