Investing in our future

This blog is written by Library of Things co-founder and co-director Emma Shaw. A version of this blog originally appeared on Medium. Estimated reading time of 9 minutes.

As a purpose-before-profit company, we’re often asked by peers and investors alike how a social enterprise like Library of Things raises funds, without compromising our mission.

This blog shares our experience raising over half a million pounds, on our terms. A timeline of what became a transformative experience for us personally as founders, for our organisation and for the 22 individuals and one institution that signed up to our radical investment agreement, which reimagines shareholder responsibility to pursue community and environmental benefit in balance with fair financial returns.

This story is the first I’ve shared publicly to raise awareness of the barriers to accessing good, patient capital for women-led business and social enterprise. In sharing my experiences with Library of Things, my goal is to uphold our commitment to transparency, shine a spotlight on what made it difficult and make it easier for others to do the same — whether founder or funder.

Next year, we go big or we go home

co-founders Rebecca, Sophia and I said to each other, back in July 2018.

Why raise money?

It was nearly midnight, we’d worked another 14 hour day on a grant funding application we were unlikely to get, using a free trial day at a co-working space we couldn’t afford.

“If only we could raise a million quid, we could do this properly”. By which we meant — pay the team, invest in some good technology and develop our partnership offer to be able to respond to the hundreds of messages in our inbox from people across the world wanting to bring libraries of things to their communities.

We were all volunteers when we started Library of Things (LoT) in 2014, with £500 from a local fund. Over four years we grew revenue to £130k+ per year — renting out items, running DIY events and hosting tours for groups interested in the circular economy, topped up by grants. Costs were lean — we bartered stock and materials, built volunteer power to a ten-person team and secured rent-free space for our shipping container home, which was crowdfunded by the community.

We knew how every pound was made and spent, making enough surplus to survive. Yet there was little or no financial security for the team — as founders, we left stable day jobs and spent all our time working on manual, repetitive tasks like fixing carpet cleaners or tracking down late returns, without the headspace or funds to improve.

It was time to invest in good, long-term development plan for LoT and our mission “to make borrowing better than buying for people and planet”. Without our own cash reserves, we needed to raise investment from external partners. They would be purposefully recruited for their commitment to LoT’s mission, to sharing their own skills and networks, and an agreed expectation around patient and fair financial returns.

Starting with strong foundations

Speaking to peers like food surplus companies, Olio and Oddbox, we soon learnt that fundraising is an almost full-time occupation. So we brought on two trusted advisors to help:

Alice Millest, an investment advisor with a brilliant network of social investment institutions. She helped us painstakingly map out our cash needs over five years, model up different scenarios for funding and repayment, and reach out to trusted contacts so we could test our ideas.

Social enterprise lawyer, Patrick Andrews, had guided us through the redesign of LoT’s ‘steward ownership’ governance model (more on this here) — so we knew he’d be a dab hand at drawing up a simple, compelling legal agreement that put our mission and values at its heart, and could help us navigate complex negotiations.

Traditional finance doesn’t fit

Ideally, we wanted patient, flexible and mission-aligned capital that could be gradually repaid over time, as and when the company can afford it. Testing out traditional funding routes, none of them fit neatly:

1. Grant — appealing as it’s non-repayable, but highly competitive to secure and often restricted to new projects rather than overheads and salaries. We couldn’t bank on it.

2. Debt — to secure a loan we needed predictable income, but as a young company with an experimental business model, our ‘riskiness’ meant we’d be charged prohibitively high expensive interest rates (10%+ per year) and wouldn’t have surplus to start repayments for a few years. Plus, we needed valuable assets to secure a loan against, which we didn’t have.

3. Equity — attractive as the funding is entirely at the investors’ risk, so we would have no liability to repay until we could afford to. Selling shares meant sharing ownership, which we felt hesitant about.

Instead, we spent the next six months working with Alice and Patrick to design a new funding option altogether: the Demand Dividend, a flexible, equity-like debt instrument. In simple terms, it was a patient revenue share model — we’d repay only when the company became profitable. We forecast we needed £1.3 million over five years, then repayments would be made from a percentage of free cashflow, and capped at an agreed maximum. This type of instrument was being used by some pioneering investors and pushed the boundaries of traditional finance options.

Dear institutional investors, we need dialogue & flexibility

By January 2019, we were ready to socialise our Demand Dividend offer. We sent a teaser presentation to a list of over 50 social investment and environmental networks, and lined up a full calendar of meetings to test it out. We spent much of the next four months at breakfast and evening networking events, travelling from one end of London to the other practising our pitch on the tube. With our bags stuffed with flyers, business cards and speeches scrawled onto scraps of paper, we felt like Will Smith’s travelling salesman character in the film, The Pursuit of Happiness.

I couldn’t help thinking it would be better to invite potential investors to pitch to us instead, and to see LoT in action on our own turf — rather than trying to tell our story through Powerpoint and spreadsheets. Instead, we went through rigorous ‘due diligence’ checks, submitted endless documents, and awaited the decision of distant, faceless Investment Committees. We didn’t have the chance to talk to them directly. Then out would pop an answer: ‘yes’ or, more often, ‘no’. There was very little room for dialogue.

With each round of rejection and feedback, we updated our business plan and moved onto the next pitch. The personal toll was exhausting, hitting our self-esteem hard at a time we were meant to be exuding confidence around the clock. By April, it was time to regroup on what we’d learnt:

1. Divided market ignores the middle ground between for-profit and not-for-profit — we found institutions tended to be either profit-maximising or impact-maximising. Environmental funds wanted aggressive growth plans, fast returns (two year exit) and couldn’t get comfortable with our mission-locked governance structure, which could theoretically break their fiduciary duty to maximise returns to their own investors. Social impact funders tended to take a single issue approach — “we’re here to help the poor and needy” — rather than address the root causes of complex problems like consumerism or inequality.

2. Traditional pitching set-up can be exclusive — this needed to be a two-way conversation to co-design an agreement that fit our needs, not just the funders’ (and remember we’re not finance experts). The process felt extractive — some investment networks charged us thousands just to pitch to them.

3. Need for fund innovation — institutional funders pointed us to their debt or equity team rather than consider our Demand Dividend as an alternative risk-reward sharing instrument.

There are individuals out there who understand where profit and purpose meet

In May 2019 we changed tack, repositioning to raise equity funding from individuals we met through impact networks like Conduit Connect and groups championing women-led businesses.

Without the bounds of institutional rules, we found individuals could instinctively understand our balance of profit and purpose, not as a handicap but as the genius of organisations like LoT, whose business and social value are symbiotic. They understood our mission-locked governance was a hallmark of trust to guarantee we’ll stay true to our mission as we grow.

As the most expensive source of capital, we reduced our target amount to £500k, in exchange for 20% equity. This would provide the cash we needed for the next two years, when we’d be in a stronger position to raise funding more affordably.

The decision came with its own challenges of course, especially as female founders entering the male-dominated world of business angel syndicates and dragons dens. It took us at least 4 months to find our allied networks. A sharp reminder of the need to shake off the ‘old boys club’ culture if we’re to open up access to capital for under-represented founders (but that’s another story altogether!).

Co-creating a new type of mission-first investment agreement

In UK law, company directors are legally bound to maximise financial returns to their members or shareholders as the primary purpose of the company (‘shareholder primacy’). And selling shares traditionally means sharing control.

By contrast, LoT’s primary purpose is its mission (‘mission primacy’). It is the responsibility of all the company’s stakeholders — its team, community, the planet *and* investors — to align around this greater purpose. LoT shareholders hold non-voting shares, because of its steward ownership model, which decouples decision-making from financial interest.

So we knew standard investment agreements would not work for us. Without any templates, we needed to create our own to reflect this balance in simple terms. This was uncharted territory for our investors too, so terms were negotiated through dialogue to reach consensus around what was fair for all. In putting this to paper, I believe we did something quietly ground-breaking. Here’s how:

1. The agreement hard-wires LoT’s mission as the company’s primary purpose, mirroring its unique articles of association (and counter to legal norms).

2. The mission is legally locked in by a Guardian shareholder, which is party to the agreement and holds veto powers over key matters (like agreeing an exit) to ensure robust accountability for LoT’s mission in the long term.

3. The principle of ‘fair returns’ recognises an exchange for the financial risk taken by investors, whilst safeguarding the mission. An indication of fairness is described to be “at least a 2x return on investment”.

4. The intention of an exit for investors was agreed around core principles: a) patient timeframe (within eight years), b) in service of pursuing the mission, and c) balances the interests of all stakeholders (including investors) to realise a fair return on their investment.

Over the next 12 months, 22 angels and one institution signed up to this agreement. We surpassed our target, raising £550k in total. We’d made it.

So who are our investors?

Today we celebrate the diversity of our 23 investors, whose experience ranges from community building technology with Google and start-up operations with Just Eat, to internationally renowned social entrepreneurs, impact funders, progressive lawyers, bankers and business people. They are a fundamental part of the LoT ecosystem.

At LoT’s first Open Board Night in April 2021, we gathered our stakeholders together for the first time — our team, investors and mission guardians (representing the interests of LoT’s borrowers and community partners). It’s easy to imagine investors sporting suits and ties. But when they introduced themselves, their humanness and powerful motivations became clear:

When the team asked, “why did you invest in LoT?”, they said: “to fight climate change”, “to tackle poverty”, “to back women and underrepresented founders”… the list went on.

Questions to our Investors and Mission Guardians at LoT's first Open Board Night, April 2021.

Our investors are activists and pioneers. In mobilising their capital for social enterprises like LoT, these investors are doing something quite extraordinary — they are shifting the very foundations of capitalism as we have known it. Together, we are starting to heal the divide between the binary worlds of business and impact, which I believe are at the heart of our broken consumerist system.

Join us

As LoT sets out on this new chapter, we invite you to join us — whether as a borrower, partner, peer or future investor — to support and cultivate this emerging ‘fourth sector’ of organisations combining purpose with profit. There is a global movement of regenerative businesses and 'Zebra' organisations like LoT who are shaping a new way forward that is kinder to people and planet.

We're excited for an upcoming crowdfunding campaign we're launching that will make it even easier for you to get involved. Sign up to our newsletter to be the first to hear about it!