Social enterprises employ commercial strategies to achieve profitability while simultaneously achieving some social purpose. Like all startups, however, the process of acquiring capital can be difficult. Pursuing a social startup can require significant capital to get it off the ground. Four potential avenues for capital acquisition are:
1. Angel Investors
Angel investors are groups or individuals who use their own money to invest in startup organizations. Angel investors typically provide funds to small business startups or businesses in emerging industries. Their investments tend to be much smaller than their venture capital counterparts. Angel investors fall into two categories: affiliated and unaffiliated.
Affiliated angel investors are people you may know personally or through business affiliations
Unaffiliated angel investors are people you do not know personally but who can be reached through advertising, cold calling, or networking
Angel investors have become popular for their ability to contribute money in smaller amounts than venture capital groups are typically willing to provide. For this reason, angel investors are key to the early development of startups.
2. Program Related Investments (PRI’s)
Program related investments (PRI’s) are another useful source for social enterprises. Unlike angel investors, who are useful for all types of startups, PRI’s are specifically designed for businesses who engage in charitable activities. PRI’s seek to finance startups with some social mission in order to receive a return on their investment within an established period of time.
PRI’s tend to come from grants and foundations. The foundations use the return from their investments to subsidize other social startups. The recipient of the PRI’s benefit by accessing capital at a lower rate than other accessible alternatives.
The classic form of acquiring capital is to finance your startup through debt. Over time, your social startup will have to repay the lender with interest; however, debt provides an attractive capital option for the founders of social startups who want to maintain complete ownership over their business.
Debt provides a contrast to equity, which exchanges shares or ownership of your company for capital. Both debt and equity are capital-raising tactics to support your social enterprise in its startup phase. Which direction you take depends on a variety of factors that are personal to you and your business.
4. Venture Capital
Venture capital is another avenue for raising startup capital, especially for social enterprises that are unable to find successful means of raising capital via debt. Venture capital is similar to angel investing, but the two capital raising strategies have differences.
Venture capital groups typically make investments in amounts much larger than angel investors. They can also provide managerial or technical expertise instead of monetary investments.
Venture capital groups exchange their investments for equity, so be prepared to lose some control over your social enterprise if you choose to pursue this route.
Venture capital groups make contact with potential investments through venture capital conferences held across the country. These conferences are a great source for networking and can be found through the National Venture Capital Association (NVCA) website. Venture capital groups also look for a thorough business plan, so be sure you are able to put together a well-organized document to attract investors.
The startup phase of your social enterprise is critical. If one of these capital sources is inadequate, do not lose hope. Venture capital, PRI’s, and angel investors invest in companies that fit the organization’s mission. Not receiving startup capital could be indicative of a poor fit with a foundation rather than a flawed business model.
Whichever method you pursue, take care to apply your capital appropriately so that your social enterprise is best situated to make the world a better place.
By John Carley