Insights from the two year Indigenous Social Enterprise Fund pilot provide lessons about supporting Indigenous social enterprises to grow.

The Indigenous Social Enterprise Fund (ISEF) was established to support the development of Indigenous social enterprises to scale and become sustainable. A $1 million, two-year pilot, the ISEF offered a combination of a grant and a flexible, interest-free loan. The pilot was funded by Indigenous Business Australia (IBA) and managed by Social Ventures Australia (SVA). Reconciliation Australia and PwC were key partners.

ISEF’s key objectives were:

• To fill a capital gap in the market between grant funding and commercial capital^[1]
• To test the ISEF pilot product and model and share learnings.

At the end of the pilot, ISEF had been approached by 165 enterprises, worked closely with 15 applicants, approved two investments, and deployed funds into one enterprise (see box).

Through reflection on the ISEF experience it became apparent that assisting the Indigenous social enterprise sector to grow requires a specific type of product offering that provides: focused capacity development to fill the skills gap; and a more socially-oriented, flexible, patient capital^[2] that offers more risk-tolerance and longer-term horizons for the support.

We have broken this down further into some specific lessons and want to share these with others seeking to support Indigenous social innovations and enterprises.

1. DO provide early-stage, patient capital

ISEF was established to provide a bridge from grant funding into commercial capital; the Social Enterprise Development and Investment Funds, commercial banks’ Indigenous divisions, and IBA had struggled to find Indigenous social enterprises that were investment-ready for their capital offering.

ISEF unearthed a large number of indigenous enterprises with an appetite to move away from relying on grants and a desire for commercial discipline. Ninety-three percent of the 165 organisations enquiring were open to the interest-free loan. A survey of the enquiries indicated that the hybrid product offering – of the grant and loan combination – was the most attractive feature of ISEF. Of the 15 applicants, 80% had not taken a loan before. ISEF was important to them to develop a credit history and evidence their ability to function commercially.

Despite ISEF’s goal, enterprises were unable to meet the commercial lending criteria applied to the loan component of ISEF and the responsible lending obligations it required. There was a mismatch with the capacity of the social enterprises to meet those commercial loan requirements and the due diligence process. This emphasises the need for risk-tolerant, early-stage capital in the form of a combination of grants, equity and patient debt, offered by investors that can apply a non-commercial framework.

2. DO provide pre-investment and ongoing support

When ISEF was established, it committed to provide some business and post-investment support to applicants to strengthen their business. As ISEF was rolled-out, however, it became clear that a very small number of the ISEF enquiries – only 16% – were categorised as medium or high investment-ready when considered against the ISEF investment criteria (see Figure 1).

Based on this, and an assessment of market maturity, ISEF shifted to more intensive pre-investment support, to improve applicants’ investment propositions and likelihood of accessing ISEF funds. This included support to better the proposition and business model, strengthen financial forecasts and reporting, access legal support, engage pro-bono networks and strengthen governance and management frameworks.

Enterprises valued the outcomes of these interactions: linkage to networks; review of, and reassurance about, their business model; and injection of new ideas – even though the interactions did not result in more successful ISEF applications. This kind of support can result in a richer pipeline; a number of enquirers returned to ISEF up to a year after first contact armed with a stronger proposition. This indicated the potential opportunity for funders and investors to seed these ideas for the future.

3. DO build relationships as a way to close the gap between actual and perceived risk

The industries Indigenous social enterprises operate in are diverse, with arts/creative (19% of enquiries), tourism (15%), retail/hospitality (12%) and education/training (11%) leading the numbers of enquiries.

The interest in ISEF was spread across states and territories (see Figure 2).

Forty-eight per cent of enquiries were outer-regional or more remote^[3], versus 33% of actual applicants (see Figure 3). These more remote enterprises face different challenges to those in urban locations, including restricted access to networks and business support, staff shortages, and isolation. Appreciation of the context in which an enterprise operates is therefore particularly important to understanding its business model.

The diversity of the ISEs and the particular social and physical environment the social enterprises operate in cannot always be easily understood through a business plan. This means potential funders/investors may be unclear about the enterprise’s business model and focus. Take the opportunity to visit the enterprise and build relationships with applicants.

“The most positive thing was that ISEF staff actually came to visit our regional operations fairly soon after being in contact.”

Further, developing personal relationships with people in the enterprise is valuable both in gathering sensitive information, and in enhancing a due diligence process that traditionally relies solely on formal documentation. Non-urban enterprises in particular place a high value on peripheral support that can be better targeted if the enterprise is well-understood. Overall, a relationship-oriented approach can assist in closing the gap between actual and perceived risk.

“The most positive thing was that ISEF staff actually came to visit our regional operations fairly soon after being in contact,” said one CEO from a retail enterprise in Victoria.

4. DON’T create barriers through documentation

A requirement for detailed documentation can be a barrier to small and medium Indigenous social enterprises as they may not have sufficient time or resources to produce all of the required documents. Fifty-seven per cent of ISEF enquirers were enterprises with less than 10 staff (see Figure 4). The absence of documentation, however, does not necessarily mean the absence of good investment propositions.

We have become aware of anecdotal evidence of what can be termed ‘business plan fatigue’ in the Indigenous sector. One traditional owner in Victoria said:

“Indigenous enterprises probably have shelves and shelves of business plans and feasibility studies gathering dust.”

Supporting the building and articulation of the business model or plan, and new thinking in the enterprise through regular interaction can be a good use of due-diligence time to help strengthen the investment proposition. Other process innovations that ISEF introduced to lower the barriers were peer evaluation, in-person due diligence and using non-traditional documentation.

5. DON’T use jargon

Financial and investment jargon can be a deterant to organisations applying and good social purpose investment opportunities potentially being missed. ISEF found it important to refine its language and financial guidelines to ensure that good ideas and propositions were not put off by dense financial terminology.

When financial terms are used, however, clear definitions are necessary. For instance the term ‘patient capital’ can mean a range of things: interest-free loans, inclusive of repayment holidays, and may also include long-term horizons, focused on social returns, including a commercial return, and more. Having a shared understanding on the definition of specific terms is important from the outset to avoid misunderstandings later.

Finally, it is important to think about how you communicate when using financial terminology. ISEF’s experience was that explanations of financial information was more effectively communicated verbally, rather than relying solely on detailed written information.

6. DO acknowledge strengths and be willing to build capacity

Funders and investors need to invest in capacity-building of the leadership and the business skills within enterprises so that they are enabled to develop their commercial potential over a period of time.

ISEF applicants had limited financial capacity in-house. Further, there was very little resourcing available for implementation of business plans. Enterprises recognised the need to develop their business skills in-house and to develop their financial capacity – for example, nine out of the fifteen applicants included the salary of a business manager or business development manager with the intent of making the position self-sustaining over time.

… invest in an Indigenous social enterprise in a way that enables and grows their leadership capacity.

What is important to consider is how to invest in an Indigenous social enterprise in a way that enables and grows their leadership capacity. The capability gap is partly because 55 per cent of enquiries were from community-based organisations that were generally established to fulfil a social purpose. Commercial skills were needed and developed with the introduction of a business model to support or scale their social impact. The CEOs of these social enterprises typically have strong community obligations that cross a wide range of economic, social and community complexities. As a result, there needs to be careful consideration of what capacity-building should look like in this context to enable leadership, rather than CEOs feeling like they had additional ‘hoops to jump through’, a term commonly heard through ISEF.

7. DO value social returns

Indigenous social enterprises are endeavouring to address some of the most complex and persistent social issues faced in Australia. They deal with ever-changing government policy, acute and complex economic and social issues, and a cultural landscape that is unique and not clearly understood.

Further, social investment in Indigenous social enterprises can generate significant social returns in Indigenous leadership, employment, and cultural engagement for Australia. For example:  Indigenous run businesses play an important role in increasing human capital by providing training, employment opportunities and creating leadership pathways for indigenous staff. Indigenous businesses are about 100 times more likely to employ First Australians than any other business^[4].

 Capital then, and its purpose, needs to be matched to the sector.

The main areas of social impact that ISEF applicants addressed were employment (47%), training (13%), culture (13%) and health (7%). It was estimated that the 12 strongest applicants (if each was to receive an unrestricted grant or loan), over five years, could have a combined impact that included:

• 19 permanent roles
• 665 more stable contract roles
• 215 trainee roles
• 28,000 people more culturally aware

ISEF observed a frustration amongst indigenous enterprises that their current and potential capacity to generate social impact is not sufficiently recognised and valued.

There is, however, a desire to become more commercially robust. Capital then, and its purpose, needs to be matched to the sector. Namely, to reward and increase this social return, as well as supporting the development of robust enterprises that can become financially viable over time.

What the sector needs

The ISEF pilot taught us that there are a large number of Indigenous social enterprises who are keen to grow. The majority of the ISEF enquiries, however, were at early stages of development which meant they were not suited to the investment criteria and were not in a position to provide the supporting data required to access ISEF support. Such support was more suited to later-stage social enterprises.

ISEF taught us some valuable lessons that will hopefully assist the sector to grow. An appetite for flexible and innovative capital is not sufficient. At this time a different type of product offering is required that provides capability development to fill the skills gap; a relationship-oriented approach to strengthen the pipeline of applicants and increase the number of enterprises capable of accessing the financial offering; and more socially-oriented, flexible, patient capital that offers more risk-tolerance, and longer-term horizons. The sector clearly needs more patient capital offerings in the form of equity, non-commercial debt, and venture philanthropy to catalyse Indigenous social innovation and enterprises.

Read the full report: Indigenous Social Enterprise Fund Lessons Learned.

 About the authors

Indu Balachandran was SVA’s development manager for ISEF. Indu’s previous work spanned 10 years in community development, and commercial sector experience.

Leah Armstrong was a member of the Indigenous Advisory Group for ISEF which provided guidance to the pilot. Previously CEO of Reconciliation Australia, Leah is currently Chairperson, Supply Nation; and a Member of the Prime Minister Indigenous Advisory Council as well as holding other prominent roles in the Indigenous sector.

Endnotes

[1] ISEF was seeking to deploy investments of between $100,000 and $300,000, with a minimum 50% loan component

[2] For this pilot, the patient capital loan component was framed from a more commercial perspective whereby enterprises were given access to interest-free loan with flexible repayment terms.

[3] Census definition

[4] Forrest Review: Creating Parity, 2014