'Social enterprises go bust all the time' -how the sector is tackling its image problem

The appetite for companies with a social purpose has never been greater. But they still face wariness from the wider business community

Emily Mathieson, founder of Aerende. Photograph: Aerende

One in four people who want to start a business want to create a social enterprise.

When Emily Mathieson set up her homeware business Aerende in 2016, she didn’t know it would be a social enterprise. She hadn’t even heard the term before. Aerende’s products are made by people who face social challenges, including survivors of trafficking and people with learning disabilities. “I wanted to set up a business doing what I wanted to do, and I wanted to make sure it wasn’t going to have a negative effect on the world,” she says. “So I sort of fell into social enterprise.”

Fast forward 18 months and, despite a number of big wins and 400% growth year-on-year, Mathieson isn’t sure it’s a sustainable business model.

“My commitment to ethics makes everything more expensive and much more time-consuming,” she adds. “My margins are smaller … and a lot of routes to funding are closed to me,” she says.

Most social enterprises, including Aerende, are established as a company limited by guarantee, which means there’s no share capital or shareholders, and the business may be excluded from applying for a grant because it is not a registered charity.

“Everyone I’ve spoken to has said there’s nothing for anyone to invest in if they can’t have a share,” says Mathieson. “You end up having to compromise, but where do you draw the line [between success and social impact]?”

Finding the balance between social purpose and commercial viability is not an uncommon situation for social entrepreneurs to find themselves in. According to figures from UnLtd, a foundation for social entrepreneurs, 71% still struggle to make a living from a social venture. The same proportion struggle to find sustainable revenue streams and 60% find it difficult to access the right kind of finance.

Despite the challenges, one in four people who want to start a business want to create a social enterprise. According to the most recent figures from the government, the sector now accounts for 9% of the small business population, employing 1.44 million people. Social Enterprise UK estimates the startup rate is three times that of mainstream SMEs.

Peter Holbrook, chief executive of Social Enterprise UK, says the rise of social enterprise businesses could help fix many of society’s ills. “These are businesses that are outperforming traditional SMEs on turnover and innovation, and they are leading the way when it comes to diversity and fair pay, as well as creating jobs and opportunities in the communities where they are needed most.”

Demand from the market is fuelling this boom. UnLtd found 73% of consumersare more likely to buy from brands that put purpose before profit. Among those under 35, it’s 81%.

But Mona Shah, co-founder of chocolatier Harry Specters, says social enterprises still face wariness from the broader business community. Shah and her husband set up the company, which employs people on the autistic spectrum to make chocolates, after worrying about career opportunities for their son Ash. There are an estimated 700,000 adults with autism in the UK, but only 32% are in some form of paid employment. Since launching in 2013, Harry Specters now employs six staff (full or part time) and has a pool of 20 workers for peak seasonal periods.

“There’s a perception people have of social enterprise – they think it’s a charity and equate that with a rubbish product,” she says. “We have to get past that barrier every single time. People read about us employing people with autism and skip the part that says we have won 22 awards in four years. A lot of corporates buy from us but they’re always hesitatant about whether we’ll be able to do it [even though] we have always delivered when no one else would, on a really quick turnaround and with massive volumes.

“We’re constantly having to prove we are just as good – even better – than the leading chocolate brands.”

That reluctance to do business with social entrepreneurs was noticed by lawyer Abbie Rumbold in a negotiation meeting with a private sector provider of public services. The company wanted payment guarantees in the contract because “social enterprises go bust all the time and we have to protect ourselves”, Rumbold reported. But a subsequent research project in 2014 that spanned 30 years found social ventures were no more likely to fail than other businesses. More recent government figures back this up – almost all (93%) social enterprise employers generated a surplus or profits in 2016, compared to 76% of SME employers.

More needs to be done at a policy level to encourage businesses to work with social enterprise, says Mark Norbury, chief executive of UnLtd, particularly when it comes to public procurement in the wake of Brexit. Despite the Public Services (Social Value) Act of 2012, barriers to public procurement can be high, although 54% of social enterprises do some trade. Of those, one in eight have European money of some sort, meaning many will lose significant funding streams after the UK leaves the European Union.

“The idea that you’re building a business that’s also doing something good – people get that and they love it,” Norbury says. “But we know not enough customers understand what social entrepreneurship really is. That there isn’t enough capital at the right time that’s affordable and appropriate to social entrepreneurs. And not enough businesses or public sector departments are buying into social firms.”

Matthew Thomson, chief executive of Fifteen Cornwall, a social enterprise established in 2006, which has now trained 191 disadvantaged young people to be chefs, agrees. He supports the chair of Social Enterprise UK who recently called for social enterprise to be moved to the remit of the Department for Business, Energy and Industry.

“We’ve already made a decision to do something differently,” Thomson says, referring to the EU referendum. “Already that means redefining the way quite a few things work in Britain. That has got to be an opportunity for social enterprise.”