So, all change at the top for Big Society Capital. The big question is whether this change offers Big Society Capital the chance to revisit the central question at the heart of its creation, namely: how to build a healthy social capital market in the UK.
The assumption central to Big Society Capital’s (BSC) operation to date has been that in order to support the development of a sustainable social investment market, BSC itself must be a sustainable business – lending out its capital to intermediaries at a rate that enables it to at least cover its running costs. Those of us who argued that subsidised capital into the sector was required, and that this meant BSC spending down its funds in order to stimulate a wider market providing the kind of finance that social organisations need, lost that argument some years ago.
Rather than rehashing this argument perhaps there’s a different way to think about capitalising social investment.
Getting To Zero
This different way of thinking about what BSC might do and how we could build the market is best explained through the example of Kiva, the US based organisation that allows people to lend money via the internet to underserved entrepreneurs and students in 82 countries. To date Kiva has raised and then lent on more than $780 million from 1.3 million lenders (mostly individuals like you and me) to borrowers in 83 countries. Repayment rates are over 98% and lenders’ roll-over rates (where they repeat lend) are at 97%. And the cost of their capital (the return they provide to investors)? Wait for it – it’s all provided at zero percent. Now that is a whole heap of nothing!
Why is this the case? What relevance does this have for BSC? And, most importantly, what would this mean for on-the-ground organisations in search of finance? Let’s answer this last question first.
We Need Nothing
The Alternative Commission on Social Investment (ACSI) reported that the main area of unmet demand for social investment in the UK was for “cheap, risky, long term growth finance in the tens – but not hundreds – of thousands.”[1]
While over 80% of current social investment is secured investment and the average investment size is £264,000, the latest Social Enterprise UK research shows the average turnover of a UK social enterprise is £151,000 and, amongst those seeking to raise external finance, the median amount sought is £60,000[2].
However, the outgoing BSC Chief executive Nick O’Donohoe has noted that, based on the current approaches, Social Investment Finance Intermediaries (SIFIs) “cannot possibly” make investments under £250,000 without subsidy.
What this means for organisations looking for smaller amounts of finance is that generally it’s simply not available and where it is the cost is prohibitive due to the combined wholesale cost (generally 5% from BSC) and management costs incurred by SIFIs. This takes APR costs into the double digits. Compare this to the costs of mainstream finance into the sector reportedly being at around 4% and you can see there’s something broken in the sector.
Clearly one simple way to address this issue would be for BSC and other wholesale providers to offer their capital at zero percent, bringing SIFI costs to frontline organisations down so they are comparable to mainstream finance.
But wait, what if this provision of capital at zero could be scaled? Perhaps BSC could use its funds to unlock a pipeline of capital at zero percent in the same way Kiva has done?
Why Zero Is The New Black
Let’s return to Kiva and pause for a moment to understand why they might have had so much success offering a return of nada…
Altruistic acts – think volunteering to work with kids in your local summer play scheme or Comic Relief’s work in Africa – have been shown by researchers to stimulate a section the size of a walnut at the upper back of the brain, called the posterior superior temporal cortex, or pSTC. The pSTC is activated by what psychologists call ‘intrinsic motivation’ [3].
Monetary rewards – like gambling on the Grand National or investing for your pension – stimulate a different section, in the lower front part of the brain, called the nucleus accumbens [4]. The nucleus accumbens is stimulated by what psychologists call ‘extrinsic motivation’.
Why does this matter? Because of the ways in which intrinsic and extrinsic motivations interact. Behavioural psychologists have shown that activity in the nucleus accumbens (extrinsic motivation) appears to override activity in the pSTC (intrinsic motivation).
So, and this is critical, in tests when faced with activities that require cognitive skill, people who are financially rewarded perform worse than people who are not rewarded at all. The RSA has done a lovely little animation of a talk by Daniel Pink that explains this [5].
In other words, introducing the promise of monetary reward can actually reduce both the motivation to do good as well as performance. So extrinsic motivation trumps intrinsic. Monetary reward wins out over altruism. And as a result we perform more poorly as we get richer!
Some at Kiva think this dynamic is precisely why they’ve been so successful in raising finance at zero percent. People consciously perceive their placing money into Kiva as an extrinsically motivated investment but unconsciously their brains are treating it as an act that is intrinsically motivated, which leads to the high levels of initial investment and then of roll-over.
Big Society Capital As The New Nothing?
Now let’s imagine a reconfigured BSC providing capital at a cost of zero.
First up the finance would meet needs fairly and squarely, as evidenced across multiple studies succinctly summarised in the Alternative Commission on Social Investment (Chapter 1) [6]. Win!
Next it’d be building the capacity of SIFIs allowing them to get to the scale they need to break even and start throwing off enough surplus to drive further efficiencies, serving the sector as a whole and on-the-ground organisations. Win!
And, if configured thoughtfully, it could start leveraging finance at zero percent in significant volumes from sources that to date have never considered engaging in social investment, thereby contributing to the success and increasing size of the sector AND incrementally improving terms for the recipients of finance. Win!
So, Cliff, as you take up the reins at BSC you might want to give some serious thought to how to create the biggest heap of nothing in the social investment world. May the force be with you.
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[2] http://socialenterprise.org.uk/public/uploads/editor/SEUK_StateofSocialEnterprise_FINAL_WEB.pdf
[3] Tankersley, Stowe & Huettel, “Altruism is associated with an increased neural response to agency”, Nature Neuroscience, 2007. http://www.nature.com/neuro/journal/v10/n2/abs/nn1833.html
[4] Knutson et al, “Anticipation of Increasing Monetary Reward Selectively Recruits Nucleus Accumbens”, The Journal of Neuroscience, 2001. http://www-psych.stanford.edu/~span/Publications/bk01jn.pdf
[5] https://vimeo.com/15488784 for the RSAnimate video and http://www.danpink.com/drive/ for his book, Drive, on which the talk is based.