By Cynthia M. Adams
Founder and Corporate Advisor
What Type of Social Enterprise Funding Should I Choose?
The number one question I am asked about social enterprise development is: What types of funding will support the launch or expansion of my social enterprise?
And the answer is: confusing.
I say confusing because, as a person who has worked to identify and secure funds for both businesses and nonprofits for over 45 years, I know the answer isn't simple.
There are many types of funds you can secure via government and private donors, but they all have their own restrictions, guidelines, and, I'll just say it, "hoops" you have to jump through. The key, for those trying to secure financial support for your good work, is to untangle this web. Obviously, you must ask for the funds in order to receive them! But the first step, and the most essential step, in my opinion, is to understand the funding playing field. Then you can focus your attention on those avenues that are most likely to give you a decent return on your investment of time.
Start your research by fully understanding what you need (how much money, for what purpose, and the timing). When I started GrantStation in 1999, I knew I needed money -- but how much and when I would need it was utterly unclear. And because I was unsure how much I needed, I brought in shareholders a little at a time, creating tremendous stress on my psyche, not to mention our checkbook! It was a bad strategy. If I'd had a clearer picture of what I needed to do, I would have broken the development of GrantStation into phases and fundraised around each phase. I learned that lesson, hard though it was, and somehow stumbled through it. But if I had to do it over again, I'd fully understand what funding I needed to achieve my goal, and when.
And let me just say, for those of you doing an expansion of your business, don't think too small. Simply getting a grant to purchase that equipment is probably not the best approach. That new piece of equipment has a whole set of training, marketing, possibly a new hire, etc., that goes along with it. So it is wiser to consider the entire picture, then plan and raise funds accordingly.
Once you have a handle on what you need and when you need it, you can dive into developing a funding plan.
What's Your Social Enterprise Funding Strategy?
We all want to be able to think strategically. But this kind of strategic thinking can be a bit of a brain twister. I often find myself scratching my head when someone starts talking about strategy. Are they talking about tactics? Or are they talking about a broader view, perhaps referencing policy? Once you introduce the word "strategy" into a conversation, sometimes clarity can go down the drain.
Thinking strategically about your approach to funding your enterprise is really just a matter of being able to make projections based on the information you have at hand. Funding strategies are always fact-based – but of course, then you need to make assumptions! Your approach has to be adaptable. You have to be able to change things as you go forward. A denial of a request will shift the strategy, just as an award will. One central concept that drives developing a funding strategy is building enough funding into the design to absorb any denials. That way, the total amount indicated in your plan will always add up to more than the amount needed for one particular phase of your enterprise development.
Let's go back to what I said about your strategy being fact-based. Your assignment at this point is to understand the types of funding available (facts), learn more about each potential funding source (facts), and then take that information and weave it into your strategic approach (assumptions).
Types of Funding Support
Many funding avenues are open to the social entrepreneur, many of which you already know and understand: bank loans, individual investors, angel investors, and venture capitalists. The sources you may not know about or completely understand will be my focus in this post.
Here are some alternate sources you may want to consider:
- Grants: Government, Foundations, Corporate Giving Programs
- Investment: Foundations, Seed funding firms, Social Finance Funds
- Loans: Government, Foundations, Social Finance Funds
Though you can secure loans, grants, or contracts from governments, both state and federal, the application processes can be complex. And there is a significant reason for those sources being complex: they are spending taxpayer money, so their investments must be accountable. This funding source is usually a relatively high number. You won't see opportunities in the $5,000 range, for example. I think the lowest I've ever noted was around $25,000. So you will only include this source in your overall strategy if you need a substantial amount.
Where do you find these sources? If you are a SEA Member, you can log in to SEA, and under Member Resources, you will see the Funding Database. You can do all of your research for both State and Federal support via these databases. If you are not a Member of SEA, you can go to grants.gov for Federal research and to your States home page for state research.
There are many different types of foundations: corporate, family, community, and independent. Each of these types of foundations will support social enterprise development via grants. The grant awards vary in size, from $1,000 to hundreds of thousands. The benefit of receiving grant funds is that you do not have to pay them back and the application process can be relatively easy compared to government processes.
Where do you find these sources? Again, if you are a SEA Member, you can log in to SEA, and under Member Resources, you will see the Funding Database. You can do all of your research for foundation support from the US Charitable Giving database. You may also want to use the International Giving database if you work overseas. If you are not a Member of SEA, the research process can take a lot of time; so buckle up, grab a cuppa coffee, and dive into research using the net.
There are several investment options you may want to consider (not counting venture capitalists, angel investors, etc.) Let me break these into a few categories for you.
Mission investing refers to using investments by foundations as tools to achieve their philanthropic goals. We use the term mission investments (also called Impact Investments) to describe investments by mission-based organizations designed to generate both a social and a financial return.
Program Related Investments (PRI's) are investments made primarily to achieve the program objectives of the funder (usually a foundation), rather than to earn a significant financial return (which is the case with mission investing). PRIs are expected to be repaid. So they are much like a loan at or below market rate.
Today, community foundations play a more prominent role in this area of investment. Community foundations have the flexibility to make program-related investments and mission investments from endowments, donor-advised, or unrestricted funds. There are fewer restrictions on what they can invest in (compared to other more regulated foundations via the IRS). It is always wise to see if your local or regional community foundation might be interested in your social enterprise.
There are some exciting loan programs out there. For many years I sat on the State of Alaska Small Business Revolving Loan Fund board. We made many loans at below-market rates and with flexible payback options. It was a volunteer job I relished and a fund that helped a lot of small businesses get off the ground or expand. Many states offer a variety of loan funds. Most states provide Business and Industry Guarantees via USDA. But some states also have their own loan funds, such as Alaska, which has 9 loan funds.
If you use the Funding Database (via your SEA Membership) you can see, at a glance, which agencies in your state offer loans. Otherwise, go to your state's home page and start by looking at their economic development agency. However, other agencies may also offer a loan program, so dig around a bit.
Next Steps to Craft a Funding Strategy?
To build your own funding strategy, you start with the amount of money you need to raise for this particular development phase. You then look at all of the potential sources of those funds, and you begin to narrow down your list. Intuitively, you will identify sources that just "feel right, " and that's fine. But you may also uncover new sources, so add them to your list as well.
Precisely what are you looking for as you review each potential funder?
Program or mission alignment is critical. Make sure what you need to be funded and what the funder wants to invest in are in sync. Then look at the funder's financial information to determine if their typical financial support, loan, investment, or grant award fits the amount of money you need. Next, make sure you are eligible to apply. Some funders will support small businesses and nonprofits with a social enterprise mission. If you have difficulty figuring out whether they will support a social enterprise, email or call them. However, when you send an email or call, remember you are not trying to sell them on your project. This is a simple inquiry: will they consider a request to support a social enterprise. And, of course, you have to look at their deadlines for application to make sure the release of funds, once approved, actually fits your own development timeline. This may also be a question you need to ask via email or phone. Don't be shy! Most funders want you to ask questions like this, so they receive well-conceived requests.
My process is pretty simple. You will probably have your own process, but this is how I do it! I like to look closely at the types of funding I might go after and the sources that look good to me under each of those categories: Loans, Investments, and Grants. I am a visual learner and like to lay out my options using sticky notes. I color code my sticky notes: Loans might be blue, Grants green, and Investments yellow. I print out the information for each potential funder, slap on a sticky note, and start to organize it into a practical approach. At this point, I usually find funders I no longer feel will fit, so I set them aside.
This process can get pretty messy before it all comes into focus! But when you are finished, you will find you have actually developed a strategic approach based on facts.
In summary, I'd like to remind you that there are many options for funding. The key is knowing how much you need and when and exploring the many available support types before adopting your strategic approach.
Additional Learning for Funding Your Social Enterprise
Learn more about Mission Investing via the Mission Investors Exchange.
Read more about Program Related Investing here.