Some Things to Consider When Looking for Financing for Your Social Enterprise

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If you’re a social entrepreneur – someone who is thinking and acting like a business entrepreneur as you pursue a social and/or environmental mission – you’ve probably found yourself spending a lot of time worrying about where you’re going to get the money to start, sustain and grow your social enterprise. This is understandable, but focusing on the money may not get you where you need to be.

Social entrepreneurship guru J. Gregory “Greg” Dees points out that money is merely a means to an end. It’s a tool that enables you to buy the human and physical capital you need to pursue your mission. So, thinking about the money you need is the wrong place to start. Dees suggests two steps to take before you even begin to think about money: 1

  1. Think about your mission and the major activities required to achieve it. So, for example, if your enterprise offers cooking classes to teach obese children (ages 8-18) how to cook and eat in a healthy way, your major activities might be: (a) Program Development; (b) Marketing; (c) Service Delivery; and (d) Impact Assessment. Ask yourself what skills and physical resources would you need to carry out these activities. For this example enterprise, Program Development might require the skills of a nutritionist and a curriculum developer. The Marketing activity could require market analysis, competitive analysis and promotional skills. Service Delivery might necessitate teaching and cooking skills and a space with kitchen equipment. Finally, Impact Assessment might require skills in impact measurement, database construction and management, and data analys.
  2. Once you know the human and physical resources you need, you can then think about where these will come from: your in-house staff and volunteers (if your enterprise is a nonprofit), outside consultants and suppliers, or partners with whom you might barter. Some of these sources require monetary payment; others do not. In deciding the best place(s) to go for which resources, you’ll need to consider trade-offs between cost and issues of quality and reliability.

Only now are you in a position to strategically think about money to pay for the required resources. However, this is a task that should be approached systematically as well. The first question to be asked and answered is “What kind of financial capital do I need?” Is it start-up capital, working capital or growth capital? This will depend on where your social enterprise is in its life cycle. The answer to this question will also suggest the appropriate source of the money required.

Your second consideration should be the prospective sources of financing. These sources might be simply categorized as follows:

  1. Philanthropists (if you have a nonprofit structure) – These would include, among others, individual donors, foundations, government agencies and corporate community giving offices;
  2. Investors (nonprofits or for-profits) – This group includes crowdfunders, social venture philanthropists, social venture capitalists, micro-lenders, gap financing providers, bankers, angel capitalists, and venture capitalists
  3. Earned Income Strategies (nonprofits or for-profits) – These might involve, selling goods or services, charging fees to your target beneficiaries (if they can afford to pay), selling the excess time and skills of your staff to others, or leasing excess physical space or equipment to others.

The sources you can approach will be limited, to some extent, by your chosen legal structure (nonprofit, for-profit, or a hybrid of the two). The sources available to you that you do approach should be based on your financial requirements, the life cycle stage of your enterprise, and your skill set as a social entrepreneur. Keep in mind that there is a hierarchy of financial capital that corresponds with your ability, and that of your enterprise, to handle such capital. This hierarchy looks something like this:2

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The enterprise’s growth is a reflection of the increased skills of the social entrepreneur. As the enterprise moves up the hierarchy, the entrepreneur proves her/his ability to manage financial capital at each step, thereby making the enterprise more attractive to financing sources at the next level.

This is only a rough sketch, but, hopefully, it will help to guide your thinking as you undertake your search for financial capital in order to build your social enterprise.

 

[1] Dees, J.G., Emerson, J., & Economy, P. (2001). Enterprising Nonprofits: A Toolkit for Social Entrepreneurs. New York: Wiley.

2 This is based upon the business life cycle model in Lichtenstein, G.A. & Lyons, T.S. (2010). Investing in Entrepreneurs: A Strategic Approach for Strengthening Your Regional and Community Economy. Santa Barbara, CA: Praeger/ABC-CLIO.

 

Author:

Thomas S. Lyons, Ph.D., Lawrence N. Field Family Chair in Entrepreneurship and Professor of Management, Baruch College, CUNY

 

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