Raising funds is one of the most challenging and time-consuming jobs for every founder, whether of a for-profit or non-profit organization. As we saw with the story of Method, this may be true even if a product is gaining substantial sales. As we saw with Charity: Water, the same can be true even if the organization is creating strong impact.
The purely for-profit model presents its own distinctive challenges. As high-profile for-profit purpose-driven companies like Ben & Jerry's, Burt's Bees, Patagonia, Whole Foods, Method, and Warby Parker have reaped such rewards and have proven the concept, there is no question that the concept of social impact investing has gained traction. A growing cadre of investors is looking to put their money into companies that can come through with both a solid financial return on investment (ROI) and a social return on investment (SROI), which is the social and/or environmental impact of the organization. But this in no way means that money is easy to attract, or that satisfying these investors is any less difficult than pleasing those looking primarily for quick returns. In many cases, it may be more difficult due to the added variables that come into play when looking for financial, social, and environmental performance.
When it comes to finding investors for social enterprises, the investor and the social entrepreneur must be in clear agreement about the expected outcomes in terms of profit and purpose. The pursuit of purpose can be (but is not necessarily) at odds with the maximization of profits, and this can result in a long-term power struggle between investors and the social entrepreneur.
Not every investor is right for every deal. Investors come in all shapes and sizes and are hoping for various types of returns. Some influential investors are strong supporters of pursuing a triple bottom line, and others argue that it's fundamentally flawed.
One strong supporter of the social innovation cause in the investment community is Albert Wenger, a partner at Union Square Ventures, who has invested in some of the most successful tech companies including Twitter and Tumblr. He considers himself a pure tech venture capitalist, not an impact investor, and yet he is strongly in favor of the social enterprise. He argues that while the current version of capitalism has been incredibly efficient with technical innovation, creating and distributing everything from computers to clothing at cheaper and cheaper prices and to an ever-widening market, it has been inadequate in solving the largest social problems. “The problem of technological innovation is not the primary problem that we still need to solve,” he says. “The primary problems now are the very large-scale ones: giving people access to good education, quality healthcare, poverty alleviation, and not destroying our planet.” He argues that we must usher in a new version of capitalism that will shift the focus from purely technological innovation to social innovation.
One key problem with the current version of capitalism that Wenger points to is short-termism: the mandate to produce short-term shareholder returns has led to the neglect of longer-term vision and strategy, and it leads stakeholders to attempt to extract value from organizations too soon. A good example of this, according to Mr. Wenger, is the Myspace acquisition. “News Corp. bought it, and paid what they thought was a reasonably high price for it and then proceeded to want to recover that price very quickly. So they tried to monetize the network very, very heavily, ultimately contributing to its collapse.”
Even an organization's managers may only work at the company for five or ten years, and investors are generally looking to exit even more quickly. This fundamental disconnect between the incentives for short-term profit maximization and long-term value creation is one of the most difficult challenges for any for-profit firm, but it can be especially difficult for a social enterprise given the tension between the pursuit of purpose and that of profit that they're also struggling with. Wenger stresses that “In a social enterprise, management, directors, and shareholders must set a long-term vision for the health of their company and make those decisions that align with those goals without the interference of short-term focused shareholders.”
Another influential investor, David S. Rose, an angel investor and entrepreneur who has founded or funded more than 75 companies, makes a different argument about the challenge of building social enterprise. He insists that you cannot create a successful company if you're trying to pursue purpose and profit simultaneously. When the rubber meets the road, you must choose either profit or purpose, he says. “It's wonderful to think that one can have one's cake and eat it too,” he argues. “In the real world, however, things tend to optimize in one area. It is nearly impossible to try and truly optimize for a double bottom-line. Starting a new venture is insanely tough. It's really, really difficult. Given the fact that the majority of new businesses fail even though entrepreneurs are busting their rear ends to try and make them succeed only economically, to overlay on top of that a secondary goal is really, really challenging.”
He believes in doing good through business, he just believes the only way to do that is to give clear priority to profit over purpose. In fact, he has invested in, and serves as the chairman of the board for Porti Familia—a company bringing modern healthcare to the slums of Lima, Peru—a company that is certainly doing a great deal of good in the world. Other investors in the company include some of the biggest impact investment funds in the world, such as Acumen and responsAbility. Rose says, “We all agree that the company is doing good things, but I invested in it not to do good things—I can give money to charity for that. I invested in this company to make money, and oh, by the way, it's making money in a good way by doing good things.”
One way to try to assure that those who invest in your organization are in alignment with your mission is to organize as a benefit corporation. A benefit corporation is a new class of corporation created for social entrepreneurs. It has two distinctive attributes. First, the purpose of the organization is to pursue positive financial, social, and environmental impact. Second, benefit corporations have increased transparency and accountability on social and environmental performance.
Ron Cordes, one of the leaders in the impact investing movement, has had a long career in investment, including serving as co-Chairman for the $21 billion asset management firm Genworth, explains the rationale behind the benefit corporation well. He points out that most investment rounds include multiple investors and, more often than not, the investors have never met each other; they're just names on a capitalization table. There is no way to understand the other investors' motives for making their investments. Typically, to align investors around a common mission, the CEO of the company must bring a group of them together.
Incorporating as a benefit corporation sends a clear signal to investors that they are signing on to your profit and purpose goals. “You have the goals in writing,” he says, “baked into the articles.” Inevitably, a company will run into challenging circumstances as it grows, Cordes notes. “Growing a business is never a linear path. It's always two steps forward, one step back. And crashes like 2008 happen,” he added. When setbacks occur, he explains, investor support for the social and environmental mission of a company may wane, and a company may face strong pressure to put the mission aside. “Things like that can happen,” says Cordes. “If the values are not codified, you're going to be relying on the collective good intentions of the group.”
Because of the challenges involved in dealing with investors, one might be more inclined to pursue purely philanthropic funding. But philanthropic funders present their own challenges. Though philanthropic capital may seem free, there is a high cost to that free money.
The cost of philanthropic capital can be much higher than that of commercial capital. The cost that often goes unaccounted for is the time required. Many of the executive directors I speak with regularly spend 40 percent or more of their time in any given week fundraising. Most of that time investment, either by the executive director or by the development staff, has no guaranteed pay off. It's very common to spend 20 hours on a detailed grant application and not win the grant. And in the situations where the organization is successful at winning the grant, they often have to dedicate precious staff time to monitoring and reporting impact back to the donor. Time is the key cost of philanthropic capital. Time spent on constant fundraising is time not being spent on strategies and tactics for improving service to serve the beneficiaries. So, due to the constant chase for money, the services to beneficiaries often suffer.
Philanthropic capital also often comes with its own form of strings attached. A donor may want to fund a project that is not exactly in alignment with the core mission of the organization. But because funds are needed, the conditions are accepted, and an organization drifts away from its original mission. In addition, most philanthropists have no appetite for failure; they only want to fund a program that is proven. Thus, many charitable organizations are unwilling to take risks for fear that they may be criticized for failures and jeopardize their own funding sources. Philanthropic capital disincentives risk.
As Charity: Water's Scott Harrison says, “In the for-profit world, I think you can break things a little more easily, because it's not donor money. You can completely burn through $5 million and realize, ‘that didn't work’. We (nonprofits) have a different kind of stewardship and accountability. In the traditional startup world you could try five things and you only need one to work. If we try five things, we kind of need all five to work.”
Krista Donaldson of D-Rev also stresses how this can stifle the experimentation that is so crucial to innovation. “The traditional nonprofit operation depends on a strategic plan and the investment of a lot of resources in one big effort. It is very hard to change direction. For the most part, if you fail at your mission, very few funders are going to say, ‘okay, here, let me give you the same amount of money or more to go try something new.’
In consideration of all of these challenges, this chapter will introduce a number of ingenious funding models that have been developed, many by the founders profiled in the book, which every founder and organization should consider. At the core of the success of all of these techniques is that the founders were able to convince funders, whether investors, donors, or consumers, about the authenticity of their commitment to the purpose and the quality of the product or service, and in turn they inspired the authentic and engaged commitment of funders. Crucial to solving the funding conundrum is finding investors and donors who are committed to the same cause and vision that drives you.
A hot new fundraising approach that has emerged in recent years is crowdfunding—raising small amounts of capital from a large number of people, typically through an online platform.
Soma founder Mike Del Ponte knows a thing or two about crowdfunding and executed a brilliant fundraising campaign by blending a smart mix of angel investment and crowdfunding on Kickstarter.com to launch his company. The most successful crowdfunding campaigns have been launched at the design phase, when an organization has created a good prototype of a product, but requires capital to go into full production. This was true for Soma, and Mike not only did a great job of attracting funds through his Kickstarter campaign, he also leveraged it to help draw in traditional investors.
The key to successful crowdfunding is mobilizing both friends and the media. The media needs to be well targeted, with strong readership, a large reach, and a relevant audience. But potentially more important than the media is getting your friends excited and on board as advocates. In order to do this, you've got to spend a lot of time prior to launch soliciting and listening to their advice, giving them a sense of ownership in your mission, which increases their commitment to seeing it succeed. Surprisingly, Mike found that crowdfunding is not only about the money you raise in the campaign, it's about the media exposure and about building a community and gaining social proof of concept. One last benefit is that it helps you learn what consumers want from your product. Mike used his campaign to capitalize on all of these benefits.
Mike had never imagined he would end up running a high-design, sustainable products company; he had planned on being a priest. As a student at Boston College, a Jesuit-Catholic university, he was inspired by the priests and nuns there to follow in their footsteps. So he headed next to divinity school at Yale, where he discovered that while he didn't think he'd make a great priest, he was good at inspiring and connecting people to empower people to follow their dreams. He also met a group of young social entrepreneurs at the school, and he started helping them out with their ventures and discovered he really liked it. So he became a social entrepreneur himself and launched Sparkseed when he was 24. Sparkseed is an organization aimed at helping young social entrepreneurs gain access to capital, mentorship, conferences, and community—everything they would need to make their organization thrive. But after running the organization for a number of years, launching initiatives around the globe—including food programs in Africa, composting programs in the United States, and helping design green companies—he decided he wanted to get some experience in the for-profit startup sector. So he joined a young startup called Branchout.com, a professional network on Facebook, where he led the marketing team. While he was there, the user base grew to 25 million and the company raised $49 million in venture capital. But he felt that as interesting as the work was, it wasn't his calling.
Then one night when he was throwing a dinner party at his home, a friend asked for a glass of water. When Mike grabbed his “leading brand” water filter pitcher out of the fridge, he was struck by the black specks floating in the water, and by how ugly and ungainly the cheap plastic pitcher was. He certainly couldn't bring it out to his nicely set dinner table. So he decided to pour the filtered water into a glass wine decanter. Which was how he found his Purpose Point. He was passionate about the water crisis, and had followed what Charity: Water was doing closely. An idea hit him: why doesn't somebody make a water filter that's beautiful, that works well, and that also does good? He decided he wanted to disrupt the water-purification industry with a product that consumers could be proud of on both an aesthetic and a moral level.
That fateful dinner party was the genesis for what Fast Company called “The best design story of the year,” and Soma was named one of Inc. Magazine's top 25 Most Audacious Companies.
To move Soma from the concept to the prototype phase, they initially raised an angel round of $1.2 million from Silicon Valley luminaries like Tim Ferris and Michael Birch. They had a great response and had to turn investors away. The round closed in the summer of 2012.
After that round closed they began to focus on their Kickstarter campaign, which launched in December 2012. Mike set a goal of $100,000 for their campaign. Mike and a couple of virtual assistants got together to launch the Kickstarter campaign.
Mike didn't want to leave anything to chance, so he interviewed 15 of the top-earning Kickstarter creators. Their projects ranged from a grizzly bear jacket to a gaming console that raised nearly $8.6 million on Kickstarter. According to Mike, “What we learned is that whether you're successful or struggling, your Kickstarter campaign is often ‘40 days of chaos,’ as one creator put it.” Either you succeed beyond your wildest dreams and are overwhelmed with inquiries from backers, press, retailers, and investors, or you struggle to achieve your goal and frantically beg bloggers and friends to spread the word. Either type of overwhelm can be a huge headache.
Soma did not have a huge staff. The team included three full-time teammates, two virtual assistants, one intern, and an army of friends. The network of friends had a strong sense of ownership because they were engaged months before the Kickstarter launched. So they got creative, used virtual assistants, and laid out a clear strategy to hit their goals. Mike learned some lessons in the process.
Mike says, “Chefs don't prepare meals like you and me. They don't start 15 to 60 minutes before dinner. Instead, they prep everything in advance (sometimes days before), so they can just heat the food and make it look nice when it's time to eat. This concept was critical to our success. We did 90 percent of the work in advance.”
In order to get people to fund your Kickstarter project, you first have to get them to the project's site. But, not all traffic is created equal. Some traffic is more likely to yield backers than others. Soma's virtual assistants analyzed the traffic for successful Kickstarter campaigns and they found that the top drivers of traffic were:
Based on this data, they decided to focus all of their attention on just two goals: first, getting coverage on the right blogs, and second, activating their networks to create buzz on Facebook, Twitter, and email. Mike looked for the following characteristics when compiling their media list:
They compiled their media list outreach, complete with a dossier for each property, and had the virtual assistants reach out to each property. Once they connected with a blogger who was interested in covering their project, they didn't send them some canned email, but tailored it specifically to that publication and made it as easy as possible for them to write a piece on Soma. Bloggers have to pump out a ton of stories, so make it easy on them and valuable to their readers.
Once they landed the story, they pushed to get confirmation on the timing of the piece. You want to ensure each story reaches people who will back your project. So after a story is confirmed, they pushed to try to time the piece with the launch of the campaign.
They got a good deal of coverage in just 10 days (Forbes, Fast Company, Inc., Mashable, Cool Hunting, Business Insider, GOOD, Salon, Gear Patrol, Thrillist, The Huffington Post, and many more). In order to understand how the press impacted the campaign, one week into the Kickstarter campaign they reviewed their press coverage. Surprisingly, the post that earned the most money was on a site most people have never heard of: www.good.is, the online property of GOOD magazine.
Mike says, “We stopped and asked ourselves, ‘why did good.is outperform bigger and more well-known media outlets?’ We discovered that good.is was in some cases ten times more valuable than other press because the audience is relevant, the readership is substantial (400,000+ unique monthly visitors), we got an introduction to a writer at GOOD, and we reached prospective backers through GOOD's daily email and its Facebook and Twitter accounts.”
But most importantly, Mike says that the reason they were successful is because of their friends. He asked for (and listened to) his friends' advice. They asked for feedback on everything from the company's name to product design to pricing. He offered them “sneak peeks” that no one else gets. They showed their friends product renderings, pictures, and the Kickstarter video long before they were released to the public. Letting friends in on the process and allowing them to give input gives them a sense of ownership, and they are more apt to advocate on your behalf.
They threw a launch party. “Having a large group of people in one room, all excited about your project, creates a united energy you can't create through emails, phone calls, or one-on-one meetings,” says Mike. They invited more than 50 motivated and influential friends, showed them the Kickstarter video and made a speech telling them why the company needs their help and exactly what they need them to do. The people who attended their launch party ended up being their first backers and their most passionate evangelists.
This clear strategy paid off. Soma quickly became one of the most popular projects on Kickstarter and was featured as a “popular project,” which then engaged people browsing Kickstarter searching for cool projects to back. Within only nine days, they hit their goal of $100,000 and ended up raising $150,000, one and a half times their goal, throughout the entire campaign.
“Crowdfunding is not just about the money,” according to Mike. “If you were asking about the five best things about crowdfunding, money would be at the bottom of the list.” As the field of crowdfunding is maturing, more people are realizing that the benefits of crowdfunding extend far beyond money.
Crowdfunding builds community. Gathering a group of people around the goal of getting the project funded creates the core of your community. The backers are the early adopters of a brand and the best advocates. They are the ones Mike hopes will buy Soma water filters for their friends for the holidays.
Crowdfunding is great for market research. You can test out messaging and pricing, send out surveys to them, and meet with them to understand who your audience actually is. From there you can build archetypes of your customers.
Crowdfunding also builds social proof prior to launch. Most companies launch without any proof of acceptance by the market, with no way to know if consumers will respond. But due to Soma's success on Kickstarter, they had already been ranked number one on Fast Company's list of top design stories and were named one of the top 25 most audacious companies by Inc. Magazine. The market was responding.
They had run a successful Kickstarter campaign, but in the scheme of their financial needs, $150,000 was fairly minimal. They had already raised $1.7 million, and needed to raise another $2.5 million. So they honed their pitch and went back in for another round of financing.
The investors in this round were impressed by the Kickstarter success, it had turned a lot of heads in Silicon Valley, but they prudently noted that a one-month prelaunch campaign is not a business model.
When approaching the second-round investors, Mike used the success of the Kickstarter campaign, but was careful to put it in context. He says, “The customer insights that we had were equally or more impressive than the money we made on Kickstarter because the amount of money raised on Kickstarter in the timeframe was relatively small. There is one month out of hopefully decades-long life of a company, and it is $150,000, out of what will hopefully be a billion dollar company. So we stated that upfront, and said, we did the Kickstarter. We wanted to get proof of concept, and our goal was $100,000. We did $150,000. Thousands of people signed up, and we are thankful for that. But here is the road map of how to really build the company. Kickstarter was one very early milestone that definitely presented the customer insights. That was incredibly impressive, because most companies pre-launch don't know that much about the customers.”
Going through the fundraising process the second round was different than the first round. This time they had a business to run while they were raising money, so they wanted to do it very efficiently in order to not disrupt the momentum of their business.
Mike sat down with the lead investor from Soma's first round and brainstormed who should be the second round. The name that emerged at the top of the list was Kirsten Green of Forerunner Ventures. Mike said, “Forerunner is fantastic at e-commerce. They have invested in and helped grow some of the coolest e-commerce companies like Bonobos, Warby Parker, and Birchbox. The second thing is that Kristen is an absolute hustler for her portfolio companies. She is very proactive about asking where she could help. She has great ideas and right off the bat we knew that she would be a great partner. She and Forerunner in general add so much value.” They met her and immediately saw the value that she would add and her excitement about Soma. They wanted to lead the second round and Soma was excited to have them do so.
Next, they circled back with their original investors and gave them the opportunity to reinvest. Then they let it be known that they were raising another round of capital, and other investors jumped into the round. So much so that Soma had to turn away investors.
They closed their $2.5 million round by the middle of the summer of 2013 and were back to work equipped with more cash and expertise to help them launch a successful company.
Soma raised money both from a crowd-funding campaign on Kickstarter as well as through a traditional seed round. This hybrid seed-crowd round is a new approach to raising early stage capital. So why did Mike choose that fundraising strategy?
Mike originally was just planning to raise a seed round from investors. He didn't like the idea of crowdfunding because he wasn't sure that great brands could be launched on Kickstarter. There are plenty of cool projects launched on the site, but not many examples of lasting brands.
Secondly, the amount of effort required to run a successful campaign does not match the amount of capital raised. They raised $3.7 million in the more traditional fashion, and they spent much more energy to raise $150,000 on Kickstarter. $150,000 in proportion isn't a significant proportion of fundraising.
Mike said the reason why he chose to raise a seed-crowd round was that “Great advisors emphasized the benefits of crowdfunding as proof of concept. We de-risk our business by proving that thousands of people would pull out their credit cards and purchase Soma at the product pitch stage. A lot of companies will spend a ton of money bringing a product to market, cross their fingers, and hope that it does well. We had a significant proof point earlier on in the stage of the company.”
Applying the seed-crowd strategy allows a company to raise a level of capital that is unlikely to be raised on a crowdfunding platform, while simultaneously proving the concept of a product prelaunch.
After Scott Harrison raised the $1 million from Michael Birch to support operations, he and the team had some breathing room to figure out how to make the 100 percent funding-model work. He came up with an idea that has brilliantly solved the operations funding dilemma, inspired by some prescient advice from a savvy CEO.
Scott was in a meeting fundraising for operations from some CEOs. At that time they were spending $100,000 per month on operations. Somebody spoke up and asked, “What if you get 100 people to commit to giving $1,000 per month?” Scott thought about it. Twelve thousand dollars a year is not too big of a commitment, many people in New York spend that per month on rent. All he would have to do was convince 100 people and they would have all of their ops covered annually. Scott said, “So we started to ask people for twelve grand a year, and they started saying yes!”
The first person that signed on for this regular giving was Shawn Budde, a member of their board at the time. Then others began to follow. Scott was in a meeting with the CEO of Saks Fifth Avenue and he committed to two thousand dollars a month, but he said, “Make us all sign up for a three-year commitment, that way you can properly plan for the future.” So, from there forward, they asked for every donor to commit to giving for the next three years. In addition to Michael Birch's initial donation of $1 million, he also committed to giving $5,000 per month. So, now there were different levels of giving—$1,000, $2,000, and $5,000 per month—and everybody was signing up for three-year commitments.
The team decided that they needed to call this group of recurring donors something. They wanted to create a community. So, Vic came up with the idea of referring to them as “The Well.” The hope is that the well never runs dry.
Thus far it hasn't. In 2012, Charity: Water spent $5.5 million on operations, but the well raised $11 million. Not only are they surviving, but they are getting ahead and are able to make prudent financial-planning decisions, such as hiring and office expansion.
For the third year they were trying to think about ways to scale the party. They thought, “this year let's ask everybody to stay home.” Instead of coming to a party, why not ask everybody to give up their birthday? Scott thought he'd take the lead and see if it caught on, “I'm going to give up my birthday party this year. I'll ask my friends to donate my age in dollars. I was turning 32. Everybody I know has $32 they could give to charity; they would have spent that on a cab and a tip to the waitress on any given night.”
So Vik created an HTML page. Scott wrote a mission statement about giving up his birthday, promising that he'd go to drill a well himself in Kenya with their money if the campaign was successful. The campaign was successful and they didn't spend a dime or any energy to plan and host an event. Scott celebrated his birthday in Kenya drilling a well, which was streamed live for the whole world to see.
Along with Scott, Charity: Water put out a call for all September birthdays to give up their birthday. Ninety-two people joined in, and they raised a total of $150,000 from the birthday campaign. In year one, they made $15,000 from the party, year two jumped tenfold to $150,000. The following year they set an ambitious goal for September, they wanted to dig 333 wells in Ethiopia. That year they raised $1.5 million. Each year they had seen a ten-fold growth in their September fundraising.
The idea was more powerful than they could have imagined. It worked well for a number of reasons. First of all, it just redirected spending that would have been occurring for birthday gifts in the first place. It's easier to give to charity than to find a present for someone, and it feels better. So, it's an easy ask from the person whose birthday it is. Also, the idea of asking for the amount of dollars to align with your birthday turned out to be an incredibly sticky idea.
The team thought that there was something bigger that they could do with this idea of giving up your birthday. So, the next year, they launched My: Charity: Water—a customizable web platform that allows an individual to set a fundraising goal and reach out to her friends and family to meet that goal.
Then people started getting more creative with it and using the platform for more than just birthdays. One guy ran a campaign called “Save my beard/Shave my beard.” He encouraged his friends and family to tell him what he should do with his beard. Each donation was a vote toward whether you wanted to save or shave his beard, and whichever side raised the most money would win. A member of the military in Afghanistan raised $1,000 by writing haikus for those that funded his campaign.
A beard contest? A soldier writing haikus? These are ideas that the Charity: Water team could have never thought of, but they are effective, authentic ways for individuals to tap into their networks, tell the story about the water crisis, and tell about how Charity: Water is trying to create a solution. The real power has come from letting their donors become storytellers. By empowering their donors, they have become brand ambassadors with a very easy way to engage their network and raise funds online.
Since the purpose of the Embrace Warmer was to reduce infant mortality in developing countries, the founders assumed that the nonprofit structure would be the best choice for the organization. They thought they wouldn't be able to price for profit. But they still wanted to “operate as a business,” as so many social entrepreneurs do. They planned to sell products and make a profit margin that would be reinvested in the business for growth.
A key question in their decision making was the source of funding. They thought that structuring as a nonprofit would allow them access to philanthropic capital—grassroots donations as well as grants—which they thought was necessary because as Jane recalls, “Given the inherent risk associated with what we were attempting to do (an untested management team bringing to market an unprecedented medical device) and the uncertainty of the commercial viability of the product, and given the type of customers we wanted to serve, we decided the best option was to go down the nonprofit route and created a 501(c)3.”
They soon realized their naïveté on a number of levels. Jane says, “When I want a good laugh, I look at our first business plan. We projected that with two people and $100,000, we would be able to bring the product to market in one year.” The team had little understanding of how much time, effort, and capital it would take to bring Embrace from concept to market. They also had no clue how much of their time would be dedicated to chasing after donor money. Jane estimates that up to 40 percent of their time was dedicated to fundraising—that's almost half of their time not spent on building a really great product, building out a distribution channel, or creating organizational infrastructure—but very inefficiently chasing down donors, which only resulted in a relatively low amount of money raised.
It's a common pitfall to think that nonprofit funding is free. It seems free, you just set up a nonprofit and ask for money. But the energy spent writing grants, submitting lengthy incubator applications, hosting events, running online fundraising campaigns, and the like all comes at a cost—your limited time. These activities shift the focus away from actually building a game-changing product or service. In addition, funders can ask you to slightly tweak your focus in order to fall within the guidelines of their grants. Most foundations like to fund programs that are already having an impact, they generally don't like funding research and design. Especially at the startup stages, an organization must trade impact for philanthropic money.
So, rather than continue in the nonprofit structure, they chose to take a bold structural move. Embrace spun out a for-profit in order to gain access to investment capital. So, Embrace was split into two separate, but related entities.
The nonprofit arm, Embrace, continued to hold the intellectual property it had already created during the concept and design phase, donate the product to the poorest communities through NGO partners, and build an ecosystem of services around baby health care. These activities would be funded by philanthropic capital and royalties from licensing the intellectual property.
The new for-profit entity, Embrace Innovations, licenses the intellectual property from the nonprofit under a revenue-sharing agreement, manufactures, conducts clinical testing and future R&D, and sets up the distribution and sales channels for the bottom of the pyramid market. This entity is funded by investment from social venture capitalists.
Jane describes the functional practicality of this set up. “This allows the for-profit entity to develop and focus its competencies to sell and distribute products, as well as to conduct research and development. At the same time, the nonprofit is able to focus on broader issues around newborn health, through training, education, and monitoring and evaluation. Early last year, we were able to close a Series-A round of financing from Khosla Impact Fund and Capricorn Investment Group, giving us a launch pad by which to try this new structure. Thus far, through this approach, Embrace and Embrace Innovations have helped more than 3,000 babies with our product. While our primary focus is in India, Embrace is doing pilot projects with NGO partners in 10 countries, and we hope to further scale this year.”
Embrace wanted investors who believed in profit and purpose, so rather than approaching the traditional venture capital community, they focused on more impact-driven investors. They spoke with Acumen and Omidyar—two leaders in the field of impact investing. But they ended up working with funds that were a bit more profit focused, but still cared about impact. Khosla and Capricorn were two such funds, and they invested.
“Khosla himself has run a business before. So, he really understands the nuts and bolts of operations and also believes in impact. In fact, the first time I sat down with him, he asked me at the end ‘If you had to choose one, what would it be? Making money or making impact.’ I told him that if I had just wanted to make money, I would've done something else, other than Embrace. It was very clear to me when I answered him, but I told him, impact. If I had to choose one thing, it would be impact. Although to me the two actually go hand in hand, because if we want to scale this like crazy, then it has to be profitable.”
Lerer Ventures is an investment firm that operates on a straightforward assumption: any business that has not been disrupted by the Internet will be. They are always looking for David and Goliath stories, new companies that can tap the power of the Internet to disrupt an industry. When Ben Lerer, a partner at the firm and co-founder of Thrillist Media Group, met Neil and Dave of Warby Parker he saw just such an opportunity.
For Ben, a core criteria in investing in a for-purpose brand is authenticity; any social good that a company says it's promoting must be a matter of true commitment, not just marketing ploy. With Warby Parker, the impact of giving away a pair of glasses for every pair bought was perfectly clear, and the team had the expertise from Neil's five years working on the problem at VisionSpring to get it done. Ben was also impressed by the personal passion Neil brought to the cause and the commitment of those five years. “That said something about Neil and his character,” says Ben.
It is easy to believe that investors make decisions purely on financial models but investors, especially venture capitalists, are investing in people, not spreadsheets. Ben's comments about the authenticity of the Warby Parker commitment to its mission speak powerfully to this point. If a social mission is genuine and comes from a place of authenticity, even though from a strictly profit and loss perspective it will probably cost more to run the business, the payoffs of the approach can far outweigh the losses. The success of Warby Parker shows that funding purpose with a totally for-profit model really is possible. It takes a really good product and a really authentic message. That winning strategy allowed the Warby Parker founders to raise substantial funding even though they were launching in the wake of the 2008 financial crisis, which dried up so much investment money.
As Neil recalls, “The crisis of 2008 scared the crap out of all the banks. They overreacted, they would basically not lend to companies that have less than two years of tax returns.” They were a company that was financially solid from launch, lead by MBAs from one of the best business schools in the world, and they couldn't get a small business loan.
In order to get a simple $50,000 line of credit, they had to put $50,000 of their own dollars as collateral. They were borrowing their own money and paying interest for the pleasure of doing so. There was no other way for the company to build a credit history.
Then they went to 14 different banks and were turned down 14 times. The bank officers would tell say, “You have the best business plan we've ever seen, and the best performance in this short time that we've ever seen, but our hands are tied.” Finally, through a family friend, a regional bank in New Jersey gave them a $200,000 term loan that was backed by the Small Business Administration. Even so, they still had to personally guarantee it and put up $100,000 of collateral. “We were really only borrowing like a $100,000,” Neil said. “We had to sign all these crazy documents saying that we wouldn't use the money to build an aquarium or a zoo.” The whole point of having the federal government guarantee small business loans is that if the business defaults, the SBA will pay the bank back 90 percent of the loan, but the bank still required 50 percent of the loan amount for collateral. Apparently the paperwork for the bank to recover that 90 percent in the event of failure is so onerous that they rarely do it.
So they jumped through all the hoops, put down $100,000 collateral, and promised not to build an aquarium or zoo with the money, just to get a $200,000 SBA-backed small business loan. They kept growing like crazy through the summer and fall of 2010, and needed more cash to continue to grow, so they raised a small $500,000 seed round of funding through a convertible debt from friends and a few angel investors.
In May 2011, 15 months after they launched, they set out to raise a $2.5 million round. In this first round, they had 46 investors. That is not a typo, 46 investors for a round of $2.5 million. From a traditional fundraising perspective, and from a purely logistical perspective, this is a nightmare.
But they decided to engage with this many investors for a reason. Neil explains their thinking, “Our thought was we've gotten this far because of all the good will of all these people. Why not get more people that are awesome.” They were extremely deliberate in their search, targeting investors in tech, entertainment, and fashion. Within the tech world, Lerer Ventures led the round, and First Round Capital, SV Angel, and Thrive also invested. From the entertainment world they had Ashton Kutcher, Ryan Gosling, Troy Carter (Lady Gaga's manager), and Ariel Manuel who runs William Morris Endeavor (also famous for being the inspiration for Ari on the HBO series Entourage). From the fashion world they had the group that had invested in Tommy Hilfiger and Michael Kors as well as the family that owns Chanel. Overall, this round was as much about raising influence as it was about raising capital. Having these influencers from key sectors buy into Warby Parker's success was key to get them to the next level. They weren't just looking for checks; they were looking for relationships.
They were really crushing it. Sales were through the roof, and they kept growing. The founders were so overwhelmed with their work that they couldn't meet with investors during normal business hours. But this was such a hot deal that investors were taking the red eye from the West Coast just to sit down for breakfast with the cofounders, so they could get time with them outside of business hours.
In September 2011, Warby Parker raised their second round. This was a $12.5 million round led by Tiger Global—a hedge fund that has been a major investor in Facebook as well as in e-commerce sites like Netshoes (the largest footwear sites in Latin America) and Flipkart (the Amazon.com of India). Their portfolio’s companies have had great success partly because they are incredibly thoughtful about how to provide support and expertise. They have experts on retainer to help their investees strategize. The team continued to focus on operational excellence and continued to grow.
In January 2012, Warby raised its third round of $41.5 million, led by General Catalyst Partners. American Express and fashion icon Mickey Drexler, CEO of J Crew, also invested in this round. In the fall of 2013, they raised yet another round of $60 million from the same investors. The fact that the investors keep re-investing in Warby Parker's growth is a sign that the fundamentals of the business are incredibly compelling in this social enterprise.
Warby Parker is a B Corp certified company, a certification for socially and environmentally responsible business. Neil can't remember B Corp certification coming up in the meetings with investors. His sense was that the investors believed that the team knew how to build the brand and if this is part of it, they are fine with it. Most of the investors believed that it was important to invest in good teams, and since they clearly felt Warby Parker was a good team, and the social mission was important to them personally, they were good with it…especially since it was making money.
Many legacy charitable organizations simply raise money from the public without any indication of how that money is going to be used. At times the money has been abused, with almost all of the money going to operations. Charity: Water took the extreme approach to address this problem by creating the 100 percent model; DonorsChoose.org innovated a very smart middle route.
Charles Best was committed to total transparency about where the donor's money was being spent, and he thought it was reasonable to ask donors to support not only specific classroom projects but also to offer some portion of their donation to support the organization. But unlike traditional nonprofits, he wanted to be upfront about this and let donors know that's what would be done. The result was that Charles designed a model that would eventually reach financial sustainability.
When a donor visits a classroom project on the site, they're encouraged, but not required, to allocate 15 percent of their donations to support outreach and overhead costs. The 15 percent is completely optional, but it is the default setting. Donors have to click to choose not to donate the 15 percent. Additionally, the 15 percent is included in the amount you want to donate, instead of adding it on. So, say a donor wanted to donate $100 toward a project and wanted to support operations with 15 percent. Her total check out would not be $115, but $100 ($85 going to the classroom project and $15 going to support operations).
This design for checkout is leveraging behavioral economics to achieve an optimal outcome for DonorsChoose.org. First, a surprisingly large number of people in any context tend to stick with the default option, even when it's easy to make changes. Think about the settings on your computer, chances are you've stuck with almost all of the default settings (except for maybe that horrible wallpaper). Second, by including the 15 percent in the total amount the donor is choosing to donate, they are removing a hurdle of adding money to the bill.
A complex checkout process ruins so many transactions in the charitable or the ecommerce world. DonorsChoose.org has kept the checkout process as simple as possible, while still giving the donor choice and transparency. They must be doing something right, because about three quarters of donors keep that 15 percent allocation included. And they have completely funded all operations with that 15 percent since December 2010.
Until DonorsChoose.org broke even, as is common among founders, Charles spent almost half of his time not setting long-term strategy, figuring out how to improve the product, or leading his team, but raising funding for operations. Charles knew he didn't want to do this for the rest of his life. Any founder of a charitable organization knows the feeling. He also knew he wanted the organization to go national. Was there a way to achieve both goals?
The only way to get there was to raise money and scale up rapidly to the point that the money they were raising for operations on the platform actually covered the operational costs. In order to do that, they needed to conduct a significant capital campaign to get them out of the business of fundraising for operations. So, in 2007, that's what they did. Except they did it in a different way than most charitable institutions, they raised it like a tech startup. So, they packed their bags and headed out to Silicon Valley to start pitching.
According to Charles, “We put together a round of funding modeled on a venture capital-style round of funding.” They were pitching to the elite Silicon Valley set that had built the dot-com boom in the 1990s and were a new type of philanthropist. Charles framed the conversation the same way that a tech startup would. “We need $14 million to scale up to break even. If we get this infusion of operating capital, we will be able to invest in our organization and grow fast enough that we'll get to scale quickly enough, assuming donors keep that 15 percent allocation included in their donation.” Charles said, “We will pay all of our bills before the $14 million runs out.”
This was a new spin on philanthropic giving. Instead of milking a high-net-worth donor year after year, they just needed a one-time cash infusion to get to the point that they never needed to raise for operations again. This was appealing to entrepreneurs and venture capitalists that think in those terms every day—identify a web property that has performed well on a small scale, inject cash to fund to scale up, and reach profitability. But rather than the normal financial return on investment, they were going to get a social return on investment.
Charles recalls, “There were varying degrees of excitement around this sort of new approach to funding. I think one or two of those funders had a more classical mindset of this is a great cause. We want to put money behind a great cause that has a great plan for having more impact. Then others in that syndicate were like, this is how the nonprofit sector should apply venture capital startup plans and principles to its work. I'm getting behind this, because I love this idea of participating in a one-time round of funding, and helping an organization hit sustainability, get to breakeven. It was fundamental to those backers that our plan would have us not coming back to them again asking for more money. They were excited that their donation was not creating a dependency. That it was the opposite of creating a dependency.”
So, eventually Charles pulled together a syndicate of philanthropists that funded the $14 million from the founder of eBay, co-founder of Yahoo, founder of Netflix, and the founder of Sun Microsystems. They scaled up nationwide and the revenues from check out were eventually enough to bring them to financial sustainability before the $14 million ran out.
“We are completely out of the business of asking people for help with the rent payment, which is very liberating,” says Charles. Now the conversation with donors is much more interesting. Rather than appealing to them to help keep the lights on, Charles can have a more interesting discussion with big donors. “It's very different to sit down with them and ask them about their interests and passions and focus their giving directly to the classroom where they can have a direct impact funding something that they are passionate about. ‘You like swimming and you like Shakespeare? Well let's talk about a match offer that you could underwrite for swimming and Shakespeare projects on DonorsChoose.org,’” Charles might say. “‘Where all of your money would go to these classroom projects.’ That's a very different conversation from, ‘Please, sir, we need help in keeping our lights on, and paying rent and staff salaries.’ The former conversation we still have, the latter conversation we have not had since 2010.”
Most CSR departments at big corporations are there to hedge risk and write a few checks to worthy causes. But Hannah Jones realized the team at Nike should evolve past that. Her vision for where her team could go was much bigger. The story of the pivot she put in motion will be told more fully in a later chapter, but here we'll focus on how the team has implemented a more powerful method for funding causes than the standard corporate approach of simply giving philanthropic funds to organizations.
In 2009, when Nike changed the name of its CSR department to the Sustainable Business and Innovation Lab (SB&I), much more was involved than a name change. The whole emphasis of the group changed from a focus on compliance with high environmental and social responsibility standards to the innovation of more sustainable products. They turned their lens inward on Nike's own product lines (more about that in Chapter 7), but they also decided to begin identifying companies with innovative solutions for driving sustainability to invest in and partner with.
They realized that their goal should be to accelerate innovation and that giving money away wasn't the best way for them to do that. “As we began to think about innovation,” Hannah explains, “it became clear that one of the things we were going to have to do was to devise a whole new toolkit.” They determined that a key component to accelerating innovation is creating innovation partnerships, which can take many forms, from strategic alliances to joint ventures to investments. So they repurposed some of the team and some of the philanthropic funds and they began hunting for emerging technologies and new startups that could help accelerate, trigger, change, or disrupt materials, products, manufacturing, and services. And they made a substantial commitment to the process, recruiting experts from Venture Capital and Clean Tec. They have invested in a wide variety of companies. One of them is DyCoo, which has disrupted the business of dying textiles by innovating a waterless and chemical-free dying procedure. Typically, the dying process is extremely water intensive. To dye one kilogram of textile requires 115 liters of water. In the apparel industry, this means that every two years they are using the same amount of water that is in the Mediterranean Sea just to dye their clothes. This is a tragic waste, considering the fact that one billion people lack access to clean drinking water globally. Nike loved the company, and it has brought the DyCoo technology into its factories to drastically reduce its water footprint.
Another investment made was in Lavasoft, a software company that works on logistics to help companies lower their carbon footprint from shipping, which was a big issue for Nike itself. Both of these investments have not only supported these innovations, but have helped make improvements to Nike's core business and will help many other companies become more sustainable. That's a great acceleration effect. As Hannah says about the approach “It's both about business and sustainability.” Nike's SB&I investment fund will likely yield a substantial financial return for the company in addition to its social return.
Funders invest for a range of reasons. Some are more intent on profits and others on impact. Both can be tough taskmasters. When you are building an organization that is attempting to balance financial return and social and environmental impact, it's important to look for investors who genuinely feel a commitment to your vision. It's also important to such investors that you have an authentic commitment to the purpose you're pursuing. You and your funders must be aligned in your commitments.
Key Question: What funders are committed to the same outcomes I am?
After locating funders who are aligned with your mission, you must close the deal by making a persuasive pitch to them, presenting them with clear and easily actionable means to commit funds. Vagueness and shyness are not welcomed by funders. You've got to make a clear ask, including the specific amount of support you're looking for, the timeline you have in mind for the use of the funds, and for the realization of a return if the funds are offered as an investment.
Key Question: What it the appropriate ask for this funder at this time?