The Gritty Reality of Social Investment: “Chalking it up to experience” – Confessions of a social investment wholesaler

As the number of Big Society Capital’s investments have grown, so have the challenges we have experienced in turning concept into practice. 


We have always known that a number of investments, while well intentioned, will ultimately fail, either financially or socially. Understanding the reasons for such failures is critical to enabling us and others to learn from our mistakes and not repeat these errors.

In 2012 when Big Society Capital was formally unveiled we launched with a portfolio of five investments. One of these, the FranchisingWorks Licence Fund, sought to test the hypothesis that a franchise, with its successful and mature business model, support networks and established business infrastructure and systems, offers a lower-risk path to self-employment. As such, this form of employment could support long-term unemployed people back into work.

To enable this the Fund was created to invest in a portfolio of franchise licences and lease them to unemployed people who would not otherwise be able to afford the upfront purchase cost, opening up this seemingly lower-risk path to self-employment to those who had the most to benefit from it.

The fund would generate an income from sharing in the revenue generated by the franchisee (the previously unemployed individual) and franchisor (typically SMEs) from such licences, with the franchisee aiming to buy-out the fund’s investment in the future once they had generated sufficient income and savings.

Built on a small, grant-funded pilot in Manchester, we committed £1 million in capital to the fund alongside a £200,000 commitment from the Esmée Fairbairn Foundation. It was hoped that over the fund’s five-year life, it would support over 170 people to establish thriving franchises and deliver a return to investors, proving the model and enabling it to expand nationwide.

Unfortunately, it soon became clear it was not going to be plain sailing for the Fund.

"Understanding the reasons for failures is critical to enabling us and others to learn from our mistakes"

Big Society Capital, as a wholesale investor, required a third-party be established to hold the licences – this fund was to be managed by the fund manager and ensure that the licences purchased were held only for the benefit of the investors. As one of our first investments, we were in effect breaking new ground and whilst this approach would make the fund scalable and able to more easily attract other investors, it did bring with it protracted negotiations and the need for regulatory authorisations, governance structures and so on with them and built expenses into the model. Additionally, we were in effect asking Shaftesbury Partnership, who had pioneered the initial pilot in Manchester, to become a fund manager, which is not something they had ever done before.

Eventually these structural hurdles were overcome and the fund was officially launched. However, transitioning franchisors that had previously been extremely supportive of the pilot was harder than expected. This limited the ability of the fund to offer access to the types of enterprises that prospective franchisees wanted to own and operate. The result was an extended period of renegotiation between franchisees and the fund. To compound matters, during this period one of the small team working on the project at the Shaftesbury Partnership left to take up a senior position in government. Whilst a fantastic opportunity for him, this did cause significant disruption to the implementation of the fund.

At the same time, the government launched its Start-Up Loan initiative to support entrepreneurs with low-cost loans. These subsidised loans were significantly cheaper than the terms offered by the Fund, meaning demand for its investment was lower than expected.

The combination of these factors meant that the fund’s deployment rate ran significantly behind plan. This was compounded by the high cost of the fund structure which had increased significantly from when the fund was launched in light of changes to the EU’s regulatory rules. This meant that the income from the fund’s investments was insufficient to cover the Fund’s running costs. After 2 years the fund had only made 11 investments against an original target of 113 and investors were forced to make the difficult decision to close the fund early.

To ensure the social impact of the fund’s few investments was sustained, we took the decision to sell the licences to the franchisees for a nominal amount to ensure they were able to continue to operate successfully, supporting themselves and their local economy.

Although we are of course disappointed that the fund was not more successful and could not support a greater number of unemployed people into self-employment, we have only crystalised a small loss of a quarter of our original investment and have learnt a number of important lessons through the process:

  • Don’t run before you can walk – if developing an innovative idea, flexibility in prototyping and piloting is key and making sure the market testing is as robust as possible before investing the time and money in the infrastructure required to scale it up significantly. Additionally, transitions from grant-based pilots can be more challenging than expected given the difference in incentives unless they closely reflect the social investment model proposed.
  • The importance of partnerships - fund management is a particular skill set and is often at odds to the skills held by the social entrepreneurs and visionaries attempting to find solutions to particular social issues. It is important to try not to distract people from what they’re good at. Forging effective partnerships between these groups is key. 
  • People really matter – the turnover of key staff is a significant risk to the success of any project – especially within small teams – and difficult to mitigate.

These lessons have helped us think about how we invest our capital and while it is always important to have the risk appetite to test new ideas and models – knowing how to do this effectively is key. 

We still wholeheartedly believe that social investment is an important tool for charities and social enterprises to be able to use in achieving their social missions. Whilst this model proved to be unsustainable, we are continuing to consider how to support social enterprises working in the franchising space. By through sharing these stories we hope we can all learn from previous mistakes and be better prepared for the challenges ahead.