Social entrepreneurs are motivated by a desire to improve lives and systems.
In this four-part series, we’ll review the major types of capital along the impact capital spectrum. We’ll also share insights and perspectives from funders and entrepreneurs about their experience seeking and receiving different types of capital.
Global Entrepreneurship Monitor 2016 found that the choice to bootstrap is often due to inaccessibility of other types of capital, especially for women entrepreneurs “who may face unequal treatment from traditional lenders, both in developed and developing countries (World Bank, 2015)”
I wanted to run it all the way bootstrap only because that’s where the fun is: you make money and then you put more money into the business, and grow it, and then make more money. But later I realized that it would take a lot of time for me and there are a lot more opportunities for impact and that impact can be escalated if I raise funds.
Mixing family and money can be a delicate situation. It’s best to document the agreement from the very beginning to ensure there is a shared understanding of repayment terms and conditions.
We didn't have anything to show to anyone. We had imported a number of products and tested them in the marketplace. We didn't have traction. We didn't have revenues. We had an idea. And at the idea stage, I think the easiest thing to do is to turn to friends and family, and that's what we did.
Part 2 of this series goes into options to raise capital over short-term engagements to continue building momentum in the early days: crowdfunding and competitions. These specialized methods can secure quick injections of capital and provide the necessary boost you need to keep charging forward.
Part one of this series explores early-stage capital to grow a social enterprise. Personal savings and a friends and family round can ignite the spark, but that flicker will quickly extinguish unless more fuel is added.
Short-term engagements like crowdfunding or impact-focused competitions and programs can supply much-needed capital, especially if you’re trying to become ‘investment-ready’ for more traditional types of capital.
Just as critical, but often overlooked, are the non-financial benefits that come with these experiences: mentorship, networks, and exposure.
What’s more, Bre DiGiammarino explains that crowdfunding is, “no longer just the first-time entrepreneur... We’re finding repeat entrepreneurs who use it again and again to bring new products to market, and even established companies that are using it to launch exciting new products and learn about what is working in their community.”
Overall, competitions can be a way to fast track your learning as a new founder. The judging rules provide concrete criteria to focus your efforts and pitching your idea forces you to practice explaining what you do and why in a compelling manner. Even if you don’t end up taking home cash for top prize, the experience of putting yourself into the spotlight can lead to many unexpected and welcome benefits in terms of building your network and awareness for your social enterprise.
With a variety of program types, it’s important to understand the time commitment and responsibilities of participation and to make sure the goals of the program align with yours.
Although you don’t need to give up equity with grants, there can be a considerable amount of time invested both in the application phase before receiving the money, and in the reporting phase after receiving the money.
Part one of this series explores how early-stage founders can tap into personal resources and the support of friends and family to fund seeds of a social venture idea.
Part two explores the benefits and drawbacks of accessing capital through crowdfunding, competitions, programs designed for social entrepreneurs, and grants.
Grant funding, crowdfunding, and other types of early stage capital can help you prove the business fundamentals of your company like market demand and revenue model, but at a certain point you’ll need to seek funding to scale.
The good news is that impact investing is gaining traction.
In the Global Impact Investing Network’s Sizing the Impact Investing Market report, the global impact investing market is estimated to be USD $502 billion, managed by over 1,340 organizations. The market has grown by 10 times since 2009 when funds under impact investment were $50 billion (Investopedia).
Despite the growth, there is still much to learn on the part of both entrepreneurs and investors.
As Brian Trelstad, former Chief Investment Officer at Acumen, and now Partner with Bridges Fund Management Ltd. shared in interview: “More clarity and more communication would go a long way to helping ensure that the capital that is allocated for impact delivers as much good as possible and the financial returns that people are seeking.”
Impact investors may have varying focuses in terms of geography, stage of business, or impact area, but they share the common objective of funding companies that are making an impact. However, many define and measure impact differently. For example, Acumen developed Lean Data to better understand how investee companies are making a real, lasting difference in the lives of low-income people.
Aside from considerations for impact potential, these funding vehicles work much the same as they would for a traditional, non-impact startup or company.
Raising capital at this stage, whether philanthropic or equity, is a challenging task for any entrepreneur. It takes an investment of time, building relationships, perfecting your pitch and mastering your mindset.
Sasha Dichter, former Chief Innovation Officer at Acumen and now co-founder of 60 Decibels, urges founders to examine their underlying beliefs about fundraising. Instead of fearing rejection, every fundraising conversation is an opportunity to serve both sides in a true exchange of value. Reframe your fear of fundraising with Sasha’s advice:
We talk ourselves out of successful fundraising long before we ever get in the room with somebody.
Since many angel investors are focused on certain sectors or industries, it can be helpful to understand how their goals aline with those of your organization.
Similar to new legal structures emerging around the world to support the growing sector of social enterprises, there are also new capital funding options that aim to better meet the needs of hybrid organizations.
While many social enterprises will do well navigating the spectrum of funding available to traditional for-profit and nonprofit organizations (explored in the first three parts of this series), depending on the circumstances, sometimes a more specialized option is a better fit.
A social impact bond (SIB) is a contract with the public sector or governing authority, whereby it pays for better social outcomes in certain areas and passes on the part of the savings achieved to investors. A social impact bond is not a bond, per se, since repayment and return on investment are contingent upon the achievement of desired social outcomes; if the objectives are not achieved, investors receive neither a return nor repayment of principal.
Seven service providers helped ex-prisoners with substance abuse and mental health issues, helping to cut reoffending rates by 9%–above a target of 7.5%. The SIB therefore delivered a financial return of 3% on capital to foundations that funded the initiative.
There is still much to be explored to determine the efficacy and optimal use cases for implementing Social Impact Bonds to finance social impact.
Epstein also explains how quasi-equity provides benefits for both investors and entrepreneurs. From the investor’s side, it allows them to invest in impactful companies that aren’t necessarily able to show a clear path to exit through acquisition or IPO (initial public offering). For entrepreneurs, it provides the opportunity to align investors with the best interests of the company, since they will only receive a return when the company does well. For both sides, quasi-equity is a financing solution that offers more flexibility as an alternative to the long-term commitment of a straight-equity deal.
Program-Related Investments (PRI): PRIs are investments made to charities as well as for-profit and non-profit enterprises to further the Foundation’s program objectives, but, unlike grants, they also aim to generate financial returns, with a tolerance for below-market returns.