Funding for social enterprises

Finding funding for the growth phase, a mission impossible?

Financing for social enterprises

For many social entrepreneurs, a tough process begins as soon as they try to get funding in place. Breakneck stunt scenes and breathtaking twists included. In most cases, donations and grants are just the starting sequence to the plot of the social problem-solving movie. But the more money has to be raised for growth, the more sparse the search for suitable capital providers turns out to be. So is sustainable funding as a social entrepreneur an impossible mission?

The right equipment

"Investment-ready," that is, being ready for a social investment, sounds easy, but it has its challenges. The key sticking points here are formed around 5 factors: social impact, business model, proof of concept, team & entrepreneur, and financial planning.

Social impact: those who have not made themselves fit here will have a hard time finding suitable growth capital providers. The "impact", the social and/or ecological effect, for example, must be clearly defined and stand on logically thought-out legs: in the form of a coherent concept, the "theory of change". Is the intended effect achieved in practice? How exactly is it measured? Is there a clear value-add over other existing approaches to solving the problem? These are just a few key issues that can be addressed using social reporting standard or similar impact reporting formats.

Business model: then the business model itself is put under the microscope: is there even a commercial business model that can generate its own revenue streams and thus raise growth capital? Is the model scalable and sufficiently flexible to withstand changes in the market and in the legal and social environment? The business plan for the coming years must be clearly defined with its milestones, comprehensible and attractive for social investors, so that the mission to find capital has a chance of success.

Proof of concept: a practical test, the "proof of concept" is also important. This shows whether the business model and impact are not only in theory, but also in reality. Successful pilot projects, first incomes and won awards are excellent indications for it. Depending on the model, a few months of "training" in the market should have already been completed so that investors can see that the effectiveness is also true.

Team & entrepreneur: in social investing, capital providers are willing to put social impact at the forefront of their investment decisions. Accordingly, the team members of the social enterprise also play a crucial role, or rather their skills and motivation to make an impact. In this respect, social entrepreneurs are faced with a double set of expectations: on the one hand, they should bring with them the tools of the entrepreneur, and on the other, the enthusiasm of the social "changemaker". Similar to the traditional investment business, one-man shows are not as welcomed. A charismatic founder is great, but complementary skills on the team count just as much.

Financial planning:and finally, please provide a detailed, realistic and convincing financial plan for the next 3 to 5 years. Include an adequate balance between capital needs and growth steps and the impact to be achieved.

The correct address

Then, once you've prepared the five points, you're faced with the next challenge: where will the money come from?? Who are the impact investors? For traditional financing at the bank, the required capital is often too low, the collateral insufficient and the financing costs too high. And donations wouldn't cover the need in the long run either. So where to find the right funders who get carried away with the social impact of an idea and want to back it up with patient growth capital?

Few investors are yet flocking to the uncharted territory of impact investing – but more are joining the ranks. Meanwhile, many want not only to watch this film, but also to participate in the "action". What makes this type of investing so appealing is that investors can make an important contribution to solving a social or environmental problem while earning a modest financial return. Thus not only social increase in value develops, but self-supporting, social-entrepreneurial business models are promoted. More sustainability: a donation only works once, an impact investment can be recycled over and over again and go to new social projects. Thus, the story of "more impact for the company" accelerates and heads for a happy ending.

Good points of contact can therefore be private investors, business angels, foundations, but also professional fund investors, banks and funding institutions. Hybrid financing models, which bundle very different types of investors into one transaction, can also achieve their goal. That's when a social venture fund, a foundation and a business angel come together to jointly push the social entrepreneurial idea forward.

The right example

For heinz frey, too, the financing world did not look so rosy at first. The dedicated teacher had set his mind on creating more infrastructure and meeting opportunities for the citizens of his village Jülich – he wanted to make a difference. This has since given rise to the social enterprise DORV (www.Dorv.En). Today, DORV is concerned with multifunctional local supply and a better quality of life for villagers and residents of urban neighborhoods. As regional food supplies continue to dwindle in remote areas, initiatives of this kind are especially important to local citizens. Behind the counter they can now get not only fresh food, but also the TÜV sticker or stamps. DORV centers also provide opportunities for residents to meet and short-circuit over coffee: breaking the widespread vicious cycle of out-migration and local service gaps. Seniors, in particular, will enjoy greater independence when they can access all of their essential products and services in close proximity to one another. Since its inception, DORV has been inundated with more than 100 requests to advise communities on developing similar centers across the country. To date, 40 centers have been launched and 12 DORV centers of their own have been established.

But before that, heinz frey faced the same question as many other social entrepreneurs: how am I going to manage this growth on my own?

The right support

Anyone who, like heinz frey, needs support in answering this question can get professional help. FASE, the funding agency for social entrepreneurship is committed to building a bridge across the funding gap and effectively supporting social entrepreneurs. If they are not already "investment-ready," they will be coached so that repayable growth capital is within the realm of possibility for them. After that it can go into the actual transaction support. There is a wealth of intermediary services available: from business plan and business model finetuning to investor outreach to designing the appropriate financing structure and assisting with due diligence and contract negotiations with investors. Interested funders, in turn, get access to a constantly bubbling source of exciting, investment-ready social entrepreneurs and can discover their fascination with impact investing. Here's how the right partners come together on both sides.

Through fase-backed contracts, more than 3 million euros of fresh money has now flowed into the sector in just two years, and nearly 200 new investors have been infected by the "impact investing" idea.

For the social entrepreneur, the advantage is that they have a solution tailored to them that gives them enough room to breathe as they set out to scale enterprise and impact. Various financing components such as subordinated loans, social impact incentives and revenue or profit shares ensure that the debt service is not too heavy at the beginning and that the social entrepreneur does not wear himself out between diverging interests of his backers. Everyone pulls together.

A happy ending

So what is our film tip for the social entrepreneur on the way to the successful adventure "growth capital"? Subject social impact, business model, proof of concept, team, and financial planning to a precise systems check. Then everything is actually like before every challenging mission: good preparation is (almost) everything.