Chapter 20: What Capital is for Social Entrepreneurs? -
Tomorrow Toolkit for Entrepreneurs
ROAR for Good founder Yasmine Musafa
What Capital is for Social Entrepreneurs? By Tony Abraham
There’s a spectrum of funding options for social entrepreneurs. Whether you’re looking to scale a nonprofit or a social enterprise, there are myriad options for funding your venture. Just don’t forget about bootstrapping.

If you’re a social entrepreneur pursuing a for-profit enterprise, let’s get one thing straight: venture capital is not always the best option for scaling your business. Really, as we said in Chapter 10, it’s the case for any business. Most investors themselves will tell you the same thing.

“If there’s absolutely anything else you can do to get money, do it,” said Jacob Gray, senior director at Wharton Social Impact Initiative, the University of Pennsylvania’s social impact research arm. “VC is really, really tough and comes with a great cost. There’s often a mismatch there of expectations.”

Gray said whenever he’s approached by an entrepreneur looking for venture capital, he tells them two things:

  • Look for access to virtually any other funding avenue besides venture capital.
  • Still, the very first equity investors should be the three F’s: family, friends and fools. Bootstrapping should never be underestimated as a valuable tool in the entrepreneur’s toolbox.

Crowdfunding is also an approach. Philadelphia-based ROAR for Good raised money for its first product, a wearable alert system, on Indiegogo.

Grants are also available, as Prasanna Krishnan and Kartik Hosanagar learned in receiving support from the National Science Foundation for SmartyPAL, a platform for interactive storytelling apps.

But if venture capital is what your social enterprise needs to scale, pitch impact investors — a sect of venture capitalists looking for social returns to complement their 10x financial return. From funds and firms to angels, impact investors are unique in their expectations, said Gray, and are steadily growing in numbers.

If you’re a social entrepreneur pursuing a nonprofit model, you’re in luck: you can’t get your hands on venture capital, anyway. But you can take on debt — even high-risk debt — via loans from institutions like Reinvestment Fund.

“They are the granddaddy of them all,” said Gray. “They have a strong social mission, they work almost exclusively with debt and they’re like a bank.”

Available for both nonprofits and social enterprises, “impact debt investing” can come in two forms:

  • Institutions: These are places like TRF that provide stable low-interest, low-risk loans to entrepreneurs and organizations aligned with their mission.  
  • Individuals: Individual venture capitalists and angel investors will occasionally offer to take on high-risk debt. Gray said this type of debt is “mostly unsecured with no collateral.”

While it’s a common misconception that for-profit ventures cannot take grants, it’s a funding option for both nonprofit and for-profit models. However, it’s less common for for-profit enterprise because grantors will not receive a tax benefit from the grant. Grants can come from individuals, government, foundations and corporations.

What about bonds? Social impact bonds — also known as “pay for success” — are gaining popularity in the public sector. In a nutshell: investors fund programs that will achieve benchmark metrics for government, which then puts money back in the pockets of those initial investors. Don’t do it, said Gray.

“That is a horrifically bad way to try to fund innovation,” he said. It’s essentially borrowing money from investors. “They only work on a large scale because the transaction costs are extremely high and very complex.”

Extremely high, indeed. The absolute floor for most SIBs is $15 million, and even then, Gray said they aren’t that very economical.

Besides bootstrapping, Gray said social entrepreneurs across the tax status spectrum can always look to one-off pitch competitions.

“You could practically make a living just going from competition to competition at this point,” he said.

If you feel you must raise capital, know your options, but growing a business on your revenue is still the smartest way, said Jacob Gray of the Wharton Social Impact Initiative.

Your Checklist:

  • Go to a Small Business Development Center: It’s important to have these ideas in mind, but these government-backed resource centers are valuable to get the chance to talk through your options. Also be on the lookout for open office hours, which investors and other advisors frequently host.
  • Nonprofit or for-profit? If you’ve been delaying your decision, here’s where it matters. This will determine how you pursue funding. There is a wider range of options available for for-profit enterprises than there are for nonprofits.
  • Family, friends and fools. This should be the very first round of funds you raise — whether they’re donations for a nonprofit model or equity investments for a for-profit model.  
  • Get involved in pitch competitions. Take your show on the road. Pitch competitions will get eyes on your product, can provide valuable consumer feedback and many offer cash prizes.
  • If you need facility or equipment, consider debt. Low-interest loans will cover the high expenses carried by facility and, when needed, equipment. There are both mission-driven institutions and individuals that will loan to nonprofits and for-profits.
  • Decide if your model needs venture capital. If you’re a for-profit and you absolutely need venture capital to scale, seek out impact investors. Just remember: it’s not the best fit for most business models.
  • Build a sustainable model from the start: All organizations that succeed are defined by a model that had a clever and reliable funding mechanism. If you can access paying customers from the outset, that’s universally the best method forward.

The point here is that an array of options exist for growing organizations but nothing can hide the idea that you need a reliable method of funding. Everything else is just a tactic to get there.

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