This book started with the promise to guide SEs through what they may experience as a financial wilderness. Finding funding for their noble activities is a challenge for young and experienced social entrepreneurs. It is important to realize that financing a venture could be challenging even for experienced entrepreneurs and managers of conventional businesses. Therefore, SEs should take the financial challenges of their ventures as a normal part of the process. Addressing these challenges requires thus a systematic approach. Yet, the first step is to understand the origin of financial challenges in social entrepreneurship.
Chapter 1 discusses three main reasons why SEs encounter challenges with respect to funding their ventures: (i) access to funding, (ii) complex business models and (iii) predominant focus on social impact. The first challenge, limited access to funding, is very clear. With respect to this challenge, SEs need to ask themselves “How can we have better access to funding?” The easy answer to this question is to have a better overview of the financial sources available. Chapter 2 provides a non-exhaustive list of funding organizations who might be relevant for SEs in the Belgian context, however, this is only the first step of the solution. And one of the main messages of this book is that taking only this first step to know better the various funding sources would not provide good guidance for SEs in the so-called “financial wilderness”. Knowledge of funding sources is simply insufficient, and hence we argue in favor of closer attention to four key elements: communication (Chapter 3), impact measurement (Chapter 4), supportive ecosystems (Chapter 5) and business models (Chapter 6). In other words, a systematic focus on those four elements will provide better guidance to SEs in addressing their financial challenges. Figure 11 provides a good illustration of our main message of this book.
Let’s have a look again at challenge number 1, access to funding. In addition to the financial sources available, SEs should consider and take into account the conditions under which funding is provided. The knowledge of funding providers and their conditions could be either accumulated in the social enterprise or provided as a piece of advice from third parties. In any case, SEs need to convince the funding providers, and in this sense effective communication is crucial. Communication about the goals of the social enterprise, how those goals can be reached, and how the funding could be repaid (if necessary for the respective source of funding). In other words, SEs need to communicate clearly about the logic of their business model and about how they intend to generate social impact. Being well embedded in supportive ecosystems, SEs leverage on existing actors in the ecosystem to strengthen their business model, to improve their impact measures and to communicate. This means that the challenge of access to funding cannot be overcome by simply having an overview of the various financial sources. SEs should consolidate their business strategy considering all different aspects from a solid business model, supportive ecosystems, impact measurement and communications. These elements are closely interrelated and necessary to convince those who can provide the necessary funding.
Challenge number 2 refers to the complexity of SEs’ business models. In Chapter 1, we have presented six different levels that constitute this complexity. Each of those levels has a specific direct or indirect implication for SE funding, which we would like to approach directly in a first instance:
•Beneficiaries and customers are different parties: SEs need to satisfy both parties. Social impact is created by addressing the needs of beneficiaries, while income is generated by customers. SEs without customers limit their funding to donations, grants and subsidies, as they cannot generate repayment capacity. SEs with customers need to clearly explain that income from the customers is used to address the needs of the beneficiaries (cf. StreetwiZe / Mobile School case in Chapter 6). It is important to note also that SEs may encounter problems to fund their working capital (this is the accumulation of stock and products sent to beneficiaries) if incomes from sales are not stable and have enough margin (the difference between the sale price and costs). Hence, there are also models, where customers pay for a product or service that can be donated to beneficiaries, and this automatically generates funding for working capital.
•Employees and volunteers are not motivated in the same way: this level of complexity refers to the stability and professionalism in the internal organization of social enterprises. How is this related to funding? Very straightforward! There is a saying that impact investors and financial institutions provide funding to teams, and not to ideas. They prefer to have a solid team, that will lead the social enterprise to achieve its goals. This attitude is similar to all other organizations providing funding. Great ideas remain unrealized by weak teams, while great teams improve and realize various ideas. Hence, it is important to convince providers of funding that a social enterprise has a performant and motivated team of employees and volunteers.
•SEs do not always own their resources: also here, we refer to the stability of operations. Receiving access to resources by partners or philanthropists contributes to the agility of SEs’ business models, but at the same time exposes it to operational risks. When access to those resources is denied or withdrawn, SEs risk a reduction of operations, if not a standstill. Funding partners prefer to see mitigation strategies to those risks1 and in this sense, SE can think of alternatives for those resources. However, it is important to note that ownership of resources gives comfort to some funding partners, especially if they need to take collateral to provide the funding. For example, if you have real estate, you could have collateral on that real estate (i.e. a mortgage) as a guarantee of the repayment of the funding. Without this, it would be difficult to receive funding that requires guarantees. Leveraging on the resources of solid partners and supportive ecosystems, however, is a very good alternative.
•Unstable income is another level of complexity: some SEs have no income at all, while others have irregular incomes. This makes it difficult to access funding from impact investors and financial institutions, who typically require repayment. SEs can either increase the pace of sales, find alternative streams for sales (e.g. consulting, inspiration trips, …), or simply not target funding that requires repayment.
•The legal structure is not optimal: SEs that choose for NGO type of legal structure have no shares, and cannot invite others to become a shareholder. This excludes impact investors in equity. On the other hand, SEs that choose for the for-profit type of legal structure may find it difficult to tap into funding sources such as donations, sponsorships, and some grants or subsidies for NGOs. Why would individuals and organizations provide funding without a requirement for reimbursement, if there are shareholders who can benefit from this? Why would volunteers or VIPs invest free effort for a profit generation activity? To resolve these issues, the hybrid structure of a social enterprise needs to be clearly explained. Accountability and transparency are key. Some SEs resolve this challenge by having a group of organizations with different legal structures (e.g. Close the Gap, Mobile School / StreetwiZe).
•Tensions among financial and social objectives: this topic has been discussed at length in this book. Without finance, there will be no social impact, and without social impact, there is no social enterprise. The solution is thus in the overall business model logic that blends both financial and social objectives.
After all, the complexity in the business model of SEs is not likely to disappear. Such complexity is in a sense an invitation for various actors in the supportive ecosystem to join the efforts of the social enterprise. Yet, operating a complex business model, does not mean that its overall logic should be complicated. To the contrary, the logic of SEs’ business models can be presented in a very clear and easy to understand fashion. Thus also here, the interplay of business model, impact measurement, supportive ecosystem and communications reinforces the chances to receive funding. In several levels of complexity, we suggest that creative solutions can be found to some of the financial challenges of SEs.
As for challenge Number 3, predominant focus to social impact, our message is quite simple. Keep focusing on the
social impact, otherwise, there is no social enterprise. Without a focus on the business model and any focus on the financial or commercial aspect of a social enterprise, the social impact is likely to remain very limited. Social impact can be reached and increased by performant organizations. Be lean, be professional, and leverage on partnerships! There is nothing wrong in generating costs to invest in further developing the engine of your social enterprise. This same engine will be eventually generating more social impact.
In conclusion, we advise four basic guidelines that will help you through the financial wilderness of social entrepreneurship: a solid business model, supportive ecosystem, impact measurement and effective communication. Passion for social entrepreneurship comes as a bonus. And do not forget to enjoy the journey, our planet needs more social entrepreneurship!
1 Funding partners would not expect you to reduce all risks down to zero, which is in practice not possible. They will rather expect that you are aware of those risks and have a plan of action prepared, in case they materialize. Plan B, C etc. are also recommended.