So You Want to Start a Social Enterprise? (Part 3)

Flywheel Social Enterprise Hub’s three-part blog series, So You Want to Start a Social Enterprise, will walk you through the formation of a social enterprise through a legal lens. Produced in partnership with Northern Kentucky University’s Chase College of Law, the series will answer questions about general legal structure, funding, and scaling your business.

Part III: Funding As Your Fuel

We touched on funding in Part I of this series. There, we covered the importance of determining how you intend to fund your social enterprise after you decided what you will be doing. Once you’ve determined whether you are going the non-profit route or the cash-for-equity route, your attention should turn to the sources and ways in which you will raise money.

A survey of 400 social entrepreneurs by the Duke University Center for the Advancement of Social Entrepreneurship and cited by SocialVenturers.com shows that funding sources are widely distributed. The good news in this is that there are nearly a dozen different sources where you can seek funding – and you have the potential to get funds from several sources. The bad news, of course, is that there is significant competition for the dollars. Here, we offer some of the basics about the most popular funding sources as well as few tips to keep in mind as you start the process.

The first round of funding is commonly known as the “seed” round. This initial round of financing is most critical to the success of a startup; without sufficient funding, a great idea might be just that – an idea. The goal here is to turn an idea into a commercially viable organization.

A common source of early-stage funding for startup companies comes from individuals in the personal networks of their founders. The amount of capital raised in this round varies greatly depending on the personal networks of the founders, but often falls between $10,000- 100,000.

Another category of early-stage individual financing comes from “angel” investors, typically high- net-worth individuals. Angel investors often network with others to collaborate on investment strategies and potential investments. Thus, once an angel investor is interested in funding a startup, that investor will often recruit others to invest as well.

A grant is a means by which the government or foundation funds ideas and projects providing services that benefit society. Although there are thousands of federal grants available, only a few of these grant offerings are available to startup companies. Therefore there is a great deal of competition for the awards and since the application process is so extensive, grants may not be a viable source of startup funding.

Banks and credit unions offer loans to founders who have sufficient collateral. However, most potential founders do not have adequate assets to secure a sizeable business loan. If not, the Small Business Administration (SBA) may help by guaranteeing a portion of the loan.

Crowdfunding is the practice of raising project funding from a large number of people. It typically takes place on a web platform which links project founders with supporters (e.g. Kickstarter), so it may be a particularly good strategy to fund a social enterprise.

Although there are a variety of ways to fund your enterprise, there are some core principles to keep in mind regardless of which funding strategy you pursue:

  1. Tell your story with a compelling emphasis on your impact.

One of your best assets to generate funding is your story. Not just your idea, but your story. Of course, you will need a robust business plan. But successful social enterprises will have the best chance of generating investment for growth if they have a compelling story about their impact – both current and projected. Here, data is your friend. Clearly articulating, measuring, and analyzing your success metrics through the lens of the impact you are making will paint a picture for your potential investors and will also provide a scope for how big your market may be.

  1. Seek out specialists.

Often, dedicated social enterprise funders will specialize. That means they are more likely to fund an idea or mission where they have a passionate commitment and deep knowledge. You’ll have the best luck of securing resources from a funder who specifically understands your market. This is particularly important to ensure that a funder doesn’t expect you to compromise on your mission in order to grow and deliver a return. This also means you probably do not want to take every check you are offered. Social entrepreneurs should think carefully about the type of financing strategy that makes sense for their enterprise and stick to it – no matter how tempting investment deals may appear. Experts generally agree that you’ll end up with a better financial structure in the long run.

  1. Broaden your perspective of an investor.

Most investors will prefer to take their time in getting to know you. You’ll be best served to move beyond seeing simply the transactional side of investing. Working with investors is about building relationships over the long term. Although it is true that investors often decide to make an actual investment relatively quickly after the pitch, there are many benefits to having cultivated a relationship long before the pitch actually takes place. This will help you understand how to tailor your presentation to the specific interests of the potential investor, and will also help you to read your potential investors during the pitch.

Don’t underestimate the legwork that it will take to make yourself, your team (if you have one at this stage), your business plan, and your impact well known. There are many ways you can do this. This is one area where Flywheel can help. There are a variety of organizations that specialize in bringing social entrepreneurs together. One of the largest in the United States is the Social Enterprise Alliance (SEA). Flywheel is a member of the Greater Cincinnati Regional Chapter of SEA. We can help to connect you to some of the national programming and resources available through SEA, including many specific to funding your social enterprise.

  1. Understand some basic legal framework.

Once you obtain funding, it will be important to understand any conditions associated with it. For instance, grants may have certain restrictions or requirements associated with the use of those funds. Also, you should familiarize yourself with some of the basic elements of securities law, which, depending upon your funding sources, will guide you on topics such as full disclosure and related reporting requirements.

Produced in partnership with:

The Small Business & Nonprofit Law Clinic at Northern Kentucky University’s Chase College of Law provides free legal services to entrepreneurs, small businesses, and nonprofit entities in the local northern Kentucky-Southwest Ohio community who could not otherwise afford access to quality legal representation. Staffed by law students, it gives those student the opportunity to provide legal services to real clients under the supervision of an experienced supervisor. In its first five years, the Small Business & Nonprofit Law Clinic prepared 65 students for the practice of law and provided over 7,000 hours of free legal services to over 160 clients.

Contributors:

Professor Barbara Wagner is the Director of the Clinic. As Director, she helps students acquire the hands-on practical skills necessary to succeed in corporate and transactional work. Before joining the Chase faculty, Wagner practiced law for over 30 years at major law firms and inhouse, in areas including corporate, securities, finance, governance, compliance and other transactional law areas. Wagner is admitted to practice in New York, Ohio and Kentucky, and is a member of the American, Kentucky, Cincinnati and Northern Kentucky Bar Associations, as well as the Society of Corporate Secretaries and Governance Professionals and the Ethics and Compliance Officer Association. She earned her BA at Yale University, an MSBA from Boston University and her JD from Columbia University.

Craig Buchholz has more than 20 years of experience in marketing, public relations and communications. He currently leads the Global Communications organization at P&G where he serves as a key advisor to P&G senior leadership. He is responsible for developing and directing an overall strategic communications plan that fosters favorable perceptions of P&G, its products, its services, and its people. In May 2017, Craig received his J.D. from The Thomas R. Kline School of Law at Drexel University in Philadelphia; he participated in the Small Business & Nonprofit Law Clinic during spring 2017 as he completed his studies to support local entrepreneurs and growing non-profit organizations in a hands-on and practical fashion.

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