New social enterprise accelerators, incubators and fellowships are popping up left right and centre, but what’s the payoff for your time investment?
You need to move into a physical space, step up your marketing or actually pay the team who have been volunteering with you so far.
The social investment sector is thriving but, as an early-stage social entrepreneur, are you still facing hurdles getting funding when starting out?
Are you looking at grants? Crowdfunding? Struggling with charging competitive prices to customers who might not be able to afford it? Or are you making eyes at a corporate sponsor to take the pressure off instead? Where to start with funding can seem overwhelming and a drain on your precious time.
To break things down we will:
- Look at funding sources available across the income spectrum
- Hear from a Big Lottery Fund representative
- Get tips from a corporate on CSR partnerships
- Learn how to transition from grants to traded income
What’s everyone else doing?
A recent research study by Zeppelin University found that social impact investors mainly fund for-profit ventures, making up 62% of social investors portfolios; while hybrids account for 30% and non-profits only access 6%.
Stats like that, show that people are looking to invest in a safe bet. Here are 3 key funding approaches social enterprises are taking at the moment:
- Starting out as a non-profit, applying for all available grants to slowly achieve growth and develop a sustainable business model over time. Then transition into a for –profit model to raise startup capital.
- Remaining as a non-profit and avoiding any of the risks of your social mission being compromised. However, you’re also running the risk of remaining reliant on external funding.
- Existing as a hybrid, juggling grant applications and audience impact reporting with impact investors needs to see positive cashflow.
Which category do you fall into?
Scoping out the landscape
To give you the lay of the land, here’s an overview of different sources of funding available. Like you might expect, each has its pros and cons…
Gifts and philanthropic donations: often unrestricted and requiring minimal evaluation and reporting. A dream to receive, but typically difficult to come by in practice.
Grants: considered a safe bet with pots of money available, if somewhat hidden away in private or community foundations. However, grant applications can be painfully time-consuming to complete with rigorous evaluation and prescriptive requirements to fulfill in terms of impact.
Structured market: this involves activities like bidding for local authority commissioned projects or business to business contracts. These have the benefit of being fixed contracts, over a set period, but can fall prey to sudden changes in scope or budget cuts that can leave the supplier feeling short changed.
Open market: selling direct to customers clients on the open market. A great opportunity if you have a compelling offer and a captive audience of paying customers. But, it can also be a challenge going up against competitors that are not constrained by your ethics and the additional costs those might incur. And of course, more often than not, the audience social entrepreneurs serve are not in a financial position to pay competitive prices hence the need to identify a proxy market in the shape of corporate partnerships to subsidise prices.
Social investment: repayable investment is usually available from community banks or impact investors. Great for ventures that have high capital costs but investors terms and conditions will be as comprehensive as for any other non-social venture. Consistent trading history is required as standard alongside a business plan and cashflow forecasting.
A word from the experts.
We caught up with representatives on the front line at Big Lottery Fund, Big Issue Invest and the Head of CSR at a global corporate law firm. They shared tips and common pitfalls to avoid when trying to access funding.
Jane Winter – Big Lottery Fund
- On average there is only a 10% chance of success when applying for large grants of £150k and above. ‘It’s better to start small and build a track record before with us before going for the big pots of money.”
This way, Big Lottery Fund have confidence that you can implement your goals and provide evaluation reporting based on your previous projects.
- The most common mistake applicants make is also a simple one – not reading the guidelines. She recommends breaking down the submission form into sections and carefully reading the accompanying guidelines to ensure you meet the criteria.
- As with most other grant makers, Big Lottery, prioritises audience engagement and impact. Entrepreneurs should show tangible evidence for why and how their offering impacts the social issue at hand. It’s also important to provide examples of skills & leverage previous experience to prove you can achieve goals.
Lorna Gavin, Head of CSR at law firm Gowling WLG
Lorna advises those seeking corporate partnership to treat it like building any meaningful long-term relationship, i.e. ‘Flirt a little and at least buy the person you’re courting dinner before popping the question.’
- Research the company to ensure your values align in terms of their CSR focus and the social issues you aim to tackle. Most organisations will state their CSR policy on their website.
- When reaching out, start with an email followed up with phonecall. It’s even worth dropping them a tweet to get their attention. Measured persistence is key to getting a positive response.
- Start with asking for something the corporate can readily give i.e. specialist resources in kind, meeting room space rather than cash upfront. In this way you can build trust over time and it provides an opportunity for them to better understand your mission and how you operate.
Annie Minter – Social Investment
Annie Minter from Big Issue Invest is attracted to social enterprises that can show a clear path to profitability.
- She highlights the need for strong governance and evidence of trading history for 1-2 years before they can consider proposals.
- A benefit of social investors over traditional mainstream investment is that their terms are likely to be more supportive if the going gets tough.
The path to financial sustainability
You know you don’t want to rely on grants funding forever. As a social business, you also know your target customers and clients can’t necessarily afford to pay top whack to keep you afloat. Tapping up support from big business is becoming increasingly popular. Here are a few steps to make that leap.
Step 1: Identify a proxy market, a company or individual that is willing to support and invest in you and your venture although they aren’t the end user of the core product.
An example of this could be developing relationships with a corporate business that has shared values or corporate social responsibility policy that aligns with your social mission. For private philanthropists, this could be identifying an individual with a personal, vested interest in your mission.
Step 2: Engage in building a relationship with your target company. Expect it to take some time.
Be sensitive to the time and attention your target company can offer but keep them up to date and in the loop of your activities and show them the benefit of their support.
Step 3: Define your value proposition.
Be clear on your point of difference, what makes you preferable over the competition. How does this add value to the corporate partner, either directly or via being affiliated with your brand or target audience.
Step 4: Amass evidence of impact and demonstrate Theory of Change.
Get clear on recording the impact you’re venture is making on the audience you serve. What did the story look like before you came on the scene and how has the situation transformed afterward? Being able to provide evidence of this impact will give you invaluable credibility when talking donors, grant-makers and investors.
Step 5: Commodify the output and scale it.
With a proven methodology, target market and evidence of impact, you can now work to turn the grants or gifts from your corporate partner into fees for the offering you provide. What’s more, you can use this new customer relationship with your corporate partner as leverage and a reference to engage new corporate partners and customers.
In summary, when looking at funding, there’s no one size fit’s all solution. Your decision should be based on the on the resources and time available in your team and the needs of your venture. Overall, until a sustainable and resilient business model is defined, a blended funding mix seems to be a trend on the rise for early stage social entrepreneurs.