Part one of this series explores how early-stage founders can tap into personal resources and the support of friends and family to fund seeds of a social venture idea.
Part two explores the benefits and drawbacks of accessing capital through crowdfunding, competitions, programs designed for social entrepreneurs, and grants.
Grant funding, crowdfunding, and other types of early stage capital can help you prove the business fundamentals of your company like market demand and revenue model, but at a certain point you’ll need to seek funding to scale.
The good news is that impact investing is gaining traction.
In the Global Impact Investing Network’s Sizing the Impact Investing Market report, the global impact investing market is estimated to be USD $502 billion, managed by over 1,340 organizations. The market has grown by 10 times since 2009 when funds under impact investment were $50 billion (Investopedia).
Despite the growth, there is still much to learn on the part of both entrepreneurs and investors.
As Brian Trelstad, former Chief Investment Officer at Acumen, and now Partner with Bridges Fund Management Ltd. shared in interview: “More clarity and more communication would go a long way to helping ensure that the capital that is allocated for impact delivers as much good as possible and the financial returns that people are seeking.”
Impact investors may have varying focuses in terms of geography, stage of business, or impact area, but they share the common objective of funding companies that are making an impact. However, many define and measure impact differently. For example, Acumen developed Lean Data to better understand how investee companies are making a real, lasting difference in the lives of low-income people.
Aside from considerations for impact potential, these funding vehicles work much the same as they would for a traditional, non-impact startup or company.
Raising capital at this stage, whether philanthropic or equity, is a challenging task for any entrepreneur. It takes an investment of time, building relationshionships, perfecting your pitch and mastering your mindset.
Sasha Dichter, former Chief Innovation Officer at Acumen and now co-founder of 60 Decibels, urges founders to examine their underlying beliefs about fundraising. Instead of fearing rejection, every fundraising conversation is an opportunity to serve both sides in a true exchange of value. Reframe your fear of fundraising with Sasha’s advice:
“We talk ourselves out of successful fundraising long before we ever get in the room with somebody.”
- Sasha Dichter
Debt funding is required to be paid back to the lender, typically the full amount plus interest accrued throughout the lending period.
The most common types of debt come from banks in the form of term loans, revolving lines of credit, or credit cards. Typically, debt needs to be secured by assets, which means that in the event of a default - when the borrow cannot repay the loan as agreed - security will be taken by the bank to recover their funds. In some cases, debt can be unsecured, but this is less common in traditional financing.
Debt requires the lender to make an educated decision about the creditworthiness of the recipient. This desire to mitigate risk can be fulfilled by a solid credit history, but most lenders require loans to be secured by an existing asset, such as equipment or property. Depending on the security available to provide the lender with reassurance in the event of default, or inability to repay, on the part of the recipient, they may ask for a personal guarantee.
Term loans can be a good option for financing assets and equipment that will increase efficiency or production. The revenue gains produced as a result can service (pay) the debt payments.
Term loans generally have set repayment terms including the monthly installments and term length. Loans require repayment regardless of financial performance so if the business is struggling taking on a term loan may contribute to overall financial strain instead of alleviating it.
Revolving Lines of Credit
You only pay interest on the amount you use, for the length of time the funds are drawn. Likewise, when funds aren’t being used, there is no interest charged (although there may still be bank fees).
Because lines of credit are designed to cover temporary shortfalls in operational cashflow, they are not designed to finance the purchase of capital expenditures like equipment or assets.
In contrast to debt capital, equity capital is received in exchange for a share of the company, typically in the form of stock. Although equity capital doesn’t need to be repaid, it does come with the expectation that value creation will exceed the initial investment as well as certain governance and reporting responsibilities to investors and shareholders. It also has the long term implication of decreasing your control over the direction of the organization, since more owners means more decision-makers at the table.
In order to determine what percentage of equity to give in exchange for the equity capital, you will first need to determine the total value of your company.
We’ll look at three types of equity capital: angel investment, patient capital, and venture capital.
Angel investors are high-net worth individuals who invest their own money in entrepreneurs and companies based on their individual investment thesis, which can be based on their experience in a sector, recognition of a trend, or area of interest. Sometimes, several angels will come together to invest in small groups. They are typically experienced entrepreneurs themselves, and are interested in passing on knowledge and mentorship to their investees.
Since many angel investors are focused on certain sectors or industries, it can be helpful to understand how their goals aline with those of your organization.
The capital does not need to be repaid; however, investors may receive dividends proportional with the company’s financial performance.
If the investor is not aligned with your company’s values and mission, there could be disagreement about strategic direction and financial decisions.
Securing angel investing can be contingent on your network, making it much more challenging for those traditionally excluded from capital opportunities - females, people of color, and companies based outside of hub cities like San Francisco or London.
Yuliya Tarasava, Founder of CNOTE and Acumen Fellow, explains what she likes about working with angel investors, and also why they might only be able to take you so far.
Venture capital is administered through venture capital firms, many of which have a specific industry, stage, or location focus. This type of capital is usually invested in companies that have already proven their business model, product-market fit, a sustainable market demand, and are ready to scale quickly.
Venture capital deals are sizeable when compared with other types of capital. The expected equity exchange can be up to 30% or more, with investments ranging from $250,000 to $100 million; VC’s typically look for 10 times return on their capital when the company is sold or goes public (GEM 2016).
Global Entrepreneur Monitor 2016 found that in 2014 roughly half (52%) of all venture capital was invested in the United States, with China and Europe representing 16% and 11% respectively.
Former Chief Investment Officer at Acumen, and current Partner at Bridges Fund Management, Brian Trelstad, explains the different types of venture capital:
Venture capital can provide large injections of capital needed to scale quickly
VC funding is often called ‘smart money’ because investors provide additional services, insights, and connections to help the company grow - it’s in their best interest, after all, to leverage the resources they have at hand!
Venture capitalists are invested in your success for the long-haul, typically until the company is sold or goes public. This can be a huge asset, but it’s also important to put in the effort to maintain a good relationship over time
Below, Brian Trelstad shares a few specific ways Venture Capitalists can support the growth of a social venture:
By giving up shares in the company in exchange for funding, you cede some of the decision-making control
Raising VC funding can be a lengthy and time consuming process that takes focus away from the running of the business
If your venture is seeking venture capital funds, hear what Brian Trelstad and Kathryn Wortsman, Fund Manager of MaRS Catalyst Fund, have to say about they qualities they look for when evaluating new investee companies:
Also be on the lookout for making these common mistakes when raising venture capital funds:
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.