Getting funding for a new social or not-for-profit enterprise can be difficult. But there is a lot of help out there budding social entrepreneurs.
There are lots of talented entrepreneurs creating solid businesses to solve the pressing social issues of the day but it can sometimes be difficult for these organisations to access mainstream finance. The social venture field is hugely varied, incorporating all manner of finance models and approaches. But there is a lot of help out there for budding social entrepreneurs – you just need to know where to look.
Some mainstream sources of capital aren’t open to social entrepreneurs, but there are pools of ‘social capital’ that only they can access. However in order to fully qualify, you must be credible. “In my own experience as a social entrepreneur and in supporting other social entrepreneurs to start and grow their ventures, there are a few things we’re clear that all ventures need to have in place to succeed in scaling,” says Belinda Bell, programme director at Social Incubator East, which provides intensive support for people with an ambition to set up or grow a business dedicated to making positive social impact. The top two, Bell says, are proper management and solid governance. “Proper day-to-day understanding of management information is crucial. A surprising number of entrepreneurs – both social entrepreneurs and mainstream – simply don’t understand the numbers well enough to be able to make good decisions,” she says.
“It’s also important to have proper governance and this includes external individuals who hold the founder and others to account,” Bell adds. This is likely to be a formal board of directors or trustees, although initially it may be an advisory board. Either way, it must have the appropriate levels of skills and experience and a strong understanding of the market.
“Even if you do not need to borrow from your bank from the outset, you may anticipate needing a loan or overdraft over the next few years,” adds Amanda Murphy, head of business banking at HSBC. “It is important to consider the financing options and lending services available from the different banks.”
Avoid planning problems
Particularly with new, unproven initiatives or those involving a big increase in activity, organisations can be over-optimistic, often making unreasonable assumptions. Carolyn Sims, head of banking at Charity Bank, says: “Organisations need to assess their projections dispassionately and err on the side of caution in their expectations for income and expenditure and on how quickly the increase in activity will occur.” Organisations should also be willing to identify skills gaps and recruit additional help as appropriate, whether it be more staff or external professional support.
Having identified probable project costs, organisations often forget that projects rarely go to plan and underestimate the contingency they need to cover unexpected events. “Organisations should identify the risks involved, such as the effect of bad weather, and hold an appropriate level of contingency funding,” Sims says. Another common misconception is that, if an organisation can demonstrate an ability to repay a loan, asset security is not required. Although a lender will primarily be concerned with demonstration of the borrower’s ability to repay out of its cashflow, security provides an essential alternative source of repayment if the borrower suffers severe stress.
Have a robust plan
Without doubt, having a robust business plan and financial projections are the basis upon which an initial investment decision is made. Your plan doesn't need to be hundreds of pages long but it does need to give a clear outline of where your enterprise is now, where you want to be and how you’re going to get there. It should be supported by realistic financial projections with evidence to back up the forecasts. “Do not be over optimistic, a cautious assumption is best and do not underestimate the project costs,” says Tracy Axten, head of business development and marketing, loans and investments at Big Issue Invest.
A good two-page executive summary of your business plan helps to grab the investor’s attention and compel them to read on.
Seek angel investing
Seeking social investment for impact-focused entrepreneurs is greatly appealing because of the non-financial value add brought by an angel. Angel investors bring their expertise and their networks to support the entrepreneur; they may take a seat on a social enterprise’s board to support an enterprise further. Katrina Cruz, who prepares ventures pitch to the Clearly Social Angels network – which invests in businesses and charities creating social impact – explains: “The investment can be much more human and personal than through an institution because angels connect directly with entrepreneurs – they are not governed by institutionalised processes and systems and are self-initiated and flexible.”
It’s all about values-alignment; if the entrepreneur and the angel both buy into the social mission, they are going to work together to grow and scale that business. “When you’re pitching to angels, articulate your social impact first and get them on board with your mission – but it’s absolutely key to demonstrate that you have commercial nous: don’t forget the financials,” Cruz says. For social entrepreneurs, angel investing provides a real, accessible option for growth capital and it is a key part of the early-stage market as the angels are often willing to tolerate a high level of risk.
Turn to crowdfunding
In a climate of reduced budgets and grant application fatigue social enterprises find it useful to be able to harness the power of their support network and community to raise necessary funds. Crowdfunding is a method that is gaining real traction. It allows individuals and groups to promote specific projects and invite financial donations or offers of support in the form of time and expertise. “Our experience has shown that many social enterprises have heard about crowdfunding but aren’t sure how to create a campaign let alone a successful one,” says Oliver Mochizuki, co-founder of Fundsurfer, the crowdfunding platform which also offers a consultancy service, helping to create, manage, promote and fund projects.
“The donations crowdfunding model use is particularly attractive as it allows rewards to pitched at level appropriate to each project,” Mochizuki says.