How to find the right capital for your social enterprise
Getting funding can be difficult for any entrepreneur, but how do you find a funder whose mission matches that of your business? RSF Social Finance’s VP of Lending advises on how to do this.
Photo by Klaus Vedfelt via Getty Images
Asking for money is difficult. Founders seeking funding for a new venture often feel like they are on the losing side of an uncomfortable power dynamic. But any conversation about financing should be as much about the entrepreneur evaluating the funder as the funder evaluating the entrepreneur. Each party has the right and responsibility to check the other to determine if goals and philosophies align, and this is especially important when you’re a social entrepreneur looking for mission-aligned capital.
By asking yourself and potential funders the following questions, you can find the best fit for your social enterprise.
Am I ready for funding?
Mission-aligned funders seek founders who are keenly aware of their own strengths and weaknesses and know how to hire other talented people to fill the gaps. A strong team with the skills to accomplish your mission will signal to funders that you can survive inevitable setbacks. A clearly defined mission and products or services that express that mission are equally important.
Yve-Car Momperousse, founder of Kreyòl Essence, understood this well when introducing RSF Social Finance to her own beauty business, which works with Haitian farmers to sustainably produce black castor oil for his products.
“What sets Kreyòl Essence apart is that Yve-Car has always had a very clear vision of where it wanted to take the company, not only in terms of financial success, but also in terms of the impact it will have. ‘she envisioned having in Haiti and the beauty industry,’ said Alexandria Cabral, former senior credit associate at RSF.
You must also demonstrate that you understand what is going on financially in your organization. If you are a social business start-up, having a system to track income and expenses is crucial. The cost to do it later is significant. It might seem obvious, but I’ve met plenty of enthusiastic founders who can spend all day talking about their mission, but don’t want to get bogged down in the details. If that’s you, hire someone to take care of it – financial viability serves your purpose.
How fast do I want to grow and what kind of capital do I need to do so?
The expected growth rate of your social enterprise should determine the types of funding you seek. Some backers, including most venture capitalists, will want you to grow quickly and at all costs. If this fits your mission, so much the better; rapid growth is key to solving many of the world’s greatest challenges, such as the development of renewable energy. But others need slow-growth solutions – most businesses in local food systems, for example. Figure out where your business sits on the spectrum and look for funders who have matching growth expectations.
What are your options? Social entrepreneurs have the same options as everyone else – private equity (angel investors, venture capitalists) and debt (banks, private lenders, community development financial institutions) – but also one you might not have not thought: integrated capital. This funding model coordinates different forms of financial capital and non-financial resources to support a business working to solve complex social and environmental problems. Funding can include equity investments, loans, loan guarantees and, if your business is structured as a not-for-profit organization, grants.
Does the funder have expertise in my area and do I need additional support?
A funder with deep expertise in your area can provide you with much more than money; their knowledge of key players in your field, supply chains, tried and failed business models, and changing market conditions can help you accelerate your growth and avoid pitfalls.
In addition, it is common for companies to need diversified financing. A lead funder may not be able to provide every piece of the puzzle, but those with strong networks can bring in others to fill in the gaps. Look for a funder who listens to your needs and helps you design custom solutions rather than trying to force you to choose a product that works for them.
Does this funder share my values and how do they work with companies in difficult times?
Most importantly, look for a funder whose value system aligns with your organization’s mission and values. Asking a funder about their own mission can be revealing. Pay attention to how they describe their goals, how they talk about achieving them, and what isn’t said. If they say they appreciate something, they should have concrete examples of how it happens. You will have a hunch to know if you believe them. Trust your instincts.
The COVID-19 pandemic provides the perfect setting to answer these questions. Has your potential funder remained loyal to its portfolio companies and helped them fulfill their mission? Were they patient and flexible? Have they offered bridging capital, payment holidays, or interest-only periods on loans to help them preserve cash and weather COVID-19? These are not unreasonable expectations from funders who say they focus on impact.
In July 2020, when RSF borrower and fair trade coffee importer Cooperative Coffees experienced an increase in its cash flow and had to pay its farmers, RSF fortunately increased its line of credit because its mission is so aligned with ours. They are paving the way for a fairer and more transparent coffee buying ecosystem, and we didn’t want them to compromise their mission.
“Mission-aligned investor risk analyzes are likely to include the potential loss of positive social impact from the companies they have backed,” ImpactAlpha editor Dennis Price pointed out in an article. review of impact investors’ response to the pandemic shutdown. “This makes patience and flexibility a form of ‘catalytic capital’ that can generate, or at least preserve, financial and social returns.”
A final word for the wise: Early funding decisions can be tricky to unravel and will have a significant effect on the development of your business. If a funder is not feeling well, walk away.
There are plenty of resources to help you find better options. Advising organizations like Uptime and funders like Track family providing BIPOC entrepreneurs with seed funding and holistic business support to close the racial wealth gap. Opportunity Funding Network has a national database of CDFIs and their areas of expertise. Social Enterprise Network, GIIN and SOCAP also have ties to high-impact funders across the United States. There are also organizations that specialize in particular areas. Explore all your options; it’s worth the efforto find a perfect fit.