What funding sources for social businesses and social enterprises?
Quick guide to navigate financing options
Among the different things an aspiring social entrepreneur has to consider while launching a new social business, understanding the wide array of financing options is definitely a crucial one. To help you navigate through that, we put together a brief (and surely not comprehensive) overview of typical funding sources for social businesses and social enterprises.
Two roads diverged..
Let’s begin with a premise. Organizations tackling social problems do not all look the same. As a matter of fact, the so-called “social entrepreneurship spectrum” ranges from charities with commercial activities to for-profit companies with a social/environmental motive. For each type, funding considerations vary accordingly. In this article, we decided to primarily focus on funding sources for social businesses: socially-oriented companies that are economically viable and self-sustainable.
Funding sources for social businesses
In order to provide a clear overview of financing options, we should first understand the evolution curve of social businesses and social enterprises. Please find a simplified version of it below:
1. “Pre-seed Stage” = from ideation to validated problem/solution fit;
2. “Seed/Startup Stage” = from MVP to validate product/market fit;
3. “Growth & Scale Stage” = from validated business model to full scale-up.
As you might already guess, the right types of funding might change depending on constraints, opportunities, as well as the evolution phase the company is in. Let’s now take a closer look at each of these stages.
At this stage, the founder has identified a market opportunity and a social problem to address. Also, he/she might have already ideated a first, rough value proposition for the audience, as well as an early sketch of a business model. Throughout this stage, the goal is to “get out of the building” and learn directly from the field, testing and validating earliest, riskiest assumptions.
Here, the most likely funding options for early-stage social entrepreneurs are: bootstrapping, grants, money from family and friends.
According to Investopedia, bootstrapping is all about creating a company from scratch, with nothing but personal savings/resources. In other words, the founder self-funds the social business and carries out the first activities pouring in personal finances. From time to time, bootstrapping might also include cash coming in from the first sales, but this is usually quite rare in the context of social entrepreneurship.
Grant funding is another great alternative during this phase. Often times local, philanthropic foundations run programs specifically dedicated to scout and support promising social business ideas in need for money (and mentorship) to being operating.
Finally, early-stage social entrepreneurs might consider raising capital from their closest networks, namely family and friends. This option is often complementary to bootstrapping, even though mixing money and person relationships might be delicate at times.
When entering this phase, social businesses start to gain traction, with value proposition and business model’s riskiest assumptions already validated. The next step consists in building repeatable sales roadmaps and begin driving market demand. Thus, there’s a need for more fuel. Common funding options suitable for this stage are seed funding, angel funding, crowdfunding.
We are not going to analyze the current state of the impact investing market here. As a rule of thumb, it’s enough for you to know that impact investors seek social impact as well as financial returns. In the seed stage, social businesses usually begin approaching early-stage impact investors and seed venture capital firms/funds. Unlike venture capital (check next paragraph), seed capital involves lower investments in exchange for equity stakes, as risks and uncertainties are still quite high.
Bear in mind that seed venture capitalists usually work alongside with incubators and accelerators. To selected startups, incubators and accelerators offer mentorship, tutoring and professional services of all kinds. Also, they unlock access to networks of impact investors. Because of that, social businesses joining similar programs are more likely to attract seed venture capital.
If lucky enough, social entrepreneurs might also end up getting in touch with angel investors. These are high-net worth individuals, typically successful entrepreneurs themselves. In exchange for equity, they support a rising social business through its difficult early stages, with both money and counseling.
Lastly, there’s crowdfunding. Crowdfunding traditionally comes in 3 forms:
– reward-based, with campaigns to keep validating the market and pre-sell a product/service
– debt-based, also known as peer-to-peer lending
– equity-based, where backers pledge to receive a share of the company.
From time to time, one option might be preferred over the others. If you want to get familiar with crowdfunding, we recommend reading Thorpe’s book “Crowdfunding for Social Good”.
Growth & Scale stage
By the third stage, a social business has a solid proposition, a fully-validated business model and a proven track record. So, it is ready to scale its activities as well as its impact. Among the diverse funding sources available at this stage, we’ll here focus on debt and venture capital.
As you already know, debt funding requires to pay back to the lender before a certain deadline occurs. Sure, social businesses can seek debt funding through traditional institutions/banks. However, “social enterprise lending” can ensure social businesses with below-market rate loans and more favorable conditions. That’s why it is also called “patient lending“. More flexibility because of the social outcomes sought.
When it comes to social venture capital, we can consider it as the “elder brother” of seed funding. As a matter of fact, seed money is invested during the early stages of the company, with greater risks involved for investors. Conversely, venture capital is invested when risks and uncertainties have been dramatically mitigated. So, venture capitalists pour in larger amounts of money in exchange for equity (or quasi-equity).
Truth to be told..
In entrepreneurship, nothing should be seen as “black or white”. Nor the funding sources discussed so far.
In fact, according to their visions for growth, social entrepreneurs can choose to navigate the funding landscape in very diverse ways. For instance, grants and venture philanthropy come useful throughout every single stage. Also, some entrepreneurs may come across angel investors during the pre-seed stage, while some others do only when ready for the scale-up. Again, debt funding might get used in early phases. And some businesses may even manage to solely rely on the entrepreneurs’ personal finances. So, the list discussed in this article is meant to provide a first glimpse over what is usually considered as most suitable for each life-stage of the business.
In this article, we discussed typical funding sources for social businesses.
To get off the ground, social entrepreneurs frequently rely on personal resources (“bootstrapping”), friends/family money and grants. Once they validated earliest, riskiest assumptions and gained some traction, they usually approach seed venture capital funds and angel investors. Here, crowdfunding is another great alternative, as it simultaneously builds financial capital as well as market demand. Finally, when the enterprise enters the growth stage, debt funding and venture capital may be needed to further scale activities and impact.
In conclusion, please remember that there’s no unique roadmap for entrepreneurs to navigate the funding landscape. There’s a myriad of funding alternatives.. and a myriad of pathways to make the most out of them!
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