At one point, nongovernmental organizations and charity groups were the only options for alleviating societal ills, but in today’s increasingly interconnected world, we’re facing more complex issues that require more innovative and sustainable solutions. This has led to the rapid upsurge of social entrepreneurship; now, socially conscious entrepreneurs tackle local and global social challenges while generating profits.
Social entrepreneurship combines social impact and sustainable business growth, taking on social issues using business principles to its advantage. In theory, social entrepreneurship is an amazing concept, but the practical process in progressing from an idea to a sustainable operation has critical challenges, in particular during the startup financing stage.
How social entrepreneurs get initial financing
Typically, a regular startup would turn to the following funding sources: network investments, banking, equity debt, convertible debt, crowdfunding and so on, with a relatively straightforward process for funding channels that are revenue model options. However, social ventures don’t have the same flexibility as regular startup ventures when it comes to leveraging capital.
First, equity or VC financing usually expects an exit strategy that doesn’t automatically exist in social ventures, which usually plan on staying in it for the long haul. Second, investors need to have confidence in your business concept. However, social ventures make assessing risk more difficult, given the unique nature of cultural and business resource issues and investor networks. Third, and most important, investors usually depend on comparable investment activity that helps validate an investment thesis around market opportunity and valuation levels. That doesn’t exist in many social venture markets, where activity is a lot patchier and those markets have yet to demonstrate clear trends in delivering investor returns. All this limits the availability of capital in social ventures.
The global trend for social ventures clearing the financing hurdle
To access capital, social ventures have to do several things, including conducting intensive market research to prove their need for funding and their ability to manage and expand their business. But funding roadblocks might still arise. If that happens, social ventures should look into the following three options: leveraging partnerships, philanthropic organizations and social cause competitions and funds.
Revenue-sharing partnerships involve social entrepreneurs identifying a partner who can bring economic value to both parties. The partner may have intellectual value or property to contribute that adds value to the venture in a unique way. The beauty of this strategy is that it’s a win-win situation for both parties.
Philanthropic money is a large pool of capital social entrepreneurs can tap into. However, the definition of philanthropic money has shifted over the years. Originally it meant simple donations, which are commonly seen today as an unsustainable method of giving. Today’s new wave of philanthropy is called impact investing, a form of investing in which a measurable social or environmental impact is part of the goal, along with a financial benefit.
For entrepreneurs, this source of capital is advantageous because it requires lower than market rate interest or return targets, and for philanthropists, a principal attraction is that the returned capital can be recycled into other charitable activities. The concept of impact investing is still evolving, however, and it will take some time until it can accommodate the growing number of social enterprises.
Finally, as in other industries, startup competitions, accelerators, angel investors and impact funds provide valuable exposure and mentorship, which can lead to capital for social ventures. Good avenues to explore would be business plan competitions, such as the Global Social Venture Competition and the Hult Prize, as well as business incubators and accelerators like Echoing Green, Unreasonable Institute and Endeavor Global. Since most social ventures get their start thanks to committed and passionate donors, the challenge for the social entrepreneur is to identify a sustainable model.
Example: how Pi Slice got funded
Genny Ghanimeh is the founder and CEO of Pi Slice, a web-based social platform for microfinance. Here’s how it works at her company, in her words:
“In practice, what model examples do we have of social venture startups that are securing financing? At Pi Slice, when we went for our first funding rounds, we learned from meeting diverse investors to rely on all funding channels. From the beginning, we had some pre-seed angel money that helped us get started, and allowed us, with MicroWorld (www.microworld.org) from the group Positive Planet (www.positiveplanet.ngo), to build a revenue-sharing partnership model — we’re big fans of partnerships and creating shared value.
“We also participated in different entrepreneurship competitions, as much as time and timing allowed us to — the exercise of preparing for a competition, being mentored and presenting the case to the jury is very beneficial to reassess the model, whether one gets funded or not. We still needed money, so we approached philanthropy capital while still pitching the project, focusing on financial and operational metrics. At the end of the day, social investors or philanthropists, like any investors, need to know that you can be sustainable and scalable, and that you won’t require any other emergency rounds of financing.
“Finally, we also engaged with VCs and set future milestones to pitch them at a time when they would be interested to come in — this is a very useful exercise to set standards and milestone achievements in foreseeing the growth of the venture. Our experience has taught us to knock on all doors and try all funding models, because each model has its own added value and can prove to be crucial for a new trend to be successful.”