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Raising Capital

Social Entrepreneurs Don't Have It Easy Raising Capital

Social Entrepreneurs Don't Have It Easy Raising Capital
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You're reading Entrepreneur Middle East, an international franchise of Entrepreneur Media.

At one point, NGOs and charity organizations were the only options for alleviating societal ills, but in today's increasingly interconnected world, we're facing more complexity in issues which require more innovative and sustainable solutions. This has led to the rapid upsurge of social entrepreneurship; now socially-conscious entrepreneurs tackle local and global social challenges, while generating profits.

According to John Green, "social ventures have at their core a strategy to deliver explicit social impact in combination with sustainable business growth, recognizing the power of business in tackling social issues around the world." In theory, social entrepreneurship is an amazing concept but the practical process in progressing from an idea solution to a business 'sustainable' operation has its most critical challenges, in particular during the startup financing stage.

Social 'treps face their first challenge: how do they get the initial financing? 

Typically, a regular startup would turn to the following channels of capital: network investments, banking, equity debt, convertible debt, crowdfunding etc., with a relatively straightforward process for funding channels that are revenue options models. However, social ventures don't have the same flexibility in their identity structure on leveraging capital the same way as regular startup ventures do. First, equity or VC financing usually expects an exit strategy that does not automatically exist in social ventures that plan on generating impact for the long haul. Second, the risk appetite for investors adjusts with the existence of proof of concept models.

However, social ventures exacerbate the challenge of assessing risk, given the unique nature of cultural and business resource issues and investor networks. Thirdly, and most importantly, investors usually depend upon comparable investment activity that helps validate and support an investment thesis around market opportunity and valuation levels. That backup and peer justification doesn't exist in many social venture markets, where activity is a lot patchier, and those markets have yet to demonstrate clear trends in delivering investor returns. All of this limits the availability of capital in social ventures.

What is the global trend for social ventures to clear the financing hurdle?

To access the aforementioned capital streams mentioned before, social ventures have to do several things, including intensive market research to prove the need and execution capabilities. But funding roadblocks might arise, and for that, social ventures look into the following three options: leveraging partnerships, philanthropy organizations and social cause competitions and funds. Firstly, regarding revenue sharing partnerships, it involves social entrepreneurs thinking innovatively and identifying partners who can bring economic value to both parties. The partner may share intellectual value or property, which adds value to the venture in a completely unique way. The beauty of this avenue is that it is a win-win situation for both parties involved.

Secondly, regarding philanthropic money, it is a large pool of capital that can be tapped into. However, the definition of philanthropic money has shifted over the years from being simple donations, which are commonly seen today as an unsustainable way of giving. The new direction for this new wave of philanthropy is today called impact investing. For entrepreneurs, this source of capital is advantageous in that it requires lower than market rate interest or return targets, and for the philanthropists, a principle attraction in that the returned capital can be recycled into other charitable activities. It must be noted that the concept of impact investing is still evolving, and as such, it needs more time to expand to accommodate for the growing number social enterprises.

Finally, startup competitions, accelerators, angel investors and impact funds are the new buzz words in the industry, and they provide valuable exposure and mentorship leading to capital for social ventures. Good avenues to explore would be university business plan competitions as well as business incubators and accelerators, which are widespread in most big cities, like Echoing Green, Unreasonable Institute, Endeavor Global, the Global Social Venture Competition, and the Hult Prize. Since most of these initiatives exist so far on committed and passionate donors, the challenge would be to identify sustainable models.

How did we get funded at Pi Slice?

In practice, what model examples do we have of social venture startups who are securing financing? At Pi Slice, when we went for our first funding rounds, we learnt from meeting diverse investors to rely on all funding channels. From the beginning we had some pre-seed angel money that helped us to get started, and allowed us with Microworld.org from the group PlanetFinance.org to build a revenue sharing partnership model– we're big fans of partnerships and creating shared value.

We also participated in different entrepreneurship competitions, as much as time and timing allowed us to- the exercise of preparing for a competition, being mentored and presenting the case to the jury is very beneficial to reassess the model whether one gets funded or not. We still needed money, so we approached philanthropy capital while still pitching the project focusing on financial and operational metrics. At the end of the day, social investors or philanthropists, like any investors, need to know that you can be sustainable, scalable and that you won't require any other emergency rounds of financing.

Finally, we also engaged with VCs, and set together future milestones to pitch them at a time when they would be interested to come in- this is a very useful exercise to set standards and milestones achievements in foreseeing the growth of the venture. Our experience has taught us to knock on all doors and try all funding models, because each model has its own added value and can prove to be crucial for a new trend to be successful.

What is the future outlook of social venture financing?

We all know today that the MENA region has a big unemployment/youth unemployment problem, and that realistically we can help solve part of that problem by creating jobs through encouraging small startups. The problem is that startups struggle with access to talent, markets, and capital. The landscape is slowly changing and we're witnessing private and governmental initiatives for budding entrepreneurship ecosystems in almost all countries in MENA, fostering positive trends related to these challenges. That being said, the gap between the capital need of these startups and available seed money and support by investors or institutions is still too big, all more so for social ventures even though they are needed to solve, innovate and disrupt societal issues and challenges.

The change is happening anyway, and more and more people are realizing the value of supporting such startups while creating impact for the wider community. Maybe the MENA region is still not there yet in terms of global standards and networks for social ventures, but societal issues -and the will and commitment to solve them- are definitely there, and sometimes this is all it takes for a movement to be in motion and for the change to leapfrog.