053 – Investment as a Service

[00:00:00] David: Hi and welcome to the IDEMS podcast. I’m David Stern and I’m a founding director of IDEMS and I’m really excited to be here with Kate Fleming, our incoming director again. Hi, Kate.

[00:00:19] Kate: Hi, David.

[00:00:21] David: This doesn’t get old for me, I really love having you on board.

[00:00:25] Kate: I love being on board.

[00:00:28] David: So today, the topic I’m wanting to talk about is investment as a service, from a social enterprise perspective. Most people would think you go out and look for investment as, you know, people offering you a service of giving you investment. Whereas I believe, fundamentally, good social enterprises seeking investment are offering a service. And if we can frame it that way, I think it changes the whole way of thinking about investment in different ways.

This is something which was the defining moment at which, as a social entrepreneur, I suddenly felt comfortable. Yeah, of course we need to get investment. But we need to get investment because we’re offering it as a service to others.

[00:01:21] Kate: Okay, so I was going to interrupt you as you were talking and say, interesting. Now, I will ask you to expand on that a bit. What does that mean when you say that?

[00:01:32] David: So the inspiration for this came when I was talking to a professor at Oxford University who had a college that he was part of, and he was on the board of the college, he was quite a senior professor, and you know, he was looking after one of the colleges. And he was talking to me about how difficult it was that as a college they had this endowment. And their endowment needed to basically be able to sustain and run the college activities, it needed to get at least six percent interest a year so that they could do this. But they wanted to do this with responsible investment.

They didn’t want to just put it into places where, yes, they could get a return on their investment. They could sensibly run their activities with the college. They also recognized that their endowment and using that endowment responsibly, so the investment was responsible, was something they cared about.

And this is when it suddenly hit home that actually, many things that I believe in that are doing really wonderful work across the world in different ways, use this endowment model, you know, even in pension funds, of course, and have a similar concept behind them, they need to make investment to survive.

And this is really how the world works. And of course, I was aware of this before. What I hadn’t put into place before then is the role of social enterprise in this where actually a profitable social enterprise who offers investment as a service and gives a fair return on that investment in a stable and safe way is offering a service because the endowment or the group putting in that investment, and it could also be individuals, is doing so, and they’re supporting something they believe in, while getting the service that they require and they need that service. They can’t make a risky investment because they can’t afford to lose their endowment.

[00:03:28] Kate: Yes, I would agree with that. And also there’s so much interest now in divesting from things that are non-sustainable, that are adding to harms in the world and putting funds elsewhere. So yes, I get that completely.

The question I would have for you is does IDEMS feel not risky enough? If you are that pension fund, making that decision.

[00:03:53] David: Not yet.

[00:03:54] Kate: So right, this is a long term, this is a long term aspiration.

[00:03:57] David: And this is not an IDEMS view. You know, I would love IDEMS to get into the position and to be in the position where it could be that fund. And one of the things which I think that changed in my thinking, and this is why it’s such an important concept, is we’ve always discussed the fact that, you know, one of the things which is important is to be able to stop growing. So as an organization, there has to be the opportunity to be at a stage where you say this is the right scale for us to be working at, we don’t need to keep growing.

This exponential continued growth is part of something which is recognised as a problem. So part of our concepts as an organisation since day one were; we have to be stable if we stop growing. Now, of course, my expectation before that moment and that insight moment was that, well, if we use investment to grow, then of course the aim is that once you stop growing, then you stop taking on investment, because you don’t need investment anymore.

Whereas if you think of investment as a service, well actually that’s not necessarily true. Actually, once you’ve stopped growing, that might be exactly when you’re best placed to offer it as a service, because you can now do so in a way which reduces risks. While you’re growing, there is inherent risk involved.

But when you’re not growing, as a social enterprise, offering this stable investment and that’s serving you as an organization and those who invest in you in constructive ways, that could be very interesting. And that’s sort of part of what I’ve never thought of before but once you turn it around it becomes clear.

[00:05:41] Kate: Well I have a question in all that which is, do you ever stop growing? Does a company ever stop growing? I think that if you want to sustain your business, if you want to avoid just being pushed out, even if you’re a social enterprise, even if you’re a charity, you have to continue to grow and evolve. Maybe part of what we should define here is what growth even means. I think growth often gets mapped to simple metrics.

[00:06:09] David: Exactly.

[00:06:10] Kate: Where it’s clear we’re talking about a more complex idea of growth. So let’s dive into that.

[00:06:15] David: Absolutely. And the key point is, what do I mean by growth? Well, the simple metric which is used is turnover growth, let’s say. Does your turnover need to keep growing? I would argue as a charity or as a community interest company, if you are run really well, then you should be able to be successful, even if your turnover shrinks because the need for the certain services that maybe you were offering in the past is no longer there.

I was reading this very recently that Doc Martens, I believe, is going into problems because their shoes last too long.

[00:06:50] Kate: Right.

[00:06:51] David: As a social enterprise, if Doc Martens were a social enterprise, the shoes lasting too long is not a problem, you just adjust your production to meet supply and you’re a profitable business, you’re providing high quality shoes. If you’re trying to maximise profit and turnover, then you reduce the quality of those shoes so they last less long and people have to buy more of them. But that’s not serving your consumers.

[00:07:16] Kate: Yes, I mean, this gets back to incentives, which I think we’ve talked about before. What are the incentives that are set up? I mean, obviously, planned obsolescence and all those ideas around tech are because we need you to buy a new one because that keeps the money coming in. But that’s not good.

But there are, of course, other ways to grow, other ways to innovate. You know, you can see that there is continued value that’s being added in different ways. So I suppose this…

[00:07:43] David: Value can change. And it could be that it becomes smaller. So very concretely, a lot of our work really is work which should be being done by partners in low resource environments, but where the skillsets to do it are not yet widely enough available. And another part of our work is to help build those skill sets in low resource environments. So if we are extremely successful, then we should be doing ourselves out of a job in most of that work.

And that is not a bad thing, that’s a good thing because we then have our partners who now come up and take up that work and take it away from us and out compete us on that work because they don’t need us anymore and they can do this. And that is nothing but good.

[00:08:26] Kate: Yes, and I think this is an argument that’s being made in the charitable sector a lot, where you have these charities where they’ve become like the charity industrial complex, where they’re very committed to continuing the need because otherwise they go away and there are no jobs for the charity workers. When in fact, your goal should be, well, we no longer need to address homelessness in this place because, hey, look, we’ve figured out the solutions and now, you know, it’s managed. And now we can move on to the next thing, or other people can get this funding to solve other problems that have not been solved. So I think it’s that…

[00:08:57] David: Exactly.

[00:08:57] Kate: …view of kind of the ebb and flow and…

[00:09:00] David: And recognizing that exactly as you say, done right, if we can move on, we have to have the structures in place to do that. Now, what I would be arguing is, let’s come back to the key point of what does this relate to with the idea of investment as a service?

Well, actually, if we have a business model, which is, you know, sustained, where we may not be growing, but we may be offering investment, we might not need to offer investment. But this is exactly what Apple has also done. They’ve built up their cash reserves. And they then have the ability to use that in other ways.

And so, actually, your role has evolved. If we got, and it’s not going to happen anytime soon, but if we got to that stage where suddenly we didn’t need to ask for investment, but we did, well, maybe that investment that’s coming in, that can sustain our sort of day to day, and then what we can be doing is helping support others who are coming along, it’s our partners who are trying to build up and follow us, and actually out compete us. Can we support those who are out competing us?

[00:10:12] Kate: It almost becomes a new model of what is now the Venture Studio or something like that, it’s a new concept for how things get developed and it’s much more, it’s not about disruption, it’s about evolution, it’s about shifting to where there’s more need and funding. And seeing very clearly because it relates to something that came before that this is where the need has emerged and there’s already demand there because we’ve already seen it we’re already working with it and now let’s pass the torch on to this other group that’s way better positioned to solve these particular problems.

[00:10:49] David: And this is one of our principles, continually evolving. It’s that evolution. I love the fact that you’ve been the one to bring that out, because normally it’s me who does that. But it’s really hanging on to that idea that we need to accept that it’s continually evolving, we should be continually evolving, the situation is continually evolving, everything is continually evolving. But what we should be always recognizing is that because that evolution is happening, if we know what the services are that we’re offering, as long as we’re profitable enough, it will always be profitable for us to offer the service of investment, social investment. And that will always be something where, you know, this would be good for us and those who invest in us, as long as we are able to continue to evolve in our role.

[00:11:41] Kate: Well, I guess what I’m hearing is that you are imagining holding shares, or whatever it is, in a business as something that is continually evolving. In other words, those shares are actually following the opportunity. Well, I don’t even know what that would look like. I don’t know in business terms what that would look like, but it sounds like it’s a bit saying like, well, right now I bought shares in Apple and if Apple doesn’t do well, the end, I’m going to dump those or whatever, I’ve lost my money.

Whereas this is, well, I guess this is a question. Is the case you’re making that someone is investing in something, which is IDEMS or whatever, but eventually that investment is kind of rolling over into something different, even though it’s still under the auspices of IDEMS.

[00:12:27] David: I guess what I’m sort of advocating is that if you are an endowment where your aims are charitable, and you use the interest really to run your activities, what you need, and this is the same for pension funds, what you need is you need organizations, companies, to invest in, where you just have peace of mind, it’s risk free, although it’s really low risk. But you want to also have peace of mind that your investment is serving the public good, you know, that it’s not doing harm, that it’s not actually leading to these sorts of things.

So my simple claim is that that is a service which is recognised, and there are people out there claiming to offer these services, but a lot of those organisations then just reinvest, and then it’s actually quite a lot of different work in different ways. My claim is if social enterprises of all scales, small, big, whatever, who were just running themselves as businesses. If they were able to offer this service, then that actually is a service which should be in demand.

[00:13:40] Kate: Right. You’re thinking more broadly about a category of investments that get labelled as something. Perhaps there are tax incentives for putting your money into those. There are various ways that you could encourage people.

And I’m sure for the companies, as there are now qualifying factors to make a company access this kind of funding. So it could be the same thing where you have to have hit these, it’s like bond ratings or things like that, there’s some sort of certification of this, this is the company that meets these parameters.

[00:14:12] David: Absolutely.

[00:14:13] Kate: Right. I see what you’re saying. I guess a little bit of what I was digging into was something more complex within that would be like a subset investment issue in there. Whereas you’re really just thinking broadly about reframing a category of…

[00:14:29] David: And this reframing of that category, what’s so interesting to me is, in the UK, we’re very lucky. We actually have some of those regulator structures in place, but they’re not used for this. The Community Interest Company is a very interesting regulation structure, which is, in theory, set up so that it could play that sort of role. Now, of course, there’s elements then, of the whole infrastructure doesn’t exist yet.

But imagine now, let’s say, a larger proportion of companies, big and small, were community interest companies, which meant that they are regulated like a charity in certain ways, but it’s not charitable regulation. They’re a normal company that pays taxes and the rest of that. But they have that regulation.

Imagine that that regulation now is able to add, sort of, qualifiers related to certain things which particular investors would care about. And then imagine that, as you said, your bonds approach type thing, where you have your rating of the bonds, which has the safety in different ways. Now you have that applying to those same organizations.

That is a structure where, as somebody managing the endowment for a college in Oxford, they don’t need to make difficult decisions. You know, you’re making their life easy.

[00:15:49] Kate: I guess the thing I would say to bring us right back to the beginning is that even though the concept might be investment as a service, I imagine the category will need some name that has a better, that better captures what this is, what this category of investment is, so that people can self identify as this is right for us.

[00:16:13] David: But from which end? This is the key thing.

[00:16:16] Kate: Well, obviously on the company end, you’d need to know if you fit into that, to apply or whatever that process is. On the investor end, a lot of these big holdings, like a pension fund, like an endowment fund, they’re obviously run by a small handful of people, but they’re getting a ton of input from their constituents of, well, we don’t want you to invest here, we want you to invest here. So I think it would be both layers where you’d have to educate, well, all layers, you’d have to educate the companies, you’d have to educate the fund managers, you’d have to actually really publicize to the general public, hey, this is something that your pension fund should be investing in if you care about these issues.

[00:16:55] David: And exactly what you’re explaining is exactly why this is a purely theoretical discussion, because there would be so much infrastructural change needed to enable this.

[00:17:04] Kate: I don’t agree. I think there is so much hunger, where I think these are policy decisions. I think these are about, you just create, like, what is EIS/SEIS? Like, that was created. It’s now well established. You just need clear policy that incentivizes certain behaviours, then there’s some reason that you would choose that over some other structure. And I think there, it’s as you’re saying, there is hunger for this.

[00:17:30] David: But even if there is hunger, so let’s say there is hunger.

[00:17:33] Kate: Yeah.

[00:17:34] David: And this is where the key, the key statement I started with was thinking of investment from social enterprise being a service. At this point, social enterprises looking for investment are not thinking of it as a service, they’re thinking of being served.

And this is the thing, almost by definition, the secure investment is exactly by the people who don’t need investment. You know, at the heart of this whole process, as you say, at the moment you could put all that infrastructure in place and there just may not be the social enterprises there with the right structures in place to be able to offer this service.

[00:18:11] Kate: Yeah, I don’t even think there are enough social enterprises right now. That was the main thing I’d just say is like the pipeline or the the suite of businesses that you could potentially invest in. It’s tiny. So to imagine that a massive endowment or pension fund could find enough place to put its money, it’s just not… Right, so in that sense, yes, there would be a lot of shift that would have to happen. So the first incentives would have to be around getting people to found social enterprises, getting them to create them under certain structures.

Although arguably, I mean, I think this is a little bit the B Corp movement, where it’s taking businesses that are already just traditional businesses, but you’re thinking toward how do I run this responsibly? So I imagine there is more stuff happening out there and at larger scale than we’re conceiving of in this conversation.

[00:19:00] David: Well, and I think the key point, and you’ve brought up B Corps, which are fantastic, and there’s a lot of really good stuff, which has happened there. And so there are a lot of people thinking about this but they’re thinking about it from the other way on. And this is why I think this idea is so interesting. What I’m actually saying is, you know, again, this is why it’s a thought experiment…

[00:19:21] Kate: Yes.

[00:19:21] David: The simple thought experiment, and this is where it’s come from for me, is this element that actually, I agree, people trying to do this are doing it in much more sensible ways, which have much better chance of success than actually, you know, through good incentives and all the rest of it, creating B Corps, all of this is great, and I’m really supportive of it.

But the insight which really struck me, let’s say from one day to the other, and this isn’t going to happen of course, but let’s say Apple, with its cash reserves, became a social enterprise. Let’s say it’s now primary focus was social impact. Should it be seeking investment? And my argument is very simply, yes.

Because Apple, it doesn’t need investment, it’s got huge cash reserves. But if it was a social enterprise, and it offered social investment, what a service to the world that would be.

[00:20:15] Kate: Right, right.

[00:20:16] David: That’s the insight. And this is where, yes, this is not a realistic, you know, you’ve taken this into a very pragmatic, and I’m really excited you have, which is exactly correct.

[00:20:29] Kate: Well, and it is, because I think that the core insight that you’ve had, which is completely true, is that you have all these big, particularly pension funds, particularly university endowments, that are having demand from their students, their alumni, their unions, whoever is involved in them. Like, why are we investing in the technology, for example, that’s actually taking our jobs? That’s encouraging whatever these things are that we don’t want to see in the world.

So that’s where I think, well there’s something here right now, it’s just, what would it look like, and I would have to think about this way more, and really what we need to convene is a bunch of people who know way more about this issue than either of us. But that’s where I would think, like, practically…

[00:21:11] David: You are trying to solve the problem!

[00:21:14] Kate: I know, because why not? Because it is a problem, this is probably where I would default toward applied, where you default toward theoretical. Or I’m thinking like, well, what would it look like to put this into action? These are real problems. And, yeah, maybe somebody will listen who knows the answer.

[00:21:31] David: I was in a meeting about this. Social Enterprise UK had a report which came out and this was presented. And it basically presented all these issues. And broadly, they, exactly as you are sort of stating, they understood a lot of these issues. These issues are understood. We’re not the first people to understand that.

[00:21:50] Kate: Yes.

[00:21:51] David: The insight which I believe and I hold to, is I was in that discussion and saying, well, okay, what should I do? We’re a little company, we understand, we see everything you’re doing, what should I do? And the answer that came out from all the experts, was absolutely agreed, is no, it’s not your place to do anything.

We need the people at the top, we need the policies, we need the people managing the funds, we need them to be doing the work. And I am aware that I don’t believe they have the insight. And my simple insight here is that I can’t change all that other stuff. I don’t have that power. What I do have is the power to change how I think about what we’re doing.

[00:22:33] Kate: I was going to say, you do, we do, have the power, as all people do, to introduce new ideas that will get somebody who does have influence, who’s looking for an idea but isn’t living the experience to think, well, there is this opportunity here. I think it’s outing something that somebody else could take and adapt and run with and, and like, great, if you figure out how to make something like this work, super.

[00:22:58] David: I agree with that. Maybe someone will actually listen to this podcast and take that idea and take it and run with it. More likely, what we can do, and this is where this is such an important thing, is in what we do, we can try to hold to this core idea of actually thinking of our own investment as a service, and thinking of this this way, which is a really brave thing to do, because we aren’t able to offer that service at that scale.

But if we design and we think about taking on investment as a service we are offering, it changes everything in my mindset. And that’s within my power. So I can take on that as a social enterprise focused on social impact, I can have that mindset. And what I believe I might have the power to do, especially if we are successful within that, is to then teach other social enterprises how to do that as well.

[00:23:57] Kate: Right.

[00:23:58] David: And that’s the sort of thing where, again, within these communities, actually changing that mindset of social entrepreneurs, from thinking of them receiving a service from others, to offering a service. That is a powerful concept.

[00:24:12] Kate: Yes, and I agree that that power dynamic shift is, I mean it’s just a concept, it’s just language, it’s just whatever, but I do agree that there is something in that. And in even just our own thinking about what we are. That’s really valuable. Yeah. Agreed.

[00:24:31] David: Probably doesn’t make any difference because it’s just language.

[00:24:33] Kate: No, well.

[00:24:34] David: But it’s nice! It’s nice!

[00:24:36] Kate: It was an interesting conversation. It’s an interesting conversation. I guess what I see is it’s interesting just to see how we both think about it. And what our own frames are that we bring to the conversation.

[00:24:49] David: Absolutely.

[00:24:50] Kate: And how that makes us talk through it. So, yeah, I’m sure if we had some other voices in the room, it would go, it would be even, even more interesting, but…

[00:25:00] David: If somebody’s listening who would like to have more voices in the room, we would love that. You can set up a workshop, we’ll be there. If we want to discuss this stuff.

[00:25:09] Kate: Yes.

[00:25:09] David: It’s hard, we don’t have the answers, or I don’t have the answers, you might have answers.

[00:25:13] Kate: I don’t have the answers. I have opinions, we both have opinions.

[00:25:17] David: We have opinions. But yeah, no, this has been fun. I’ve really enjoyed this. Thank you.

[00:25:22] Kate: Me too. Thanks, David. Until next time.

[00:25:25] David: Until next time.