Imaging the social finance demand pipeline
There’s a great deal of momentum building following the release of the landmark report of the Canadian Task Force on Social Finance. The report provides a focused roadmap with seven key recommendations to mobilize new sources of capital, develop an enabling tax and regulatory environment and build a pipeline of investment-ready social enterprises.
We wanted to look at the current pipeline of investment-ready social enterprises to find the clogs and determine whether there was sufficient capital demand for immediate investment opportunities.
In order to image the pipeline, the Ontario Nonprofit Network (ONN) and the Social Venture Exchange (SVX), an initiative of Social Innovation Generation (SiG) at MaRS conducted Ontario’s first-ever Social Finance Census. The Census is a collaborative research initiative to build a detailed sector profile and understand the demand for capital and barriers faced by social ventures in Ontario, from nonprofits to social purpose businesses. A total of 250 social ventures were profiled, generating vital data on age, revenues, assets, access to capital, capital need, resource needs and barriers to achieving their mission.
WHAT DID WE LEARN?
1. Ontario has a mature and growing social venture sector. According to our research, nearly half of the social enterprise and social purpose business respondents started operations in the past five years. Additionally, one-third of nonprofit respondents without social enterprise activity have plans to start a new venture in the next two years. This recent growth comes in a sector that is also quite mature. One in five social enterprises has been operating for over 25 years and one in four social purpose businesses have been operating for over 10 years.
2. Despite recent growth, social ventures have significantly inadequate access to capital, preventing them from effective start-up, growth, or continuation of their operations. Approximately 80 per cent of social purpose businesses and 75 per cent of social enterprises reported that access to capital is a significant challenge. The impact of increased access to capital could be tremendous. For example, 80 per cent of social purpose business respondents stated that they could more effectively achieve their mission with improved access to capital.
3. There are tens of millions in unmet capital need for ventures that could be tackling our most pressing social and environmental problems. The majority of social ventures need additional capital in the next two years: 66 per cent of nonprofit social enterprises and 61 per cent of social purpose businesses. Fifty seven (57) per cent of nonprofits without social enterprises need capital to start-up a venture in the next two years. The aggregate capital need amongst survey respondents is estimated at $170 million. This only represents a portion of capital demand, as survey respondents represent a sample of social ventures in the province. There were also interesting trends in the individual level of capital need and desired source of financing. Half of all capital need was for individual amounts of between $50,000 and $1 million. In addition, approximately half of all nonprofit respondents and 70 per cent of social purpose businesses would be interested in pursuing debt financing. Over half of the social purpose businesses stated that they would be willing to issue public or private equity to meet capital need.
4. Social ventures also face a variety of non-financial barriers to advancing their mission, including regulatory hurdles and resource needs. Half of all nonprofits selected one or more legal and regulatory considerations as barriers to engaging in social enterprise. A large majority (65 per cent) reported a need for greater certainty regarding the application of legislation and regulations that govern social enterprise activity. Forty eight (48) per cent of social purpose businesses reported the lack of financial market intermediaries to facilitate the flow of capital as a major barrier to their success.
The regulatory barriers cited above can be addressed by swift implementation of the policy recommendations of the Canadian Task Force on Social Finance. But there is another immediate opening in the local social finance sector. There is a pipeline of potential investments, providing an opportunity for local investors and intermediaries to finance social ventures that can help us tackle social and environmental problems today.
Adam is the Director, SVX at MaRS. Adam helped found the MaRS Centre for Impact Investing and the School for Social Entrepreneurs – Ontario. Prior to MaRS, he was Executive Director of the Ontario Association of Food Banks (OAFB). See more…