Why it’s up to grant-makers to make the charity sector a good place for new ideas

By John Copps 16 August 2012

“Eureka!” shouted Archimedes as he sat in the bath and saw the water rise around him. Centuries later, this moment of inspiration still resonates among inventors and entrepreneurs everywhere.

‘Innovation’ is something that charities are fond of talking about as part of the distinctiveness of the sector. But is it true? Are charities a good place to innovate?

Non-profit organisations have a strong claim to be good at new ideas. Historically they have been the laboratories for all kinds of innovation: modern public services, including schools and hospitals, originated from the minds of the heroic social reformers, campaigners and philanthropists of yesteryear. Today, the state stills looks to charities to provide the intellectual raw materials to fuel the new challenges of providing public services.

The Charity Commission in England and Wales sees thousands of new charities join its ranks every year. Added to this there are countless new community groups that go under the regulator’s radar, and the new ideas springing every day from within existing organisations. All this suggests no shortage of new things.

But ideas are only one part of the jigsaw – you also need the conditions to make them flourish. Good ideas are not adopted automatically.

I think the truth is that charities aren’t great places to turn ideas into successful and sustainable enterprises. It’s hard to succeed with any new venture anywhere, but charities have it particularly tough.

As is so often the case, money is a barrier. Grant funding provides early stage investment but as social entrepreneurs seek to expand, it becomes a limiting factor. It’s impossible for charities to get investment in the traditional sense of the word because there’s nothing to give away in return – investors’ risk can’t be rewarded with an equity share. At best this slows new ideas down, at worst it suffocates ideas before anyone has a chance of really knowing whether they’ve got legs or not.

Social investment purports to offer a solution. But loans need to be repaid and therefore require solid business models and evidence of future cash flow. For many early stage ventures, that’s not feasible.

All this underlines the importance of grant-makers to the ecology of the sector. They hold the key to the sector’s success as innovators, in their role as the backers of new ideas. In the absence of alternative sources of investment, it means grant-makers have a difficult but important call on how long they persist and how much they spend backing each idea.

After his Eureka! moment, Archimedes got out of the bath and ran naked through the streets to celebrate. For any social entrepreneur that sees their idea succeed, I can imagine the temptation.