For-profit Social Enterprises: Funding

Goals

To identify what social enterprises do to attract funding, why they struggle more than regular startups, what tools, services, strategies they use, and how much they spend on them.

Early Findings

  • Social Sector Network states that according to The Guardian and UnLtd, 71% of social entrepreneurs struggle to make a living from their ventures and 60% of social enterprises cannot access the right type of funding. Another study from Mexico found that one of the main reasons behind the failure of social enterprises was the lack of resources and infrastructure. "Social enterprises could not secure funding because teams lacked fundraising skills, teams did not know where to find funds, or funds did not exist."
  • An article from Entrepreneur states that social enterprises do not have the same flexibility in leveraging capital the same way as regular startups because:
1. "equity or VC financing usually expects an exit strategy that does not automatically exist in social ventures that plan on generating impact for the long haul."
2. the risk appetite of investors depend on the proof of concept of business models.
3. investors depend on comparable investment activity that helps validate market opportunities and valuation levels.
  • The article further states that in order to access the desired capital streams, social enterprises need to conduct extensive market research to prove their need as well as their execution capabilities. It recommends 3 options for social ventures: leveraging partnerships, philanthropy organizations, and social cause competitions and funds.

OTHER FINDINGS

  • The key sources of funding for social enterprises according to Acumen Academy are:
- Self-funding (bootstrapping): Bootstrapping is common during the early stage of businesses due to higher risk and lack of track record. Self-funding allows businesses to build credibility for other forms of funding in later stages. Global Entrepreneurship Monitor 2016 found that the choice to bootstrap is often due to the inaccessibility of other types of capital, especially for women entrepreneurs.

- Friends and Family: raising funds from immediate personal networks is an extension of bootstrapping. However, this is not an option for every business. Global Entrepreneurship Monitor 2016 has predicted that crowdfunding will increasingly take the place of asking close relations for funding directly.

-Crowdfunding: "Crowdfunding is the process of campaigning towards a funding goal by collecting small amounts of money from many people." This can be rewards-based (most popular), equity-based, or debt-based. Its benefits include building social and financial capital and proving market demand hence crowdfunding can "play a pivotal role in a social startup’s early development."

-Competitions: Competitions come in a range of formats, eligibility requirements, and prizes, and if the timing and area of focus is a good fit, competitions can be a great opportunity for both exposure and funding. The most well-known competition for social entrepreneurship is the "Hult Prize" where the winner gets $1 million for tackling a market-worthy social challenge.

-Incubators, Accelerators, and Fellowships: These organizations provide resources for entrepreneurs, typically for equity (usually 5%-10%) in return. The article states that "most programs have an application process, are quite selective, like to keep cohorts small and intimate, and many come with funding, but not all." the Global Accelerator Learning Initiative found that "ventures participating in accelerators earned more revenue, hired more employees, and raised more investment capital than other ventures."

-Grants: "Securing grants from governments, foundations, or corporations can be a great option for early-stage social enterprises." The Global Entrepreneurship Monitor 2016 has reported that grants are crucial for startups in sectors with high startup costs and are riskier investments for private investors. However, there is a time-consuming process involved both before receiving the funds and during the reporting stages after the grant.

Proposed next steps:

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