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'Social enterprise - a dangerous mix' 1

Finance | Tania Mason | 10 Feb 2010

I was watching Dave one evening last week (as you do) when the 2007 episode of Dragons Den featuring social entrepreneur Paige Allen came on. I’d not seen it before so I watched with interest.

Allen’s pitch was this: she wanted £125,000 from the Dragons in return for 5 per cent of her business making and selling inflatable plastic fruit pouches for kids (pictured). In exchange for their investment, the Dragons would receive 5 per cent of all profits made, while Allen would donate the other 95 per cent of profits to charity. Hence the ‘social enterprise’ tag.

Had you switched on your telly at this precise point, you could have been forgiven for thinking Allen had tried to persuade the Dragons to invest in DIY bomb-making kits, such was the level of antipathy to her venture.

True, her figures seemed a little ambitious – turnover was then just £90,000 and profits £23,000, yet she was valuing the business at £2.5m. Yet it wasn’t so much the creative accounting that raised the Dragons’ hackles, but the concept of mixing business with charity.

Duncan Bannatyne immediately pointed out that if he simply gave a donation to the charity concerned, it would immediately attract 40 per cent tax relief – a better outcome financially for the recipient charity than simply investing in the business.

Theo Paphitis said he didn’t think he could sit in a boardroom and put his 5 per cent profit in his pocket while the other 95 per cent was given away. “It wouldn’t be morally correct or ethical,” he said."It's a dangerous mix."

Deborah Meadon told Allen that if her proposition was purely commercial, she would dispute the valuation of the business and try to negotiate on the price. “But I can’t bring myself to do that, because of the charity connection,” Meadon said. “It’s very confused.”

Richard Farleigh said it was “very difficult to combine business and charity, unfortunately”.

“I imagine you’ll have some volunteers working for you,” he told Allen. “How will they feel knowing some of the profits are being siphoned off? I would rather just give directly to charity without the complications.”

Peter Jones summed up their responses with his characteristic bluntness. “You’re in the wrong place,” he told Allen. Who, in case you were in any doubt, left the Den empty-handed.

Now, if you’re wondering why I’m bothering to regurgitate all this, given that the programme is nearly three years old, rest assured there is a point. I think the issues raised by the programme are entirely current, especially in light of the government’s recent proposals for a Social Investment Wholesale Bank. The Treasury expects to supplement the bank’s initial capital from dormant bank accounts with cash from private investors who, it hopes, will be happy to accept lower profits in return for benefits conferred on society or the environment by the social enterprises that will borrow from the bank. It’s a nice idea, and the Paige Allens of this world may indeed be queuing up to request loans. But if the Dragons’ reaction to Paige Allen is any indication of general investor sentiment toward the fusion of commerce with charity, the funds flowing in may be more a trickle than a tsunami.

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