Impact Investment the Word on the STREAT
12 February 2014 at 9:35 am
The site of a former brothel loaned to Melbourne social enterprise STREAT at five dollars per year for the next 50 years has enabled the youth homelessness organisation to build on its first round of impact investment, writes journalist Nadia Boyce.
Not for Profit social enterprise STREAT was launched in Melbourne in 2010 by founder Rebecca Scott with one small food cart. Humble beginnings have preceded the success which was to come and the development of a reputation as one of the sector’s leaders and an early example of impact investment within Australia.
Last July, businessman and philanthropist Geoff Harris purchased Cromwell Manor in the inner Melbourne suburb of Collingwood, previously a licensed brothel, for $2.5 million.
He has gifted its use to STREAT for the next 50 years at $5 per year – the catalyst to initiate a second round of impact investment.
The building is set to be redeveloped by STREAT into a youth training academy, cafe, artisan bakery, boutique coffee roastery, function centre and catering hub, providing training and work experience for over 250 young people per year.
STREAT’s first foray into impact investment, where capital is invested with the expectation of both social and financial returns, came in early 2012 when the organisation acquired the Social Roasting Company’s two cafes and coffee roasting business. As of 2014, the organisation operates four businesses that provide homeless youth with support, life-skills, work experience and training.
Pro Bono Australia News visited the manor and spoke with Harris and Scott about impact investment, social enterprise and STREAT’s legacy as the organisation works towards its goal of financial sustainability by 2015.
Sold on Stability
As a product of the business world, Harris is clearly both intrigued and motivated by the prospects of growing a social business from its infancy.
‘It’s about being connected with Rebecca and her team, the nuances, and hopefully meeting occasionally,” he says.
“The real attraction for me is that quasi-business model…to get to the creativity of business.”
He speaks of the rewards to be reaped by STREAT from not having to worry about relying on government funding and donations, including the possibility of Scott and her team focusing on the young people they are working to help.
“The overwhelming intent is to give STREAT security of tenure and an ability to get to sustainability quickly for their programs.”
“At our Melbourne Central site, we used to be on month to month,” she explains. “We couldn't take the risk of signing long leases, the business is still so new, you don't know if your business is viable yet.”
“It’s about the ability to have a bunch of things fixed in your business, to know it’s not going to wildly fluctuate.
“I think that stability makes it a really attractive project to draw other money in. There are quite a lot of pieces in a jigsaw puzzle, but the fact some of those big pieces are already there takes a bit of the risk out of it.”
“Geoff being the first one means he’s almost like the cornerstone investor. The whole development will cost us about $6.2 million with the building being $2.5 million of that. We’ve got a bigger project that we now want a whole lot of other people to become involved with.”
Intent on Investment
Scott emphasises the slowness development process STREAT underwent to become investment-ready – a process helped by the expertise on hand.
“It certainly didn't happen fast, and we've done it incrementally,” she says.
“We did an acquisition two years ago now of another social enterprise. We knew we wanted to scale and this opportunity came up. We couldn’t have gotten the money through grant writing fast enough. It wasn’t a knee-jerk reaction, it was a combination of timing and it matching our strategy.”
“A year and half before that, our board had been grappling with the question of the circumstances in which we would be taking investment, and we educated ourselves. We brought in external experts to educate us about impact investment.
“We did a bunch of modelling and we modelled a whole lot of scenarios about what the future might look like.”
The new investment is a significant step up for Scott and her team, from $300,000 to now millions of dollars.
“This is putting another zero on the end, and thats a bit scary,” she says.”But we’ve had a bit of a go, we’re comfortable with it, it’s part of a strategy.”
STREAT’s first round of impact investment returned a seven per cent dividend for investors, a figure with which Scott, optimistic about the future, expresses her satisfaction.
“We were really happy with that for year one. I think the thing we were going to struggle with is that the current premises we’ve got, you can’t scale them any further. This new site will allow those businesses to keep scaling.
“One thing I love is that it feels like we’re broadening out our engagement with it. We’re sitting here with business people in the room…it just seems like there’s so much more brainpower.
“If you look at our investors, they’re just a bunch of really savvy people, they’re not a bunch of bleeding hearts, they’ve worked hard, made their money, and want to get the most out of it.”
Scott sees capacity and bureaucracy as key issues stymying the prospects of many social enterprises securing investment.
“If I look round the sector at the moment, it feels like there are some pots of money but very little is investable. Systems and processes haven’t been put in place to allow it to scale. You couldn’t take it big enough to get the returns,” she says.
“We need more intermediaries helping small startups getting to the point where they are investable. There’s absolutely a pipeline issue.”
‘Where I often see hurdles is when the social enterprise is part of a larger non-profit. You’ve got this behemoth culture, and a tiny social enterprise grafted onto the side. Often you've got the dominant culture being non-entrepreneurial and this tiny thing trying to innovate and do interesting things – but then there’s too much bureaucracy.”
“If a coffee machine breaks down this morning, my guys need to know that they can pick up the phone and get the guy who’s going to be there in the hour.”
Scott reinforces the importance of unity between board and management.
“I’ve seen some fall over when management teams and organisations have done the thinking and have been prepared to do it but the board’s been disconnected,” she says.
“You have to have the board and your management team so unified and committed together.”
“I think the difference with us is that our board’s got a whole bunch of business people. If we’d had a bunch of only NFP people on our board taking business risk it just would have been too hard.”
It is reluctance to take risks that Scott insists must be overcome.
“At the end of the day you’ve still got to jump off the cliff,” she says.
“Something I’ve seen a number of times in the sector is that organisations almost get to the edge but the fear of jumping off the cliff overcomes them and they won't go that next step.”
Investing in the Future
Overcoming fear of risk is also the key to encouraging future impact investment, Scott says.
“The money sitting out there is very cautious,” she says. “I’ve had multiple conversations with philanthropic foundations who would love to do impact investment but people want to know the first thing they put their money into isn’t going to fail.”
“The second time you do something it’s a lot easier than the first time. We need some people in there experimenting and taking risks.”
“If we look at that first group of investors we’ve got, it’s not just that they love STREAT, it’s that they’re trying to change the system. They know that they’ve got to start trying some things and it’s as we try things, we learn some more. As that happens you get learning across the sector and we start to see more things happen.”
“My frustration is that it’s just so slow to build things.”
“As a sector, I’d love to see us getting pools of impact investment, and rather than incremental scaling over time, get a bunch of amazing investors and start start buying existing for-profits and turning them into social enterprises. Go to where the scale already is instead of spending 20 years slowly growing something.”
“I’m interested in the future – can you socialise existing for profits or can you build some interesting hybrid organisations between a for profit and a non-profit?”
“Why couldn’t we be the non-profit arm of an existing corporate, where we’re a nimble part of their business… a pipeline for people coming into their business. I see some big companies around Australia and see how this could work…we’re part of their business, or at least an equity shareholder.”
Scott says the battle for talent and funds becomes easier as the organisation grows and living, breathing evidence emerges in the form of young people who turn their lives around.
“I think you attract more excellence if you’ve been around a bit longer. We couldn’t have got the same support when we were pushing our food cart around Federation Square,” she says.
“It’s a given that the only reason we’re doing the business is to bring about social change but what Geoff’s got is decades and decades of scaling business. And what’s a little different about STREAT is that at the outset we were building a business to scale.”
“His brain's valuable, not just his wallet!”
For now, Scott will continue to procure expertise and build on her success in helping Melbourne’s homeless youth. For the next 50 years, Geoff Harris is in for quite a ride.