Funding a social enterprise 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. You might take out a bank loan or bootstrap your business to get it off the ground. A business that aims to scale dramatically usually needs outside investment. This is generally the case with startups 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. This is especially true if you have a plan for growing revenue and know how the venture capital is going to enhance that growth. But VC money comes with an expectation. Your funders will exit with their investment within a short time period (say 3 -10 years). This means you grow your company to go public with an IPO or be sold to a bigger company.
The VC path is the stereotypical funded enterprise, intended for huge growth. Investments start with friends & family and then progress to angel funding. Angel investors often take on much more risk, which ties 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.
Lack of social entrepreneurship funds
There are only a few social entrepreneurship funds out there. Structurally, it is awkward since the need to repay investors is 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 with venture capital 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.) Conscious Capitalism fuels this trend and a large number of people recognize the need for businesses built around ideals other than “make a lot of money”. Social Venture Capital still requires a return on investment – but this works for ventures that will scale. (As is the case with most technology platforms.) Are you funding a social enterprise that is geared towards growth? Find social venture capital.
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 you 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. There are many varieties, including one of my favorites, Start Some Good. (Here’s another list!) As a bonus, crowdfunding often gives you an indicator of your ability to find your audience. It is also some experience in selling. That’s 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. They 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, about 30% of the grants are approved — competition is tight. Alternatively, nearly any sound social enterprises concept is likely to get funding because they won’t rely on those dollars forever.
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 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. This is a loan designed for social entrepreneurship. Impact investors exist because they believe in the impact you’re making. You repay them, but they are prepared to take a lower (sometimes close to zero) interest rate. This basically means that they’re more willing to risk losing their capital and less interested in making tons of money. Usually, they’re in it because they want to multiply the effect that their money has. Grants funding the non-profit world is a financial donation that the donor never sees again. With impact investing, they’ll likely get most of their investment back. Once it is back, they can reinvest it to accomplish even more good. I suspect impact investing will become a key driver to funding a social enterprise going forward.
While the term, impact investing, has become more popular recently, it is very much in line with the philosophies of micro-lending. Kiva is a major player in this field. They started in 2005 and have given out over $1.2 billion in loans. So, it’s not new. Micro-lending exists because it doesn’t take much for people to start small home-based businesses in some parts of the world. 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 determine your success. 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. Your pitch is a compelling story which describes your business and your impact and takes only 30 seconds to tell. You want people to clearly understand your mission and what financial support you need to get going. This makes it much easier for people to know how they can best help you.
At every step of your growth, you should have a financial plan that you refine. Build a projection of your profit & loss that says how much money you really think you’ll make. You’ll also want to understand your cash flow. Cash flow 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, then you’ll need capital to cover the gap. The same is true for payroll! If you have to cover employee salaries, make sure you understanding your flow of cash. You want to make sure your workers get paid on time!
In summary, find the key to funding a social enterprise and you’ll magnify the impact you can make in the world.