Funding Your Social Enterprise, Part 1: Grants, Donations and Crowds

By Jacen Greene, Ames Fellow for Social Entrepreneurship at PSU

This is the first in a three-part series on funding social enterprise startups.  Information in the first two posts is based in part on recent sessions of our Social Innovation Incubator: one with Mark Grimes, founder of ned.com and NedSpace, and one with David Connell and Doug Morris, partners at the law firm Ater Wynne LLP.

The biggest challenge faced by many social entrepreneurs is how to obtain funding for their venture. Because social enterprises exist in the space between traditional, grant-funded nonprofits and profit-maximizing businesses, they may have access to the funding options of both, but without the clearly defined methods and access of either.

The “capital curve” — sources and amounts of money needed to become successful — has yet to be fully developed for social entrepreneurs, but as the field grows, strategies for obtaining funding have begun to emerge. From small investments by friends and family to major equity deals with impact investors, here’s a brief overview of different ways to fund your social venture.

Social Enterprise Capital Curve

Earned Revenue:
The most common funding source for startups is earned revenue. Whatever money the venture makes from selling its service or product is simply reinvested into growing the business. This has the added benefit of providing immediate validation of the model, as well as enabling the founders to retain full control. Some capital-intensive firms, however, require significant investment before they can even launch a product. For them, some other source of funding is needed.

Grants and Donations:
Tax-deductible grants and donations are a common source of income for nonprofits, but donations to social ventures organized as a for-profit business offer no tax benefit. This can discourage individuals and corporations from giving money, as can the expectation that a business should operate solely on earned income and credit or investments. Foundations may also believe themselves to be constrained from offering grants to a business, given the rather complicated legal restrictions around the practice.

However, if a business operates some strictly charitable programs, it can partner with a fiscal sponsor to process donations for those programs. A fiscal sponsor is a tax-exempt nonprofit that can legally receive tax-deductible contributions on behalf of another organization. These contributions are placed into a fund for the recipient, and the sponsor charges a fee, typically between 5% and 15%, for managing the process. State or local nonprofits may also take advantage of fiscal sponsorship to avoid the cost and complications of a full 501(c)(3) filing.

Grants to low-income social entrepreneurs are available through Individual Development Accounts (IDAs), a government-funded program that matches the personal savings of the entrepreneur with a grant several times larger. In Oregon, both Mercy Corps Northwest and MIPO provide IDAs in amounts ranging from $4000 up to $10,000.

Crowdfunding:
Crowdfunding is essentially a way for any organization to receive donations (although not tax-deductible ones) or earn revenue from pre-selling a forthcoming product or service. This is not to be confused with equity crowdfunding, a component of the recently passed JOBS Act. Equity crowdfunding, or the sale of company stock  directly to the public through a website or broker intermediary, will not be legal until the SEC finishes writing new regulations in early 2013. Our third post in the series will cover equity crowdfunding in detail.

A number of websites now offer non-equity crowdfunding services targeted at specific project types. StartSomeGood.com provides crowdfunding solutions specifically for social ventures (read our interview with the co-founder here), but as with any crowdfunding campaign, it’s important to know how to create a successful outcome. Here are a few tips:

• Put together a great team: a well-known project team has a much higher chance of success.
• Offer a great product: the public is more likely to donate to a campaign if they receive something new or unique in return.
• Create professional media: campaigns with well-made videos perform better. Make certain you have an engaging (and copy-edited) campaign description.
• Do your research: some sites, like IndieGoGo, allow you to keep what you raise even if you don’t meet the target. Most, like Kickstarter, require your fundraising goal to be met—or you receive nothing.
• Set a reasonable target: $10,000 is a typical goal, and 30 days is a good campaign length. A shorter campaign may not give you enough time to reach your target, and a longer one risks a loss of momentum and flagging interest. More than 50% of campaigns fail to reach their goals, so make certain you have a Plan B.
• Leverage your network: email suggested tweets and Facebook posts to your friends and fans for them to use in promoting your campaign.
• Generate buzz: reach out to bloggers, local reporters, and Twitter celebrities in your subject area or local community.

Next week’s post covers debt and equity capital — funding sources that you have to pay back, in one way or another. Perhaps unsurprisingly, they tend to come in much larger amounts than grants, donations, and crowdfunding contributions. Get ready to grow your business as we move higher on the capital curve.

Read part two now >>

 Disclaimer: these posts are not intended as legal or financial advice.