The SCP Business Model

August 2003

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The Innovation of Social Enterprise

How SCP Makes it Work

Next Steps for SCP

Early Evidence of Success

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What is a Social Enterprise?

1. 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

2. 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

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

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Types of Social Enterprises

1. 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

2. 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

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

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Where is the Innovation? What makes SCP’s social enterprise model innovative is not the individual strengths

of the business model or the social service that is provided

Business Mission Social Mission

SCP portfolio companies tend to operate in very traditional markets

Several examples of similar businesses exist in the regular private sector

In absence of a social mission and with good management these businesses could make profit and create a return for investors

On the surface, SCP Portfolio organizations may have no innate competitive advantage over other market players

SCP portfolio companies strive to create skill and job training opportunities

Several examples of programs that strive to create these opportunities exist in the nonprofit sector

With good management these nonprofits can help those who access the programs

Training capabilities of management in SCP Portfolio organizations are not inherently better than those running charitable programs

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Where is the Innovation? What makes the model innovative is the way that these two components of the

social enterprise mutually reinforce one another

The social mission creates sources of potential competitive advantage for the business:

― Provides access to preferential sales channels

― Provides access to preferential terms from suppliers

― Provides a strong marketing and branding opportunities with customers

The business strengthens the organization’s ability to reach its social goals :

― Provides individuals with a real income rather than a small stipend from a training program

― Creates real-world working experience by giving a paying job with real responsibility so people can learn by doing

― Provides work experience that can be put on a resume for future employers

― Provides income to pay for the social mission so that dependence on external funding is reduced or eliminated

― Provides the self-esteem and pride that most people get from having a “real” job rather than a handout

Business Mission Social Mission

Reinforcement

The innovation is in the ability to create strong social outcomes for a disadvantaged population in the context of a sustainable, competitive business

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The Innovation of Social Enterprise

How SCP Makes it Work

Next Steps for SCP

Early Evidence of Success

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The Challenge of Social Enterprise

The stresses on the business as a result of employing members of a community who face significant employment barriers will naturally pull the business away from profitability

This phenomenon is particularly evident in many social enterprises that are run within charities to serve very challenged populations

We have investigated several such enterprises that cover 50% or less of their costs through revenue generation

The remaining funds are raised through grants (usually government)

Most businesses that SCP invests in could, under normal circumstances, be run profitably

There are hundreds of examples of renovations companies, packaging companies and retailers that generate returns for shareholders

Typical Social Enterprise

Typical Private Enterprise

Break Even Point

Typically, social enterprises in Canada are organized as training programs where grants cover the vast majority of the expenses and business revenue represents a small portion of the total receipts of the organization

Illustrative

Tendency Pure Social

Return Pure Financial

Return

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SCP’s Model: What We Bring to the Table

Management team has 30 years of combined experience in the private sector in a variety of sectors Founder brings extensive experience as an entrepreneur and CEO Operational experience with 3 portfolio organizations and strategy work with several other social enterprises

not in the portfolio Partnership with International strategy consulting firm The Monitor Group to provide case teams and expertise

to work with portfolio organizations

SCP tries to change the traditional model by bringing resources and expertise to help overcome some of the key challenges inherent in a social enterprise

One of only a few organizations in Canada providing risk capital for social initiatives One of only a few organizations in Canada providing non-grant financing through program related investments

in a foundation Backed by C$10MM in initial funding through the Bealight Foundation and significant additional commitments

made by the founder for a social venture fund Close relationships with regional co-funders such as Community Ownership Solutions (COS) in Winnipeg

Business Experience/Expertise

Social Enterprise Experience/Expertise

Appropriate Capital

Extensive research into social enterprises in both Canada and the United States One of only a small group of organizations in Canada with hands-on experience in the field of social enterprise

development Management team has direct experience in the areas of social mission strategy, social entrepreneurship, and

community economic development Hands-on experience developing social support infrastructure for various target populations within working

social enterprises One of only a few organizations in Canada adapting the Social Return on Investment framework for tracking

social outcomes

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SCP’s Model: Results of SCP’s Involvement

Break Even Point

By adding expertise and appropriate capital SCP can help its portfolio companies overcome the natural effects of the social mission on the financial sustainability of the business

Further benefit is created by strategically leveraging the social mission to generate competitive advantages for the business either through improved channel access, improved cost structures or enhancements to marketing

Even with these aspects of added value we understand that the business may still not reach the level of profitability that could be gained in a more traditional for-profit business in the same sector

Our belief is that these businesses can at least break-even and, in some instances, generate small (<10%) returns to investors

SCP Portfolio Org

The result is that with the help of SCP, portfolio organizations can strive for financial self sufficiency while still accomplishing the social mission

SCP will only work with organizations committed to reaching this goal

Illustrative

Typical Social Enterprise

SCP Counterbalance Typical Private Enterprise

Pure Social Return

Pure Financial Return

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The Innovation of Social Enterprise

How SCP Makes it Work

Early Evidence of Success

Next Steps for SCP

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Real Life Examples SCP has put its business model to work with its initial investments and is beginning to

see results that indicate that the concept can work

Description

SCP Investment

SCP Value Added

Contract packaging company located in London Ontario

Began as a government sponsored workshop program within a psychiatric hospital but was taken independent by the current CEO in the early 1990s

Was successful in bringing on several private sector clients and reducing government dependency however remained financially unstable

Employs a variety of low income individuals from the London area

Pivotal Services Inner City Renovations

Start-up home renovations company in Winnipeg Manitoba

Inspired by a workshop program run by a local nonprofit Created as a joint venture of several nonprofit housing

corporations to renovate run-down housing stocks in the inner city

Employs low-income inner city residents, most of whom are Aboriginal Canadians

Goal is to become employee owned over time

$200,000 loan Funded mostly working capital needs and small

capital investments Allowed for the recruitment of professional

management and improvements in operating efficiency

$30,000 in grant equity and $50,000 in loans Co-invested with local organization called

Community Ownership Solutions Funded all start-up costs and operating losses

during the first year of operations

Access to a Monitor case team which provided advice around customer segmentation and marketing, cost accounting, pricing and growth opportunities

Strategic advice around the creation of social support infrastructure and outcome measurement

Advice and research around leveraging the social mission within customer organizations

Provide significant support in the area of financial planning and cash flow management

Assisted in recrafting the business plan for the organization

Strategic advice and active participation in the creation of social support infrastructure and outcome measurement

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Initial Results: Pivotal Services

Employed individuals from a variety of low income backgrounds, many with psychological challenges

Employed approx 30 full time target employees and up to 70 during times of high demand

Management committed to providing supportive and flexible work environment

Social support infrastructure ad hoc and lacked goals or direction

Social Outcomes Continues to employ individuals from a

variety of low income backgrounds including psychiatric survivors

Now employs approximately 55 full time target employees and up to 70 during times of high demand

Management remains committed to creating a supportive environment, however, the social support infrastructure and training has become more sophisticated and consistent

Financial Outcomes

2001 revenue of approximately $1.1MM with less than 15% growth

Organization came close to breakeven some years but experienced significant cash flow problems and had made few reinvestments in the business

Inexperienced management team with significant skills mismatches

2002 revenue of approx. $1.4MM with 25% growth

Enterprise is near the break-even point Management has begun to re-invest in the

business and has fewer cash-flow challenges

New, professional operations management has been added and skills re-aligned

Leveraging Social Mission

Little or no use of the social mission to create competitive advantage for the company

Prior to SCP Involvement With SCP Involvement

Has now identified and is actively pursuing leads that have been generated through the use of the social mission

One year after our initial investment, preliminary evidence suggests that SCP’s approach has been effective in helping to create a financially viable social enterprise

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Initial Results: Inner City Renovations

ICR was a start-up Small home building programs employed

individuals from low income, inner city neighbourhoods

Programs that were the precursor to ICR employed fewer than 10 individuals each

Programs were run by a local nonprofits as charitable work

Social Outcomes Continues to employ low income individuals from inner-city Winnipeg, the majority of whom are aboriginal

Employs approximately 25 full time staff of which approximately 19 are target employees

Social worker has been hired to assist workers with issues unrelated to the job

Training being provided that will lay the groundwork for future employee ownership

Financial Outcomes

ICR as a business did not exist Programs existed to create training opportunities

and revenue figures were irrelevant Organizations relied on ongoing support from the

nonprofit and other funders

2003 revenue of approx. C$1MM Lost money in its first several months of

operations but is expected to be breaking-even month over month by the end of 2003

New, professional production management has been added and skills re-aligned

Leveraging Social Mission

Social mission was the only major value proposition and therefore the organization worked almost exclusively with the nonprofits

Prior to SCP Involvement With SCP Involvement

Continues revenue generating partnership with nonprofit housing corporations

Leveraging social mission to secure contracts with the government and the private sector

Made connections with the Manitoba Government to provide technical training to employees

While it is still very early going at ICR, results here are also beginning to improve

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The Innovation of Social Enterprise

How SCP Makes it Work

Next Steps for SCP

Early Evidence of Success

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Where we Would Like to Go: Making New Investments

We would like to do between 5 and 10 more deals over the course of the next 5 years

We are interested in investing in both for-profit CED businesses and non-profit social enterprises

We believe it is important to be active investors for several reasons― We would like to test the model with different types populations― We would like to test the model with different types of businesses― We would like to create sufficient evidence of the potential synergy

between a business and social mission― We would like to create sufficient expertise around our business model

such that we can consistently add value and improve the chances for success in a social enterprise

Social Capital Partners believes in the concept of learning by doing and therefore feels that it is important to be actively investing

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Where we Would Like to Go: Growing Current Portfolio Companies

While we continue to make new investments we would also like to scale our current portfolio

― We think that in order to employ hundreds, or even thousands of people we will have to create strategies to significantly grow our portfolio organizations

― We see opportunities to expand some of our existing portfolio into new markets where similar social and business opportunities exist

― We see opportunities to expand each of our portfolio organizations within its current market

We believe that we have invested in businesses that are conducive to growth― We see opportunities for each of our current portfolio organizations in

markets beyond their own― In each case we believe that there are other communities where the

business conditions and social need exist to create similar enterprises

We also believe that a key to making this model truly successful will be to see our businesses expand well beyond their initial markets

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Our Challenges: Finding Qualified Deals Challenges remain around finding good qualified deals while using limited

organizational resources, therefore, SCP will focus much of its effort on creating regional partnerships for deal sourcing

Deal Source Examples Level of Investment Likely Quality of Deals

Regional Partnerships

Networking Opportunities

Media

Local CED or financial institutions- VanCity Capital Corp- Aboriginal Financial Institutions- ACOA- Western Economic

Diversification

National Press Local press in areas of interest Targeted publications

- Entrepreneur focused magazines

- Economic development publications

Conferences Speaking engagements Referrals

High Requires face-to-face meetings

and coordination

High Regional partner can pre-

qualify deals to ensure alignment

Medium/Low May require investment in travel

and takes up significant time

Medium/Low May get alignment if events

chosen correctly No pre-qualification of deals

Medium Can outsource media planning

and execution Requires significant financial

resources

Medium/Low Difficult to get alignment Potential for misunderstanding

of criteria and mission No pre-qualification of deals However, significant deal flow

created

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Our Challenges: Financing Vehicles

Foundations and philanthropists are limited in terms of the types of organizations that they can support

- Through grants they can only support charitable organizations

- Only a few venture investments can be made using the capital in a foundation (PRIs)

Therefore, foundations and individual philanthropists have virtually no facility to fund social enterprises that are not charities

Many of the most attractive social enterprises could never be registered as charities by the CCRA

Even when registration is possible, the limitations that come with being a charity does not always facilitate the needs of a double bottom line business

The biggest challenge to our ability to invest in and scale more enterprises is that current methods of financing are insufficient

The quality and depth of data around the financial success of social enterprises is limited but:

- Our hypothesis is that these businesses will be unable to generate returns that would be required by typical venture capital financing vehicles

However, the risk profile of these businesses is likely to be too great for typical bank financing

Therefore, the opportunities are very limited for most social enterprises to receive private sector venture financing

Private Sector Vehicles Philanthropic Vehicles

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Our Challenges: Financing Vehicles

Social Capital Partners invests money that is currently within a foundation started by Bill Young (the Bealight Foundation)

― Therefore, Social Capital Partners is limited in terms of the types of organizations it can fund and has very limited facilities for investing in non-charitable social enterprises.

Through its work, SCP has learned that many, if not most, of the strongest social enterprises are nonprofits or for-profits, not charities

― To date the process of getting funds into these non-charities has proven to be very difficult and has required significant investment of time and money

― Initial investigation into the most fertile sources of new deals has indicated that there will be an ongoing need to invest in non-charities

― Based on our experience to date, it would be improbable that the CCRA would register these business as charitable

― Moreover, in many cases the entrepreneurs would see such registration as highly undesirable

The fact that many social enterprises fall between the regulatory and financial cracks is extremely important and relevant for SCP

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Overcoming the Challenges: New Value Propositions for 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

• A grant for a specific program of a registered charity

• 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

Alternative Value Proposition

• Money to be provided as loans or equity investments in social enterprises

• Perhaps some ongoing intellectual support

• 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

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Overcoming Challenges: New Financing Options for Social Enterprises

Enterprise Type / Potential Return

Stage

Social Enterprise

(50% – 103%)

CED Enterprise

(103% plus)

Growth

Start-up

Early/ Mid

Grants

Equity / Enhanced Equity

Subordinated / Enhanced Debt

Low Interest Loans

With access to new sources of venture funding, SCP can expand its ability to provide appropriate forms of capital to the various forms of social enterprises

Illustrative

Current SCP Investment Capability

Required SCP Investment Capability

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Overcoming Challenges: SCP’s Structure SCP may restructure itself to create a range of venture financing vehicles for 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

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 on-the-ground management duties for mutual investments

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

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Questions That SCP Will Answer With the First Fund

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?

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