Financing Social Enterprises: Government grants, corporate funders, foundations, bootstrapping or funders and investors?

Social entrepreneurs are creating “blended” values, delivering social and/or environmental benefits along with financial returns. But those organizations who provide financing are still distinct:

• the “funders” who grant funds or (less often) lend to social (non-profit) enterprises
• the “investors” who invest in or lend to social-purpose (for-profit) businesses

How can you finance your non-profit social enterprise?

As a social entrepreneur, you have a great “change” idea. To develop it, you need financing.
Financing is the money or assistance you will need to start your organization or your new initiative to deliver a service or sell a product based on your idea.
Ask yourself or your non-profit organization the following as you pull together the plan for financing:

Are you starting a new social enterprise or an initiative emerging from within an existing non-profit/charitable organization?

If you’re a new enterprise:

• Are you starting a new social enterprise or an initiative emerging from within an existing non-profit/charitable organization? If so, you should ask yourself: do you have the characteristics to be successful?
• Will those attributes be recognized by prospective funders or lenders? If not, perhaps you need to consider partnering with another more experienced entrepreneur or organization to launch your social enterprise.
• Is there an existing charity or non-profit organization that might be interested in your idea to further their social mission that may be a logical partner for you?

If you are starting a new revenue-generating initiative to support the core mission of an established charity or non-profit organization:

• Will this initiative be spun out as a separate legal entity?
• If so, with what human, financial and other resources?
• If it will be an internal initiative, how will it be funded and tracked internally within the existing organization structure?

If you’re seeking outside funding, determine what types of financing might work and how much money you will need. Ask:

• How much funding you can access based on your track record and the network of contacts you have with prospective funders?
• If you are a social enterprise, emerging from an existing charity/non-profit organization, is the board and management willing and able to provide any funding or guarantees for loans to the social enterprise. This consideration will depend on the culture of the existing organization. Today many groups are risk averse and not willing to take on or support a social enterprise unless it is a direct fit with the organization’s mission and a project of reasonably small scale to mitigate some of the inherent risks in a new venture.

Consider bootstrapping as a financing option

If you are unsure of your ability to attract outside funding or if you want to approach a new social enterprise in a more cautious way that may be more appealing to your board and current funders, then a bootstrapping strategy may be effective.
Bootstrapping is a common sense approach to a frugal launch of your business using your existing assets or a small subset of an established organization’s assets to launch your business idea and test the entrepreneurial waters.
For social enterprises, bootstrapping might involve generating:

• Donor funding (individuals or businesses), private foundations or early customers for the service or product you’re going to launch in your social enterprise
• Corporate funding may be available from businesses or their related foundations where their business objectives are a good match with your social mission or where their employees/other stakeholders share a passion for your social cause.
• Customers may be willing to purchase an early prototype; provide an advance for future services; or purchase consulting services from your team, based on your area of expertise, particularly, if they see significant potential in your idea.

These early revenues can be an effective way to get your enterprise off the ground, contributing social/environmental benefits and building value until you can secure additional financing.
Bootstrapping can be augmented in social enterprises by the effective use of volunteers to operate the enterprise.

Approaching outside funders or investors

You have made a decision to approach outside funders and/or lenders about your business plan for the social enterprise. You need to determine if your enterprise will be in a position to provide any financial return to the funder from the operation and if so, on what timeline. If applicable, you should ask your parent organization:

• Are they willing to accept the risk associated with funding that may involve repayment over time and provide some level of return for the funder or lender?

If there will be no anticipated return of funds to the lender or funder, then traditional funding sources of donors (corporate and individual), foundations and government agencies will be your targets.
If you or your organization are willing to explore alternative funding models and sources, then the following links may help to identify targets:

• www.socialcapitalpartners.ca which provides links to organizations that will help finance social ventures. Social Capital Partners uses the term“social enterprise financing” to refer to for-profit funding sources and“social enterprise grants and venture philanthropy” to refer to non-profit funding sources.
• www.enterprisetoronto.com/index.cfm

Interested in learning more about social innovation and social entrepreneurship? Visit the SiG Knowledge Hub.

References

MaRS Discovery District. (2009). Social Venture Finance, Enabling Solutions to Complex Social Problems [white paper]. Retrieved July 29, 2009