Stepping Stones Fund
Applications to Round 3 of this programme are now open, with up to £700,000 of funding to be awarded. The deadline for submission is 15th August 2016 and full details can be found in the Application Process.
Aims of the programme
London’s voluntary, community and social enterprise sector organisations play a vital role in delivering services to vulnerable and marginalised groups. The sector is going through significant change in the way it secures funding, delivers services and in the way performance is measured and paid for. Organisations now need to consider new or extended ways of generating income, how to widen their customer base, the opportunities to collaborate with other organisations and how to ensure they produce identifiable, replicable outcomes which have a true value to society.
Social investment might be an appropriate financing route for some social sector organisations which are able to generate sufficient revenue.
However, there are many issues to consider before taking on any form of repayable finance and the capacity of an organisation may need to be enhanced to manage an investment. Organisations may also need to test out new business models, to create new services and partnerships and, in so doing, develop a deep understanding of the cost bases to any such innovations and the strength of the impact they generate.
Links with City of London Corporation’s Social Investment Fund (COLCSIF)
The Stepping Stones Fund was created in recognition of the gap between the grant finance available for organisations and the requirements of an organisation that sought to secure social investment through the COLCSIF (and other funds). Stepping Stones seeks to provide targeted support in the form or grants and risk finance to test out the viability of different propositions. In this way, the fund helps to de-risk any future investment, whether it is the City of London Corporation considering an investment, or any other investor.
Grants from the Stepping Stones Fund will not be dependent on being a previous or current grantee of City Bridge Trust, nor on being a potential investee of the COLCSIF.
Finance gaps in the UK social investment market
The areas for support have been selected after extensive consultation with a range of financiers, intermediaries and potential beneficiary organisations with an interest or experience of social investment. Several new social funds have been created in the last two years, largely spawned with Big Society Capital’s finance. In theory, a social sector organisation which is able to present a well-tested, robust, well managed proposal to an appropriate fund manager has a realistic opportunity to secure investment. In practice, there are a variety of barriers to reaching this point and ensuring that this finance is secured. These include:
Transaction costs: these are disproportionately high, so the smaller ticket size of investment or lending, especially unsecured and in relatively high risk ventures, is unattractive for investors to engage with; the result is that a range of smaller social investment deals can never get off the starting blocks.
Imperfect information on the investment risk: the investor or lender often has difficulty in pricing investments or loans under £50,000 to account for the relatively high risk and high default rate at this end of the finance market, but at a price which organisations at an early stage could consider taking on. For charities, this is exacerbated as equity is underused, and standard debt requires constant repayments from the point of taking on the loan.
The missing value of the social impact created: except in payment by results based contracts, there is usually weak or no price integrated into the investment deal to account for the value of the social impact generated. The majority of charities need to develop their capacity to measure and report on the social impact of their programmes.
Capital is rarely patient enough: most organisations are expected to return finance to investors within a relatively tight time period (within four years usually if invested into by a fund, and around 3-5 years if debt financed). For young organisations in an underdeveloped market, this is punishingly fast for many potential investees.
The Stepping Stones Fund is structured to circumvent or directly tackle these barriers. Monitoring and evaluation of the programme will be in part measured against objectives relating to tackling the above barriers.
Available support for social sector organisations
Having taken extensive soundings from and within the sector, our understanding of the provision of investment readiness support is that it is highly competitive, England-wide and non-sector specific. There is plenty of scope for further initiatives to support the development of organisations’ capacity to develop sustainable business models, to take on repayable finance and to create the intended impact repetitively. We also expect there to be plenty of cross-over between grantees supported by the Stepping Stones Fund and other relevant support programmes as these schemes are complementary to one another.
The Stepping Stones Fund will keep abreast of other initiatives and will carry out its own monitoring and evaluation to ensure that it is reacting to need, not creating it.
Our programme outcomes
This fund aims to bridge the evident gap between grantees and investees. It seeks to encourage organisations to make full use of the different types of finance which are potentially available to them if their capacity and products or activities are expanded.
We want to fund work which will achieve the following:
more organisations with improved understanding of social finance as a financing strategy, its benefits and drawbacks;
more organisations with improved skills in financial management as required to take on repayable finance;
a greater understanding of the risk component of an organisation’s business and how these could be mitigated;
more organisations with improved capabilities in strategic, business, marketing and partnership building skills;
more organisations to test out alternative revenue generating models with a thorough understanding of the cost basis to these;
more organisations, for whom it is appropriate, securing a social investment package;
more organisations able to offer to deliver valued social outcomes consistently with a clear understanding of the factors affecting these.
Who will we fund?
Eligible organisations must be registered in the UK, serving beneficiaries based in the Greater London area, and be structured as one of the following:
Registered Community Interest Company
Registered Charitable Incorporated Organisation
Exempt or excepted charity
Registered charitable industrial and provident society or charitable
The Stepping Stones Fund is open to past and current grantees, as well as organisations which have never held CBT funding before.
What will we fund?
The Stepping Stones fund will consider applications under the following strands:
1. Capacity building grants for charitable organisations:
to provide organisations with human, financial and strategic support as well as supporting access to appropriate expert intermediaries to enhance their overall performance skills to meet their mission, deliver their outcomes and thereby enhancing their investment readiness and long term financial stability.
2. Grants to pilot better outcomes:
to support organisations wishing to pilot new ways of creating improved social outcomes in a specific sector, geography or outcome area; test out new ideas, new business models, new partnerships and ways of working as well as alternative ways of measuring complex outcomes. The pilot should lead the organisation to using social investment for expansion or further development.
3. Risk finance: first loss capital to qualifying organisations to reduce other investors’ risk:
to provide finance in the form of a repayable grant which catalyses an investment package already underway. It will be expected of applicants to indicate in their application and proposal how the finance package will be constructed. Following this, each shortlisted proposal under strand 3 will have to be discussed and decided about individually. See more details under Application process.
We expect that these three strands allow Stepping Stones Fund to accompany successful organisations in their evolution to social investment readiness and in the development of their social investment strategy. Those, for example, that successfully complete their project under strand 1 (capacity building) would be encouraged to return and apply for support under strand 2 or 3 (piloting outcomes or risk finance).
Amount of funding offered
There is no minimum amount, but the maximum grant amount under strands 1 and 2 can be expected to be £50,000. However, it is not our policy to award large grants to small organisations. Your proposal and the budget need to be realistic and reflect that you thought through the costs and possible revenues. Under strand 3 (risk finance) Stepping Stones Fund would consider larger amounts of up to £150,000 per grantee. As a general rule, the Stepping Stones Fund will not fund more than 50% of an organisation’s total revenue income.
Duration and milestones
The Stepping Stones Fund will use a milestone approach to payment of grants and risk finance and expects to see applications over a maximum duration of 18 months. In the case of risk finance the use/draw down of Stepping Stones Fund finance is expected to be within 12 months and the maximum duration of the Fund’s commitment will not extend beyond five years. This will always be subject to individual consideration and will be discussed with the successful applicants.