Part one of this series explores early-stage capital to grow a social enterprise. Personal savings and a friends and family round can ignite the spark, but that flicker will quickly extinguish unless more fuel is added.
Short-term engagements like crowdfunding or impact-focused competitions and programs can supply much-needed capital, especially if you’re trying to become ‘investment-ready’ for more traditional types of capital.
Just as critical, but often overlooked, are the non-financial benefits that come with these experiences: mentorship, networks, and exposure.
Crowdfunding is the process of campaigning towards a funding goal by collecting small amounts of money from many people.
The most popular type of crowdfunding is rewards-based, where funders, known as ‘backers’, receive a product or ‘perk’ in exchanging for supporting the campaign. A less common type of crowdfunding is equity crowdfunding, where backers receive a share of the company in exchange for their pledge. A third variation on crowdfunding is debt-based, where many backers pool their funds together into a loan that is expected to be repaid with interest (also known as peer-to-peer lending).
According to Startups.com, worldwide crowdfunding raised $2.1 billion USD from 2014 to 2016.
This equates to over $119,000 raised every hour via crowdfunding!
Rallying the crowd can also democratize access to funds. Bre DiGiammarino, Senior Director of Social Innovation at Indiegogo, shared that 39% of entrepreneurs on their platform are female, while only 2% of venture capital funds went to female founders in 2017.
Crowdfunding benefits include building social and financial capital as well as proving market demand - especially for product-based business where the perk backers receive is the product itself (effectively pre-ordering it through the campaign). For these reasons, crowdfunding can play a pivotal role in a social startup’s early development.
What’s more, Bre DiGiammarino explains that crowdfunding is, “no longer just the first-time entrepreneur... We’re finding repeat entrepreneurs who use it again and again to bring new products to market, and even established companies that are using it to launch exciting new products and learn about what is working in their community.”
Running a crowdfunding campaign can be an excellent way to validate your product and show future funders there is market demand and willingness to pay for your product.
Campaigns build social capital (a community of supporters) in addition to financial capital
Crowdfunding can supersede systemic barriers faced by women and people of color.
It can be time consuming to run a successful crowdfunding campaign due to the level of planning and promotion efforts involved.
Not all funds raised will be available for business needs because generally a large portion of funds raised go towards supplying backers with ‘perks’.
The obligation to deliver rewards in a timely manner can be challenging, especially for goods in their first major manufacturing run.
When we sat down to talk crowdfunding with Bre DiGiammarino of Indiegogo, she identified the three key components of successful crowdfunding campaigns: 1) a compelling frame 2) compelling content and 3) promotion plan. Learn more in the video below.
With the rise of social entrepreneurship, there are an increasing numbers of business competitions for purpose-driven startups. This is especially the case in post-secondary institutions, so if you are a student, it’s worth exploring what opportunities are available on your campus.
One of the most well-known global competitions for student social entrepreneurs is the Hult Prize, which awards 1 million dollars to a team tackling a bold challenge aligned with a large market opportunity.
There is a range of formats, eligibility requirements, and prizes (both monetary and in-kind). When the timing and area of focus fits, competitions can be a great opportunity for both exposure and funding.
Overall, competitions can be a way to fast track your learning as a new founder. The judging rules provide concrete criteria to focus your efforts and pitching your idea forces you to practice explaining what you do and why in a compelling manner. Even if you don’t end up taking home cash for top prize, the experience of putting yourself into the spotlight can lead to many unexpected and welcome benefits in terms of building your network and awareness for your social enterprise.
Presenting at competitions provides a platform for greater exposure to your community (if local), as well as potential funders, supporters and partners.
Competitions generally come with a set of judging criteria that force participants to clearly articulate the fundamentals of their business, including ideal customers, business model, and financials. Although every entrepreneur should be clear on these, participating in a competition and receiving critique and questions from judges can be a great learning experience.
Preparation for Pitch Competitions can be very time-consuming. If participating in too many, the process of continuous pitch preparation and practice can distract from focusing on growing the business itself.
Below, co-founder and CEO of Musana Carts, Manon Lavaud, shares the benefits of participating in the 2016 Hult Prize competition where her social enterprise was selected as a top 5 finalist among 25,000 projects.
Incubators, Accelerators, and Fellowships
Incubators, Accelerators and Fellowships are programs that provide participating entrepreneurs with the resources and support they need to grow.
Most programs have an application process, are quite selective, and like to keep cohorts small and intimate. Many come with funding, but not all. Typically, for-profit accelerator programs provide funding in exchange for equity in the company, usually around 5%-10%. The Gust Global Accelerator Report 2016 found that 35.5% accelerators surveyed were non-profit, many of which support specific fields - such as healthcare or education - or serve a specific demographic - such as women entrepreneurs - and may not take equity in exchange for their support.
GALI, collaboration between the Aspen Network of Development Entrepreneurs (ANDE) and Emory University, the Global Accelerator Learning Initiative, collects data to analyze the effectiveness of accelerator programs. Their insights found that ventures participating in accelerators earned more revenue, hired more employees, and raised more investment capital than other ventures.
Regardless of whether or not they provide funding, accelerators, incubators, and fellowships provide a mix of access to mentorship, networks, office space, professional services (such as legal or accounting support), and a cohort of like-minded peers.
With a variety of program types, it’s important to understand the time commitment and responsibilities of participation and to make sure the goals of the program align with yours.
There are many incubator, accelerator, and fellowship opportunities for social entrepreneurs that come with various levels and structures of funding.
Being selected to participate in a competitive program can boost your enterprise’s credibility and exposure.
The primary goal of many accelerator programs is to prepare entrepreneurs to secure further funding with angel investors or venture capital. This can provide an excellent opportunity to get connected with the right investor networks if you plan to pursue more equity investment.
With Fellowship programs especially, and many Accelerators and Incubators, participants from strong bonds with each other and this network can provide invaluable connections and opportunities for collaborations.
Participating in these programs can be very time consuming. They can also be distracting if program goals are not aligned with the priorities of your stage of business and your organizational values and goals.
Watch the video below to hear from Echoing Green’s Deputy Director and Portfolio Manager, Neil Yeoh, about the type of criteria they assess when selecting climate change Fellows:
Acumen is well known for its Fellows program which has seen more than 440 Fellows take part over the last 13 years. Below, a few of Acumens Fellows from India explain the program’s role in their own leadership development.
Securing grants from governments, foundations, or corporations can be a great option for early-stage social enterprises. The Global Entrepreneurship Monitor 2016 report points out that grants can be crucial for sectors with high start-up costs and where investments are generally riskier to private funders, such as medicine, information technology or energy production.
Although you don’t need to give up equity with grants, there can be a considerable amount of time invested both in the application phase before receiving the money, and in the reporting phase after receiving the money.
Grant funding does not need to be repaid, and there is no additional cost associated with it other than time and managing a relationship with a funder.
Applying for grants can be time-consuming. Most require some level of progress reporting and/or auditing to monitor use of funds and to confirm the level of impact that is generated.
Dan Chu, Executive Director of Sierra Club Foundation, explains how one fund supports community-level groups to advance clean energy in a way that also creates job opportunities, affordable housing and more.
Grants can play a pivotal role in the early stages of growing a social enterprise. Acumen Fellow, Krupa Patel, shares how an Innovation Fund grant was critical in the first few years growing Silverleaf Academy, and why they wouldn’t have taken another type of capital in this early stage.
In part three of this series, we’ll explore scaling impact and revenues with debt and equity.
Danielle Sutton is the Content Animator at Acumen where she surfaces stories to inspire and activate social entrepreneurs. In an age of information overload, she believes in learning 'the right thing at the right time' to intentionally design impactful social enterprises. You can usually find Danielle digging into the Acumen course library, playing in the mountains, or exploring marketing on The Sedge blog.