Funding for social entrepreneurship varies from traditional entrepreneurship funding. There are many models for traditional funding, all of which depend on your goals and what you’re trying to achieve.
In traditional entrepreneurship, there are two tracks to growth. For a lifestyle business, you’ll likely be self-funding the operations – possibly taking out a bank loan or bootstrapping your business to get off the ground. A business that aims to scale dramatically usually needs outside investment, which is generally the case with startups that you see seeking venture capital.
Social Enterprise and Venture Capital
An awkward but not impossible fit…
Venture capital is a great way to fund growth, especially if you have a clear plan for growing your revenue and it is clear how the venture capital is going to enhance that growth. But VC money comes with an expectation that your funders will exit with their investment within a short time period (say 3 -10 years). This means that you are growing your company to be sold to a bigger company or to be taken public with an IPO.
The VC path is the stereotypical funded enterprise – something designed for huge growth. Investments start with friends & family and then progress to angel funding. Angel investors often take on much more risk, but that risk is usually tied to ownership in your company. As you get into angel and venture capital, pressure mounts to grow your company quickly so that it reaches the next stage of funding, or can be sold, which is how the investors get their money back.
There are a few social entrepreneurship funds out there, but they’re often an awkward fit since the need to repay investors put a priority on making a profit which can clash with your need to prioritize the impact you’re aiming to make. It can even change your core mission. Because of the controlling interest that venture capital comes with, and the associated drive for profits, VC money typically is unsuitable for a social enterprise.
However, sources of Social Venture Capital are on the rise. (Check out these 15 social venture capital firms… or this sort of money in the bay area.) This trend is being fueled by conscious capitalism, and a large number of people recognizing the need for businesses that are built around ideals other than “make a lot of money”. Social Venture Capital is still going to look for a return on their investment, but might be a great fit for ventures where scale is needed for a business to be viable. (As is the case with most technology platforms.)
Other Ways of Getting Cash
BOOTSTRAPPING, by contrast, is about growing organically, using your own funds and reinvesting your profits back into your company. It is the most liberating form of funding. The huge benefit is that you’re not paying interest on loans, and don’t have strings attached from grant requirements or a controlling interest demanding that you put profits before your purpose.
CROWDFUNDING involves using small contributions from a wide network to fund your objectives. The contributions are usually in exchange for some service, product, or mention, and are quite often project-driven. Online, the giants are Kickstarter, IndieGoGo and GoFundMe, but there are many varieties, including one of my favorites, Start Some Good. (Here’s another list!) One bonus is that, when you’re testing whether you can find an audience, success with crowdfunding often gives you an indicator and some experience in selling (something which I missed when starting Wild Tiger Tees). Crowdfunding doesn’t necessarily need to be on-line – Columbus, Ohio had a local group called Columbus Soup, which crowdfunded quarterly via a dinner for local ventures – and you got to vote with your spoon! Talk about a fun way to raise awareness and funds for local stuff.
GRANTS. Social enterprises which are not for profit are often eligible for grants and funding from the non-profit fundraising realm. In applying for grants, a social enterprise (where there is a business aspect to your venture) is ahead of the pack for one single reason: when it is successful, it won’t depend on grants. Here in Columbus, I’ve heard about 30% of the grants are approved — competition is tight. But for social enterprises, nearly any sound concept is more likely to get funding because those dollars don’t need to be permanent.
BANK LOANS are typically how businesses grow that aren’t using venture capital. But for new social enterprises, your lack of profits and unproven sustainability usually lead to unaffordable interest rates. You’re at a disadvantage with typical businesses, and you still need some sort of collateral. For new businesses, this may mean your house or other significant assets that you own. (It never seems fair that entrepreneurs should have to bet their house for the risks they take to start a business. It’s stressful enough already!)
IMPACT INVESTING. I noticed this term becoming popular in 2018. These are loans designed for social entrepreneurship. You repay them, but the ones providing the loans are prepared to take a lower (sometimes close to zero) interest rate because they believe in the impact you’re making. This basically means that they’re more willing to risk losing their capital, and are typically not in it to makes lots of money. Usually, they’re in it because they want to multiply the effect that their money has. When grants fund the non-profit world, a donation of funds is made that the donor never sees again. With impact investing, they’ll likely get most of their investment back and can send it back out to do more good in the world.
While the term, impact investing, has become more popular recently, it is very much in line with the philosophies of micro-lending. Kiva, one of the major players in this field, has been around since 2005 and has given out over $1.2 billion in loans. So, it’s not new. Micro-lending started with the notion that it doesn’t take much for people to start small home-based businesses in some parts of the world, so a low-interest loan can do a lot to stimulate the economy.
Before You Dive In…
Quite often, you want to look at the question of funding before you incorporate. Whether you’re a for-profit or non-profit company may depend on who is willing to fund you. Talking to people and determining the right sort of funding can make your success, so quite often it’s more important to figure that out before deciding if you’re better off as a non-profit or for-profit.
Regardless of what type of funding you seek, it pays to put time into developing your elevator pitch — that compelling story which describes your business and your impact and takes only 30 seconds to tell. When people clearly understand your mission, as well as what sort of financial support you need to get going, it’s much easier for people to know how they can best help you. At every step of your growth, you should have a financial plan for growth that you refine as you go on – a projection of your profit & loss that says how much money you realistically think you’ll make. You’ll also want to understand your cash flow, which is a chart of when money is going out the door, and when it is coming in. If you have to spend huge amounts of money upfront before you have revenue, then you’ll need capital to cover the gap. The same is true for payroll – if you have to cover employee salaries, then understanding your flow of cash is very important to make sure that your workers don’t go unpaid.