Obtaining funding for any new business venture is hard; the hybrid nature of social enterprises and the new territory they represent makes securing financing, whether from traditional nonprofit funders or private sector investors, even more difficult. Understanding the specific challenges social enterprises face in seeking funding from different sources is a first step toward applying two recommended funding strategies: identifying funders with which your venture has a strong “fit” and creating open and honest relationships with your funders.
The primary funding sources for most nonprofits are rarely set up to provide the kind of funding social enterprises need. Both foundations and governments usually distribute their money as grants tied to providing social services. Unfortunately, the social impact of an investment in a social enterprise may not occur until after the grant is spent, as the business develops, grows and hires and trains more people. This longer timeframe does not fit within a typical program period. Nor, generally speaking, will foundations or governments commit to the multiple-year funding that businesses need to make it through the cash-strapped start-up phase before they start to turn a profit. Foundations often look more favorably at “new and innovative” programs than at ongoing, albeit successful, programs.
Although social enterprises are currently very popular as a concept, some foundations are hesitant to take a financial risk and so obtaining funding past the business development or initial implementation stages can be difficult. Nor are community development resources always oriented toward the capital requirements of building a business to scale. Government money is sometimes available but is often not responsive enough to business opportunities that arise because of longer lead times and it is more political to obtain. The potential paperwork in most government funding – which a business is usually not set up to do- makes it essential to do a cost-benefit analysis before going after these funds.
The expectations of investors in for-profit start-up businesses, such as private investors and community loan funds, typically do not fit with social enterprises. First and foremost, private investors want a financial return on their investment. However, the law prohibits nonprofits from giving an equity stake or otherwise distributing profits for any reason other than furthering their mission. The private and community loan funds that are available to nonprofits for community development may offer discounted interest rates but are often initially set up for housing development and so may require negotiation and adjustments on both sides. Standard business loans will be available, typically at market interest rates. However, they will have collateral requirements that may be hard for nonprofits to meet because most organizations typically have few assets or significant cash holdings.
Social enterprises should concentrate their efforts on funders who want to work with this kind of organization, and with whom the relationship can effectively meet the goals of both parties. This means first defining what you’re offering in terms of target social outcomes, the timing of expected results and funding requirements. Basic questions to be addressed include:
- How many years will you need funding before breaking even as a business?
- How much money do you anticipate needing over this period? (It’s always more than you think!)
- How many people do you expect to employ over time?
- How much can you accept in the form of loans vs. grants?
While defining your own needs, you must also become familiar with the needs of the funder and evaluate the costs and benefits of what they offer your organization:
- Do they view social enterprises as a viable concept and are they familiar with the ups and downs of business development?
- Can they participate in a multi-year relationship?
- Do they have access to the necessary capital or help leverage their investment with other funders?
- Do they have access to other resources beyond capital that are necessary for the social enterprise’s success?
- Are they mandated to serve a certain population with certain services?
- What are their reporting requirements?
Having a clear vision of your business model and social mission will also make it much easier to say “No” to tempting funds whose social outcome requirements may require you to make decisions that are not ultimately in the best interests of the business.
The most effective relationship between a social enterprise and a “good fit” funder is very different from the typical nonprofit to grant maker relationship. Rather than presenting a “dog & pony show” in which the nonprofit portrays itself as “perfectly ready and ideally suited to execute a program” once it receives the desired funds, a good social enterprise seeks to present itself to funders as accurately as possible.
Again, unlike many grant recipients, a social enterprise will be held accountable to its budgets and outcome projections. Putting together a tight, realistic business plan that details your financial needs and has believable pro-forma financial statements for at least five years makes this process easier.