Capital for Social Enterprises: Grants
Grants can generally be defined as an award that is made to a non-profit or social enterprise. They are typically financial, but can also come in other forms such as in-kind support or pro-bono assistance. This section, however, will primarily focus on monetary grants. The main thing that sets grants apart from other forms of capital is that there’s no expectation of financial payback, so the returns that a funder is seeking come in the form of social returns or outcomes achieved.
There are two general categories of grants. There are grants that support specific programs or projects, which tend to fall under the category of restricted funding. And then there are grants that support capacity and growth, which tend to fall under the category of unrestricted funding.
Restricted grants typically have a set of activities, objectives, and budget tied to them and the funds may be used only for the specific designated project. Some of the types of funding that you may see that are considered restricted are grants such as planning grants, or start-up grants, or grants that support programs and execution. Restricted grants tend to be the most common form of grants available.
On the other hand, unrestricted grants are when the funder gives an organization money to support the mission, but there isn’t a specific mandate on how it’s used. This means it can be used for operating support, or to increase staffing or capacity, or to fund a marketing campaign to grow your business. By definition, these grants are far less restricted in what they can be used for, but they are also less common to find.
Why do social enterprises need grants when they earn revenue?
When a social enterprise is seeking grant funding, a common reaction is: why do social enterprises need grants when they earn revenue? There is an assumption that social enterprises are businesses and their point is to generate revenue for parent non-profit, at least enough to cover costs. So why then would they need grant support?
While it’s true that social enterprises are generating revenue, and ideally enough to cover their costs, there are a lot of costs associated with programmatic purposes and that go above and beyond business costs. These are what we call “social costs”. So while a social enterprise business can be doing well and covering all its business costs, it’s not unusual for them to also need additional grant support to cover these social costs. Therefore, it’s perfectly reasonable to obtain additional grant funding to cover these additional social costs.
Typical Sources of Grant Funding
Grant funding can come from a variety of sources, from the government, to public or private foundations, to individual donors. Success will depend on finding funders that share an area of interest with your social enterprise, such as target population or geographic area of impact. A key thing to note is the importance of your social enterprise’s tax structure. Most of these funders are only able to give grants to non-profit 501(c)3 organizations. There are some rare occasions where it’s possible to get funding for a B-Corp or a for-profit organization, but typically these need to get funneled through a nonprofit sponsor.
Understand the stage of your social enterprise
As you’re preparing to apply for grant funding, it’s important to be reflective of your social enterprise and the stage of growth that it’s in. This will help determine how best to position your proposal and understand who is best to approach and what you will be approaching them for. One way to frame your thinking is through this lifecycle framework, which REDF developed specifically for employment social enterprises to get a better sense of where each enterprise should be at each stage of development. The four stages are: vision, startup, growth, and established.
The vision stage is simply ideation, when there is an idea for a social enterprise or you have a business and you’re thinking about forming into an employment based social enterprise. Startup enterprises are launched, but are still working on developing the model and the business. After their operations are stabilized, enterprises in the growth stage are focused on continuing to grow the business and starting to think about scale and replication. Established enterprises have a proven model and a successful business, and are ready to replicate and startup new enterprise or move into new locations.
As you think about the stage of your social enterprise, it’s really important to remember that different elements of your social enterprise may be more developed than others. For example, your enterprise may have a more developed business side, but may be just starting to think about the supports that it’s providing to its employees. And that aspect may be newer and more in the startup phase.
When you’re approaching a funder, it’s helpful to be able to demonstrate what you’re moving towards. For example, you can make the case that your enterprise is currently in the startup phase, but with funding it would be able to move into the growth stage. This really gives funders a concrete way to visualize the progress and the impact of their dollars.
Framework for preparing to apply for grants
Once your social enterprise is ready to apply for a grant and has identified potential funders and funding opportunities, it’s important to think through is this framework of questions to make sure you have all the pieces in place to set your organization up for success.
The first step is to identify the need. Be clear on the problem you’re trying to address, which will typically tie back to the mission of your social enterprise. Essentially, this is the answer to why you need funding. Be able to succinctly describe what you are attempting to do and what you are attempting to impact. This also where you can highlight the program needs of the social enterprise and explain the social costs the business. If you’re asking for operating support, be able to explain how this funding will help your enterprise grow.
The next step is to consider impact. How will your intervention make a difference? Think about how the interventions you’re proposing are going to have an impact or how the additional operating capacity can change how you’re doing your business.
The nonprofit and philanthropic world has a growing focus on being data driven, so be sure to plan for measurement. Be able to show how you’re measuring the changes you are driving and how you plan to measure the impact. Know what can be measured and what can’t be. Know what metrics you’re going to look at and how long it will take to collect the results. Ultimately, ask: how will you know if you’ve been successful?
It’s important to be really thoughtful and honest and identify challenges. It’s important to be transparent with potential funders to set the right expectations. Funders can typically support your enterprise in mitigating road blocks and helping connect you to additional resources such as technical assistance. So be upfront about potential challenges your enterprise is facing. It’s also important to be realistic, otherwise it may demonstrate to funders that you haven’t thought through some of the challenges of implementation.
Finally, it’s important to evaluate the capacity of your organization. There have been instances where grant funding has been too much for an organization to take and they have to scale up too fast too quickly and it’s actually hurt them. So it’s important to take into serious consideration the impact that the funding is going to make on the enterprise and make sure you evaluate the potential roles and responsibilities of the employees if you were to receive the funding.
Finally, expect to provide these different types of documents when you’re applying for grants. Not all grants and not all funders will ask for the same thing, but this is a pretty representative sample of the sorts of documents that you’ll be asked to provide.
First there’s the narrative portion that will address all of the things that you thought through fin the above framework. It’s also really important to produce a budget and pro forma financials. and it’s extra good if you can break out things into a double bottom line statement which means you show which portions are social costs and which portions are business costs. Of course you want to outline your expected outlines and metrics and be able to demonstrate how you’re going to show success. And finally, show the strength of your existing organization by providing your IRS 990 and audits. If you are proposing growth to your business or starting a new social enterprise or line of business, it’s also important to provide a business plan.