Financing Options for Social-Purpose Businesses (for-profit)

While social entrepreneurs are creating“blended” types of organizations, delivering social and/or environmental benefits along with financial returns– those organizations who provide financing are distinct: the“ investors ” who invest in or lend to (for-profit) social-purpose businesses and the“ funders ” who grant funds or (less frequently) lend to (non-profit) social enterprises. This article focuses on how to finance your social-purpose business (SPB).

You have a great idea and in order to take it to the next phase, you need financing. Financing is the money or assistance you need in order to start a business delivering a service or selling a product based on your idea. Here are a series of questions to ask yourself as you pull together your plan for seeking financing:

Step 1) If you are a first-time social entrepreneur, you should ask yourself: Do I have the characteristics to be successful? Will those attributes be recognized by prospective investors or lenders? If not, perhaps you need to consider partnering with another individual or organization to launch your business.

Step 2) If you have concluded you are a social entrepreneur, you need to determine if you are ready to accept investment from outside investors to build your business. If so, what types of financing? How much money do you need? Can you access this funding based on your track record, your collective personal assets (including your family and friends willing to help), and your networks of contacts with outside investors or lenders? A key consideration for the social entrepreneur is: Will the presence of outside investors, who generally want to be active participants in the strategy and supervision of management of the business, have any negative impact on the accomplishment of your social mission? If so, then it might be too early to add outside financing partners (see ideas for“social bootstrapping: below) or special care may be required in selecting investors.

Step 3) While you’re seeking outside financing or in place of it, you can consider“bootstrapping” your business. Bootstrapping refers to a common sense approach to the frugal launch of your business using your assets and those of the business. For social entrepreneurs, bootstrapping might involve generating early funding from corporate sponsors or early customers to seed your business. Businesses or their related foundations may fund your organization if their business objectives are a good match with your social mission or where their employees/other stakeholders share a passion for your social cause. Finally, customers may be willing to purchase an early prototype; provide an advance for future services; or purchase consulting services from your team, based on your area of expertise, particularly, if they see significant potential in your idea. These early revenues can be an effective way to get your business off the ground, contributing social/environmental benefits and building value until you can secure additional financing. 

Step 4) You have made a decision to work with outside investors. What type of financial return do you expect generate for investors from your business plan, along with your projected social or environmental benefits? A market-rate return for equity in a start-up is 20-30% and for debt is usually lower at 5-15% for traditional loans.

If you expect a lower-than-market rate return from your social-purpose business and/or the sector you are operating in is not one regularly funded by traditional investors (e.g. Education, International Development, Programs for Disadvantaged Members of Communities), then your prospects will be a narrow sub-set of the investor and lender community. These are groups willing to accept lower financial returns in exchange for tangible social and/or environmental benefits. You can use the following link to help identify targets:

• Social Capital Partners provides links to organizations that will help finance social ventures. Social Capital Partners uses the term“social enterprise financing” to refer to for-profit funding sources and“social enterprise grants and venture philanthropy” to refer to non-profit funding sources.

If you are targeting a market-rate return and the industry sector you are focused on attracts angels (angel investors are individuals with a high net-worth who invest directly in businesses) and private investors (like Clean Technology or Health), then you can develop a financing plan that targets traditional equity investors. You will also likely be able access to traditional lenders, subject to the normal restrictions for loans to any new business. You can use the following links to identify potential targets:

• The Government of Canada’s Sources of Financing Database  
• Angel Directory for North America
• The Canadian and US venture capital association membership lists 

Finally, if you do not expect your business to generate any financial return, but will contribute significant social and/or environmental returns, yours is likely a social enterprise rather than a social-purpose business. You should consider whether a traditional corporate structure is the most appropriate vehicle for you to deliver your product or service and to attract the funding necessary to support your initiative.

References

MaRS Discovery District. (2009).Social Venture Finance, Enabling Solutions to Complex Social Problems [ white paper ] . Retrieved July 29, 2009

Tags: social-entrepreneurship, social-innovation