Alongside more traditional charities, a new generation of social purpose organisations has emerged, and the social entrepreneurs behind them are using an ever wider spectrum of business models and legal forms to build sustainable high impact entities. This means that the way philanthropic capital is deployed also needs to evolve to better support these organisations to unlock their full potential.
At Shift we’re part of this movement. We design products and build social ventures to help solve social problems, which we do either by ourselves or in partnership with other Charities. We believe that raising equity investment from 3rd party investors can play a crucial role to fund new innovation because it provides a vital source of risk-hungry capital appropriate to the early stage, and experimental, product development activities needed to deliver market traction. In the commercial world the investor trade off for the higher levels of risk at this early stage are the potential for financial return, with the understanding that for every ten investments investors make, five will return nothing, four will do ok, and one will be a home-run.
However, a lack of clarity as to how existing UK regulations should be interpreted is restricting the flow of capital from charitable foundations, who are nervous about embracing more innovative models of funding.
We’ve come up against this challenge first hand here at Shift. We have designed an innovative new structure, establishing a non-incorporated charitable trust, that mirrors the same objects as our existing Charity, through which new ventures can be incorporated that qualify for the tax reliefs that high-net-worth investors expect when deploying early stage equity capital. We launched our first venture, BfB Labs, through this new structure in 2016, and have obtained approval from HMRC.
Unfortunately, after 2 years of discussion with the Charities Commission, we’ve reached an impasse whereby they are refusing to register our new trust as a charity unless we significantly restrict the potential returns of investors into new ventures it establishes, which the commission deems as unacceptable private benefit from charitable activity. Doing this would nullify the fundamental purpose of the structure, which was explicitly designed to maximise the potential for investor returns, and is therefore unacceptable to us. We believe that there remains a strong case for our new trust becoming a charity, and it is only the progressive nature of the structure, in the face of the inherently risk-averse approach of the Charities Commission, that mean we are unable to continue.
We think there is a system wide need for a change in approach if impact investing is going to be established in the mainstream to help deliver on charitable activities. It turns out that Holly Piper at CAF Venturesome and David Bartram and UnLtd. felt the same way! Holly, David and I have over the last few months engaged our colleagues in philanthropic capital to get their perspectives on the challenge and unearth existing best practice as to how they are overcoming it.
It’s exciting to have discovered a number of charitable foundations are developing interesting and innovative approaches to this challenge, building robust and defendable models for making social investments, despite the ongoing regulatory uncertainty. We’ve brought our initial findings together in a discussion paper and are looking forward to further engaging across the sector in the coming months. By identifying the challenge, and highlighting examples of how some philanthropic funders are addressing it, we are leading a broader conversation on what can be done to encourage more social investments using philanthropic capital.