Research shatters the myth that social enterprises are more likely to fail than traditional start ups
The following article is by Abbie Rumbold and is taken from The Guardian
There is a lazy but persistent myth that social enterprises should be viewed with suspicion as deliverers of public services or vehicles for new investment because they are inherently unstable, and risky and on the verge of bankruptcy.
Just how pervasive this myth is was brought home to me when I was negotiating, on behalf of a social enterprise client, with a large private sector provider of public services. The company wanted copious payment guarantees in the contract, because, “social enterprises go bust all the time and we have to protect ourselves”.
My initial reaction was that this was a ridiculous assertion for which there is no hard evidence. One very successful social enterprise, the London Early Years Foundation, has been around for more than 100 years, for example, and now boasts a trading income of £10.4m. But I wanted to test the “conventional wisdom” that social enterprises are innately more precarious business ventures than their private sector equivalents. So I asked Professor Simon Denny, director of enterprise, development and social impact at Northampton University, to compare the longevity of FTSE 100 companies and the top social ventures.
Denny’s research looked at the survival rates, for the period from 1984 until 2014, of the 100 top social enterprises and trading charities in comparison with the top 100 PLCs. He found that the social ventures were not more likely than the PLCs to cease operating or fail to repay investments. In fact, overall, 41% of these ‘competitive third sector organisations’ have endured, compared with 33% of the PLCs.
When you take out the 40 trading charities in the list, and just look at the remaining 60 social enterprises, there was a small but not significant difference between their percentage survivability and that of the PLCS – 31.6% and 33% respectively.
No one is claiming that being a social enterprise or trading charity is plain sailing. There will always be those that fail. But this research shows that giving social ventures tougher contracts than traditional businesses on the grounds that they are inherently riskier, is unjustified and unfair.
The research also found that PLCs are significantly more likely to be acquired by other companies than social enterprises. If a company is bought out, it can affect the focus of the organisation and its ability to fulfil a public sector contract. Social enterprises are far less likely to merge or be acquired by a competitor. It does happen sometimes, but it’s much less common. In that sense, social enterprises are significantly less risky as deliverers of public services.
I hope public sector commissioners will examine this research and lose some of their nervousness about commissioning from social enterprises. This nervousness is reflected in qualification criteria that demand huge financial reserves, thus excluding many social enterprises. As a National Audit Office report last autumn showed, government relies far too much on four big private sector suppliers to deliver public services. This research demonstrates that there are reasons why there should be much more diversity among providers.
Abbie Rumbold is a partner in Bates Wells Braithwaites’s Charity and Social Enterprise Department.