Creating Risk Capital for Social Initiatives

August 2003

Context and Introduction

The Need for a Social Capital Market in Canada

Looking for Opportunities: Parallels in the Private Sector

Conclusions and Next Steps for SCP

Who is SCP?: Our Mission

Invest in and support social enterprises that employ at-risk populations

Help these organizations to grow and eventually exist without external

funding

Help these organizations provide improved social outcomes and financial

self sufficiency for the individuals they employ

Be a catalyst for encouraging other innovative approaches to funding social

initiatives in Canada

What is a Social Enterprise

The term Social Enterprise can mean many different things. For SCP, a social
enterprise is a businesses that balances a double bottom line:
1.

2.

The Financial Bottom Line

The business operates like a private sector enterprise by selling goods or

services to its customers

The business strives for at least break even and, in some instances, for limited
profitability

The Social Bottom Line

The enterprise balances its financial mission with a clearly defined social
mission

For SCP, the social mission revolves around the creation of quality employment
opportunities for members of disadvantaged or at-risk populations

These jobs must be provided in the context of a supportive environment that

helps employees work towards personal and financial sustainability
4

Types of Social Enterprises

Historically, SCP has taken a narrow definition of Social Enterprise but going forward
we will work with a broader range of Social Enterprises:
1.

2.

Our narrow definition of Social Enterprise includes:

Businesses that create employment in a supportive environment for identifiable

at-risk populations in any geography (e.g. at-risk youth, psychiatric survivors)

These businesses employ groups who have significant employment barriers

such as skills deficits, psychological issues, or substance issues

Our broader definition includes Community Economic Development (CED)

Enterprises:

Businesses that create employment in geographically identifiable,

economically depressed communities

Unemployment in these communities is considerably higher than the national

average often as a result of the loss of primary industry which supplied the
majority of employment in the area (e.g. forestry, fisheries)

The individuals in this community may not have inherent employment barriers
beyond those created by their geographic location and their current training
5

Who is SCP?: Our Approach

Using Venture
Capital
Principles

To Invest in . . .

Social Enterprises

With a Vision of . . .
National Network
of Successful
Social Enterprises

That. . .
Employ
Thousands of
People
6

Who is SCP?: What We Bring to the Table

Experience

Significant research into, and experience with, social

enterprises in both Canada and the United States

Internal expertise in business and social mission strategy,

operations, entrepreneurship, and community economic
development

Significant initial funding in place and several funding

partners available to provide additional capital

Strong operating partnership with international strategy

consulting firm, The Monitor Group
Close relationships with regional co-funders such as
Community Ownership Solutions (COS) in Winnipeg
Have, and continue to seek, additional partnerships with
private, public and social sector thought leaders

Expertise

Capital

Partnerships

Context and Introduction

The Need for a Social Capital Market in Canada

Looking for Opportunities: Parallels in the Private Sector

Conclusions and Next Steps for SCP

Our Study
As part of our catalyst role we undertook a study to find innovative approaches to
funding social initiatives in Canada. The study consisted of several components:
1.

Study existing research from Canada and other countries related to social
investment

2.

Learn from the experiences of other social capital providers in Canada and
internationally

3.

Study parallels between private sector capital markets and the market for social
capital with the help of RBC Capital Markets

4.

Interview leading thinkers in the area of social initiative financing

Focus predominately on the United States and the UK

Look at opportunities to adapt financial vehicles that fund unique private

sector organizations to fund social initiatives

Create next steps for SCP based on our findings

Highlight questions that still must be asked and answered

Create a specific action plan for SCP based on our findings

9

Goals of this Study

Overarching Goals

Look for ways to create a more buoyant capital market for social initiatives

Expand the type and number of financial instruments available to fund social
organizations

Expand the total pool of capital that is available for social initiatives

Social Enterprise Goals

Understand the unique aspects of financing social enterprise

Create new financing vehicles specifically for social enterprise

Expand the total amount of funding available for social enterprise

10

Our Basic Premise

Canada has developed a strong social safety net that provides funding for various forms of social services
The majority (approximately two thirds) of this funding is provided by the government with the rest
being provided by a combination of individual, corporate and foundation funding

One issue with the current system is that there is an over-dependence on a relatively small set of funders
As a result, external factors such as government cutbacks or economic downturns have a
disproportionate impact on the social sector
Also, with such a small pool of funders, there will be limited variation in the risk/return profile of the
initiatives that are funded

Another issue is that social initiatives are almost entirely dependent on one form of financing the grant
Even if this one form of financing were as effective as possible, the result of such limited financing
options is that only projects with one particular risk/reward profile are funded
Moreover, as government funding becomes less available or economic hardships constrain corporate
and individual giving, budgets for social initiatives are squeezed

Therefore, SCP believes that a much more dynamic Social Capital Market must be created
This capital market should include a variety of financing vehicles for social initiatives similar to the
array of financing vehicles available in the private sector
Moreover, these vehicles must be created such that they attract more funding and support for a wider
array of innovative social initiatives from a broader array of funders

The risk of not taking creating this market is that we stifle entrepreneurship and creativity around solutions
to significant social problems
11

Financing Social Initiatives: The Traditional View

Historically the different sectors of the economy have been thought of as distinct and
separate silos governed by with rigid conventions that limit interaction and forms of
cooperation
Policy / Regulation

Government
Government raises
tax dollars
Registers charities
and foundations
based on a rigid and
outdated set of
criteria
Provides grants to
charities to carry out
social policy

Social Service

Charities

Foundations

Charities raise
money from
governments,
corporations,
foundations (and
individuals)
Charities carry out
narrowly defined
programs based on
societal need and of
funder stipulations
Charities preserve
funding by staying
within the narrow
definitions of a
charity as provided
by the government

Raise money from

wealthy individuals
Donates money to
registered charities
as defined by the
government
Charities carry out
social programs that
are in line with
donors expectations

12

Profit

Private Sector
Private sector
conducts business
The purpose of
business is
predominately to
generate maximum
profit
Businesses provide
some of that profit to
registered charities
in return for an
improved public
image

Illustrative

The Social Capital Market: A New Guiding Framework

A new approach to thinking about funding for social initiatives is to look at each of the
sectors and the organizations within them as part of a market spectrum within which
overlap and cooperation between the sectors is possible
Pure Social Returns

Blended Returns

Pure Financial Returns

The Social Capital Market

Potential
Funding
Instruments
Potential
Types of
Enterprises

Government, Foundation,
Corporate Grants

Charities

Community
Loans

Community
Venture
Capital

Social Purpose
Businesses

Social
Venture
Capital

Community /
Small Business /
Cooperatives

Government
Participating
Funders

Charitable Foundations
Private Sector

13

Labour Commercial Lending

Sponsored / Private Capital /
Funds
Public Capital

Larger / Higher Growth

Business

Types of Risk Capital for Social Initiatives

Within this broader spectrum some of the most important yet under-provided
financing vehicles for social initiatives (risk capital vehicles) can be created
Risk Capital
Government/Corporate/
Traditional Foundations

Progressive
Foundations /
Venture
Philanthropy

Motivations

Fulfill Social Policy

Donor-driven Social Causes

Promote highperformance
nonprofits

Sources of
Capital

Government Agencies
Wealthy Individuals
Corporations

Wealthy
Individuals

Forms of
Capital
Provided
Investment
Stage
Form of ROI
to Capital
Source
Method of
Sustainability

Community
Capital

Encourage Community Development

Government
Credit Unions
Co-ops
Small Loans
Co-op Shares

Project Grants

Individual Donors

Social
Venture
Capital
ROI with social
benefit and/or
low social cost
Individual
Investors

Equity Investment

Start-up / Early
Stage

Early Stage /
Growth Stage

Various

Tax Credit

Interest on
Principle

Tax Credit

Capital
Appreciation

Ongoing Government Funding

Ongoing Charitable Gifts

Principle
Repayment

Capital
Appreciation

Reinvestment

Program Funding

Early Stage /
Growth Stage

Community
Development
Venture
Capital

14

Illustrative

Canada Relative to Other Markets: Social Capital Market

Currently, the Canadian environment does not encourage the creation of these risk
capital vehicles and therefore Canada lags significantly behind the United States and
other markets in the creation of new social capital financing
Blended Returns

Pure Social Returns

Pure Financial Returns

The Social Capital Market

Government
Funding

Canada

United
States

Britain

Traditional
Foundations

Progressive
Foundations / Venture
Philanthropy

Community
Capital / Co-op

Development Venture
Capital

Commercial Lending /
Private Capital / Public
Capital

Very strong government funding

Relatively small number of innovative foundations providing risk capital
Relatively small community finance sector

More limited direct government funding

Large and relatively innovative foundation sector
Fast growing community investment sector

Relatively strong government funding

Some innovative foundations
Emerging community finance sector with strong government support
Area of Strength
15

Developing Area

The Environment for Social Investment Outside of Canada

In contrast to the Canadian market, the United States and, to some extent the UK
have a fairly vibrant risk capital market for social initiatives

The creation of risk capital for social investment has been made a priority in the
US and other markets through favorable tax and regulatory regimes
US financial institutions are required to invest a portion of their profits back
into the community giving rise to many community venture capital companies
Social investors in the United States are often provided with tax incentives
In the UK the promotion of social investment has been made an explicit
priority by the government

But while the concept of risk capital for social initiatives has been quite ground
breaking the ways in which the money is raised and invested is quite simple
With few exceptions, money is raised and invested through very typical debt or
venture capital vehicles
The key difference is that investors are usually asked to accept lower than
average returns relative to a traditional venture capital fund in exchange for
social benefit in addition to some tax or regulatory benefit
16

The Results of This Investment Environment

While directly comparable statistics are difficult to find, the most obvious and direct
result of the efforts in other markets to drive social investment has been the creation
of significant amounts of social risk capital relative to Canada
Risk Capital

Canada

United
Kingdom

United States

Community
Development
Venture
Capital

Government
Grants

Foundation
Grants

Venture
Philanthropy

Community
Loans

Government
accounts for
65% of social
funding

Foundations
are relatively
small and
often donor
driven

Nascent
used by a
handful of
innovative
foundations

Loan
programs
exist but are
relatively
limited

Little venture financing exists.

Some Labour Sponsored
Funds and others provide
limited socially motivated
funding

VP market is
nascent few
players exist
in market

Market more
advanced national
coordination
taking place

Growing market promotion of

social enterprise has been
made a government priority
with an assigned cabinet
minister

Original VP
market
several
players exist

Several
hundred loan
funds manage
over US$3bn

Foundations make up a large

portion of social funding. Still
tend to be donor driven but
demonstrate some creativity

Tend not to be
as active as in
other markets

Make up large
portion of
funding. Show
significant
creativity

17

Over 50
CDVCs exist
across the
USA

Social Venture
Capital

Dozens of
VCs exist that
invest in
social
business

Why This Matters

The failure to foster an environment which encourages the creation of risk capital
through social investment leads to:
And. . .
Lack of Social
Investment Institutions

Financial support for

social initiatives
comes mostly from
government agencies
and traditional
foundation or
corporate
philanthropists

Which Leads to. . .

Few Social
Investment Vehicles

Less Risk taking and

Innovation

Support almost
always comes in the
form of a grant for a
program of a
registered charity
The only value
proposition to
philanthropists is in
the form of a tax
receipt

Traditional forms of
financing tend to be
conservative and
based on programs
There is little or no
incentive to take risks
or try new solutions
because failure
results in the
withdrawal of funding
Long term
sustainability and
working capital is
nearly impossible to
secure

And. . .
Limited Social
Investment Expertise

Little or no expertise
exists in Canada
around creative
financing and social
investment
Even a decision to
change the
environment today,
Canada will continue
to lag behind other
markets because no
expertise has been
created

The net result is a much less vibrant and creative set of approaches to
important social and cultural issues in Canada
18

What Could be: The Spectrum of Financing Institutions

By encouraging social investment several different financial institutions could be
created in Canada that would support a wide range of innovative social initiatives
Risk Capital
Financing

Loan Financing

Equity Financing

For Profit

Non Profit

Subordinated
Debt funds
Community
Bonds
Loans from
Financial
Institution

Community
Loan Funds
Community
Banks
Government
Loan
Programs

For Profit

For Profit
CDVCs
Social Venture
Capital Orgs
Angel
Investment
networks

19

Non Profit

Non-profit
CDVCs (e.g.
SCP,
Community
Ownership
Solutions)
Venture
Philanthropists

What Could be: Resulting Financial Options

The resulting financial vehicles could help to create a more dynamic capital market
that provides financing alternatives which exhibit a variety of investment
characteristics and financial / social motivations
Loan Financing
For Profit

Investor
Motivation
Areas of
Focus

Community Service
Profit

Non-profit
organizations
Community
businesses
Social enterprises

Source of
Capital
Investment
Stage
Form of ROI
Fund
Sustainability

Equity Financing

Non Profit

For Profit

Community
Development
Political Policy

ROI with a heart

Business in
economically
depressed areas

Environment
Medical
Education

Financial Institutions
Financial Services
customers

Government
Community Donors

Mid-stage
Growth

Early stage
Growth

Interest Charges
Often subsidized by
other business units
Social Returns

Charitable tax receipts

Some interest payment
Social Returns

Principle Repayment
Marketing

Principle Repayment
Fundraising
20

Non Profit

Community Economic
Development

Economically
depressed regions

Individual investors
Some institutional
Investors

Individual investors
Governments
Financial service orgs.

Mid-stage
Growth

Mid-stage
Growth

Capital appreciation
Competitive with other
investments
Social Returns

Tax relief
Small capital
appreciation
Social Returns

New fund

Ongoing Fundraising

Context and Introduction

The Need for a Social Capital Market in Canada

Looking for Opportunities: Parallels in the Private Sector

Conclusions and Next Steps for SCP

21

Drawing on Private Sector Learnings

While the Social Capital Market in Canada remains underdeveloped, several unique
structures do exist in the private sector that take creative advantage of existing tax
laws and regulations:

We hypothesized that some of the unique structures used in the private sector
could be used to create more investment in social initiatives

We decided that one of the best ways to study different structures was to go to
the very organizations that have been creating unique capital structures in the
for-profit sector for decades
We approached RBC Capital markets to request assistance from their
corporate finance division to research potential parrellels between the social
capital markets and the private sector capital markets
RBC generously donated the time of 3 of their team members

Together RBC and Social Capital Partners undertook an initial four month
research project

22

Overview of the RBC Research

The main thrust of the research was to look into tax driven capital structures that are
used in the for-profit sector

Each of these structures took advantage of tax breaks offered by various

governments

These tax breaks tended to be used to promote specific industries

Other tax breaks were associated with particular legal incorporation structures

The industry specific tax driven structures are most often used to fund companies in
the for-profit sector that are unable to generate typical market returns

These organizations are in industries such as film, sports, and mining exploration

The tax breaks that are specific to certain legal structures tended to be used to attract
investment from certain types of investors

These structures included Limited Partnerships which attract high net worth
investors looking for tax losses and Labour Sponsored Investment Funds which
attempt to attract small investors to the venture capital market

23

Overview of Social Investing Models

The key premise of our work with RBC was that there could be a way to apply tax
laws such that investors could invest in organizations that provide strong social
returns while receiving financial returns closer to those found in typical investments
Economic Returns / Risk Profile

High

Low

High

Charitable
Foundations

Social Returns

Community
Loan
Programs

CDVCs

Socially
Responsible
VCs

Environmen
t / R&D
Funds

None

Labour
Sponsore
d Fund

24

Sector /
Regional
Focused
LP

Pure
Equity
Investor

Assessment of the Need for Tax Driven Structures

Based on financial models in Canada, the U.S. and internationally, RBC believed that
there may be an opportunity to utilize a structure driven by various tax credits and
deductions to attract incremental financing

Social enterprise and other non-profits are unlikely to generate sufficient

profitability to attract investors on the basis of the economic return alone

Without encouragement such as preferential tax treatment, social initiatives

are unlikely to attract funding beyond what is currently provided through
governments, foundations and corporations

As a result, non-profit organizations would have to benefit from various eligible

tax deductions in order to generate new pools of capital and appeal to new
types of investors

The viability of a proposed structure would be highly dependent not only on

the tax credits available but also on the specific social cause and the potential
for strong social returns
25

Conclusions from the Study

However, despite initial optimism, we discovered that under the current tax regime it
would be difficult, if not impossible, for most social initiatives to utilize tax driven
financial structures to raise new risk capital from a more varied group of funders

The system of tax credits is generally ad hoc and highly variable amongst different
industries and provinces

There is little concerted effort on behalf of governments to encourage non-traditional

investment in social initiatives
The Federal government has used tax incentives to promote investment in other
industry sectors such as film, professional sports, and mining exploration but not
social investment

Some provincial governments have started to use limited tax incentives to generate
investment in CED projects
The ability to use tax credits would be highly dependent on the geography and type of
business and therefore would not likely be the basis for a concerted investment
strategy

Therefore, the opportunity to create unique, tax driven, financial vehicles in Canada
appears very low today given the current tax environment
Facilitation of these financial vehicles would require government commitment to
fostering blended return financing for social initiatives
26

Assessment of Opportunity for Tax Driven Structure

The target market for such a vehicle will depend on the magnitude of the eligible tax
deductions provided
Current Charitable
Donations Model
Tax-Deductions
Provided

Charitable donations eligible to

be deducted in computing
taxable income

46% tax savings (assumed tax

rate) in year of donation

Tax-Driven Model

Deductions provided through combination of flow-through of

operating losses and business/regional specific tax credits

46% tax savings as operating losses are realized (timing uncertain)

plus other available tax credits
Alternative B: Investor TaxDriven Model

Alternative A: Donor Tax-Driven

Model
Tax Credits < 100% (but 46%)

Target Market

Investment/
Donation
Considerations

Individuals, businesses, and

government interested in funding
non-profit/charitable
organizations

Individuals, businesses, and

government interested in
funding non-profit/charitable
organizations

Tax Credits > 100%

Individuals interested in realizing

additional tax deductions
combined with potential upside
from participation in underlying
businesses

Social return as secondary

consideration

Specific social cause

Specific social cause

Reputation/brand and track

record of specific charitable
organization

Reputation/brand and track

record of specific charitable
organization

Economic returns (magnitude,

timing and certainty)

Reputation/brand and track

record of investment manager

Efficiency of deriving social

benefit with funding provided

Nature of underlying
investments

Efficiency of deriving social

benefit with funding provided
27

Summary of Investment Features

Several structures could potentially offer tax advantaged social investment
Summary

Structural Feature

Opportunity to increase after-tax dollars through a tax deferral

mechanism by allowing the investor to keep significant portion
of taxes payable, which can be invested for up to 10 years at a
minimal return in order to fund the future tax liability

Repayment of 100% of investors original investment at

termination provided by a forward agreement with a financial
institution with additional upside potential provided through
the underlying portfolio of investments

Investor can deduct 100% of operating losses renounced to

the Partnership, resulting in potential income tax savings of up
to 46%

Downside protection is provided through the reduction of

money-at-risk for the investor

Investors are allowed to apply various different tax credits in

calculating income tax payable assuming that the underlying
businesses are targeted by the Tax Act in supporting growth
in such industries (i.e. SR&ED, CRCE, LSIF)

O/P

Utilize specific tax credits available to certain institutions (i.e.

banks) and pass through these benefits to investors

Tax Deferral

Principal Protection

Tax Deductions

Investment Tax
Credits

Institution-Specific
Tax Credits

Applicability to SCP

28

Application of Investment Features to SCP

Structural Feature

Principal
Protection

Summary

Advantages / Disadvantages

SCP establishes an investment

trust that invests the proceeds
raised in a fixed portfolio of
equity securities and a managed
portfolio comprised of the
targeted businesses of SCP
Approximately 50% of the
proceeds raised by SCP would
be invested in a fixed portfolio of
equity securities and the balance
would be invested in the
managed portfolio

Investors have 100% capital

protection and have additional
upside through ownership of the
underlying businesses

Investment trust maximizes the

tax efficiency by ensuring that
any realization of income /
distribution is characterized as
capital gain / return of capital

The major disadvantage is that

only 50% of the actual proceeds
raised would be available for
investing
in
the
targeted
businesses

A chartered bank would enter

into a forward agreement to
purchase the fixed portfolio,
offering investors 100% capital
protection

SCP establishes a limited

partnership that invests in the
targeted businesses

Investors may realize upside

potential through ownership of
the underlying businesses

Flow through of operating

losses of underlying businesses
results in a potential 46%
income tax saving for investors

However, any realization of

income / distributions from the
Partnership will be characterized
as income and taxed at the
investors marginal tax rate

Tax Deductions

29

Investor Demand

High

Medium

Application of Investment Features to SCP

Structural Feature

Summary

LSIF Tax Credit

Tax Credits
Available to
Certain
Investors

Advantages / Disadvantages

The Fund is registered as a

labour-sponsored
venture
capital corporation under the
Income Tax Act (Canada) [the
Tax Act] and as a laboursponsored
investment fund corporation
under the Community Small
Business Investment Funds Act,
1997 (Ontario) [the Ontario
Act].

The Fund is taxable as a mutual

fund corporation under the Tax
Act and Corporations Tax Act
(Ontario). The Tax Act and
Ontario Act both allow an
individual to invest in Class A
Shares of the Fund and to obtain
a personal income tax credit.

For instance, a chartered bank

can act as an intermediary in the
investment
process
and
captures the incremental capital
tax benefit entitled to banks from
investing in small businesses
and flows these benefits through
to the investor
30

Investors have 100% capital

protection and have additional
upside through ownership of the
underlying businesses

Investment trust maximizes the

tax efficiency by ensuring that
any realization of income /
distribution is characterized as
capital gain / return of capital

The major disadvantage is that

only 50% of the actual proceeds
raised would be available for
investing
in
the
targeted
businesses

Investors may realize upside

potential through ownership of
the underlying businesses

However, any realization of

income / distributions from the
Partnership will be characterized
as income and taxed at the
investors marginal tax rate

Investor Demand

High

Medium

Context and Introduction

The Need for a Social Capital Market in Canada

Looking for Opportunities: Parallels in the Private Sector

Conclusions and Next Steps for SCP

31

What Needs to Happen?

If the Canadian regulatory environment does not afford opportunity to create social
investment structures then what steps should be taken to create more risk capital?
1.

2.

3.

Creative Thinking from Financing Organizations

Traditional philanthropists must consider new ways of encouraging innovation and risk taking

We need to re-think our focus on funding narrowly defined programs and think of ways to invest
behind the most innovative social agencies and entrepreneurs

Considerable learning can be gleaned from the Venture Philanthropy movement

Creative Thinking from Members of Individual Social Initiatives

Leaders in social organizations must change the value proposition that they offer to funders

We must move away from asking for funding because it is the right or nice thing to do

We must move toward a model where funders are provided with a clear value proposition based
on innovation and the creation of real social change

Consideration should be given, where appropriate, to the applicability of revenue generating

social enterprise as a way of creating sustainability

Commitment from Policy Makers

Canada needs to create an environment that encourages the social capital market to flourish

Regulatory and tax laws should promote the creation of new financing organizations and vehicles
the expand the amount and the types of capital available to social initiatives

Without government commitment to creating this environment, efforts of individual philanthropists

and social entrepreneurs are likely to remain isolated and small scale
32

SCPs Role
In response to these broad suggestions, SCP feels that it has an active role to play
within its own area of expertise to create new examples of risk capital for social
initiatives

SCP has developed skills and expertise in the area of social enterprise
We will continue to play in this space with the goal of creating risk capital for these
types of organizations
We will do this by trying to create new investment vehicles and value propositions for
social enterprises

We do not see these enterprises as the panacea for all social issues
Where appropriate we help others create alternative and entrepreneurial approaches
for other types of social initiatives
Where appropriate, we will use our learnings to help others in their efforts to
advocate for changes to tax and regulatory policy that might help to create a more
buoyant social capital market in Canada

33

Creating New Value Propositions for Social Enterprise Investors

In our view, one of the most crucial ways to create risk capital for social enterprises
is to demonstrate potential new value propositions to philanthropists and other
would-be social investors
Current Value Proposition

Investor
Provides

Investor
Receives

Alternative Value Proposition

A grant for a specific program of a

registered charity
Perhaps some ongoing intellectual
support

Money to be provided as loans or equity

investments in social enterprises
Perhaps some ongoing intellectual
support

A tax receipt that amounts to $.46 or

less on the dollar
Recognition by the charity of the
donation
Anecdotal reports on how the money is
being used
Requests for further money to sustain
the program

The principle is returned within 5-7

years
In addition to the principle a modest
return may be provided (perhaps 3-5%)
Specific social and financial return on
investment reports
Recognition by the social enterprise of
the investment
The Ability to re-invest the money in
other social initiatives
A self-sustaining social enterprise

34

The Social Capital Market: Where SCP Will Play

Grant
Funding

Social Capital Partners

Social Service

Investment
Funding

Social Enterprise

Either on its own or through its partnerships SCP will offer a range of funding options
These options will be tailored to fit with the needs these businesses
These funding options will include both granting and for-profit vehicles

SCP will work with social enterprises that fall close to, but on either side of the breakeven point

In all instances these enterprises will strive for breakeven over time
The speed at which they reach breakeven and the extent to which they are expected to exceed
it will depend on the type of investment provided

The vehicles will also attempt to meet the return on investment requirements of SCPs investors
However, the purpose of these vehicles will not be to make typical venture capital returns
Rather, SCP will look to create value propositions that are an improvement on the traditional tax
receipt
In some instances this will mean generating returns greater than breakeven

Throughout all of our work we will continue to look at the bigger picture
We will track blended returns that include both social and financial variables
35

Illustrative

Financing Options for Social Enterprise

The choice of funding vehicle will depend on the potential for returns which are, in
turn, related to the stage and type of business
Growth

Equity / Enhanced
Equity

Subordinated /
Enhanced Debt

Stage
Early/ Mid

Low Interest
Loans

Grants

Start-up
Social Enterprise
(50% 103%)

Enterprise Type /
Potential Return
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CED Enterprise
(103% plus)

How Might SCP Structure Itself to Create these Value Propositions?

SCP may restructure itself to create a range of venture capital vehicles for financing
social enterprise in Canada.
Social Venture Foundation

Social Venture Fund

SCP: Fund Manager

Deal Characteristics
C$2M fund
Social enterprises started by
charitable organizations (qualified
donees)
Funding in the form of grants or very
low interest loans
Enterprises strive for break-even
ROI in the form of a tax return
SROI measured around employment
and sustainable livelihoods

Deal Characteristics
C$5M fund
For profit or nonprofit social
enterprises (non-qualified donees)
Funding in the form of equity or
subordinated debt instruments
Enterprises strive for limited profits
ROI in the 3-5% range for investors
SROI measured around
employment and sustainable
livelihoods
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Necessary Conditions for Going Forward

Before SCP moves ahead with a strategy to expand its work with social enterprises
and CED businesses, the following conditions will have to be in place
1. Lead Deals

SCP will have identified 2 3 lead deals that could be shown to potential
investors in a fund as examples of good CED investments

These companies would have a demonstrable ability to generate returns in the 3

10% range while creating employment in an community that has experienced
some form of economic dislocation

2. Aligned Investor Group

SCP will have identified a group of investors who are aligned with the objectives
of the fund and willing to be involved in a pilot fund

These investors would have to be willing to invest a combined total of at least

C$3M

3. Regional Partners

In order to effectively invest in multiple geographies across multiple industries

SCP will have to create a network of strong co-investors and partners

Partners will help create deal flow in specific geographies and perform some onthe-ground management duties for mutual investments
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Questions That SCP Will Answer With the First Fund

Through our work with social enterprises SCP hopes to answer questions that will
help lead the way forward to creating more social capital vehicles

Can investors be convinced that there may be advantage to viewing some

investments through both a social and financial lens?

Under what conditions and using what value propositions?

What types of investors are most likely to be interested?

What types of investment vehicles should be created to allow investors to

consider investment in social initiatives as a viable use of capital?

Are there specific investment characteristics that make the most sense for
these types of vehicles from a risk/return standpoint?
Assuming that Social Enterprises and CED businesses are the best
investment types, what are some of the key success factors for making
these organizations work effectively?

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