Raising Capital For a Better India
Today, there is a new breed of startups which stand in between capitalistic ventures and NGOs, bringing the startup DNA and 'tech-for-good' into public and social sectors, for disruptive innovations solving the country's big problems. These start-ups can access non-dilutive, non-equity funds such as grant funds, philanthropic capital, CSR funds, impact investments and other creative finance models to operate
If you are a ‘social impact/non-profit entrepreneur’ solving for developmental challenges that are not currently solved for by market forces, here is a sneak peek into raising stage appropriate capital for your organization, along with the sources of funding.
According to the India Philanthropy Report 2020 by Bain Consulting, domestic philanthropic capital (including individual giving and CSR) more than quadrupled from INR 12,500 crore in FY2010 to INR 55,000 crore in FY2018. As a social entrepreneur, that should make you exceptionally happy.
However, what is more important is the entire pie is almost never available to you; pieces of it are depending on the organizational maturity of your non-profit. This piece only focuses on giving you a perspective on what is the highest ROI piece of the pie for you at various stages of your growth, and some things to remember while targeting each of those pieces:
Always the toughest phase for anyone, whether in the for-profit or non-profit arena. Your money in this phase is almost always going to come from either your wallet or friends and family. If you do know a high net-worth individual (HNI) or two well enough to pitch to them, you can, though you might want to conserve that bullet for the next phase. The critical thing to communicate at this early stage is who you are (qualifications), what your vision is and why you are doing what you want to do (personal story or connect with vision).
To get to a minimum viable product, there is some risk funding available. This is usually the time to focus on incubators, accelerators and early-stage competitions. All of these are looking for early-stage ideas where some proof of concept is available. This is also usually the right time to approach HNIs in your network, with some evidence to show. While the entrepreneur is still the most important component at this stage, the learning from your experiments in the pilot phase becomes integral to communicate too. While you should have gotten a 12A and 80G in place as soon as possible, you can’t really exit this stage if you don’t have it by now.
Ah, finally the turning point, where you graduate from fishing in lakes to the sea. This is usually when you hit the three year mark and are hence legally allowed to take institutional money, mainly CSR. This is also usually where you can begin to access the UHNI money, which along with the CSR adds up to INR 37,000 crore, two-thirds of the INR 55,000 crore pool that we started with. Proof points of impact and the potential to scale become the key to communicate in this phase, to the new set of more experienced/advanced investors. The critical thing to remember here is research. CSR is often constrained by geography and verticals, and most of that information is in the public domain, usually company annual reports. The exception to this rule could be when you have the confidence of a senior influencer in a company or its CSR committee which has budgets parked for novel interventions every year.
The scale phase usually is when you have demonstrated impact on a critical mass of people, and are now ready to scale to new geographies. Apart from the entire pool of INR 55,000 crore that is now available, you can access foreign capital (another INR 13,000 crore as per Bain Consulting in FY18), of course assuming you have gotten an FCRA. Even more importantly, this is usually the stage in which you can tap into the largest pool of money in the system (and one that most often gets ignored), the government, which at INR 145,000 crore of spending is nearly 3x of the philanthropic capital in the country. The critical thing to remember in government partnerships of course is to be a partner (utilizing their infrastructure and hence lowering your costs) rather than a vendor (which is what you become when you take money from them).
While every non-profit/social impact startup will be different with the organizational maturity based on the complexity of the problem and the ability of the early team, an easy thumb rule think about the stage on timing would be pilot (0-1/1.5 years), MVP (1.5-3 years), growth (3-5/6 years) and scale beyond that.