In this blog article we cover the topic of funding for social entrepreneurs — for-profit or non-profit — addressing questions social entrepreneurs have, or should have, and point to typical fund raising pitfalls and best practices.
Thinking about funding your social enterprise
External funding is typically for the growth of the start-up, within their window of opportunity. Sometimes products have long gestation periods before they start generating revenue, for example developing a vaccine. In such cases of deep tech, funding is required much earlier to even build the product. In many cases investors could also benefit the start-up because of their expertise and experience.
Of course, many startups grow without any external funding. But some founders do not want funding to avoid losing ownership and control of the company. Such prioritisation of control over growth is not good, as ultimately growth is what matters, whether it be for financial or impact goal or both.
Stages of Funding (Courtesy of Pentathlon Ventures)
Types of funding
- Equity Funding: Is when an investor buys a stake (%age shareholding) with the money infused in the start-up. But there are other types of funding, where ownership is not diluted.
- Debt: Loans are better for working capital, not for growth. Of course, loans require collateral.
- Grants: One-time money from Government or private foundations is extremely beneficial for start-ups when their revenues are distant. These funds do not have to be repaid to the grant giver. Here, the alignment of the startup with the objective of the grant funding program becomes important. Example the BIG (Biotechnology Ignition Grant) Scheme from BIRAC (Biotechnology Industry Research Assistance Council).
- Donations: Corporates can provide funds under their CSR programs to start-ups that are aligned to their objectives. Crowdsourcing can be used to get funds from Individuals.
Social entreprenuers can be both for-profit (Private Limited Company – PLC, Limited Liability Partnership- LLP etc.) and non-profit (Non Govt. Organisation, Trust, Sec 8 company). One important consideration for funding is the nature of the company, which determines the regulations that must be complied with.
Planning for a fund-raise
To successfully close a funding effort, it is important to plan properly and in advance. We have seen multiple failed efforts due to lack of planning.
- Skills & Proficiency: Fund raising requires a basket of skill sets such as presentation and communication skills, financial skills, and negotiation skills. Although founders are very enthusiastic and credible with their efforts, lack of one or all skills will affect fund raising outcomes. Advance awareness of missing skills, personal skill enhancement efforts, and plenty of practice and feedback improves proficiency and successful funding outcomes.
- Time & Effort: Fund raising takes a significant amount of effort, time, and persistence. Many founders underestimate the time and effort required and as a result come short in achieving the desired outcomes. We have also observed that poor delegation of tasks in the team prevents the founders to find time away from the day-to-day operational workloads to focus on fund raising.
Best Practices for fund-raising by Social Entrepreuners
While mentoring dozens of social entrepreneurs to fund raise, we have noticed a few best practices that new entrepreneurs might find useful.
- Legal Structure and Compliances: It is important to have the proper legal structure(s) with all compliances current to be able to fundraise. Example Private Limited Companies (PLCs) cannot directly get CSR funding into the company while non-profit entities have no concept of funding for equity. In some cases, we have seen dual company structures to tap into a diverse source of funding. Example a post breast cancer surgery prosthetic is made by a PLC, but all cancer awareness campaigns and trainings are done via a non-profit funded by CSR contributions.
- CSR Funding: Landing CSR funding requires much effort in filtering and targeting suitable donors, customizing access to the CSR department, writing winning proposals, and doing the proper follow-ons during and at project closure to ensure donor satisfaction. We have found that building high trust relationships with existing donors is the easiest way to get repeat CSR funding.
- ‘Tag-Along’ Collaboration: Many times, CSR projects involve multiple solutions – example a rural school upgrade might involve a library, computers, solar power, teacher training – these bundled projects offer good opportunities for a social entrepreneur to ‘tag-along’ with other entrepreneurs.
- Digital Engagement: Having a strong digital presence on the web and social media helps tell the story, raise awareness, building a community, demonstrate results and create credibility and trust. These help during the fund-raising efforts. Periodic newsletters sent to various stakeholders and well-wishers created good will before it is needed.
Funding can be a crucial factor in the success of start-ups. Fund-raising for the right reasons and preparing well can make the difference between success and failure of the fund-raise. Esp. social entrepreneurs can really benefit from the best practices in this note. All the best with your fund-raising efforts!
This blog article is by PIC Social Innovation Lab Mentors, Sanjay Kanvinde & Gireendra Kasmalkar.
Mr. Sanjay Kanvinde is a member of PIC. He has 23 years’ experience in the international Energy Industry and is the co-founder of Lavni Ventures. He is actively involved in several charities and social organizations.
Mr. Gireendra Kasmalkar is the Founder Director and CEO of Ideas to Impacts Innovations Pvt. Ltd., Lead Investor and General Partner at Pentathlon Ventures and Owner of the Ideas to Impacts Innovation Centre promoting innovative ideas that can create significant positive impacts for both customers and the small towns of India.