Social venture capital is a form of investment funding that is usually funded by a group of social venture capitalists [1] or an impact investor [2] to provide seed-funding investment, usually in a for-profit social enterprise, in return to achieve an outsized gain in financial return while delivering social impact to the world. There are various organizations, such as Venture Philanthropy (VP) companies and nonprofit organizations, that deploy a simple venture capital strategy model to fund nonprofit events, social enterprises, or activities that deliver a high social impact or a strong social causes for their existence. There are also regionally focused organizations (both for-profit and nonprofit) that target a specific region of the world, to help build and support the local community in a social cause. [3]
Apart from the traditional venture capitalists focusing on just the financial profit, social venture capitalists believe in achieving financial success through social impact to the world. [4] Beside, those Venture Philanthropy (VP) funds such as Venture Philanthropy Partners initiate investment in a high-performing nonprofit organization, [5] the following criteria that social venture capitalists generally assess on social venture companies for funding: [6]
Social venture accelerators is a form of seed accelerators that fixed termed, cohort-based entrepreneurial development programs designed to transform validated idea of the social startups companies to seed funding. Hence, increase the outcomes for sustainability and growth of startup companies that have potential to scale (usually tech-based companies). Such programs allows startup companies to gain exclusive visibility to early- stage investors and other resources such as providing initial investment, technical facilities/development, to office accommodation and under the guidance of experienced mentors, all of which in return of a minor share in the invested startups companies, [7] or under grant funding to support participating companies. [8] Seed accelerator companies will assess based on startup companies' business model and ensure market/customer sector validated, to develop a commercial validity of the social startup companies to investment ready and prepare to scale their impact. [9]
Business incubators usually provide business with facilities and funding with the help of external management team to manage an idea that was developed internally. Given the intense efforts involved, the incubator period usually lasted longer the seed accelerator, and takes up a much larger amount of equity than Seed Accelerator as well. [10]
As part of effort of UK Government to support social ventures from a grassroots level to deliver positive social and environment impact, a £10 million Social Incubator Fund, which was launched on 24 July by Minister for Civil Society, Nick Hurd. The fund run by Big Lottery Fund will increase the amount of money available at the early stages of projects where the financial return is too low [11] while Big Society Capital invests social investment intermediaries that carries higher financial risk. [12] However, such funds doesn't indicate free funding, as incubators such as Social Incubators North, a social business incubator [13] provided a repayment interest free loan of £25k to successful applicant. On the other hand, newly launched Non-For-Profit incubator Halcyon Incubator targeting on the social impact that the social ventures deliver, does not require equity in the fellow's venture, but only a commitment to growing ideas to achieve social change. [14] [15]
Venture philanthropy deploys simple venture capital strategy model to fund non-profits events/social enterprises/activities that deliver high social impact or a strong social causes for its existence. Organization such as Amanter Social Venture provides such services focusing on social principles as main assessment criteria and running programs to help existing social organization/enterprise through capacity building and executive training to deliver a multiplier effect to the next beneficiary organizations. [16] The classic example of Benetech, a non-profit organization, shows that the proceeds gained were being used to create a handful of new social enterprise patterned. [17]
Regionally-focused organizations such as Venture Philanthropy Partners (VPP), the European Venture Philanthropy Association (EVPA) and the Asian Venture Philanthropy Network (AVPN), are associations that covers venture philanthropy funds targeting certain regions such as the National Capital Region in the US, Europe and Asia that finance charities, revenue generating social enterprises and socially driven business. [18]
Social ventures unusually face a ranges of funding options not limited to the common ones such as debt capital with participation rights, mezzanine financing (quasi equity) or license fees. [19]
Common forms of funding such as debt capital + capital. Such funds supports the social ventures with invested capital that must be repaid either in short or long period of time, in additional with an agreement amount of interests. These raised capitals are usually secured with the assets of the company, by the lenders from banks and venture capital companies. [20] In other words, if the company failed to repay their debt capitals, would results their ownership and equity interest to be liquidized. Noted, that mezzanine financing usually blinded with a high returns of 20% to 30%. [21]
Social venture capital companies will usually make equity investment and co-investments, when an anticipated exit strategy of the company is foreseeable. [22] Such investment are made through preferred shares which commonly entitled the lenders a fixed dividend that takes priority over that of ordinary share dividends, usually without voting rights. [23]
To effectively maximize the fund's capital to deliver social impact, social venture companies are attracted to successful financing social enterprises that show growth and financial sustainability, usually when anticipated exit strategy of the company is foreseeable, [24] especially for young venture capital firms to minimize their exit from the invested companies, to maximize the opportunity of future fund raising, especially, when prospect of exits beyond the 7 year periods decreases for companies going for initial public offering (IPO) and merger and acquisition. [25]
The Enterprise Investment Scheme is a tax advantaged scheme designed to help companies that are at their early growth stage to raise equity finance from investors. Through this scheme, qualifying investors are able to claim income tax relief of 30%, plus exemption from capital gains tax when enterprise investment scheme shares are disposed of. [26]
The Seed Enterprise Investment Scheme is a tax advantaged scheme designed to encourage investment from investor in higher-risk small companies that are in their early growth stage to raise equity finance. With contrast the existing Enterprise Investment Scheme (EIS), the SEIS allows qualifying investors can claim income tax relief of 50%, plus capital gains tax relief. [27]
The Venture Capital Trust Scheme is a tax advantaged scheme designed for a HMRC-Approved VCT company to chip in for shares in, lends money to small unquoted companies. Under scheme, the VCT companies itself exempt from CT on chargeable gains and their investors can claim income tax relief on subscriptions of up to £200,000. [28]
Social investment tax relief scheme is designed to encourage more social investments from investors to support social enterprise by introducing a range of tax relief schemes such as Income Tax relief, capital gains hold-over relief and capital gains disposal relief. SITR covers investments made on or after 6 April 2014. [29] It means that debt investments into asset-locked bodies (like community interest companies) can now be made on the same tax relief terms as the Enterprise Investment Scheme for equity investments.[ citation needed ]
Investors (need not to be UK resident) who subscribed to qualifying shares or make qualifying debt investments in the social enterprise that meet SITR requirement, are able to calm at 30% of the amount they invested, to a maximum investment of £1,000,000 up to 5 years after the 31 January following the tax year in which the investment was made. [30]
Investors are able to defer the payment of tax on a capital gain of any kind of disposed asset, when the capital gains are reinvested in the share or debt investment which qualify for SITR Income Tax Relief. However, it must arise in the period from 6 April 2014 to 5 April 2019. The SITR qualifying investment must be made in the period one year before or three years after the gain arose. [31]
Any gain on the investment that is disposed after it has been held for at least three years, are free from Capital Gain Tax, in addition to the Income Tax Relief coverage on the cost of the investment. [32]
Business angels are usually a group/single individual investors with a high-net-worth pool of investments looking for opportunities to invest in an enterprise, to achieve a reasonable amount on return of investment. As business angel funding involves investors injecting funds into a startup/private company in return for a share in its ownership, businesses that operate as sole traders or partnerships are usually not eligible for such financing. [33]
Crowdsourcing is a practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the internet. For-profit fundraising companies using strategies such to charge a premium on "keep what you raise” model or minor charges on an "all-or-nothing funding approach" [34] However, particularly for Social Crowdsourcing, non-profit organization such as razoo to help social enterprise or non-profit, student organization to raise fund for event or charitable causes. [35]
An individual savings account is a class of retail investment arrangement available to residents of the United Kingdom. First introduced in 1999, the accounts have favourable tax status. Payments into the account are made from after-tax income, then the account is exempt from income tax and capital gains tax on the investment returns, and no tax is payable on money withdrawn from the scheme.
An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital the investor usually purchases some species of property. Types of investments include equity, debt, securities, real estate, infrastructure, currency, commodity, token, derivatives such as put and call options, futures, forwards, etc. This definition makes no distinction between the investors in the primary and secondary markets. That is, someone who provides a business with capital and someone who buys a stock are both investors. An investor who owns stock is a shareholder.
Corporation tax in the United Kingdom is a corporate tax levied in on the profits made by UK-resident companies and on the profits of entities registered overseas with permanent establishments in the UK.
In the United Kingdom, taxation may involve payments to at least three different levels of government: central government, devolved governments and local government. Central government revenues come primarily from income tax, National Insurance contributions, value added tax, corporation tax and fuel duty. Local government revenues come primarily from grants from central government funds, business rates in England, Council Tax and increasingly from fees and charges such as those for on-street parking. In the fiscal year 2023–24, total government revenue was forecast to be £1,139.1 billion, or 40.9 per cent of GDP, with income taxes and National Insurance contributions standing at around £470 billion.
The Enterprise Investment Scheme (EIS) is a series of UK tax reliefs launched in 1994 in succession to the Business Expansion Scheme. It is designed to encourage investments in small unquoted companies carrying on a qualifying trade in the United Kingdom.
An investment club is a group of individuals who meet for the purpose of pooling money and investing; members typically meet periodically to make investment decisions as a group through a voting process and recording of minutes, or gather information and perform investment transactions outside the group. In the US the upper limit for the value of an investment club's worth is $25m. There is no lower limit. Investment clubs provide members a means to learn about markets, while meeting and working with people who have similar interests.
A self-invested personal pension (SIPP) is the name given to the type of UK government-approved personal pension scheme which allows individuals to make their own investment decisions from the full range of investments approved by HM Revenue and Customs (HMRC).
A personal pension scheme (PPS), sometimes called a personal pension plan (PPP), is a UK tax-privileged individual investment vehicle, with the primary purpose of building a capital sum to provide retirement benefits, although it will usually also provide death benefits.
A venture capital trust or VCT is a tax efficient UK closed-end collective investment scheme designed to provide venture capital for small expanding companies, and income and/or capital gains for investors. VCTs are a form of publicly traded private equity, comparable to investment trusts in the UK or business development companies in the United States. They were introduced by the Conservative government in the Finance Act 1995 to encourage investment into new UK businesses.
Venture philanthropy is a type of impact investment that takes concepts and techniques from venture capital finance and business management and applies them to achieving philanthropic goals. The term was first used in 1969 by John D. Rockefeller III to describe an imaginative and risk-taking approach to philanthropy that may be undertaken by charitable organizations.
Legatum Limited, also known as Legatum, is a private investment firm, headquartered in Dubai, United Arab Emirates. Legatum is a partnership that uses its own funds to invest globally. The firm also invests in activities to promote entrepreneurship and free enterprise as well as anti-slavery, health and education initiatives.
A low-profit limited liability company (L3C) is a legal form of business entity in the United States. Commonly referred to as a hybrid structure, it has characteristics of both for-profit and non-profit entities. L3Cs were created to comply with the Internal Revenue Service (IRS) program-related investments (PRIs) rules which allow most typically private foundations the ability to maintain tax-exempt status through investments in qualifying businesses and/or charities. With a social mission as the primary objective and a secondary objective of profit generation, the L3C legal form is considered a viable option for businesses seeking a reputation or marketability for being a social enterprise.
Small Self Administered Scheme (SSAS) is a type of UK Occupational Pension Scheme.
Impact investing refers to investments "made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return". At its core, impact investing is about an alignment of an investor's beliefs and values with the allocation of capital to address social and/or environmental issues.
A tax transparent fund (TTF) - also known as an authorised contractual scheme fund - is the proposed authorised collective investment scheme structure in the United Kingdom once the UK Finance Bill 2012 becomes an act and when the Financial Services and Markets Act 2000 and the Corporation Tax Act 2010 are amended, sometime mid-2012. TTFs will then have the option to be based in the UK rather than in competing European domiciles. Both Luxembourg and Ireland have already introduced such structures, formally known as the Fond commun de placement (FCP) and the Common contractual fund (CCF).
Research and Development (R&D) Tax Credits are a UK tax incentive designed to encourage companies to invest in R&D. Companies can reduce their tax bill or claim payable cash credits as a proportion of their R&D expenditure.
The Research and Development Expenditure Credit (RDEC), introduced in 2013, is a UK tax incentive designed to encourage large companies to invest in R&D in the UK. Companies can reduce their tax bill or claim payable cash credits as a proportion of their R&D expenditure.
Research and Development Capital Allowances, also known as RDAs, are a tax relief for businesses in the United Kingdom. They provide a 100 per cent first year capital allowance for research and development (R&D) capital expenditure. RDAs are the capital expenditure equivalent to the R&D tax relief scheme.
Angels Den is the Europe's first and largest online investment platform that connects businesses with angel investors. It was founded in 2008 and is authorised by the Financial Conduct Authority (FCA).
A Social Impact Contractor is a corporate body which holds a contract with a public body to provide goods or services with defined outcomes intended to achieve a community or environmental benefit.
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